-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S1KgJmdC717E94W4LzH6hImxct1DSMQrnXJW/rNMtuuujXsYW2pLRAJHl1XPCoK1 6vABO8MLW/kslZm05FwYPg== 0001144204-03-006031.txt : 20031003 0001144204-03-006031.hdr.sgml : 20031003 20031003100716 ACCESSION NUMBER: 0001144204-03-006031 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030930 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20031003 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AROTECH CORP CENTRAL INDEX KEY: 0000916529 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 954302784 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23336 FILM NUMBER: 03926377 BUSINESS ADDRESS: STREET 1: 632 BROADWAY STREET 2: STE 1200 CITY: NEW YORK STATE: NY ZIP: 10012 BUSINESS PHONE: 6466542107 MAIL ADDRESS: STREET 1: 632 BROADWAY STREET 2: SUITE 1200 CITY: NEW YORK STATE: NY ZIP: 10012 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRIC FUEL CORP DATE OF NAME CHANGE: 19931223 8-K 1 v00188_8k.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 30, 2003 AROTECH CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 0-23336 95-4302784 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 632 BROADWAY, SUITE 1200, NEW YORK, NEW YORK 10012 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (646) 654-2107 (Former name or former address, if changed since last report) ================================================================================ ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE. Pursuant to the terms of a Securities Purchase Agreement dated September 30, 2003 (the "Purchase Agreement") by and between Arotech Corporation and six institutional investors (the "Investors"), we issued and sold to the Investors (i) an aggregate principal amount of $5,000,000 in 8% secured convertible debentures due September 30, 2006 (the "Initial Debentures"), convertible into shares of our common stock at any time after January 1, 2004 at a conversion price of $1.15 per share, and (ii) three-year warrants to purchase up to an aggregate of 1,250,000 shares of our common stock at any time after January 1, 2004 (the "Initial Warrants") at an exercise price of $1.4375 per share. The Investors also have the right, at their option, to purchase up to an additional $6,000,000 in debentures (the "Additional Debentures" and, together with the Initial Debentures, the "Debentures") convertible into shares of our common stock at any time after January 1, 2004 at a conversion price of $1.45 per share, and to receive warrants to purchase up to an aggregate of 1,500,000 shares of our common stock at any time after January 1, 2004 (the "Additional Warrants" and, together with the Initial Warrants, the "Warrants") at an exercise price of $1.8125 per share. If all the Additional Debentures are purchased and all the Additional Warrants are issued, the average conversion price of the Debentures will be approximately $1.31 per share, and the average exercise price of the Warrants will be approximately $1.64 per share. The conversion prices of the Debentures and the exercise prices of the Warrants were based on the average of the closing market prices of our common stock during the ten days prior to the date on which the term sheet with the Investors was signed. We also committed ourselves to certain affirmative and negative covenants customary in agreements of this kind. We will use the net proceeds of this offering for working capital purposes. Under the terms of the Purchase Agreement, we have granted the Investors (i) a first position security interest in the stock of MDT Armor Corporation and in any assets that we acquire in future Acquisitions (as defined in the Purchase Agreement), (ii) a second position security interest in the assets of our IES Interactive Training, Inc. subsidiary and in the stock of our subsidiaries other than IES Interactive Training, Inc. and M.D.T. Protective Industries, Ltd. (junior to the security interest of the holders of our 9% secured convertible debentures due June 30, 2005), and (iii) a third position security interest in the stock of our subsidiaries I.E.S. Defense Services, Inc., IES Interactive Training, Inc. and M.D.T. Protective Industries, Ltd. (junior to the security interest of the holders of our 9% secured convertible debentures due June 30, 2005 and to the security interest of I.E.S. Electronics Industries, Ltd.), all pursuant to the terms of separate security agreements filed herewith. Under the terms of the Debentures and Notes, we are not obligated to issue shares of our common stock upon conversion of a Debentures or exercise of a Warrant if the issuance of such shares of common stock would exceed that number of shares of common stock that we may issue without breaching our obligations under applicable Nasdaq Marketplace Rules unless and until we obtain the approval of our shareholders to the extent required by applicable Nasdaq Marketplace Rules. Pursuant to our obligations under the Purchase Agreement, we will solicit the approval of our shareholders regarding the issuance of the Debentures and the Warrants, as may be required under Nasdaq Marketplace Rules, at our next annual meeting of stockholders (the "Meeting"), to be called and held no later than June 19, 2004. In this connection, and as required under the terms of the Purchase Agreement, certain of our shareholders have agreed to vote their shares in favor of the approval of the transactions contemplated by the Purchase Agreement at the Meeting, pursuant to separate voting agreements. We are required to register the shares of common stock underlying the Debentures and the Warrants with the Securities and Exchange Commission in a registration statement on Form S-3 filed no later than November 29, 2003, with such registration to be declared effective by the Securities and Exchange Commission no later than January 28, 2004. The foregoing description of the Purchase Agreement and the other instruments and agreements attached as exhibits thereto and certain other agreements executed in connection therewith is qualified in its entirety by reference to the agreements and instruments themselves. A copy of the Purchase Agreement (including the forms of instruments and agreements attached as exhibits thereto and certain other agreements executed in connection therewith) is attached to this report as Exhibits 4.1 through 4.8 hereto, and is incorporated herein by reference. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we note that certain statements set forth in this Current Report on Form 8-K may constitute forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties that may cause actual results to vary significantly. These risks and uncertainties include, but are not limited to, risks relating to: product and technology development; the uncertainty of the market for our products; changing economic conditions; delay, cancellation or non-renewal, in whole or in part, of contracts or of purchase orders; significant future capital requirements; and other risk factors detailed in our most recent annual report on Form 10-K for the fiscal year ended December 31, 2002, as amended, our most recent Quarterly Report on Form 10-Q, and other filings with the Securities and Exchange Commission. Readers should consider all of these risk factors as well as other information contained in this report. Page 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits. A list of exhibits required is given in the Exhibit Index that precedes the exhibits filed with this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned hereunto duly authorized. AROTECH CORPORATION (REGISTRANT) By: /s/ Robert S. Ehrlich ------------------------------------ Name: Robert S. Ehrlich Title: Chairman, President and CEO Dated: October 2, 2003 Page 4 EXHIBIT INDEX The following exhibits are filed with the Current Report on Form 8-K.
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.1.....Securities Purchase Agreement dated September 30, 2003 between the Company and the Investors 4.2.....Form of 8% Secured Convertible Debenture due September 30, 2006 4.3.....Form of Warrant 4.4.....Form of Security Agreement 4.5.....Form of Intellectual Property Security Agreement 4.6.....Registration Rights Agreement dated September 30, 2003 between the Company and the Investors 4.7.....Voting Agreement dated September 30, 2003 among the Company, Robert S. Ehrlich and the Investors 4.8.....Voting Agreement dated September 30, 2003 among the Company, Leon S. Gross and the Investors
EX-4.1 3 v00188_ex4-1.txt EXHIBIT 4.1 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "AGREEMENT") is dated as of September 30, 2003, by and among Arotech Corporation, a Delaware corporation (the "COMPANY"), and the purchasers identified on the signature pages hereto (each, a "PURCHASER" and collectively, the "PURCHASERS"). WHEREAS: A. The Company and each Purchaser is executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the "1933 ACT"), and Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the 1933 Act; B. The Company has authorized a new series of 8% secured convertible debentures of the Company in the form attached hereto as Exhibit A (together with any convertible debentures issued in replacement thereof in accordance with the terms thereof, the "INITIAL DEBENTURES"), which Initial Debentures shall be convertible into shares of the Company's Common Stock (as converted, the "INITIAL UNDERLYING SHARES"), in accordance with the terms of the Initial Debentures; C. The Company has authorized a new series of 8% secured convertible debentures of the Company in the form attached hereto as Exhibit A (together with any convertible debentures issued in replacement thereof in accordance with the terms thereof, the "ADDITIONAL DEBENTURES" and collectively with the Initial Debentures, the "DEBENTURES"), which Additional Debentures shall be convertible into shares of the Common Stock (as converted, the "ADDITIONAL UNDERLYING SHARES" and collectively with the Initial Underlying Shares, the "UNDERLYING SHARES"), in accordance with the terms of the Additional Debentures; D. Each Purchaser wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, (i) that aggregate principal amount ("INVESTMENT AMOUNT") of Initial Debentures set forth on such Purchaser's signature page hereto (which aggregate principal amount for all Purchasers shall be $5,000,000) and (ii) warrants, in substantially the form attached hereto as Exhibit B (the "INITIAL WARRANTS"), to acquire up to 250 shares of Common Stock for each $1,000 of principal amount of Initial Debentures purchased (as exercised, collectively, the "INITIAL WARRANT SHARES"); E. Subject to the terms and conditions set forth in this Agreement, each Purchaser shall have the right to purchase, and the Company shall be required to sell (i) up to the aggregate principal amount ("ADDITIONAL INVESTMENT AMOUNT") of Additional Debentures which is equal to 120% of the Investment Amount (which aggregate Additional Investment Amounts for all Purchasers shall be up to $6,000,000) and (ii) warrants, in substantially the form attached hereto as Exhibit B (the "ADDITIONAL WARRANTS" and, collectively with the Initial Warrants, the "WARRANTS"), to acquire 250 shares of Common Stock for each $1,000 of principal amount of Additional Debentures purchased (as exercised, collectively, the "ADDITIONAL WARRANT SHARES" and, collectively with the Initial Warrant Shares, the "WARRANT SHARES"); and F. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, substantially in the form attached hereto as Exhibit C (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain registration rights with respect to the Conversion Shares, and the Warrant Shares under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Purchasers agree as follows: ARTICLE I. DEFINITIONS Section 1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms shall have the meanings indicated in this Section 1.1: "ACTION" means any action, suit, inquiry, notice of violation, proceeding (including any partial proceeding such as a deposition) or investigation pending or threatened in writing against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency, regulatory authority (federal, state, county, local or foreign), stock market, stock exchange or trading facility. "AFFILIATE" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144. "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the common stock of the Company, $.01 par value per share, and any securities into which such common stock may hereafter be reclassified. "COMMON STOCK EQUIVALENTS" means any securities of the Company or any Subsidiary which entitle the holder thereof to acquire Common Stock at any time, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common - 2 - Stock or other securities that entitle the holder to receive, directly or indirectly, Common Stock. "COMPANY COUNSEL" means Yaakov Har-Oz, Esq. "EFFECTIVE DATE" means the date that the initial Registration Statement required by the Registration Rights Agreement is first declared effective by the Commission. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "IES ELECTRONICS" means IES Electronics Industries Ltd. "IES SECURITY AGREEMENTS" means the Pledge, Security and Escrow Agreement, granting to IES Electronics a secured second priority interest, dated as of August 2, 2002 made by the Company in favor of IES Electronics relating to the shares of I.E.S. Defense Services, Inc., as modified by the letter agreement between the Company and IES Electronics, dated as of December 31, 2002, and the Security Agreement dated as of March 17, 2003 made by the Company in favor of IES Electronics relating to the shares of IES Interactive Training, Inc., I.E.S. Defense Services, Inc. and M.D.T. Protective Industries, Ltd. "INDEBTEDNESS" shall mean the principal amount of, premium, if any, profit participation, if any, and accrued and unpaid interest on and all other amounts and costs payable in respect of (a) indebtedness for money borrowed from others; (b) indebtedness guaranteed, directly or indirectly, in any manner, or in effect guaranteed, directly or indirectly, in any manner through an agreement, contingent or otherwise, to supply funds to, or in any other manner invest in the debtor, or to purchase indebtedness, or to purchase and pay for property if not delivered or pay for services if not performed, primarily for the purpose of enabling the debtor to make payment of the indebtedness or to assure the owners of the indebtedness against loss; (c) all indebtedness secured by any mortgage, lien, pledge, charge or other encumbrance upon property owned by the Company; (d) all indebtedness of such Person created or arising under any conditional sale, lease (intended primarily as a financing device) or other title retention or security agreement with respect to property acquired by the Company even though the rights and remedies of the seller, lessor or lender under such agreement or lease in the event of a default may be limited to repossession or sale of such property; and (e) renewals, extensions and refundings of any such Indebtedness. "INTELLECTUAL PROPERTY SECURITY AGREEMENT" means the Intellectual Property Security Agreement by and among the Company, the subsidiaries of the Company party thereto, and the holders of the Debentures, pursuant to which the obligations of the Company under the Debentures are secured by the intellectual property of the Company and the subsidiaries party thereto, such agreement in the form of Exhibit F attached hereto. "LIEN" means any lien, charge, encumbrance, security interest, right of first refusal or other restrictions of any kind. - 3 - "PERSON" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PURCHASER PERCENTAGE" means, with respect to a Purchaser, the percentage equal to the product of (x) a fraction, the numerator of which shall be the Investment Amount paid by such Purchaser on the Initial Closing Date and the denominator of which shall be the aggregate Investment Amount paid by all Purchasers on the Initial Closing Date times (y) 100. "REGISTRATION STATEMENT" means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale by the Purchasers of the Underlying Shares and the Warrant Shares. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES" means the Debentures, the Underlying Shares, the Warrants and the Warrant Shares. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SECURITY AGREEMENT" means the security agreement substantially in the form of Exhibit G hereto granting to the Purchasers (i) a first priority, perfected security interest in the stock of MDT Armor Corporation and any future assets acquired by or on behalf of the Company in connection with an Acquisition (as defined in the Security Agreement), (ii) a second priority security interest in the assets of IES Interactive Training, Inc. and stock of other subsidiaries directly or indirectly owned by the Company (other than that of IES Interactive Training, Inc. and M.D.T. Protective Industries Ltd.), subordinate only to the security interest in favor of the holders of Outstanding Debentures and (iii) a third priority security interest in the stock of M.D.T. Protective Industries Ltd., IES Interactive Training, Inc. and I.E.S. Defense Services, Inc., subordinate only to the security interest in favor of the holders of Outstanding Debentures and the security interest in favor IES Electronics pursuant to the IES Security Agreement. "SUBSIDIARY" means any entity in which the Company, directly or indirectly, owns capital stock or holds an equity or similar interest, all of which are listed in Schedule 3.1(a). "TRADING DAY" means (i) a day on which the Common Stock is traded on a Trading Market, or (ii) if the Common Stock is not listed on a Trading Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the - 4 - Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by Pink Sheets LLC (formerly the National Quotation Bureau Incorporated) (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) above, then Trading Day shall mean a Business Day. "TRADING MARKET" means whichever of the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or The Nasdaq SmallCap Market that the Common Stock is listed or quoted for trading on the date in question. "TRANSACTION DOCUMENTS" means this Agreement, the Debentures, the Security Agreement, the Intellectual Property Security Agreement, the Warrants, the Registration Rights Agreement, the Transfer Agent Instructions and any other documents or agreements executed in connection with the transactions contemplated hereunder. "TRANSFER AGENT INSTRUCTIONS" means the Company's Transfer Agent Instructions in the form of Exhibit D. ARTICLE II. PURCHASE AND SALE Section 2.1 Purchase and Sale of Debentures and Warrants. (a) (i) Initial Debentures and Initial Warrants. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 2.2(a) and 2.3(a) below, the Company shall issue and sell to each Purchaser, and each Purchaser severally, but not jointly, agrees to purchase from the Company on the Initial Closing Date (as defined below), a principal amount of Initial Debentures equal to its Investment Amount, along with Initial Warrants to acquire up to 250 Initial Warrant Shares for each $1,000 principal amount of Initial Debentures purchased (the "INITIAL CLOSING"). (ii) Additional Debentures and Additional Warrants. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 2.2(b) and 2.3(b) below, at the option of each Purchaser from time to time, the Company shall issue and sell to each Purchaser, at multiple closings, if applicable, and each Purchaser severally, but not jointly, may purchase from the Company on an Additional Closing Date (as defined below), Additional Debentures in a principal amount equal to up to such Purchaser's Additional Investment Amount, along with Additional Warrants to acquire up to 250 Additional Warrant Shares for each $1,000 principal amount of Additional Debentures purchased (each, an "ADDITIONAL CLOSING"). (iii) Closings. The Initial Closing and the Additional Closings collectively are referred to in this Agreement as the "CLOSINGS". Each Closing shall occur on the applicable Closing Date at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022. - 5 - (iv) Purchase Price. The purchase price for each Purchaser (the "PURCHASE PRICE") of the Debentures and related Warrants to be purchased by each such Purchaser at each Closing shall be equal to $1.00 for each $1.00 of principal amount of Debentures being purchased by such Purchaser at such Closing. (b) Initial Closing Date. The date and time of the Initial Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m., New York Time, on the date hereof, subject to notification of satisfaction (or waiver) of the conditions to the Initial Closing set forth in Sections 2.2(a) and 2.3(a) below (or such later date as is mutually agreed to by the Company and each Purchaser). (c) Additional Closing Date. The date and time of each Additional Closing (each, an "ADDITIONAL CLOSING Date") shall be 10:00 a.m., New York Time, on the date specified in the Additional Debenture Notice (as defined below), subject to satisfaction (or waiver) of the conditions to each Additional Closing set forth in Sections 2.2(b) and 2.3(b) and the conditions contained in this Section 2.1(c) (or such later date as is mutually agreed to by the Company and the applicable Purchaser). Subject to the requirements of Sections 2.2(b) and 2.3(b) and the conditions contained in this Section 2.1(c) each Purchaser may purchase, at such Purchaser's option, Additional Debentures by delivering written notice to the Company (an "ADDITIONAL DEBENTURE NOTICE") at any time during the period beginning after the date hereof and ending on and including the date which is the eighteen month anniversary of the effectiveness of the Registration Statement relating to the Initial Debentures and Initial Warrants. The Additional Debenture Notice shall be delivered at least ten Business Days prior to the Additional Closing Date set forth in the Additional Debenture Notice. The Additional Debenture Notice shall set forth (i) the principal amount of Additional Debentures and related Additional Warrants to be purchased by such Purchaser at the applicable Additional Closing Date, which principal amount, when added to the principal amount of any Additional Debentures previously purchased by such Purchaser, shall not exceed such Purchaser's Additional Investment Amount, (ii) the aggregate Purchase Price for the Additional Debentures and related Additional Warrants to be purchased and (iii) the Additional Closing Date. As used herein, "BUSINESS DAY" means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed. (d) Form of Payment. On each Closing Date, (i) each Purchaser shall pay its Purchase Price to the Company for the Debentures and Warrants to be issued and sold to such Purchaser at the applicable Closing, by wire transfer of immediately available funds in accordance with the Company's written wire instructions, and (ii) the Company shall deliver to each Purchaser the Debentures (in the principal amounts as such Purchaser shall request) which such Purchaser is then purchasing along with the Warrants (in the amounts as such Purchaser shall request) such Purchaser is purchasing, duly executed on behalf of the Company and registered in the name of such Purchaser or its designee. Section 2.2 Company Closing Deliveries. - 6 - (a) At the Initial Closing, the Company shall deliver or cause to be delivered to each Purchaser the following: (i) this Agreement duly executed by the Company; (ii) a Debenture, registered in the name of such Purchaser, evidencing the principal amount of Debentures purchased by such Purchaser, which amount is such Purchaser's Investment Amount; (iii) a Warrant, registered in the name of such Purchaser, pursuant to which such Purchaser shall have the right to acquire 250 shares of Common Stock for each $1,000 of such Purchaser's Investment Amount, at an exercise price equal to $1.4375; (iv) the legal opinion of Company Counsel, in agreed form, addressed to the Purchasers; (v) the Registration Rights Agreement duly executed by the Company; and (vi) a Voting Agreement substantially in the form of Exhibit H hereto. (b) At each Additional Closing, the Company shall deliver or cause to be delivered to each Purchaser the following: (i) a Debenture, registered in the name of such Purchaser, evidencing the principal amount of Debentures purchased by such Purchaser, which amount is such Purchaser's Additional Investment Amount; (ii) a Warrant, registered in the name of such Purchaser, pursuant to which such Purchaser shall have the right to acquire 250 shares of Common Stock for each $1,000 of such Purchaser's Additional Investment Amount, at an exercise price equal to $1.8125; (iii) the legal opinion of Company Counsel, in agreed form, addressed to the Purchasers; (iv) acknowledgment from the Company's transfer agent as to the continuing validity of the Transfer Agent Instructions; (v) certified copies of UCC search results, listing all effective financing statements which name as debtor the Company or any of its Subsidiaries and which are filed in each jurisdiction in which a secured creditor of the Company or any of its Subsidiaries should have filed since the previous Closing for which such search results were provided to perfect an interest in any assets thereof, together with copies of such financing statements, none of which, except as otherwise agreed in writing by the Purchasers, shall cover any of the Collateral (as defined in the Security Agreement and the Intellectual Property Security Agreement) and the results of - 7 - searches for any tax Lien and judgment Lien filed against such Person or its property, which results, except as otherwise agreed to in writing by the Purchasers, shall not show any such Liens; and (vi) a perfection certificate, duly completed and executed by the Company and each of its Subsidiaries, in form and substance satisfactory to the Purchasers. (c) Within two (2) Business Days of the Initial Closing, the Company shall deliver or cause to be delivered to each Purchaser the following: (i) the Security Agreement duly executed by the Company and the subsidiaries of the Company party thereto; and (ii) the Intellectual Property Security Agreement duly executed by the Company and the subsidiaries of the Company party thereto. (d) Within six (6) Business Days of the Initial Closing, the Company shall deliver or cause to be delivered to each Purchaser the following: (i) certified copies of UCC search results, listing all effective financing statements which name as debtor the Company or any of its Subsidiaries and which are filed in each jurisdiction in which a secured creditor of the Company or any of its Subsidiaries should have filed in the past five years to perfect an interest in any assets thereof, together with copies of such financing statements, none of which, except as otherwise agreed in writing by the Purchasers, shall cover any of the Collateral (as defined in the Security Agreement and the Intellectual Property Security Agreement) and the results of searches for any tax Lien and judgment Lien filed against such Person or its property, which results, except as otherwise agreed to in writing by the Purchasers, shall not show any such Liens; (ii) a perfection certificate, duly completed and executed by the Company and each of its Subsidiaries, in form and substance satisfactory to the Purchasers; and (iii) the Transfer Agent Instructions executed by the Company and delivered to and acknowledged by the Company's transfer agent. Section 2.3 Purchaser Closing Deliveries. (a) At the Initial Closing, each Purchaser shall deliver or cause to be delivered to the Company the following: (i) this Agreement duly executed by such Purchaser; (ii) such Purchaser's Investment Amount in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by the Company for such purpose; and - 8 - (iii) the Registration Rights Agreement duly executed by such Purchaser. (b) Within two (2) Business Days of the Initial Closing, each Purchaser shall deliver or cause to be delivered to the Company the following: (i) the Security Agreement duly executed by such Purchaser; and (ii) the Intellectual Property Security Agreement duly executed by such Purchaser. (c) At each Additional Closing, each Purchaser shall deliver or cause to be delivered to the Company such Purchaser's Additional Investment Amount in United States dollars and in immediately available funds, by wire transfer to an account designated in writing by the Company for such purpose. ARTICLE III. REPRESENTATIONS AND WARRANTIES Section 3.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to each Purchaser: (a) Subsidiaries. The Company has no direct or indirect Subsidiaries other than those listed in Schedule 3.1(a). Except as disclosed in Schedule 3.1(a), the Company owns, directly or indirectly, all of the capital stock of each Subsidiary free and clear of any and all Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights. (b) Organization and Qualification. Each of the Company and each Subsidiary is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and each Subsidiary is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, have or reasonably be expected to result in (i) an adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material and adverse effect on the results of operations, assets, business or financial condition of the Company and the Subsidiaries, taken as a whole, or (iii) an adverse impairment to the Company's ability to perform on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a "MATERIAL ADVERSE EFFECT"). - 9 - (c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder and to issue the Securities in accordance with the terms hereof and thereof. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Debentures and the Warrants and the reservation for issuance of the Underlying Shares and the Warrant Shares issuable upon conversion or exercise thereof or in respect of interest payable on the Debentures, as the case may be, have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, its Board of Directors or its stockholders in connection herewith and therewith. Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (a) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (b) as enforceability of any indemnification and contribution provisions may be limited under the federal and state securities laws and public policy, and (c) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (d) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Debentures and the Warrants and reservation for issuance of the Underlying Shares, any Interest Shares (as defined in the Debentures) and Warrant Shares) do not and will not (i) conflict with or violate any provision of the Company's or any Subsidiary's certificate or articles of incorporation, any certificate of designations, preferences and rights of any outstanding series of preferred stock, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations of the Trading Market), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect. (e) Filings, Consents and Approvals. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration (collectively, "CONSENTS") with, any court or other federal, state, local or other governmental - 10 - authority or any regulatory or self-regulatory agency or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filing of appropriate UCC financing statements with the appropriate states and other authorities pursuant to the Security Agreement and the Intellectual Property Security Agreement, (ii) the filing with the Commission of one or more Registration Statements in accordance with the requirements of the Registration Rights Agreement, (iii) the application(s) to the Nasdaq National Market for the listing of the Underlying Shares, any Interest Shares and the Warrant Shares for trading thereon if and in the time and manner required thereby, (iv) all filings required pursuant to Section 4.5 hereof, and (v) those Consents set forth in Schedule 3.1(e), which Consents have been obtained prior to the date hereof. (f) Issuance of the Securities. The Debentures and Warrants are duly authorized and, upon issuance in accordance with the terms hereof, shall be free from all taxes, liens and charges with respect to the issue thereof. The Underlying Shares, any Interest Shares and the Warrant Shares have been duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens, taxes and charges with respect to the issue thereof. The Company has reserved from its duly authorized capital stock the maximum number of shares of Common Stock issuable pursuant to the Debentures and the Warrants in order to issue the full number of Underlying Shares, any Interest Shares and Warrant Shares as are or may become issuable in accordance with the terms of the Debentures and the Warrants. Assuming the accuracy of each of the representations and warranties set forth in Section 3.2 hereof, the issuance by the Company of the Securities is exempt from registration under the 1933 Act. (g) Capitalization. The number of shares and type of all authorized, issued and outstanding capital stock of the Company is set forth in Schedule 3.1(g). Except as set forth in Schedule 3.1(g), no securities of the Company are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities and except as disclosed in Schedule 3.1(g), there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Except as set forth in Schedule 3.1(g), the issue and sale of the Securities will not, immediately or with the passage of time, obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. (h) SEC Reports; Financial Statements. The Company has filed all reports required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years - 11 - preceding the date hereof (or such shorter period as the Company was required by law to file such reports) (the foregoing materials being collectively referred to herein as the "SEC REPORTS" and, together with the Schedules to this Agreement, the "DISCLOSURE MATERIALS") on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. The Company has delivered to the Purchasers a copy of all SEC Reports not available on the EDGAR system. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company is in compliance with the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated thereunder by all government and regulatory authorities and agencies. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved ("GAAP"), except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. (i) Material Changes. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting or the identity of its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option plans, (vi) the Company has not sold any assets, individually or in the aggregate, in excess of $250,000 outside of the ordinary course of business or (vii) the Company has not had capital expenditures, individually or in the aggregate, in excess of $250,000. The Company does not have pending before the Commission any request for confidential treatment of information. (j) Litigation. Except as set forth in Schedule 3.1(j), there is no Action which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, individually or in the aggregate, - 12 - have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act. (k) Labor Relations. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company. (l) Compliance. Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator, governmental body, or regulatory or self-regulatory authority or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect. (m) Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect ("MATERIAL PERMITS"), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. (n) Title to Assets. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them that is material to their respective businesses and good and marketable title in all personal property owned by them that is material to their respective businesses, in each case free and clear of all Liens, except as set forth in Schedule 3.1(n) and except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and the Subsidiaries are in compliance in all material respects. - 13 - (o) Patents and Trademarks. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect (collectively, the "INTELLECTUAL PROPERTY Rights"). The Company does not have any knowledge of any infringement by the Company or its Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding being made or brought, or to the knowledge of the Company, being threatened, against the Company or its Subsidiaries regarding its Intellectual Property Rights. (p) Insurance. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged. The Company has no reason to believe that it or its Subsidiaries will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost, other than anticipated increases in the market price of officers' and directors' liability insurance generally. (q) Foreign Corrupt Practices. Neither the Company nor any direct director, officer or employee acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. (r) Transactions With Affiliates and Employees. Except as set forth in the SEC Reports, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. (s) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (iii) has set aside - 14 - on its books provision reasonably adequate for the payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. (t) Internal Accounting Controls. The Company and the Subsidiaries maintain a system of internal accounting controls which the audit committee of the board of directors reasonably believes is sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (u) Solvency. Based on the financial condition of the Company as of the Closing Date, (i) the Company's fair saleable value of its assets exceeds the amount that will be required to be paid on or in respect of the Company's existing debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company's assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). (v) No General Solicitation; Placement Agent's Fees. Neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities. The Company shall be responsible for the payment of any placement agent's fees, financial advisory or consultancy fees, brokers' commissions or finder's fee (other than for persons engaged by any Purchaser or its investment advisor) relating to or arising out of the transactions contemplated hereby, which fees are set forth on Schedule 3.1(v). The Company shall pay, and hold each Purchaser harmless against, any liability, loss or expense (including, without limitation, attorney's fees and out-of-pocket expenses) arising in connection with any such claim. (w) No Integrated Offering. None of the Company, its Subsidiaries, any of their Affiliates, and any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require - 15 - registration of any of the Securities under the 1933 Act or cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of the Company, its Subsidiaries, their Affiliates and any Person acting on their behalf will take any action or steps referred to in the preceding sentence that would require registration of any of the Securities under the 1933 Act or cause the offering of the Securities to be integrated with other offerings. (x) Certain Registration Matters. Assuming the accuracy of the Purchasers' representations and warranties set forth in Section 3.2(b)-(f), no registration under the Securities Act is required for the offer and sale of the Underlying Shares and Warrant Shares by the Company to the Purchasers as contemplated by the Transaction Documents. The Company is eligible to register the resale of its Common Stock for resale by the Purchasers under Form S-3 promulgated under the Securities Act. Except as described in Schedule 3.1(x), the Company has not granted or agreed to grant to any Person any rights (including "piggy-back" registration rights) to have any securities of the Company registered with the Commission or any other governmental authority that have not been satisfied. (y) Listing and Maintenance Requirements. Except as set forth in the SEC Reports or as set forth in Schedule 3.1(y), the Company has not, in the two years preceding the date hereof, received notice (written or oral) from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. Except for the maintenance of the $10 million minimum in shareholders' equity (pursuant to the rules and regulations of the Nasdaq Stock Market), the Company is currently in compliance with all such listing and maintenance requirements. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market and no approval of the shareholders of the Company is required for the Company to issue and deliver to the Purchasers the maximum number of shares of Common Stock contemplated by this Agreement, including by reason of the issuance of shares of Common Stock upon conversion in full of the Debentures and the issuance of the Warrant Shares upon exercise in full of the Warrants. (z) Investment Company. The Company is not, and is not an Affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (aa) Application of Takeover Protections. The Company has taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company's Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers solely as a result of the Purchasers and the Company fulfilling their - 16 - obligations or exercising their rights under the Transaction Documents, including without limitation the Company's issuance of the Securities and the Purchasers' ownership of the Securities. (bb) Ranking of Debentures. Except as set forth on Schedule 3.1(bb), no Indebtedness of the Company is senior to or ranks pari passu with the Debentures in right of payment, whether with respect of payment of redemptions, interest, damages or upon liquidation or dissolution or otherwise. (cc) Disclosure. The Company confirms that neither it nor any Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that the Company believes constitutes material, non-public information. The Company understands and confirms that the Purchasers will rely on the foregoing representations and covenants in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, furnished by or on behalf of the Company (including the Company's representations and warranties set forth in this Agreement) are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (dd) Acknowledgment Regarding Purchaser's Purchase of Securities. The Company acknowledges and agrees that each Purchaser is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and that no Purchaser is an officer or director of the Company. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by a Purchaser or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such Purchaser's purchase of the Securities. The Company further represents to each Purchaser that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives. Section 3.2 Representations and Warranties of the Purchasers. Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants to the Company as follows: (a) Organization; Authority. Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite power and authority to enter into and to consummate the transactions contemplated by the applicable Transaction Documents and otherwise to carry out its obligations thereunder. The execution, delivery and performance by such Purchaser of the transactions contemplated by this Agreement has been duly authorized by all necessary action on the part of such Purchaser. Each Transaction Document to which such Purchaser is a party has been (or upon delivery will have been) duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms - 17 - hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (a) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (b) as enforceability of any indemnification and contribution provisions may be limited under the federal and state securities laws and public policy, and (c) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (b) Investment Intent. Such Purchaser is acquiring the Securities as principal for its own account for investment purposes only and not with a view to or for distributing or reselling such Securities or any part thereof, without prejudice, however, to such Purchaser's right at all times to sell or otherwise dispose of all or any part of such Securities in compliance with applicable federal and state securities laws. Nothing contained herein shall be deemed a representation or warranty by such Purchaser to hold the Securities for any period of time. Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business. Such Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities. (c) Purchaser Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it exercises the Warrants it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. Such Purchaser is not a registered broker-dealer under Section 15 of the Exchange Act. (d) Experience of such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment. (e) General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement. (f) Access to Information. Such Purchaser acknowledges that it has reviewed the Disclosure Materials and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that - 18 - is necessary to make an informed investment decision with respect to the investment. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company's representations and warranties contained in the Transaction Documents. The Company acknowledges and agrees that each Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2. ARTICLE IV. OTHER AGREEMENTS OF THE PARTIES Section 4.1 Transfer Restrictions. (a) Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of the Securities other than pursuant to an effective registration statement, to the Company, to an Affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. (b) Certificates evidencing the Securities will contain the following legend, so long as is required by this Section 4.1(b): [NEITHER] THESE SECURITIES [NOR THE SECURITIES ISSUABLE UPON [EXERCISE][CONVERSION] OF THESE SECURITIES] HAVE [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. - 19 - The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement or grant a security interest in some or all of the Securities and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval or consent of the Company and no legal opinion of legal counsel to the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser's expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of Selling Stockholders thereunder. (c) Certificates evidencing the Underlying Shares, the Interest Shares and Warrant Shares shall not contain any legend (including the legend set forth in Section 4.1(b)): (i) while a registration statement (including the Registration Statement) covering the resale of such Underlying Shares, the Interest Shares and Warrant Shares is effective under the Securities Act, or (ii) following any sale of such Underlying Shares, the Interest Shares or Warrant Shares pursuant to Rule 144, or (iii) if such Underlying Shares, the Interest Shares or Warrant Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the Staff of the Commission). The Company shall cause its counsel to issue the legal opinion included in the Transfer Agent Instructions to the Company's transfer agent on the Effective Date. Following the Effective Date or at such earlier time as a legend is no longer required for the Underlying Shares, the Interest Shares and Warrant Shares under this Section 4.1(c), the Company will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Company's transfer agent of a certificate representing Underlying Shares, the Interest Shares or Warrant Shares containing a restrictive legend, deliver or cause to be delivered to such Purchaser a certificate representing such Underlying Shares, the Interest Shares or Warrant Shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. Section 4.2 Furnishing of Information. As long as any Purchaser owns the Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Underlying Shares and Warrant Shares under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time - 20 - to enable such Person to sell such Underlying Shares and Warrant Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. Section 4.3 Integration. The Company shall not, and shall use its best efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market. Section 4.4 Subsequent Registrations and Subsequent Placements. (a) Prior to the Effective Date, the Company shall not file a registration statement (including any shelf registration statements) (other than on Form S-8 or pursuant to the Registration Rights Agreement) with the Commission with respect to any securities of the Company (other than a registration statement with respect to 126,000 shares of Common Stock issued in September 2003 to A.G.A. Means of Protection and Commerce Ltd. or pre-effective amendments to such registration statement). (b) Prior to the expiration of the first anniversary of the Effective Date, the Company will not, directly or indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition of) any of Common Stock or Common Stock Equivalents or any of its Subsidiaries' equity or Common Stock Equivalents, including without limitation, pursuant to a private placement, an equity line of credit or a shelf registration statement in accordance with Rule 415 under the Securities Act, (such offer, sale, grant, disposition or announcement being referred to as a "SUBSEQUENT Placement"), unless: (i) the Company delivers to each Purchaser a written notice (the "SUBSEQUENT PLACEMENT Notice") of its intention to effect such Subsequent Placement, which Subsequent Placement Notice shall describe in reasonable detail the proposed terms of such Subsequent Placement, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Placement is proposed to be effected, and attached to which shall be a term sheet or similar document relating thereto and (ii) such Purchaser shall not have notified the Company by 6:30 p.m. (New York City time) on the seventh Trading Day after (but not including) its receipt of the Subsequent Placement Notice of its willingness to provide (or to cause its designee to provide), subject to completion of mutually acceptable documentation, all or part of such financing to the Company on the same terms set forth in the Subsequent Placement Notice. If the Purchasers shall fail to so notify the Company of their willingness to participate in full in the Subsequent Placement, the Company may effect the remaining portion of such Subsequent Placement on the terms and to the Persons set forth in the Subsequent Placement Notice. The Company shall provide the Purchasers with a second Subsequent Placement Notice and the Purchasers will again have the right of first refusal set forth in this Section 4.4(b), if the Subsequent Placement subject to the initial Subsequent Placement Notice is not consummated for any reason on the terms set forth in such Subsequent Notice within 45 Trading Days after the date - 21 - of the initial Subsequent Placement Notice with the Person identified in the Subsequent Placement Notice. If the Purchasers indicate a willingness to provide financing in excess of the amount set forth in the Subsequent Placement Notice, then each Purchaser will be entitled to provide financing pursuant to such Subsequent Placement Notice up to an amount equal to such Purchaser Percentage of the financing, but the Company shall not be required to accept financing from the Purchasers in an amount in excess of the amount set forth in the Subsequent Placement Notice. For purposes hereof, a Subsequent Placement shall not include a bona fide firm commitment underwritten public offering with a nationally recognized underwriter which generates gross proceeds to the Company in excess of $30,000,000 (other than an "at-the-market offering" as defined in Rule 415(a)(4) under the 1933 Act and "equity lines"). (c) The restrictive period set forth in the first sentence of Section 4.4(b) shall be extended for the number of Trading Days during such period in which (i) trading in the Common Stock is suspended by any Trading Market, or (ii) following the Effective Date, the Registration Statement is not effective or the prospectus included in the Registration Statement may not be used by the Purchasers for the resale of the Underlying Shares and the Warrant Shares. (d) The restrictions contained in Sections 4.4(b) shall not apply to any grant or issuance by the Company of any of the following: (i) the issuance of securities upon the exercise or conversion of any Common Stock Equivalents issued by the Company prior to the date of this Agreement and listed on Schedule 3.1(g), and (ii) the grant of options or warrants, or the issuance of additional securities, under any duly authorized Company stock option, restricted stock plan or stock purchase plan in existence on the Closing Date (but not as to any amendments or other modifications to the number of Common Stock issuable thereunder, the terms set forth therein, or the exercise price set forth therein). Section 4.5 Securities Laws Disclosure; Publicity. On or before 8:30 a.m., New York Time, on the second Trading Day following the Closing Date, the Company shall file a Current Report on Form 8-K describing the terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act, and attaching the material Transaction Documents (including, without limitation, this Agreement, the form of each of the Debenturess, the form of Warrant and the Registration Rights Agreement) as exhibits to such filing (including all attachments, the "8-K FILING"). From and after the filing of the 8-K Filing with the SEC, no Purchaser shall be in possession of any material, nonpublic information received from the Company, any of its Subsidiaries or any of its respective officers, directors, employees or agents, that is not disclosed in the 8-K Filing. The Company shall not, and shall cause each of its Subsidiaries and its and each of their respective officers, directors, employees and agents, not to, provide any Purchaser with any material nonpublic information regarding the Company or any of its Subsidiaries from and after the filing of the 8-K Filing with the SEC without the express written consent of such Purchaser. Subject to the foregoing, neither the Company nor any Purchaser shall issue any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any - 22 - Purchaser, to make any press release or other public disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as is required by applicable law and regulations, including the applicable rules and regulations of the Trading Market (provided that in the case of clause (i) each Purchaser shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release). Section 4.6 Indemnification of Purchasers. The Company will indemnify and hold the Purchasers and their directors, officers, shareholders, members, partners, employees and agents (each, a "PURCHASER PARTY") harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys' fees and costs of investigation (collectively, "LOSSES") that any such Purchaser Party may suffer or incur as a result of or relating to (a) any misrepresentation, breach or inaccuracy, or any allegation by a third party that, if true, would constitute a breach or inaccuracy, of any of the representations, warranties, covenants or agreements made by the Company in any Transaction Document; or (b) any Action brought or made against such Purchaser Party and solely arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any of the other Transaction Documents. In addition to the indemnity contained herein, the Company will reimburse each Purchaser Party for its reasonable legal and other expenses (including the cost of any investigation, preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred. Section 4.7 Shareholders Rights Plan. No claim will be made or enforced by the Company or any other Person that any Purchaser is an "Acquiring Person" under any shareholders rights plan or similar plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving the Securities under the Transaction Documents or under any other agreement between the Company and the Purchasers. Section 4.8 Non-Public Information. The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company. Section 4.9 Use of Proceeds. The Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes and not for the satisfaction of any portion of the Company's debt (other than payment of trade receivables and accrued expenses in the ordinary course of the Company's business and consistent with prior practices), to redeem any Company - 23 - equity or equity-equivalent securities or to settle any outstanding litigation. Section 4.10 Secured Obligation. The payment obligations under the Debentures are secured pursuant to the Security Agreement and the Intellectual Property Security Agreement. Section 4.11 Proxy Statement. The Company shall provide each stockholder entitled to vote at a meeting of stockholders of the Company, which meeting shall be called and held not later than June 19, 2004 (the "STOCKHOLDER MEETING DEADLINE"), a proxy statement, which has been previously reviewed by the Purchasers and a single legal counsel of their choice, soliciting each such stockholder's affirmative vote at such stockholder meeting for approval of the Company's issuance of all of the Securities as described in the Transaction Documents in accordance with applicable law and the rules and regulations of the Trading Market (such affirmative approval being referred to herein as the "STOCKHOLDER APPROVAL"), and the Company shall use its best efforts to solicit its stockholders' approval of such issuance of the Securities and to cause the Board of Directors of the Company to recommend to the stockholders that they approve such proposal. The Company shall be obligated to obtain the Stockholder Approval by the Stockholder Meeting Deadline. Section 4.12 Revised Schedule. The Company will deliver a finalized Schedule 3.1(g) by the end of the business day on October 2, 2003. Such final Schedule 3.1(g) will not be materially different, then the preliminary version of such Schedule delivered at the Initial Closing. ARTICLE V. MISCELLANEOUS Section 5.1 Fees and Expenses. At the Closing, the Company shall reimburse Smithfield Fiduciary LLC (a Purchaser) for its legal and due diligence fees and expenses in connection with the preparation and negotiation of the Transaction Documents by paying up to $25,000 (in addition to any previously paid amounts) to Schulte Roth & Zabel LLP, which amount shall be withheld by such Purchaser from its Purchase Price to be paid at Closing. Except as otherwise set forth in this Agreement or in the Registration Rights Agreement, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the sale of the Securities. Section 5.2 Entire Agreement. The Transaction Documents, and the Security Documents together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. - 24 - Section 5.3 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Arotech Corporation 632 Broadway Suite 1200 New York, New York 10012 Facsimile No.: (646) 654-2187 Telephone No.: (646) 654-2107 Attn: Chief Executive Officer With a copy to: Electric Fuel (E.F.L.) Ltd. One HaSolela Street, POB 641 Western Industrial Park Beit Shemesh 99000, Israel Facsimile No.: 011-972-2-990-6688 Telephone No.: 011-972-2-990-6623 Attn.: General Counsel If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereof; or such other address as may be designated in writing hereafter, in the same manner, by such Person. Section 5.4 Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each of the Purchasers or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. - 25 - Section 5.5 Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents. Section 5.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers. Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the "Purchasers." Section 5.7 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.6. Section 5.8 Liquidated Damages. The Company's obligations to pay any liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such liquidated damages or other amounts are due and payable shall have been canceled. Such liquidated damages are not to be construed as the sole damages for remedies available to the Persons entitled to the same. The parties hereby agree that all remedies and damages are cumulative. Section 5.9 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, stockholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in The City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such Proceeding has been commenced in an - 26 - improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If any party shall commence a Proceeding to enforce any provisions of a Transaction Document, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorney's fees and other actual costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. Section 5.10 Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closing, the conversion of the Debentures and exercise of the Warrants and the delivery of the Underlying Shares and Warrant Shares, as applicable. Section 5.11 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that all parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof. Section 5.12 Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. Section 5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights. Section 5.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new - 27 - certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities. If a replacement certificate or instrument evidencing any Securities is requested due to a mutilation thereof, the Company may require delivery of such mutilated certificate or instrument as a condition precedent to any issuance of a replacement. Section 5.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. Section 5.16 Payment Set Aside. To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Section 5.17 Independent Nature of Purchasers' Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser confirms that it has independently participated in the negotiation of the transactions contemplated hereby with the advice of its own counsel and advisors. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Section 5.18 Action by Purchasers. Any action required or permitted under any of the Transaction Documents to be taken by or on behalf of the Purchasers shall, for such action to be valid, require the approval of the - 28 - Majority-in-Interest prior to the taking of such action. If the consent, approval or disapproval of the Purchasers is required or permitted pursuant to any of the Transaction Documents, such consent, approval or disapproval shall only be valid if given by the Majority-in-Interest. "MAJORITY-IN-INTEREST" means the Purchaser or Purchasers (as the case may be) holding in excess of a majority of the outstanding aggregate principal amount under the Debentures, determined on a cumulative basis. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES FOLLOW] - 29 - IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. AROTECH CORPORATION By: ------------------------------------ Name: Title: [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASERS FOLLOW] - 30 - IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. SMITHFIELD FIDUCIARY LLC By: -------------------------------------- Name: Title: Investment Amount: $1,750,000 Address for Notice: c/o Highbridge Capital Management, LLC 9 West 57th Street, 27th Floor New York, New York 10019 Attention: Ari J. Storch / Adam J. Chill Facsimile No.: (212) 751-0755 Telephone No.: (212) 287-4720 With a copy to: Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Facsimile No.: (212) 593-5955 Telephone No.: (212) 756-2376 Attention: Eleazer Klein, Esq. - 31 - IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. OMICRON MASTER TRUST By: -------------------------------------- Name: Title: Investment Amount: $500,000 Address for Notice: c/o Omicron Capital L.P. 810 Seventh Avenue 39th Floor New York, New York 10019 Attention: Olivier Morali Facsimile: (212) 803-5269 Telephone: (212) 803-5262 - 32 - IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. PORTSIDE GROWTH AND OPPORTUNITY FUND By: ------------------------------ Name: Title: Investment Amount: $750,000 Address for Notice: c/o Ramius Capital Group, L.L.C. 666 Third Avenue, 26th Floor New York, New York 10006 Facsimile No.: (212) 845-7999 Telephone No.: (212) 845-7917 Attention: Jeffrey Solomon Jeffrey Smith - 33 - IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. MAINFIELD ENTERPRISES INC. By: ------------------------------------- Name: Title: Investment Amount: $750,000 Address for Notice: c/o Cavallo Capital Corp. 660 Madison Avenue, 18th Floor New York, New York 10021 Attention: Mor Sagi Facsimile: (212) 651-9010 Telephone: (212) 651-9005 - 34 - IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. CRANSHIRE CAPITAL L.P. By: ------------------------------------- Name: Title: Investment Amount: $750,000 Address for Notice: c/o Downsview Capital, Inc. The General Partner 666 Dundee Road, Suite 1901 Northbrook, IL 60062 Attention: Mitchell D. Kopin Facsimile: (847) 562-9031 Telephone: (847) 562-9030 - 35 - IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. CLEVELAND OVERSEAS LTD. By: --------------------------------- Name: Title: Investment Amount: $500,000 Address for Notice: ---------------- ---------------- ---------------- Facsimile No.: (___) ___-____ Telephone No.: (___) ___-____ Attention: ______________ - 36 - EXHIBITS -------- Exhibit A Form of Debentures Exhibit B Form of Warrants Exhibit C Form of Registration Rights Agreement Exhibit D Form of Irrevocable Transfer Agent Instructions Exhibit E Form of Company Counsel Opinion Exhibit F Intellectual Property Security Exhibit G Security Agreement Exhibit H Voting Agreement SCHEDULES --------- Schedule 3.1(a) Subsidiaries Schedule 3.1(e) Consents Schedule 3.1(g) Capitalization Schedule 3.1(j) Litigation Schedule 3.1(x) Registration Rights Schedule 3.1(y) Listing and Maintenance Requirements Exceptions Schedule 3.1(bb) Ranking EX-4.2 4 v00188_ex4-2.txt EXHIBIT 4.2 FORM OF DEBENTURE NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. ORIGINAL ISSUE DATE: SEPTEMBER 30, 2003 No. [ ] $[ ] AROTECH CORPORATION 8% SECURED CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 2006 THIS DEBENTURE is one of a series of duly authorized and issued debentures of AROTECH CORPORATION, a corporation organized under the laws of Delaware (the "COMPANY"), designated as its 8% Secured Convertible Debentures due September 30, 2006 in the aggregate principal amount of up to Eleven Million Dollars ($11,000,000) (collectively, the "DEBENTURES"). FOR VALUE RECEIVED, the Company promises to pay to the order of [SMITHFIELD FIDUCIARY LLC] or its registered assigns (the "HOLDER") the principal sum of [ ] Dollars ($[ ]) and any additional sums due pursuant to the terms hereof, on September 30, 2006, or such earlier date as the Debentures are required or permitted to be repaid as provided hereunder (the "MATURITY DATE"), and to pay interest to the Holder on the principal amount of this Debenture in accordance with the provisions hereof. This Debenture is subject to the following additional provisions. 1. Definitions. In addition to the terms defined elsewhere in this Debenture, capitalized terms that are not otherwise defined herein shall have the meanings given to such terms in the Securities Purchase Agreement dated as of September 30, 2003 to which the Company and the original Holder are parties (the "PURCHASE Agreement"). "AFFILIATE" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act. "BANKRUPTCY EVENT" means any of the following events: (a) the Company or any subsidiary thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or Liquidation or similar law of any jurisdiction relating to the Company or any subsidiary thereof; (b) there is commenced against the Company or any subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company or any subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Company or any subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any subsidiary thereof fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; (g) the Company or any subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) the Company or any subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing. "BLOOMBERG" means Bloomberg Financial L.P. (or its successor to reporting stock prices). "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close. "CLOSING PRICE" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on an Trading Market, the closing bid price per share of the Common Stock for such date (or the nearest preceding date if there is no such price on such date) on the Trading Market on which the Common Stock is then listed or quoted; (b) if the Common Stock is not then listed or quoted on an Trading Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the closing bid price per share of the Common Stock for such date (or the nearest preceding date if there is no such price on such date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on an Trading Market or the OTC Bulletin Board and if prices for the Common Stock are then reported in the "Pink Sheets" published by the Pink Sheets LLC (formerly the National Quotation Bureau Incorporated) (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder. "COMMISSION" means the Securities and Exchange Commission. - 2 - "COMMON STOCK" means the Company's Common Stock, $.01 par value per share, and stock of any other class into which such shares may be reclassified. "COMPANY REDEMPTION PRICE" means the sum of (i) the outstanding principal amount of this Debenture plus (ii) all other amounts, interest and liquidated damages due in respect of this Debentures. "CONVERSION DATE" is the date specified in a Conversion Notice to effect conversions of Debentures under Section 5(a), which date may not be prior to (i) January 1, 2004 and (ii) the date the Holder delivers such Conversion Notice. If no Conversion Date is specified in a Conversion Notice, then the Conversion Date for such notice shall be the date that such notice is deemed delivered hereunder. "CONVERSION PRICE" means [INSERT IN INITIAL DEBENTURES ONLY: $1.15 (subject to adjustment in accordance with Section 5(d))][INSERT IN ADDITIONAL DEBENTURES ONLY: $1.45 (subject to adjustment in accordance with Section 5(d))]. "DISTRIBUTION" means, with respect to any Person, the declaration or payment of any dividends by such Person, or the purchase, redemption, retirement or other acquisition for value of any of its capital stock or other equity now or hereafter outstanding, or the making of any distribution of assets to its stockholders as such whether in cash, assets or in obligations of such Person, or the allocation or other setting apart of any sum for the payment of any dividend or distribution on, or for the purchase, redemption, retirement or other acquisition of any shares of its capital stock, or the making of any other distribution by reduction of capital or otherwise in respect of any shares of its capital stock. "EFFECTIVE DATE" means the date that the Registration Statement is first declared effective by the Securities and Exchange Commission. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EQUITY CONDITIONS" means, with respect to a specified issuance of Common Stock, that each of the following conditions is satisfied: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for such issuance; (ii) such shares of Common Stock are registered for resale by the Holder pursuant to an effective registration statement, and the prospectus thereunder is available for use by the Holder to sell such shares, or all such shares may be sold by the Holder without volume restrictions pursuant to Rule 144(k) under the Securities Act; (iii) the Common Stock is listed or quoted (and is not suspended from trading) on a Trading Market and such shares of Common Stock are approved for listing on such Trading Market upon issuance; (iv) such issuance would be permitted in full without violating the rules or regulations of the Trading Market on which such shares are listed or quoted; (v) no Bankruptcy Event has occurred; (vii) the Company is not in default with respect to any obligation hereunder or under any other Transaction Document; or (ix) no Event of Default nor any event that with the passage of time and without being cured would constitute an Event of Default which has occurred and not been cured. - 3 - "EVENT OF DEFAULT" means the occurrence of any one or more of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (i) any default in the payment of principal or liquidated damages in respect of any Debentures, as and when the same becomes due and payable (whether by acceleration or otherwise) or any default in the payment of interest in respect of any Debentures, within five Trading Days of when the same becomes due and payable; (ii) the Company or any Subsidiary defaults in any of its obligations under any other debenture or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness, whether such Indebtedness now exists or is hereafter created, and such default results in such Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable; (iii) a Bankruptcy Event; (iv) the Company shall fail for any reason to deliver certificates representing Underlying Shares issuable upon a conversion hereunder that comply with the provisions hereof prior to the fifth Trading Day after the Conversion Date or the Company shall provide notice to any Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversion of Debentures in accordance with the terms hereof; (v) the Company shall fail for any reason to pay in full the amount of cash due pursuant to a Buy-In within seven days after notice therefor is delivered hereunder or shall fail to pay any liquidated damages due pursuant to the Transaction Documents within seven days of the date of the request for such payment; (vi) the Company shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder; (vii) a Fundamental Transaction with respect to the Company or its subsidiaries; (viii) the Registration Statement shall not have been declared effective by the Commission on or prior to the 120th day after the Original Issue Date; (ix) during the Effectiveness Period (as defined in the Registration Rights Agreement), the effectiveness of the Registration Statement lapses for any reason or the Holder shall not be permitted to resell Registrable Securities (as defined in the Registration Rights Agreement) under the Registration Statement, in either case, for more than five consecutive Trading Days or an aggregate of eight Trading Days (which need not be consecutive Trading Days); - 4 - (x) an Event (as defined in the Registration Rights Agreement) shall not have been cured to the satisfaction of the Holder prior to the expiration of ten days from the Event Date (as defined in the Registration Rights Agreement) relating thereto (other than an Event resulting from a failure of a Registration Statement to be declared effective by the Commission on or prior to the 120th day after the Original Issue Date, which shall be covered by clause (viii) above); (xi) the Company defaults in the timely performance of any other obligation under the Transaction Documents (including, without limitation, any of the Security Agreements and pursuant to Sections 2.2(c) and 2.2(d) of the Purchase Agreement) and such default continues uncured for a period of five Trading Days after the date on which written notice of such default is first given to the Company by the Holder (it being understood that no prior notice need be given in the case of a default that cannot reasonably be cured within five Trading Days or for defaults pursuant to Section 2.2(c) of the Purchase Agreement); and (xii) the Company or any Subsidiary takes (or agrees to take) any Restricted Action in violation of this Debenture. "FUNDAMENTAL TRANSACTION" means any (i) merger or consolidation of the Company with or into another Person, (ii) any sale of more than one-half of the assets of the Company (on an as valued basis) in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property. "INDEBTEDNESS" shall mean the principal amount of, premium, if any, profit participation, if any, and accrued and unpaid interest on and all other amounts and costs payable in respect of (a) indebtedness for money borrowed from others; (b) indebtedness guaranteed, directly or indirectly, in any manner, or in effect guaranteed, directly or indirectly, in any manner through an agreement, contingent or otherwise, to supply funds to, or in any other manner invest in the debtor, or to purchase indebtedness, or to purchase and pay for property if not delivered or pay for services if not performed, primarily for the purpose of enabling the debtor to make payment of the indebtedness or to assure the owners of the indebtedness against loss; (c) all indebtedness secured by any mortgage, lien, pledge, charge or other encumbrance upon property owned by the Company; (d) all indebtedness of such person created or arising under any conditional sale, lease (intended primarily as a financing device) or other title retention or security agreement with respect to property acquired by the Company even though the rights and remedies of the seller, lessor or lender under such agreement or lease in the event of a default may be limited to repossession or sale of such property; and (e) renewals, extensions and refundings of any such indebtedness. "INITIAL ISSUANCE DATE" means September 30, 2003. - 5 - "INTEREST PAYMENT DATE" means each of March 31, June 30, September 30 and December 31, except if such date is not a Trading Day, in which case such Interest Payment Date shall be the next succeeding Trading Day. "INTEREST SHARES" means shares of Common Stock issued or issuable in payment of accrued interest under Section 2. "LIEN" means any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, financing lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "LIQUIDATION" means for any Person, any liquidation, dissolution or winding-up of such Person, whether voluntary or involuntary, by operation or law or otherwise. "MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal the sum of: (i) the greater of (A) the principal amount of Debentures to be prepaid and, if applicable, the Reinstated Principal (to the extent the Holder returns the Underlying Shares subject to such Reinstated Principal), plus all accrued and unpaid interest thereon, and (B) the principal amount of Debentures to be prepaid and, if applicable, the Reinstated Principal (to the extent the Holder returns the Underlying Shares subject to such Reinstated Principal), plus all accrued and unpaid interest thereon, divided by the Conversion Price on the Trading Day immediately preceding (x) the date of the Event of Default or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is less, multiplied by the Closing Price on (x) the date of the Event of Default or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures. "ORIGINAL ISSUE DATE" means the date of the first issuance of this Debenture regardless of the number of transfers of any particular Debenture and regardless of the number of certificates which may be issued to evidence such Debenture. "OUTSTANDING DEBENTURES" means the Company's outstanding 9% Secured Convertible Debentures due June 30, 2005. "PERSON" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened concerning the interpretation, enforcement or defense of any transaction contemplated by any Transaction Document (whether brought against a party hereto or such parties affiliates, directors, officers, employees or agents). "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible, of the Company or any of its subsidiaries, now or hereinafter acquired. - 6 - "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, dated as of the Initial Issuance Date, to which the Company and the original Holders are parties, as amended, modified or supplemented from time to time in accordance with its terms. "REGISTRATION STATEMENT" means a registration statement meeting the requirements of the Registration Rights Agreement and covering the resale of, among other things, all Underlying Shares by the Holders, who shall be named as "selling stockholders" thereunder. "REINSTATED PRINCIPAL" means the principal amount of Debentures converted during the ten Trading Days preceding the delivery of an Event of Default Notice, for which the Company issued or was obligated to issue Underlying Shares to the Holder. "RESTRICTED ACTIONS" means the taking by Company or any of its subsidiaries of any of the following actions: (i) create, incur, assume or suffer to exist any Indebtedness, other than Indebtedness reflected in the Company's most recent quarterly financial statement that has been filed with the Commission prior to the Initial Issuance Date or Indebtedness incurred in the ordinary course of business consistent with past practice and not in excess of $100,000; provided, however, that EF Battery Corporation, a Subsidiary of the Company, may incur Indebtedness in an amount not to exceed $1,000,000 in the aggregate to be used solely in connection with the operation of the zinc air battery business, which amount will be only secured by the assets of EF Battery Corporation; (ii) create, incur, assume or suffer to exist any guaranty, provided, that the Company may suffer to exist any existing guaranties for obligations of Subsidiaries that it had entered into in the ordinary course of business consistent with past practice; (iii) create, incur, assume or suffer to exist any Lien, upon or with respect to any interest in Property, except for Liens disclosed in the Purchase Agreement or for Liens pursuant to the Debentures, or the Outstanding Debentures or for Liens incurred in connection with the settlement with Yehuda Harats regarding assets of Electric Fuel (E.F.L.) Ltd.; (iv) create, incur, assume or suffer to exist any obligation as lessee for the rental or hire of any Property, except leases existing on the Initial Issuance Date, and any extensions, supplements or renewals thereof; (v) make any loan or advance to any Person or any purchase or other acquisition of any capital stock, assets, obligations or other securities of any Person, or any capital contribution to, investment in, or other acquisition of any interest in, any Person; (vi) make any Distribution, except that any Subsidiary may make Distributions to the Company; (vii) make any capital expenditures, in any single or a series of related transactions, during any year, exceeding $150,000; - 7 - (viii) sell, lease, assign, transfer or otherwise dispose of any of its now owned or hereafter acquired Property (including, without limitation, shares of stock and Indebtedness, receivables and leasehold interests), except in the ordinary course of business consistent with past practices; (ix) sell, lease, assign or otherwise dispose of any Property to any Affiliate; (a) merge into or consolidate with or purchase or acquire Property from any Affiliate; or (b) enter into any other transaction directly or indirectly with or for the benefit of any Affiliate (including, without limitation, guaranties and assumption of obligations of any Affiliate); provided that; any Affiliate who is an individual may serve as a director, officer or employee of the Company or any subsidiary thereof and receive reasonable compensation for his or her services in such capacity; (x) merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of related transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, or acquire all or substantially all of the assets or the business of any Person (or enter into any agreement to do any of the foregoing); (xi) take any action that would permit the sale, lease, assignment, transfer or other disposition by MDT Armor Corporation of any of its assets other than in the ordinary course of business; (xii) take any action or otherwise allow EF Battery Corporation to conduct Acquisitions (as defined in the Security Agreement) for an amount in excess of $1,000,000 in the aggregate; or (xiii) enter into any agreement with respect to any of the foregoing provisions (i) through (xii). "SECURITIES ACT" means the Securities Act of 1933, as amended. "SECURITY AGREEMENTS" means (i) the Security Agreement (as defined in the Purchase Agreement) and (ii) the Intellectual Property Security Agreement (as defined in the Purchase Agreement). "TRADING DAY" means (i) a day on which the Common Stock is traded on an Trading Market, or (ii) if the Common Stock is not listed on an Trading Market, a day on which the Common Stock is traded in the over the counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over the counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day. - 8 - "TRADING MARKET" means whichever of the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or The Nasdaq SmallCap Market on which the Common Stock is then listed or quoted on the date in question. "TRANSACTION DOCUMENTS" shall have the meaning set forth in the Purchase Agreement. "UNDERLYING SHARES" means, collectively, the Common Stock issuable upon conversion of this Debenture and the Interest Shares in accordance with the terms hereof. "VWAP" means, with respect to any date of determination, the daily volume weighted average price (as reported by Bloomberg using the VAP function) of the Common Stock on such date of determination, or if there is no such price on such date of determination, then the daily volume weighted average price on the date nearest preceding such date. 2. Interest. (a) The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture (including any interest added to such principal in accordance with this Section 2) at the rate of 8% per annum, payable in arrears on each Interest Payment Date and on the Maturity Date. Interest shall be payable on each Interest Payment Date, to the Holder, in cash or, at the option of the Company, in shares of Common Stock (the "INTEREST SHARES") provided that the interest which accrued during any period shall be payable in Interest Shares if, and only if, the Company delivers written notice of such election ("INTEREST ELECTION NOTICE") to the Holder at least 10 Trading Days prior to the Interest Payment Date (each, an "INTEREST ELECTION DATE"). Interest to be paid on an Interest Payment Date in Interest Shares shall be paid in a number of Interest Shares equal to the quotient obtained by dividing the amount of such interest by 90% of the arithmetic average of the VWAP for each of the five (5) Trading Days immediately preceding (but not including) the Interest Payment Date. Interest shall be calculated on the basis of a 360 day year and shall accrue daily commencing on the Original Issue Date (regardless of the number of transfers of the Debentures). If any Interest Shares are to be paid on an Interest Payment Date, then the Company shall (X) issue and deliver on the applicable Interest Payment Date, to such address as specified by the Holder in writing to the Company at least two Business Days prior to the applicable Interest Payment Date, a certificate, registered in the name of the Holder or its designee, for the number of Interest Shares to which the Holder shall be entitled, or (Y) provided that the Company's transfer agent (the "TRANSFER AGENT") is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer Program and such Interest Shares do not require the placement of any legends restricting transfer of such Interest Shares, upon the request of the Holder, credit such aggregate number of Interest Shares to which the Holder shall be entitled to the Holder's or its designee's balance account with DTC through its Deposit Withdrawal Agent Commission System. Notwithstanding the foregoing, the Company shall not be entitled to pay interest in Interest Shares and shall be required to pay such interest in cash on the applicable Interest Payment Date if (w) the Equity Conditions are not satisfied with respect to the Interest Shares on each day during the period beginning on the applicable Interest Election Date and ending on and including the applicable Interest Payment Date, or (y) the Company has not obtained the Stockholder Approval (as defined in the Purchase Agreement) - 9 - prior to the Interest Election Date. The Company shall pay any and all taxes that may be payable with respect to the issuance and delivery of Interest Shares. (b) If the Company fails for any reason to pay interest on the Interest Payment Date, the Holder may (but shall not be required to) treat such interest as if it had been added to the principal amount of this Debenture as of such Interest Payment Date. (c) Any interest to be paid hereunder that is not paid on the Interest Payment Date and not added to the principal amount of the Debenture shall continue to accrue and shall entail a late fee, which must be paid in cash, at the rate of 12% per annum or the lesser rate permitted by applicable law (such fees to accrue daily, from the date such interest is due hereunder through and including the date of payment). 3. Registration of Debentures. The Company shall register the Debentures upon records to be maintained by the Company for that purpose (the "DEBENTURE REGISTER") in the name of each record holder thereof from time to time. The Company may deem and treat the registered Holder of this Debenture as the absolute owner hereof for the purpose of any conversion hereof or any payment of interest hereon, and for all other purposes, absent actual notice to the contrary. 4. Registration of Transfers and Exchanges. The Company shall register the transfer of any portion of this Debenture in the Debenture Register upon surrender of this Debenture to the Company at its address for notice set forth herein. Upon any such registration or transfer, a new debenture, in substantially the form of this Debenture (any such new debenture, a "NEW DEBENTURE"), evidencing the portion of this Debenture so transferred shall be issued to the transferee and a New Debenture evidencing the remaining portion of this Debenture not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Debenture by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Debenture. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge or other fee will be imposed in connection with any such registration of transfer or exchange. Transfers of this Debenture and the Underlying Shares are governed by Section 4.1 of the Purchase Agreement. 5. Conversion. (a) At the Option of the Holder. All or any portion of the principal amount of this Debenture then outstanding (together with all accrued but unpaid interest thereon) shall be convertible into Common Stock (subject to the limitations set forth in Section 5(b)), at the option of the Holder, at any time and from time to time from and after the January 1, 2004. Holders shall effect conversions under this Section 5(a) by delivering the Company with a written notice in the form attached hereto as Exhibit A (a "CONVERSION NOTICE") together with a schedule in the form of Schedule 1 attached hereto (the "CONVERSION SCHEDULE"). The number of Underlying Shares issuable upon any conversion hereunder shall (subject to the limitations of Section 5(b)) equal the outstanding principal amount of this Debenture (plus all accrued but unpaid interest thereon) to be converted divided by the Conversion Price. - 10 - (b) Certain Conversion Restrictions. (i) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by a Holder upon any conversion of Debentures (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such conversion (or other issuance), the total number of shares of Common Stock then beneficially owned by such Holder and its affiliates and any other Persons whose beneficial ownership of shares of Common Stock would be aggregated with such Holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 4.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such conversion). For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Holder and its affiliates shall exclude shares of Common Stock which would be issuable upon (i) conversion of the remaining, unconverted portion of the principal amount of this Debenture beneficially owned by such Holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Holder and its affiliates (including, without limitation, any convertible notes, convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. This provision shall not restrict the number of shares of Common Stock which a Holder may receive or beneficially own in order to determine the amount of securities or other consideration that such Holder may receive in the event of a merger, sale or other business combination or reclassification involving the Company as contemplated herein. (ii) Principal Market Regulation. The Company shall not be obligated to issue any shares of Common Stock upon conversion of this Debenture if the issuance of such shares of Common Stock would exceed that number of shares of Common Stock which the Company may issue upon conversion of the Debentures without breaching the Company's obligations under the rules or regulations of the Trading Market (the "EXCHANGE CAP"), except that such limitation shall not apply in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of the Trading Market for issuances of Common Stock in excess of such amount or (B) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the Holder. Until such approval or written opinion is obtained, no purchaser of the Debentures pursuant to the Purchase Agreement (the "PURCHASERS") shall be issued, upon conversion of Debentures, shares of Common Stock in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the principal amount of Debentures issued to such Purchaser pursuant to the Purchase Agreement on the Initial Issuance Date and the denominator of which is the aggregate principal amount of all Debentures issued to the Purchasers pursuant to the Purchase Agreement on the Initial Issuance Date (with respect to each Purchaser, the "EXCHANGE CAP ALLOCATION"). In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser's Debentures, the transferee shall be allocated a pro rata portion of such Purchaser's Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated - 11 - to such transferee. In the event that any holder of Debentures shall convert all of such holder's Debentures into a number of shares of Common Stock which, in the aggregate, is less than such holder's Exchange Cap Allocation, then the difference between such holder's Exchange Cap Allocation and the number of shares of Common Stock actually issued to such holder shall be allocated to the respective Exchange Cap Allocations of the remaining holders of Debentures on a pro rata basis in proportion to the aggregate principal amount of the Debentures then held by each such holder. (c) Mechanics of Conversion. (i) By the third Trading Day after each Conversion Date, the Company shall issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate for the Underlying Shares issuable upon such conversion which, unless required by the Purchase Agreement, shall be free of all restrictive legends. The Holder, or any Person so designated by the Holder to receive Underlying Shares, shall be deemed to have become the holder of record of such Underlying Shares as of the Conversion Date. If the Company's transfer agent is eligible to participate in The Depositary Trust Company DWAC system and no legends are required to be included on the certificates representing Underlying Shares pursuant to the Purchase Agreement, the Company shall, upon request of the Holder, use its best efforts to deliver Underlying Shares hereunder electronically through The Depository Trust Company or another established clearing corporation performing similar functions. (ii) To effect conversions hereunder, the Holder shall not be required to physically surrender this Debenture unless the aggregate principal amount represented by such Debenture is being converted, in which event, the Holder shall deliver such Debenture promptly to the Company (it being understood that such delivery is not a condition precedent to the Company's obligations to deliver Underlying Shares upon such conversion). Conversions hereunder shall have the effect of lowering the outstanding principal amount represented by such Debenture in an amount equal to the applicable conversion, which shall be evidenced by entries set forth in the Conversion Schedule attached as Schedule I, which will be maintained by the Company and the Holder. (iii) The Company's obligations to issue and deliver Underlying Shares upon conversion of this Debenture in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Underlying Shares. (iv) If by the third Trading Day after a Conversion Date the Company fails to deliver to the Holder such Underlying Shares in such amounts and in the manner required pursuant to Section 5(a), then the Holder will have the right to rescind such conversion. - 12 - (v) If by the third Trading Day after a Conversion Date the Company fails to deliver to the Holder such Underlying Shares in such amounts and in the manner required pursuant to this Section 5(c), and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall: (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the aggregate number of Underlying Shares that the Company was required to deliver to the Holder in connection with the conversion at issue by (2) the Closing Price at the time of the obligation giving rise to such purchase obligation and (B) at the option of the Holder, either reinstate the principal amount of Debentures and equivalent number of Underlying Shares for which such conversion was not timely honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its conversion and delivery obligations hereunder. For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with a market price on the date of conversion totaling $10,000, under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. (d) Adjustments to Conversion Price. The Conversion Price in effect from time to time shall be subject to adjustment in accordance with this Section 5(d): (i) Stock Dividends and Splits. If the Company, at any time while any Debentures are outstanding, (i) pays a stock dividend on its shares of Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination. (ii) Additional Distributions. If the Company, at any time while any Debentures are outstanding, shall distribute to all holders of shares of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Conversion Price at which the principal amount of Debentures shall thereafter be convertible shall be determined by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Closing Price determined as of the record date mentioned above, and of which the numerator shall be such Closing Price on such - 13 - record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (iii) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (iv) Notice of Adjustments. Whenever the Conversion Price is adjusted pursuant to the terms hereof the Company shall promptly mail to each Holder, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (e) Certain Fundamental Transactions. In case of any Fundamental Transaction, a Holder shall have the right to do any of the following: (1) convert its Debentures into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of shares of Common Stock following such Fundamental Transaction and such Holder shall be entitled upon such Fundamental Transaction to receive such amount of securities, cash and property as the shares of Common Stock into which such Debentures could have been converted immediately prior to such Fundamental Transaction would have been entitled, or (2)(x) require the surviving entity to issue debentures in such principal amount equal to the principal amount of the Debentures held by such Holder prior to such Fundamental Transaction, plus all other amounts owing thereon, which newly issued debentures shall have identical terms to the terms of the Debentures and shall be entitled to all of the rights and privileges of a Holder set forth herein and the agreements pursuant to which the prepayment was issued, and (y) simultaneously with the issuance of such convertible debentures shall have the right to convert such shares only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of shares of Common Stock following such Fundamental Transaction (the conversion price applicable for the newly issued convertible debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such Fundamental Transaction and the Conversion Price stated herein) or (3) at the Holder's option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall either pay to the Holder the greater of (A) the outstanding principal amount of the Debentures held by such Holder plus all accrued and unpaid interest thereon, and (B) the principal amount of the Debenture held by such Holder, plus all accrued and unpaid interest thereon, divided by the Conversion Price on the Trading Day immediately preceding (x) the date of prior to such Fundamental Transaction or (y) the date the amount set forth in this section is paid in full, whichever is less, multiplied by the Closing Price on (x) the date of the Fundamental Transaction or (y) the date the amount set forth in this section is paid in full, whichever is greater. Any Fundamental Transaction shall include such terms so as continue to give the Holders the right to receive the securities, cash and - 14 - property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such Fundamental Transactions. The rights set forth herein shall not alter the rights of a Holder set forth elsewhere in this Debenture; provided, that a Holder may only exercise the rights set forth herein with respect to a single event giving rise to such rights. (f) Reclassifications; Share Exchanges. In case of any reclassification of the shares of Common Stock, or any compulsory share exchange pursuant to which the shares of Common Stock are converted into other securities, cash or property, the Holders of the Debentures then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of shares of Common Stock following such reclassification or share exchange, and the Holders shall be entitled upon such event to receive such amount of securities, cash or property as a holder of the number of shares of Common Stock of the Company into which such shares of Debentures could have been converted immediately prior to such reclassification or share exchange would have been entitled. This provision shall similarly apply to successive reclassifications or share exchanges. (g) Notice of Corporate Events. If (a) the Company shall declare a dividend (or any other distribution) on the Common Stock, (b) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (c) the Company shall authorize the granting to all holders of Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (d) the approval of any stockholders of the Company shall be required in connection with any Fundamental Transaction, or (e) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall file a press release or Current Report on Form 8-K to disclose such occurrence and notify the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which any such Fundamental Transaction is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities, cash or other property deliverable upon any such Fundamental Transaction. (h) Reservation of Common Stock. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of Debentures, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding principal amount of Debentures. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized and issued and fully paid and nonassessable. - 15 - (i) Fractional Shares. Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Closing Price on the applicable Conversion Date. If any fraction of an Underlying Share would, except for the provisions of this Section, be issuable upon a conversion hereunder, the Company shall pay an amount in cash equal to the Conversion Price multiplied by such fraction. (j) Stamp Taxes. The issuance of certificates for Common Stock on conversion of principal amount of this Debenture shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted. (k) Notices. Any and all notices or other communications or deliveries to be provided by the Holders, including, without limitation, any Holder Conversion Notice, shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the attention of the Chief Executive Officer of the Company addressed to Arotech Corporation, 632 Broadway, Suite 1200, New York, NY 10012, fax: (646) 654-2187, with a copy to Electric Fuel (E.F.L.) Ltd., One HaSolela Street, POB 641, Western Industrial Park, Beit Shemesh 99000, Israel, Facsimile No.: 011-972-2-990-6688, Attn.: General Counsel, or to such other address or facsimile number as shall be specified in writing by the Company for such purpose. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time)(with confirmation of transmission), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date (with confirmation of transmission), (iii) upon receipt, if sent by a nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. [INSERT IN ADDITIONAL DEBENTURES ONLY: (l) This Debenture Deemed Outstanding. If during the period beginning on and including the Initial Issuance Date and ending on the date immediately preceding the Original Issue Date, the Company entered into, or in accordance with this Section 5 would have been deemed to have entered into (had this Debenture been outstanding at such time), any of the events set forth in this Section 5, then solely for purposes of determining any adjustment or rights under this Section 5 as a result of such event or deemed event, this Debenture shall be deemed to have been outstanding at the time of each such event or deemed event.] - 16 - 6. Prepayment. (a) Upon Event of Default. Upon the occurrence of a Event of Default, each Holder shall (in addition to all other rights it may have hereunder or under applicable law), have the right, exercisable at the sole option of such Holder, and by delivery of a written notice to the Company to require the Company (an "EVENT OF DEFAULT NOTICE") to prepay all or a portion of the Debentures then held by such Holder and, at the option of the Holder, all or a portion of the Reinstated Principal, for an amount, in cash, equal to the Mandatory Prepayment Amount. The Mandatory Prepayment Amount shall be due and payable within five Trading Days of the date of the Event of Default Notice. For purposes of this Section, any principal amount of Debentures shall be deemed to be outstanding until such date as the Holder shall have received Underlying Shares upon a conversion (or attempted conversion) thereof that meets the requirements hereof. Notwithstanding anything herein to the contrary, upon the occurrence of a Bankruptcy Event, all outstanding principal and accrued but unpaid interest on this Debenture shall immediately become due and payable in full in cash, without any further action by the Holder, and the Company shall immediately be obligated to pay the Mandatory Prepayment Amount pursuant to this paragraph as if the Holder had delivered a Event of Default Notice immediately prior to the occurrence of any such Event of Default. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. (b) At Company's Option. At any time after the date which is 15 months after the applicable Effective Date, the Company may deliver a notice to the Holder (an "OPTIONAL PREPAYMENT NOTICE" and the date such notice is received by the Holder, the "OPTIONAL PREPAYMENT NOTICE DATE") of its irrevocable election to prepay all, or any portion, of the then aggregate amount outstanding under this Debenture (such elected prepayment amount, the "PREPAYMENT AMOUNT"), for an amount, in cash, equal to the Company Redemption Price. The Company Redemption Price payable pursuant to this Section 6(b) is due in full on the tenth Trading Day following the Optional Prepayment Notice Date (the "OPTIONAL PREPAYMENT DATE"). The Company may only deliver an Optional Prepayment Notice, and the optional prepayment thereunder may only occur on the Optional Prepayment Date, if each of the following shall be true: (i) the Company shall have duly honored all conversions and redemptions scheduled to occur or occurring by virtue of one or more Conversion Notices prior to the Optional Prepayment Notice Date and the Optional Prepayment Date, (ii) the Equity Conditions shall have been satisfied at all times from the Optional Prepayment Notice Date to the Optional Prepayment Date, and (iii) prior to the Optional Prepayment Notice Date (A) the VWAP shall equal or exceed $1.75/1/ (subject to adjustment for any stock dividend, stock split, stock combination or other similar transaction which occur after the Initial Issuance Date) for twenty (20) trading days in any thirty (30) consecutive trading period occurring after the fifteen month anniversary of the applicable Effective Date, (B) the - -------- /1/ In the case of Additional Debentures, $1.95. - 17 - volume in number of shares traded on fifteen (15) trading days out of such twenty (20) trading period referred to in Clause (A) is greater than 250,000 (excluding block trades of 20,000 shares or more), and (C) during such twenty (20) days the applicable Registration Statement shall have been effective at all times and there shall not have been any Event of Defaults. If any of the foregoing conditions shall cease to be satisfied at any time during the required period, or if the Company shall fail to pay the Company Redemption Price in full on the Optional Prepayment Date, then the Optional Prepayment Notice shall be null and void, ab initio, and the Company may not deliver any subsequent Optional Prepayment Notices. The Holder may convert any portion of this Debenture prior to the Optional Prepayment Date. The Company covenants and agrees that it will honor all Conversion Notices tendered from the time of delivery of the Optional Prepayment Notice through the Optional Prepayment Date. (c) Pro Rata Prepayment Requirement. If the Company elects to cause a prepayment of all or any portion of this Debenture pursuant to Section 6(b), then it must simultaneously take the similar action with respect to all Debentures and the Prepayment Amount for each holder of Debentures must be equal to such holder's Prepayment Allocation Percentage multiplied by the aggregate of all Prepayment Amounts which the Company elects to prepay pursuant to Section 6(b) of all Debentures. The "PREPAYMENT ALLOCATION PERCENTAGE" for any holder of Debentures shall mean a fraction, the numerator of which is the principal amount of the Debentures initially purchased by such holder on the Initial Issuance Date and the denominator of which is the sum of the aggregate principal amount of all Debentures purchased by all holders on the Initial Issuance Date. In the event that the initial holder of any Debentures shall sell or otherwise transfer any of such holder's Debentures, the transferee shall be allocated a pro rata portion of such holder's Prepayment Allocation Percentage. The Optional Prepayment Notice shall state (I) the aggregate Prepayment Amounts of all Debentures which the Company has elected to prepay from all of the holders of the Debentures pursuant to Section 6(b) and (II) each holder's Prepayment Amount that the Company has elected to prepay pursuant to Section 6(b). 7. Ranking. This Debenture ranks junior to the Outstanding Debentures and pari passu to all other Debentures now or hereafter issued pursuant to the Transaction Documents. Other than as set forth in Section 8, no Indebtedness of the Company is senior to this Debenture in right of payment, whether with respect of interest, damages or upon Liquidation or dissolution or otherwise. 8. Secured Obligations. The payment obligations under this Debenture are secured pursuant to the Security Agreements. This Debenture will be secured by (i) a first priority, perfected security interest in the stock of MDT Armor Corporation and any future assets acquired by or on behalf of the Company in an Acquisition (as defined in the Security Agreements), (ii) a second priority security interest in the assets of IES Interactive Training, Inc. and stock of other subsidiaries directly or indirectly owned by the Company (other than that of IES Interactive Training, Inc. and M.D.T. Protective Industries Ltd.), subordinate only to the security interest in favor of the holders of Outstanding Debentures and (iii) a third priority security interest in the stock of M.D.T. Protective Industries Ltd., IES Interactive Training, Inc. and I.E.S. Defense Services, Inc., subordinate only to the security interest in favor of the - 18 - holders of Outstanding Debentures and the security interest in favor IES Electronics pursuant to the IES Security Agreement. 9. Restricted Actions. The Company shall not and shall not permit any of its Subsidiaries to take any Restricted Action without the prior written consent of the holders of the Debentures. 10. Miscellaneous. (a) This Debenture shall be binding on the Company and its successors and assigns and inure to the benefit of the Holder hereto and its respective successors and assigns. This Debenture may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Nothing in this Debenture shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause under this Debenture. (c) All questions concerning the construction, validity, enforcement and interpretation of this Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all Proceedings shall be commenced exclusively in the state and federal courts sitting in The City of New York, Borough of Manhattan (the "NEW YORK COURTS"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for any proceeding, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any New York Court or that a New York Court is an inconvenient forum for such Proceeding. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Debenture and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal Proceeding. If either party shall commence a Proceeding, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (d) The headings herein are for convenience only, do not constitute a part of this Debenture and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Debenture shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Debenture shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a - 19 - commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Debenture. (f) No provision of this Debenture may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and the Holder or, or, in the case of a waiver, by the Holder. No waiver of any default with respect to any provision, condition or requirement of this Debenture shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. (g) If it shall be found that any interest due hereunder shall violate applicable laws governing usury, the applicable rate of interest due hereunder shall be reduced to the maximum permitted rate of interest under such law. (h) Except pursuant to the terms of this Debenture, the outstanding principal amount and interest under this Debenture may not be prepaid by the Company without the prior written consent of the Holder. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] - 20 - IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the Original Issue Date. AROTECH CORPORATION By: -------------------------------- Name: Title: - 21 - EXHIBIT A AROTECH CORPORATION CONVERSION NOTICE TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT THIS NOTE INTO COMMON STOCK Reference is made to the 8% Secured Convertible Debenture (the "DEBENTURE") issued to the undersigned by Arotech Corporation (the "COMPANY"). In accordance with and pursuant to the Debenture, the undersigned hereby elects to convert the principal of the Debenture indicated below into shares of common stock, par value $.01 per share, of the Company (the "COMPANY COMMON STOCK") as of the date specified below. Date of Conversion: ---------------------------------------------------- Aggregate Principal Amount to be converted: Please confirm the following information: Conversion Price: ------------------------------------------------------ Number of shares of Company Common Stock to be issued: Please issue the Company Common Stock into which the Note is being converted in the following name and to the following address: Issue to: -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- Facsimile Number: ------------------------------------------------------ Authorization: --------------------------------------------------------- By: --------------------------------------------------------- Title: ---------- Dated: -------------------------------------------------------------------------- Account Number: -------------------------------------------------------- (if electronic book entry transfer) Transaction Code Number: ----------------------------------------------- (if electronic book entry transfer) SCHEDULE 1 CONVERSION SCHEDULE 8% Secured Convertible Debenture, due September 30, 2006, in the aggregate principal amount of $_______ issued by Arotech Corporation. This Conversion Schedule reflects conversions made under the above referenced Debenture. Dated: September 30, 2003
- ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- Date of Conversion Amount of Conversion Aggregate Principal Applicable Mandatory Amount Remaining Conversion Price Prepayment Amount Subsequent to Conversion - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- -------------------- - ---------------------------- ---------------------------- --------------------- ---------------------- --------------------
EX-4.3 5 v00188_ex4-3.txt EXHIBIT 4.3 FORM OF WARRANT NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. AROTECH CORPORATION WARRANT Warrant No. [ ] Date of Original Issuance: ________ __, 200_ Arotech Corporation, a Delaware corporation (the "COMPANY"), hereby certifies that, for value received, [_____________] or its registered assigns (the "HOLDER"), is entitled to purchase from the Company up to a total of [ ]/1/ shares of common stock, $.01 par value (the "COMMON STOCK"), of the Company (each such share, a "WARRANT SHARE" and all such shares, the "WARRANT SHARES") at an exercise price equal to $[ ]/2/ per share (as adjusted from time to time as provided in Section 9, the "EXERCISE PRICE"), at any time and from time to time from and after January 1, 2004, and through and including _______ __, 200_/3/ (the "EXPIRATION DATE"), and subject to the following terms and conditions: - -------- /1/ Each Purchaser shall receive Warrants pursuant to which such Purchaser shall have the right to acquire 250 shares of Common Stock for each $1,000 of such Purchaser's Investment Amount or Additional Investment Amount, as the case may be. /2/ Amount equal to the product of 1.25 and the Conversion Price. /3/ Insert third anniversary of Date of Original Issuance. 1. Definitions. In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein shall have the meanings given to such terms in the Securities Purchase Agreement dated as of September 30, 2003 to which the Company and the original Holder are parties (the "PURCHASE AGREEMENT"). 2. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "WARRANT REGISTER"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary. 3. Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new Warrant to purchase Common Stock, in substantially the form of this Warrant (any such new Warrant, a "NEW Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant. 4. Exercise and Duration of Warrants. (a) This Warrant shall be exercisable by the registered Holder at any time and from time to time on or after January 1, 2004, to and including the Expiration Date. At 6:30 p.m., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value, provided, that if the closing sales price of the Common Stock on the Expiration Date is greater than 102% of the Exercise Price on the Expiration Date, then this Warrant shall be deemed to have been exercised in full (to the extent not previously exercised) on a "cashless exercise" basis at 6:30 P.M. New York City time on the Expiration Date. The Company may not call or redeem all or any portion of this Warrant without the prior written consent of the Holder. 5. Delivery of Warrant Shares. (a) To effect conversions hereunder, the Holder shall not be required to physically surrender this Warrant unless the aggregate Warrant Shares represented by this Warrant is being exercised. Upon delivery of the Form of Election to Purchase to the Company (with the attached Warrant Shares Exercise Log) at its address for notice set forth herein and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall promptly (but in no event later than three Trading Days after the Date of Exercise (as defined herein)) issue and deliver to the Holder, a certificate for the Warrant Shares issuable upon such exercise, which, unless otherwise required by the Purchase Agreement, shall be free of restrictive legends. The Company shall, upon request of the Holder and subsequent to the date on which a registration statement covering the resale of 2 the Warrant Shares has been declared effective by the Securities and Exchange Commission, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Company or another established clearing corporation performing similar functions, if available, provided, that, the Company may, but will not be required to change its transfer agent if its current transfer agent cannot deliver Warrant Shares electronically through the Depository Trust Company. A "DATE OF EXERCISE" means the date on which the Holder shall have delivered to Company: (i) the Form of Election to Purchase attached hereto (with the Warrant Exercise Log attached to it), appropriately completed and duly signed and (ii) if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased. (b) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), then the Holder will have the right to rescind such exercise. (c) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), and if after such third Trading Day and prior to the receipt of such Warrant Shares, the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue by (B) the closing bid price of the Common Stock at the time of the obligation giving rise to such purchase obligation and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. (d) The Company's obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. 3 6. Charges, Taxes and Expenses. Issuance and delivery of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity (which shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company's obligation to issue the New Warrant. 8. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9. (a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall 4 become effective immediately after the effective date of such subdivision or combination. If any event requiring an adjustment under this paragraph occurs during the period that an Exercise Price is calculated hereunder, then the calculation of such Exercise Price shall be adjusted appropriately to reflect such event. (b) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, distributes to all holders of Common Stock (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each case, "DISTRIBUTED PROPERTY"), then, at the request of any Holder delivered before the 90th day after the record date fixed for determination of stockholders entitled to receive such distribution, the Company will deliver to such Holder, within five Trading Days after such request (or, if later, on the effective date of such distribution), the Distributed Property that such Holder would have been entitled to receive in respect of the Warrant Shares for which such Holder's Warrant could have been exercised immediately prior to such record date. If such Distributed Property is not delivered to a Holder pursuant to the preceding sentence, then upon any exercise of the Warrant that occurs after such record date, such Holder shall be entitled to receive, in addition to the Warrant Shares otherwise issuable upon such conversion, the Distributed Property that such Holder would have been entitled to receive in respect of such number of Warrant Shares had the Holder been the record holder of such Warrant Shares immediately prior to such record date. (c) Fundamental Transactions. If, at any time while this Warrant is outstanding, (1) the Company effects any merger or consolidation of the Company with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a "FUNDAMENTAL TRANSACTION"), then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the "ALTERNATE CONSIDERATION"). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. At the Holder's option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall, either (1) issue to the Holder a new warrant substantially in the form of this Warrant and consistent with the foregoing provisions and evidencing the Holder's right to purchase the 5 Alternate Consideration for the aggregate Exercise Price upon exercise thereof, or (2) purchase the Warrant from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black Scholes value of the remaining unexercised portion of this Warrant on the date of such request. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. (d) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to paragraphs (a) or (b) of this Section, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment. (e) Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company's Transfer Agent. (g) Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least 20 calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice. 6 (h) [INSERT IN ADDITIONAL WARRANTS ONLY: This Warrant Deemed Outstanding. If during the period beginning on and including the Initial Closing Date and ending on the date immediately preceding the date of issuance of this Warrant, the Company entered into, or in accordance with this Section 9 would have been deemed to have entered into (had this Warrant been outstanding at such time), any of the events set forth in this Section 9, then solely for purposes of determining any adjustment under this Section 9 as a result of such event or deemed event, this Warrant shall be deemed to have been outstanding at the time of each such event or deemed event.] 10. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds; or (b) Cashless Exercise. At any time after the earlier to occur of the Effectiveness Date (as defined in the Registration Rights Agreement (as defined in the Purchase Agreement)) and the date such registration statement filed pursuant to the Registration Rights Agreement is declared effective by the Commission, when a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder or the prospectus included therein, is not then effective, the Holder may surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the Closing Prices (as defined in the Debentures) for the five Trading Days immediately prior to (but not including) the Exercise Date. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued. 11. Limitation on Exercise. (i) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon any exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other issuance), the total number of shares of 7 Common Stock then beneficially owned by such Holder and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 4.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise). For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Holder and its affiliates shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by such Holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Holder and its affiliates (including, without limitation, any convertible notes, convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Each delivery of an Exercise Notice hereunder will constitute a representation by the Holder that it has evaluated the limitation set forth in this paragraph and determined that issuance of the full number of Warrant Shares requested in such Exercise Notice is permitted under this paragraph. This provision shall not restrict the number of shares of Common Stock which a Holder may receive or beneficially own in order to determine the amount of securities or other consideration that such Holder may receive in the event of a merger or other business combination or reclassification involving the Company as contemplated in Section 9 of this Warrant. (ii) Principal Market Regulation. The Company shall not be obligated to issue any shares of Common Stock upon exercise of this Warrant if the issuance of such shares of Common Stock would exceed that number of shares of Common Stock which the Company may issue upon exercise of this Warrant without breaching the Company's obligations under the rules or regulations of the Trading Market (the "EXCHANGE CAP"), except that such limitation shall not apply in the event that the Company obtains the approval of its shareholders as required by the applicable rules of the Trading Market for issuances of Common Stock in excess of such amount. Until such approval is obtained, no Purchaser shall be issued, upon exercise of any Warrants, shares of Common Stock in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the total number of shares of Common Stock underlying the Warrants issued to such Purchaser pursuant to the Purchase Agreement at the Initial Closing and the denominator of which is the aggregate number of shares of Common Stock underlying all the Warrants issued to the Purchasers pursuant to the Purchase Agreement at the Initial Closing (with respect to each Purchaser, the "EXCHANGE CAP ALLOCATION"). In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser's Warrants, the transferee shall be allocated a pro rata portion of such Purchaser's Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated to such transferee. In the event that any holder of Warrants shall exercise all of such holder's Warrants into a number of shares of Common Stock which, in the aggregate, is less than such holder's Exchange Cap Allocation, then the difference between such holder's Exchange Cap Allocation and the number of shares of Common Stock actually issued to such holder shall be allocated to the respective Exchange Cap 8 Allocations of the remaining holders of Warrants on a pro rata basis in proportion to the shares of Common Stock underlying the Warrants then held by each such holder. 12. No Fractional Shares. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the Closing Price of one Common Stock as reported on the Trading Market on the date of exercise. 13. Notices. Any and all notices or other communications or deliveries hereunder (including without limitation any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to Arotech Corporation, 632 Broadway, Suite 1200, New York, NY 10012; Facsimile No.: (646) 654-2187, Attn.: Chief Executive Officer, with a copy to Electric Fuel (E.F.L.) Ltd., One HaSolela Street, POB 641, Western Industrial Park, Beit Shemesh 99000, Israel, Facsimile No.: 011-972-2-990-6688, Attn.: General Counsel or (ii) if to the Holder, to the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 14. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 30 days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 15. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without 9 regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of this Warrant), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto (including its affiliates, agents, officers, directors and employees) hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Warrant, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other actual costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. (c) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (d) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] 10 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. AROTECH CORPORATION By: -------------------------------------- Name: Title: 11 EXHIBIT I EXERCISE NOTICE TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT TO PURCHASE COMMON STOCK AROTECH CORPORATION The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock ("WARRANT SHARES") of Arotech Corporation, a Delaware corporation (the "COMPANY"), evidenced by the attached Warrant to Purchase Common Stock (the "WARRANT"), and tenders herewith payment to the Company of the aggregate exercise price in full, equal to $_____________________, together with all applicable transfer taxes, if any. Please issue the Warrant Shares in the following name and to the following address: Issue to: -------------------------------------------------------------- -------------------------------------------------------------- Facsimile Number: ------------------------------------------------------ Authorization: --------------------------------------------------------- Account Number: -------------------------------------------------------- (if electronic book entry transfer) Transaction Code Number: ----------------------------------------------- (if electronic book entry transfer) To the extent the foregoing exercise is for less than the full number of Warrant Shares issuable pursuant to the Warrant, a replacement Warrant representing the remainder of the Warrant Shares issuable (and otherwise of like form, tenor and effect) shall be delivered to holder. The undersigned confirms the continuing validity of, and reaffirms as of the date hereof, the representations and warranties set forth in Section 2 of the Securities Purchase Agreement, dated as of September 30, 2003, by and among the Company and the Buyers named therein. The undersigned agrees to comply with the prospectus delivery requirements (to the extent applicable) under the applicable securities laws in connection with any transfer of the aforesaid Warrant Shares. Date: _______________ __, ______ - -------------------------------------------- Name of Registered Holder By: ----------------------------------- Name: Title: 12 EXHIBIT I-B EXERCISE NOTICE TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT TO PURCHASE COMMON STOCK PURSUANT TO CASHLESS EXERCISE PROVISIONS AROTECH CORPORATION Gentlemen: The undersigned, registered holder of the Warrant to Purchase Common Stock delivered herewith, hereby irrevocably exercises such Warrant for, and purchases thereunder, shares of the Common Stock ("WARRANT SHARES") of Arotech Corporation, a Delaware corporation, as provided below. Capitalized terms used herein, unless otherwise defined herein, shall have the meanings given in the Warrant. The portion of the Exercise Price to be applied toward the purchase of the Warrant Shares pursuant to this Exercise Notice is $_______. Such exercise shall be pursuant to the cashless exercise provisions of Section 10 of the Warrant; therefore, holder makes no payment with respect to this Exercise Notice. The number of shares to be issued pursuant to this exercise shall be determined by reference to the formula in Section 10 of the Warrant which, by reference to Section 10, requires the use of the average of the Closing Prices of the Company's Common Stock for the five Trading Days immediately prior to (but not including) the day immediately preceding the date of this Exercise Notice. The average of the Closing Prices of the Company's Common Stock for the five Trading Days immediately prior to (but not including) the day immediately preceding the date of this Exercise Notice has been determined by holder to be $______, which figure is acceptable to holder for calculations of the number of Warrant Shares issuable pursuant to this Exercise Notice. Please issue the Warrant Shares in the following name and to the following address: Issue to: -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- Facsimile Number: ------------------------------------------------------ Authorization: --------------------------------------------------------- Account Number: -------------------------------------------------------- (if electronic book entry transfer) Transaction Code Number: ----------------------------------------------- (if electronic book entry transfer) 13 To the extent the foregoing exercise is for less than the full number of Warrant Shares issuable pursuant to the Warrant, a replacement Warrant representing the remainder of the Warrant Shares issuable (and otherwise of like form, tenor and effect) shall be delivered to holder. The undersigned confirms the continuing validity of, and reaffirms as of the date hereof, the representations and warranties set forth in Section 3 of the Securities Purchase Agreement, dated as of September 30, 2003, by and among the Company and the Buyers named therein. The undersigned agrees to comply with the prospectus delivery requirements (to the extent applicable) under the applicable securities laws in connection with any transfer of the aforesaid Warrant Shares. Date: _______________ __, ______ - -------------------------------------------- Name of Registered Holder By: ----------------------------------- Name: Title: 14 Warrant Shares Exercise Log
- ----------------------------- ----------------------------- ---------------------------------- --------------------- Date Number of Warrant Shares Number of Warrant Shares Number of Warrant Available to be Exercised Exercised Shares Remaining to be Exercised - ----------------------------- ----------------------------- ---------------------------------- --------------------- - ----------------------------- ----------------------------- ---------------------------------- ---------------------
15 FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Arotech Corporation to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Arotech Corporation with full power of substitution in the premises. Dated: _______________, ____ --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- 16 EX-4.4 6 v00188_ex4-4.txt Exhibit 4.4 SECURITY AGREEMENT SECURITY AGREEMENT, dated as of September 30, 2003, by and among Arotech Corporation, a Delaware corporation (f/k/a Electric Fuel Corporation) (the "Parent"), I.E.S. Defense Services, Inc. ("IDS"), and IES Interactive Training, Inc. ("IES" and, together with IDS and the Parent, the "Debtors") and the secured parties signatory hereto (each, a "Secured Party", and collectively, the "Secured Parties"). W I T N E S S E T H: WHEREAS, pursuant to the Securities Purchase Agreement, dated the date hereof by and among the Parent and the investors named therein (the "Secured Parties") (the "Purchase Agreement"), the Secured Parties have agreed to purchase 8% Secured Convertible Debentures, due September 30, 2006 (the "Debentures"); WHEREAS, in order to induce the Secured Parties to enter into the Purchase Agreement, the Debtors wish to grant to the Investors a first priority, perfected security interest in (A) the Parent Collateral (as defined below) and (B) the MAC Stock Collateral (as defined below), a second priority security interest in (A) the IES Collateral and (B) the Subsidiary Stock Collateral (as defined below) and a third priority security interest in the IES/IDS/MDT Stock Collateral (as defined below) to secure the prompt payment, performance and discharge in full of all of the Parent's Obligations under the Debentures and related transaction documents; and WHEREAS, it is contemplated that the Secured Parties will be granted (i) a first priority, perfected security interest in (A) the Parent Collateral and (B) the MAC Stock Collateral, (ii) a second priority security interest in (A) the IES Collateral and (B) the Subsidiary Stock Collateral, junior only to the first priority security interest, granted to certain investors (the "First Investors") pursuant to a Security Agreement, dated as of December 31, 2002, among the Parent, its subsidiaries party thereto and the First Investors, with respect to the security interest (the "First Investors' Security Interest") granted to the First Investors in such IES Collateral and Subsidiary Stock Collateral and (iii) a third priority security interest, junior only to the First Investors' Security Interest and to the second priority security interest of IES Electronics Industries, Ltd. ("IES Electronics") pursuant to the IES Security Agreements (defined below) to secure obligations of which the aggregate amount of $450,000 is currently outstanding (the "Electronics' Security Interest"), in the IES/IDS/MDT Stock Collateral. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as "General Intangibles" and "Proceeds") shall have the respective meanings given such terms in Article 9 of the UCC. (a) "Accounts" shall mean all present and future rights of the Debtors to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. (b) "Acquisition" shall mean the purchase, acquisition by lease, exchange, merger, consolidation, succession or other acquisition by or on behalf of the Parent (whether directly or indirectly through a Subsidiary or other entity currently existing or hereafter created in which Parent or any of its subsidiaries own more than 50% of the ownership interests) of more than 10% of the stock or assets of any entity. Assets so acquired that are held by Electric Fuel Battery Corporation ("EFBC") for use by EFBC in its zinc-air military battery business ("Battery Assets"), or stock acquired by EFBC of entities the primary business assets of which consist of Battery Assets, shall not be deemed to be Acquisitions under this agreement, provided that the consideration paid for such stock and/or asset should not exceed $1,000,000. (c) "Agent" means Smithfield Fiduciary LLC as agent for each of the Secured Parties pursuant to this Agreement and the IP Security Agreement, or such other Person as shall have been subsequently appointed as a successor agent pursuant to this Agreement. (d) "Collateral" means collectively, the IES Collateral, the Parent Collateral, the IES/IDS/MDT Stock Collateral, the Subsidiary Stock Collateral and the MAC Stock Collateral. (e) "First Investors' Security Agreement" means the Security Agreement dated as of December 31, 2002 made by the Debtors and certain other Subsidiaries of the Parent in favor of the First Investors. (f) "First Purchase Agreement" means the Securities Purchase Agreements dated as of December 31, 2002, by and among the Parent and the First Investors. (g) "IES Collateral" means all personal property and assets of IES, including, without limitation, the following, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and Accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith: (i) All Goods of IES, including, without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with IES' businesses and all improvements thereto (collectively, the "Equipment"); and (ii) All Inventory of IES; and -2- (iii) All of IES' contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds (collectively, the "General Intangibles"); and (iv) All Accounts of IES including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each Receivable, including any right of stoppage in transit; (v) All IES Pledged Shares; and (vi) All of IES' documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(v) above. (h) "IES Electronics' Security Agreements" means the Pledge, Security and Escrow Agreement dated as of August 2, 2002 made by the Parent in favor of IES Electronics relating to the shares of IDS, as modified by the letter agreement between the Parent and IES Electronics dated as of December 31, 2002, and the Security Agreement dated as of March 17, 2003 made by the Parent in favor of IES Electronics relating to the shares of IES, IDS and MDT. (i) "IES/IDS/MDT Stock Collateral" means (i) all the shares of capital stock of each of IES, IDS and MDT of which the Parent is the direct or indirect beneficial and record holder and set forth on Schedule C attached hereto; (ii) all additional shares of each of MDT, IDS and IES from time to time acquired by the Parent in any manner provided, however, that to the extent any such subsidiary is organized or formed under the laws of a jurisdiction other than the United States of America, a pledge of the shares of common stock of such subsidiary will be limited to sixty-six percent (66%) of the shares of common stock of such subsidiary; (iii) the certificates representing the shares referred to in clauses (i) and (ii) above; and (iv) subject to Section 4, all dividends, cash, instruments, options, rights and other property or proceeds, from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the shares referred to in clauses (i) and (ii) above. (j) "IES Pledged Shares" means (i) all the shares of capital stock of Summit Training International, Inc., a Delaware corporation ("STI") and of any other corporation or other entity of which IES is the direct or indirect beneficial and record holder and set forth on Schedule C attached hereto; (ii) all additional shares of each of the Subsidiaries from time to time acquired by IES in any manner provided, however, that to the extent any such Subsidiary is organized or formed under the laws of a jurisdiction other than the United States of America, a pledge of the shares of capital stock of such Subsidiary will be limited to sixty-six percent (66%) of the shares of capital stock of such Subsidiary; (iii) the certificates representing the shares referred to in clauses (i) and (ii) above; and (iv) subject to Section 4, all dividends, cash, -3- instruments, options, rights and other property or proceeds, from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the shares referred to in clauses (i) and (ii) above. (k) "IP Security Agreement" means that certain security agreement, dated the date hereof, among the Debtors and the Secured Parties, granting to the Secured Parties a security interest in the intellectual property of the Debtors in accordance with the terms thereof. (l) "MAC Stock Collateral" means (i) all the shares of capital stock of MDT Armor Corporation of which the Parent is the direct or indirect beneficial and record holder and set forth on Schedule C attached hereto, (ii) all additional shares of MDT Armor Corporation from time to time acquired by the Parent in any manner provided, however, that to the extent such Subsidiary is organized or formed under the laws of a jurisdiction other than the United States of America, a pledge of the shares of common stock of such Subsidiary will be limited to sixty-six percent (66%) of the shares of common stock of such Subsidiary; (iii) the certificates representing the shares referred to in clauses (i) and (ii) above; and (iv) subject to Section 4, all dividends, cash, instruments, options, rights and other property or proceeds, from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the shares referred to in clauses (i) and (ii) above. (m) "Obligations" means all of the Debtors' obligations under this Agreement, the Debentures, the IP Security Agreement, the Purchase Agreement and the transaction documents contemplated thereby, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Parties as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. (n) "Parent Collateral" means all personal property and assets of the Parent hereafter acquired or coming into existence in connection with any Acquisition, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and Accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith: (i) All Goods of the Parent, including, without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Parent's businesses and all improvements thereto (collectively, the "Equipment"); and (ii) All Inventory of the Parent; and -4- (iii) All of the Parent's contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds (collectively, the "General Intangibles"); (iv) All Accounts of the Debtors including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each Receivable, including any right of stoppage in transit; and (v) All Parent Pledged Shares. (o) All of the Debtors' documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(v) above. (p) "Parent Pledged Shares" means (i) all additional shares of any entity from time to time acquired by the Parent in any manner in or in connection with an Acquisition provided, however, that to the extent any such Subsidiary is organized or formed under the laws of a jurisdiction other than the United States of America, a pledge of the shares of common stock of such Subsidiary will be limited to sixty-six percent (66%) of the shares of common stock of such Subsidiary; (ii) the certificates representing the shares referred to in clause (i) above; and (iii) subject to Section 4, all dividends, cash, instruments, options, rights and other property or proceeds, from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the shares referred to in clause (i) above. (q) "Pledged Shares" means collectively the IES Pledged Shares and the Parent Pledged Shares. (r) "Stock Collateral" means collectively the MAC Stock Collateral, the IES/IDS/MDT Stock Collateral and the Subsidiary Stock Collateral. (s) "Subsidiary" means each of Electric Fuel Transportation Corp., a Delaware corporation ("EFT"), Electric Fuel B.V., a Netherlands corporation ("EF-BV"), Electric Fuel Battery Corporation, a Delaware corporation (formerly known as Instant Power Corporation) ("IPC"), Electric Fuel GmbH, a German corporation ("EF-G"), IES, MDT, Electric Fuel UK Ltd., a British corporation ("EF-UK"), Arotech Security Corporation, a Delaware corporation ("ASC"), and Arcon Security Corporation, a Delaware corporation. (t) "Subsidiary Stock Collateral" means (i) all the shares of capital stock of each of the Subsidiaries set forth on Schedule C attached hereto; (ii) all additional shares of the Subsidiaries from time to time acquired by the Parent in any manner provided, however, that to the extent any such Subsidiary is organized or formed under the laws of a jurisdiction other than -5- the United States of America, a pledge of the shares of common stock of such Subsidiary will be limited to sixty-six percent (66%) of the shares of common stock of such Subsidiary; (iii) the certificates representing the shares referred to in clauses (i) and (ii) above; and (iv) subject to Section 4, all dividends, cash, instruments, options, rights and other property or proceeds, from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the shares referred to in clauses (i) and (ii) above. (u) "UCC" means the Uniform Commercial Code and/or any other applicable law of each jurisdiction in which any Debtor is incorporated or organized (including, without limitation the State of Delaware) and any jurisdiction as to any Collateral located therein. 2. Grant of Security Interest. As an inducement for the Secured Parties to enter into the Purchase Agreement, and to secure the complete and timely payment, performance and discharge in full of the Obligations, each of the Debtors hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Agent for the benefit of the Secured Parties: (a) a continuing first priority, perfected security interest (the "First Priority Security Interest") in and lien upon and a right of set-off against all of the Debtors' right, title and interest of whatsoever kind and nature in and to (i) the Parent Collateral, and (ii) the MAC Stock Collateral; (b) a continuing second priority security interest (the "Second Priority Security Interest") and a second lien upon and a right of set-off against all of the Debtors' right, title and interest of whatsoever kind and nature in and to (i) the IES Collateral and (ii) the Subsidiary Stock Collateral, provided that the such Second Security Interest is and shall be subordinate to the First Investors' Security Interest in such IES Collateral and such Subsidiary Stock Collateral; and (c) a continuing third priority security interest (the "Third Priority Security Interest", and together with the Second Priority Security Interest, the "Security Interests") in and lien upon and a right of set-off against all of the Debtors' right, title and interest of whatsoever kind and nature in and to the IES/IDS/MDT Stock Collateral, provided that such Third Priority Security Interest is and shall be subordinate to (x) the First Investors' Security Interest and (y) the Electronics' Security Interest in such IES/IDS/MDT Stock Collateral. 3. Representations, Warranties, Covenants and Agreements of the Debtors. The Debtors jointly and severally represent and warrant to, and covenant and agree with, the Secured Parties as follows: (a) Each Debtor has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations thereunder. The execution, delivery and performance by each Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of such Debtor and no further action is required by such Debtor. (b) Each Debtor represents and warrants that its jurisdiction of organization and organization identification number are as set forth on Schedule A attached hereto; -6- (c) (i) Except for the Security Interests and as set forth in Schedule 3(c)(i) hereto, each Debtor is the sole owner of the Collateral (except for non-exclusive licenses granted by the Debtors in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and is fully authorized to grant the Security Interests in the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that have been filed in favor of (i) the Secured Parties in accordance with this Agreement, (ii) the First Investors pursuant to the First Investors' Security Agreement, or (iii) IES Electronics pursuant to the Electronics' Security Agreements) covering or affecting any of the Collateral. So long as this Agreement shall be in effect, the Debtors shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Parties pursuant to the terms of this Agreement). (ii) The Debtors are the record, direct and beneficial owner of the Pledged Shares and Stock Collateral. Except as set forth in Schedule 3(c)(ii) hereto, all of the Pledged Shares and Stock Collateral are owned by the Debtors, free and clear of any lien, claim, encumbrance, security interest, right or other charge, other than (A) the Security Interests granted hereunder, (B) the First Investors' Security Interest, and (C) Electronics' Security Interest. The Debtors have the power, authority and legal right to pledge, assign, transfer, deliver, deposit and set over the MAC Stock Collateral and the Pledged Shares pledged to the Secured Parties as provided herein. (iii) Concurrently with or promptly following the execution of this Agreement, all certificates or instruments representing or evidencing the Pledged Shares and the Stock Collateral, which are not currently in the possession of the Agent, have been delivered to and held by the Agent for the benefit of the Secured Parties pursuant to this Agreement together with undated stock powers duly endorsed in blank and irrevocable proxies, provided that such delivery shall not be required with respect to any such certificates or instruments delivered to the First Investors pursuant to the terms of the First Investors' Security Agreement. (d) No part of the Collateral has been judged invalid or unenforceable. No written claim has been received that any Collateral or the Debtors' use of any Collateral violates the rights of any third party. There has been no adverse decision to the Debtors' claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Debtors' right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of the Debtors, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority. (e) Each Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to each of the Secured Parties at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements under the UCC -7- and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interests to create in favor of each of the Secured Parties (A) a valid, perfected and continuing first priority security interest and lien in the Parent Collateral and the MAC Stock Collateral, (B) a valid and continuing second priority security interest and lien in the IES Collateral and the Subsidiary Stock Collateral, subordinate only to the First Investors' Security Interest and (C) a valid and continuing third priority security interest and lien in the IES/IDS/MDT Stock Collateral, subordinate only to the First Investors' Security Interest and the Electronics' Security Interest. The principal place of business of each of the Debtors is located at the address set forth in Schedule A hereto, and will not be moved without notice to each Secured Party. (f) This Agreement creates in favor of the Secured Parties a valid security interest in the Collateral securing the payment and satisfaction of the Obligations and, upon making the filings described in Section 3(g), a perfected security interest in the Parent Collateral, the IES Collateral and the MAC Stock Collateral, which security interest shall have the respective priorities set forth in clause (e) above. Except for the filing of financing statements pursuant to the UCC with the proper filing and recording agencies in the jurisdictions indicated on Schedule B, attached hereto, no authorization or approval of or filing with or notice to any governmental authority or regulatory body is required either (i) for the grant by the Debtors of, or the effectiveness of, the Security Interests granted hereby or for the execution, delivery and performance of this Agreement by the Debtors or (ii) for the perfection of or exercise by the Secured Parties of their rights and remedies hereunder. (g) The Debtors acknowledge and agree that on the date of execution of this Agreement, the Secured Parties will file one or more financing statements under the UCC with respect to the Security Interests with the proper filing and recording agencies in the jurisdictions, all as indicated on Schedule B, attached hereto and in such other jurisdictions as the Secured Parties may deem necessary. (h) The execution, delivery and performance of this Agreement does not conflict with or cause a breach or default, or an event that with or without the passage of time or notice, shall constitute a breach or default, under any agreement to which the Debtors are a party or by which the Debtors are bound. No consent (including, without limitation, from stock holders or creditors of the Debtors) is required for the Debtors to enter into and perform their obligations hereunder. (i) The Debtors shall at all times maintain the liens and Security Interests provided for hereunder as valid liens and security interests in the Collateral in favor of the Secured Parties in accordance with the terms hereof to ensure that such liens and Security Interests are and remain senior to all not existing and hereafter created security interests and liens. The Collateral will be kept free of all liens, security interest, claims and encumbrances whatsoever, except for the First Investors' Security Interest and the Electronics' Security Interest. Each Debtor hereby agrees to defend the same against any and all persons. Each Debtor shall safeguard and protect all Collateral for the account of the Secured Parties. At the request of the Agent and/or the Secured Parties, the Debtors will sign and deliver to the Secured Parties at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to the Secured Parties and will pay the cost of filing the same in all public -8- offices wherever filing is, or is deemed by the Secured Parties to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Debtors shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interests hereunder, and the Debtors shall obtain and furnish to the Secured Parties from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interests. (j) The Debtors will not allow any Collateral to be abandoned, forfeited or dedicated to the public without the prior written consent of the Secured Parties. The Debtors will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by the Debtors in the ordinary course of business), sell or otherwise dispose of any of the Collateral without the prior written consent of the Secured Parties. (k) Each Debtor shall keep and preserve its Equipment, Inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage. (l) Each Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the Agent, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or the Security Interests. (m) Each Debtor shall promptly execute and deliver to the Secured Parties such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Secured Parties may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral including, without limitation, the IP Security Agreement in which each the Secured Parties has been granted a security interest hereunder, substantially in a form acceptable to the Secured Parties, which IP Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof. (n) The Debtors shall permit the Secured Parties and their representatives and agents upon reasonable prior notice to inspect the Collateral at any time during normal business hours, and to make copies of records pertaining to the Collateral as may be requested by the Secured Parties from time to time. (o) Each Debtor will, at its own expense, take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral. (p) Each Debtor shall promptly notify the Secured Parties in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Debtors that may materially affect the value of the Collateral, the Security Interests or the rights and remedies of the Secured Parties hereunder. (q) Each Debtor shall not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or -9- ordinance or any policy of insurance covering the Collateral where violation is reasonably likely to have a material adverse effect on the Secured Parties' rights in the Collateral or Secured Parties' ability to foreclose on the Collateral. (r) The Debtors shall not grant to any person or entity any rights or interests in or to any of the Collateral that are senior to, or pari passu with, the Secured Parties. (s) Each Debtor shall notify the Agent of any change in such Debtor's name, identity, chief place of business, chief executive office or residence within 10 days prior to such change. (t) All information heretofore, herein or hereafter supplied to the Secured Parties by or on behalf of the Debtors with respect to the Collateral is accurate and complete in all material respects as of the date furnished. 4. Voting Rights; Dividends; Etc. (a) Subject to the first priority rights of the First Investors in the Subsidiary Stock Collateral and the IES/IDS/MDT Stock Collateral, and to the second priority rights of IES Electronics in the IES/IDS/MDT Stock Collateral, as long as no Event of Default (as defined in Section 5) shall have occurred and be continuing and, in the case of Section 4(b)(i), as long as no notice thereof shall have been given by the Secured Parties to the Parent): (i) The Debtors shall be entitled to exercise any and all voting and other consensual rights pertaining to the Stock Collateral and Pledged Shares pledged by it hereunder or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Debentures; provided, however, that the Parent shall not exercise or refrain from exercising any such right if such action would have an adverse effect on the value of the Stock Collateral and Pledged Shares or any part thereof. (ii) The Debtors shall be entitled to receive and retain any and all dividends paid in respect of the Stock Collateral and Pledged Shares pledged by it hereunder, other than any and all: (1) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Stock Collateral and Pledged Shares; (2) dividends and other distributions paid or payable in cash in respect of any Stock Collateral and Pledged Shares in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus; and (3) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Stock Collateral and Pledged Shares, all of which shall be, and all of which shall be forthwith delivered to the Secured Parties to hold as pledged shares, provided that, such delivery shall not be required with respect -10- to the Subsidiary Stock Collateral and the IES/IDS/MDT Stock Collateral or any Pledged Shares so long as these are subject to the First Investors' Security Interest and Industries' Security Interest (as applicable), and shall, if received by the any Debtor, be received in trust for the benefit of the Secured Parties, be segregated from the other property or funds of the Debtors, and be forthwith delivered to Agent for the benefit of the Secured Parties as pledged shares in the same form as so received (with any necessary endorsement). Upon termination of the First Investors' Security Interest or the Electronics' Security Interest, the Debtors will take all steps necessary to cause the First Investors or IES Electronics, as the case may be, to return any of the Subsidiary Stock Collateral, IES/IDS/MDT Stock Collateral or Pledged Shares held by the First Investors or IES Electronics to the Debtors and promptly upon receipt by the Debtors deliver these to the Agent to for the benefit of the Secured Parties. (iii) The Secured Parties shall execute and deliver (or cause to be executed and delivered) to the Debtors all such proxies and other instruments as the Debtors may reasonably request for the purpose of enabling the Debtors to exercise the voting and other rights which it is entitled to exercise pursuant to subsection (a)(i) above and to receive the dividends which it is authorized to receive and retain pursuant to subsection (a)(ii) above. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of the Debtors to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 4(a)(i) above shall cease upon notice from the Secured Parties to the Debtors, and all such rights shall thereupon become vested in the Secured Parties who shall thereupon have the sole right to exercise such voting and other consensual rights and any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to the Stock Collateral and Pledged Shares or any part thereof, subject to the rights of the First Investors to exercise voting and other consensual rights upon the occurrence and during the continuance of an "Event of Default" under the First Investors' Security Agreement, and the rights of IES Electronics to exercise voting and other consensual rights upon the occurrence and during the continuance of an "Event of Default" under the Electronics' Security Agreements, and the Secured Parties may exercise such powers in such manner as the Secured Parties may elect, but the Secured Parties shall have no duty to exercise any of the aforesaid right, privileges or options and shall not be responsible for any failure to do so or delay in doing so. (ii) All rights of the Debtors to receive the dividends which the Debtors would otherwise be authorized to receive and retain pursuant to Section 4(a)(ii) above shall cease, and all such rights shall thereupon become vested in the Secured Parties who shall thereupon have the sole right to receive and hold as part of the Pledged Shares such dividends, subject to the rights of the First Investors to receive such dividends under the First Security Agreement and to the rights of IES Electronics to receive such dividends under the Electronics' Security Agreements. (iii) All dividends which are received by the Debtors contrary to the provisions of paragraph (ii) of this Section 4(b) shall be received in trust for the benefit of -11- the Secured Parties, shall be segregated from other funds of the Debtors and shall be forthwith paid over to the Secured Parties as Pledged Shares in the same form as so received (with any necessary endorsement). (c) In order to permit the Secured Parties to exercise the voting and other rights which it may be entitled to exercise pursuant to Section 4(b)(i) above, and to receive all dividends and distributions which it may be entitled Secured Parties, from time to time execute and deliver to the Secured Parties appropriate proxies, dividend payment orders and other instruments as the Secured Parties may reasonably request. 5. Defaults. The following events shall be "Events of Default": (a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures; (b) Any representation or warranty of the Debtors in this Agreement or in the IP Security Agreement shall prove to have been incorrect in any material respect when made; (c) The failure by a Debtor to observe or perform any of its obligations hereunder or in the IP Security Agreement for ten (10) days after receipt by a Debtor of notice of such failure from the Secured Parties; or (d) The failure by the Debtors to pay all amounts owed to IES Electronics by December 31, 2003 and cause the Electronics' Security Interest to be terminated as soon as practicable thereunder, subject to any rights of setoff that the Debtors may claim. 6. Duty To Hold In Trust. Upon the occurrence and the continuation of any Event of Default, the Debtors shall, upon receipt by the Debtors of any revenue, income or other sums subject to the Security Interests, whether payable pursuant to the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Parties and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Parties for application, on a pro rata basis, to the satisfaction of the Obligations. 7. Rights and Remedies Upon Default. Upon the occurrence and during the continuation of any Event of Default, the Agent (on behalf of, and for the benefit of, itself and each of the Secured Parties) shall have the right to exercise all of the remedies conferred hereunder, under the Debentures and under the IP Security Agreement, and the Agent (on behalf of and for the benefit of the Secured Parties) shall have all the rights and remedies of a secured party under the UCC. Without limitation, the Agent (on behalf of and for the benefit of the Secured Parties) shall have the following rights and powers: (a) The Agent shall have the right to take possession of all tangible manifestations or embodiments of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Debtors shall assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at the Debtors' premises or elsewhere, and make available to the Agent, without rent, all of the Debtors' respective -12- premises and facilities for the purpose of the Agent taking possession of, removing or putting the Collateral in saleable or disposable form. (b) The Agent shall have the right to operate the business of the Debtors using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Agent may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Debtors or right of redemption of the Debtors, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Agent may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Debtors, which are hereby waived and released. (c) The Agent may license or, to the same extent the Debtors are permitted by law and contract to do so, sublicense, whether on an exclusive or non-exclusive basis, any of the Collateral throughout the world for such period, on such conditions and in such manner as the Secured Parties shall, in its reasonable discretion, determine. (d) The Agent may (without assuming any obligations or liabilities thereunder), at any time, enforce (and shall have the exclusive right to enforce) against licensee or sublicensee all rights and remedies of the Debtors in, to and under any license agreement with respect to such Collateral, and take or refrain from taking any action thereunder. (e) The Agent may, in order to implement the assignment, license, sale or other disposition of any of the Collateral pursuant to this Section, pursuant to the authority provided for in Section 13, execute and deliver on behalf of the Debtors one or more instruments of assignment of the Collateral in form suitable for filing, recording or registration in any jurisdictions as the Secured Parties may determine advisable. (f) In the event that any Secured Party shall recover from the Debtors or the Collateral more than its pro rata share of the Obligations owed to all Secured Parties hereunder, whether by agreement, understanding or arrangement with the Debtors or any other Person, set off or other means, such Secured Party shall immediately deliver or pay over to the other Secured Parties a pro rata portion of any such recovery in the form received. (g) Agent may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts have been assigned to Secured Parties and that Secured Parties have a security interest therein and Agent may direct any or all accounts debtors to make payment of Accounts directly to Secured Parties, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or such other obligations, -13- but without any duty to do so, and Agent and Secured Parties shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Agent may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Agent's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Secured Parties and are payable directly and only to Secured Parties and the Debtors shall deliver to Agent such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Agent may require. 8. Apportionment and Application of Proceeds. (a) Except as otherwise provided herein, the proceeds of any such sale, lease, license or other disposition of the Collateral hereunder shall be apportioned ratably among the Secured Parties (according to the unpaid balance of the Obligations to which such payments relate held by each Secured Party) and shall be applied as follows, provided that any apportionment and application under this Section 8 shall be subject to any apportionment among the First Investors and IES Electronics and application of the proceeds of any Collateral under the First Investors' Security Agreement and the Electronics' Security Agreements: (i) first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, (ii) second, to the reasonable attorneys' fees and expenses incurred by the Agent and/or Secured Parties in enforcing its rights hereunder and in connection with collecting, storing and disposing of such Collateral, (iii) third, to satisfaction of the Obligations due to the Secured Parties, (iv) fourth, to the payment of any other amounts required by applicable law, and (v) fifth, to the Debtors any surplus proceeds. (b) If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Parties are legally entitled, the Debtors will be liable for the deficiency, together with interest thereon, at the rate of 12% per annum or the lesser amount permitted by applicable law (the "Default Rate"), and the reasonable fees of any attorneys employed by the Agent and/or Secured Parties to collect such deficiency. To the extent permitted by applicable law, each Debtor waives all claims, damages and demands against the Secured Parties arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Agent and/or Secured Parties. (c) In the event of a direct conflict between the priority provisions of this Section 8 and other provisions contained in any other Debentures or documents executed in connection with the Debentures, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, -14- to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 8 shall control and govern. 9. Costs and Expenses. The Debtors agree to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements pursuant to the UCC, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Agent. The Debtors shall also pay all other claims and charges which in the reasonable opinion of the Agent and/or Secured Parties might prejudice, imperil or otherwise affect the Collateral or the Security Interests therein. The Debtors will also, upon demand, pay to the Agent and/or Secured Parties the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Agent and/or Secured Parties may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Parties under the Debentures. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debentures and shall bear interest at the Default Rate. 10. Responsibility for Collateral. Each Debtor assumes all liabilities and responsibility in connection with all Collateral, and the obligations of such Debtor hereunder, under the Debentures or under the IP Security Agreement shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 11. Security Interests Absolute. All rights of the Secured Parties and all Obligations of the Debtors hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures, IP Security Agreement or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures, or the IP Security Agreement or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Parties to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Debtors, or a discharge of all or any part of the Security Interests granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Parties shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. Each Debtor expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Parties hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Parties, then, in any such event, the Debtors' obligations hereunder shall survive cancellation of -15- this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. Each Debtor waives all right to require the Secured Parties to proceed against any other person or to apply any Collateral which the Secured Parties may hold at any time, or to marshal assets, or to pursue any other remedy. Each Debtor waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby. 12. Term of Agreement. This Agreement and the Security Interests shall terminate on the date on which all payments under the Debentures have been made in full or otherwise converted pursuant to the terms thereof and all other Obligations have been paid or discharged. Upon such termination, the Secured Parties, at the request and at the expense of the Debtors, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement. 13. Power of Attorney; Further Assurances. (a) Each Debtor authorizes the Secured Parties, and does hereby make, constitute and appoint it, and its respective officers, agents, successors or assigns with full power of substitution, as the Debtors' true and lawful attorney-in-fact, with power, in its own name or in the name of the Debtors, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Parties; (ii) to sign and endorse any financing statement pursuant to the UCC or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Parties, and at the Debtors' expense, at any time, or from time to time, all acts and things which the Secured Parties deems necessary to protect, preserve and realize upon the Collateral and the Security Interests granted therein in order to effect the intent of this Agreement, the Debentures and the IP Security Agreement all as fully and effectually as the Debtors might or could do; and each Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. (b) On a continuing basis, each Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule B, attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Parties, to perfect the Security Interests granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Parties the grant or perfection of Security Interests in all the Collateral under the UCC having the priority set forth in this Agreement. -16- (c) Each Debtor hereby irrevocably appoints the Secured Parties as such Debtor's attorney-in-fact, with full authority in the place and stead of such Debtor and in the name of such Debtor, from time to time in the Secured Parties' discretion, to take any action and to execute any instrument which the Secured Parties may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of such Debtor where permitted by law. 14. Agent. (a) Actions The Agent shall at all times act upon and in accordance with written instructions received from a Majority-in-Interest (as defined in Section 17) time to time. The Agent shall be deemed to be authorized on behalf of each Secured Party to act on behalf of such Secured Party under this Agreement and the IP Security Agreement and, in the absence of written instructions from a Majority-in-Interest (with respect to which the Agent agrees that it will, subject to the last two sentences of this Section, comply, except as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. The Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement or the IP Security Agreement by the Debtors. By accepting their Debentures each Secured Party shall be deemed to have agreed to indemnify the Agent (which agreement shall survive any termination of such Secured Party's percentage), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement, the Debentures and the IP Security Agreement, including the reimbursement of the Agent for all out-of-pocket expenses (including attorneys' fees) incurred by the Agent hereunder or in connection herewith or in enforcing the Obligations of the Debtors under this Agreement, the Debentures or the IP Security Agreement, in all cases as to which the Agent is not reimbursed by the Debtors; provided that no Secured Party shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or willful misconduct. The Agent shall not be required to take any action hereunder, under the Debentures or under IP Security Agreement, or to prosecute or defend any suit in respect of this Agreement or under the Debentures or under IP Security Agreement, unless the Agent is indemnified to its reasonable satisfaction by the Secured Parties against loss, costs, liability and expense. If any indemnity in favor of the Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. (b) Exculpation. Neither the Agent nor any of its directors, officers, partners, members, shareholders, employees or agents shall be liable to any Secured Party for any action taken or omitted to be taken by it under this Agreement, the Debentures or the IP Security Agreement, or in connection herewith or therewith, except for its own willful misconduct or gross negligence or be responsible for the consequences of any error in judgment. Neither the Agent nor any of its directors, officers, partners, members, shareholders, employees or agents has -17- any fiduciary relationship with any Secured Party by virtue of this Agreement or the IP Security Agreement. The Agent shall not be responsible to any Secured Party for any recitals, statements, representations or warranties herein or in any certificate or other document delivered in connection herewith or for the authorization, execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, or sufficiency this Agreement, the Debentures or the IP Security Agreement, the financial condition of the Debtors or the condition or value of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Debentures or the IP Security Agreement, the financial condition of the Debtors or the existence or possible existence of any default or event of default. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which it believes to be genuine and to have presented by a proper person. (c) Obligations Held by the Agent. The Agent shall have the same rights and powers with respect to any Debentures held by it or any of its affiliates, as any Secured Party and may exercise the same as if it were not the Agent. Each of the Debtors and the Secured Parties hereby waives, and each successor to any Secured Party shall be deemed to waive, any right to disqualify any Secured Party from serving as the Agent or any claim against that Secured Party for serving as Agent. (d) Copies, etc. The Agent shall give prompt notice to each Secured Party of each notice or request required or permitted to be given to the Agent by the Debtors pursuant to the terms of this Agreement. The Agent will distribute to each Secured Party each instrument and other agreement received for its account and copies of all other communications received by the Agent from a Debtor for distribution to the Secured Parties by the Agent in accordance with the terms of this Agreement. Notwithstanding anything herein contained to the contrary, all notices to and communications with the Debtors under this Agreement shall be effected by the Secured Parties through the Agent. (e) Resignation of Agent. The Agent may resign as such at any time upon at least thirty (30) days' prior notice to the Debtors and all the Secured Parties, such resignation not to be effective until a successor Agent is in place. If the Agent at any time shall resign, a Majority-in-Interest may jointly appoint another Secured Party as a successor Agent which shall thereupon become the Agent hereunder. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges, and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. (f) Replacement of Agent. A Majority-in-Interest may at any time and for any reason replace the Agent with a successor Agent jointly selected by them, upon at least ten days written notice to the Debtors and the other Secured Parties. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the terminated Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, -18- powers, privileges, and duties of the retiring Agent, and the terminated Agent shall be discharged from its duties and obligations under this Agreement. 15. Notices. All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given when (i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof, (iii) if sent by nationally recognized overnight delivery service (receipt requested), the next business day or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses: If to the Debtors: Arotech Corporation 632 Broadway, Suite 1200 New York, NY 10012 Facsimile No.: (646) 654-2187 Attn: Chief Executive Officer With a copy to: Electric Fuel (E.F.L.) Ltd. One HaSolela Street, POB 641 Western Industrial Park Beit Shemesh 99000, Israel Facsimile No.: 011-972-2-990-6688 Attn.: General Counsel If to the Secured Parties: To the address set forth under such Secured Parties' name on the signature pages hereto. 16. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Parties shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Parties' rights and remedies hereunder. 17. Actions by Secured Parties. Any action required or permitted hereunder to be taken by or on behalf of the Secured Parties shall, for such action to be valid, require the approval of the Majority-in-Interest prior to the taking of such action. If the consent, approval or disapproval of the Secured Parties is required or permitted pursuant to this Agreement, such consent, approval or disapproval shall only be valid if given by the Majority-in-Interest. "Majority-in-Interest" means the Secured Party or Secured Parties (as the case may be) holding in excess of a majority of the outstanding aggregate principal amount under the Debentures, determined on a cumulative basis. 18. Miscellaneous. (a) No course of dealing between the Debtors and the Secured Parties, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties, any right, -19- power or privilege hereunder, under the Debentures or under the IP Security Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) All of the rights and remedies of the Secured Parties with respect to the Collateral, whether established hereby, by the Debentures, by the IP Security Agreement or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement signed by the parties hereto. (d) In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. (e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement. (h) This Agreement shall be construed in accordance with the laws of the State of New York, except to the extent the validity, perfection or enforcement of a security interest hereunder in respect of any particular Collateral which are governed by a jurisdiction other than the State of New York in which case such law shall govern. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of any New York State or United States Federal court sitting in New York county over any action or proceeding arising out of or relating to this Agreement, and the parties hereto hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such New York State or Federal court. -20- The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto further waive any objection to venue in the State of New York and any objection to an action or proceeding in the State of New York on the basis of forum non convenient. If either party shall commence an action or a proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (j) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. * * * * * * * * * * * -21- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. Arotech Corporation By: ----------------------------------------------- Name: Title: I.E.S. DEFENSE SERVICES, INC. By: ------------------------------------------------- Name: Title: IES INTERACTIVE TRAINING, INC. By: ------------------------------------------------- Name: Title: -22- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. SMITHFIELD FIDUCIARY LLC By:_____________________________________ Name: Title: Address for Notice: c/o Highbridge Capital Management, LLC 9 West 57th Street, 27th Floor New York, New York 10019 Attention: Ari J. Storch / Adam J. Chill Facsimile No.: (212) 751-0755 Telephone No.: (212) 287-4720 With a copy to: Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Facsimile No.: (212) 593-5955 Telephone No.: (212) 756-2376 Attention: Eleazer Klein, Esq. -23- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. OMICRON MASTER TRUST By:_____________________________________ Name: Title: Address for Notice: c/o Omicron Capital L.P. 810 Seventh Avenue 39th Floor New York, New York 10019 Attention: Brian Daly Facsimile: (212) 803-5269 Telephone: (212) 803-5263 -24- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. PORTSIDE GROWTH AND OPPORTUNITY FUND By:______________________________ Name: Title: Address for Notice: c/o Ramius Capital Group, L.L.C. 666 Third Avenue, 26th Floor New York, New York 10006 Facsimile No.: (212) 845-7999 Telephone No.: (212) 845-7917 Attention: Jeffrey Solomon Jeffrey Smith -25- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. MAINFIELD ENTERPRISES INC. By:_____________________________________ Name: Title: Address for Notice: c/o Cavallo Capital Corp. 660 Madison Avenue, 18th Floor New York, New York 10021 Attention: Mor Sagi Facsimile: (212) 651-9010 Telephone: (212) 651-9005 -26- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. CRANSHIRE CAPITAL L.P. By:_____________________________________ Name: Title: Address for Notice: c/o Downsview Capital, Inc. The General Partner 666 Dundee Road, Suite 1901 Northbrook, IL 60062 Attention: Mitchell D. Kopin Facsimile: (847) 562-9031 Telephone: (847) 562-9030 -27- IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. CLEVELAND OVERSEAS LTD. By:_________________________________ Name: Title: Address for Notice: ----------------------------- ----------------------------- ----------------------------- Facsimile No.: (___) ___-____ Telephone No.: (___) ___-_______ Attention: ____________________ -28- Schedule A Jurisdiction of Organization of the Debtors: Organization Identification Number: -29- Schedule B Jurisdictions: -30- Schedule C
- ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- Name/Address of Issuer Name/Address of Jurisdiction of Class of No. of Shares No. of Pledged Holder Incorporation Securities Outstanding Shares - ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- I.E.S. Defense Services, Inc. - ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- IES Interactive Training, Inc. - ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- Electric Fuel GmbH - ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- Summit Training International, Inc. - ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- Electric Fuel UK Ltd. - ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- M.D.T. Protective Services Ltd. - ----------------------- ------------------- -------------------- ----------------- ------------------ ---------------- Electric Fuel Ltd. - ----------------------- ------------------- -------------------- ----------------- ------------------ ----------------
-31- EX-4.5 7 v00188_ex4-5.txt Exhibit 4.5 INTELLECTUAL PROPERTY SECURITY AGREEMENT INTELLECTUAL PROPERTY SECURITY AGREEMENT, dated as of September 30, 2003, by and among Arotech Corporation, a Delaware corporation (f/k/a Electric Fuel Corporation) (the "Parent"), I.E.S. Defense Services, Inc. ("IDS") and IES Interactive Training, Inc. ("IES" and, together with IDS and the Parent, the "Debtors") and the secured parties signatory hereto (each, a "Secured Party", and collectively, the "Secured Parties"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to the Securities Purchase Agreement, dated the date hereof between and among the Parent and the Secured Parties, the Secured Parties have agreed to purchase 8% Secured Convertible Debentures, due September 30, 2006 (the "Debentures"); and WHEREAS, the Debtors executed and delivered to the Secured Parties a security agreement, dated the date hereof (the "Security Agreement", and together with this Agreement, the "Security Agreements"), for the benefit of the Secured Parties and to grant to them a security interest in certain property of the Debtors to secure the prompt payment, performance and discharge in full of all of the Parent's obligations under the Debentures and related transaction documents; and WHEREAS, it is contemplated that the Secured Parties shall be granted (i) a first priority, perfected security interest in the Parent Collateral (as defined below) and (ii) a second priority security interest in the IES Collateral (as defined below), and that the Collateral (as defined below) will secure all of the outstanding Obligations on a pro rata basis. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as "general intangibles" and "proceeds") shall have the respective meanings given such terms in Article 9 of the UCC. (a) "Acquisition" shall mean the purchase, acquisition by lease, exchange, merger, consolidation, succession or other acquisition by or on behalf of the Parent (whether directly or indirectly through a Subsidiary or other entity currently existing or hereafter created in which Parent or any of its subsidiaries own more than 50% of the ownership interests) of more than 10% of the stock or assets of any entity. Assets so acquired that are held by Electric Fuel Battery Corporation ("EFBC") for use by EFBC in its zinc-air military battery business ("Battery Assets"), or stock acquired by EFBC of entities the primary business assets of which consist of Battery Assets, shall not be deemed to be Acquisitions under this agreement, provided that the consideration paid for such stock and/or asset should not exceed $1,000,000. (b) "Agent" means Smithfield Fiduciary LLC as agent for each of the Secured Parties pursuant to this Agreement and the Security Agreement, or such other Person as shall have been subsequently appointed as a successor agent pursuant to this Agreement. (c) "Collateral" the Parent Collateral and the IES Collateral. (d) "Copyrights" means any and all of Debtors' (i) copyrights in computer software owned by the Company, including any revisions and derivative works, whether registered or not and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held, including, without limitation, those set forth on Exhibit A attached hereto and (ii) copyrights, copyright applications, copyright registration and like protections in each work of authorship and any derivative work thereof, including computer programs, that is created by the Debtors, whether published or unpublished and whether or not the same also constitutes a trade secret, and all copyright licenses now or hereafter existing, created, acquired or held by the Debtors, including, without limitation, those registrations and applications set forth on Exhibit A attached hereto. (e) "IES Collateral" means all right, title and interest in and to all of Trademarks, Patents, Copyrights, domain names and other general intangible property of IES, all trade secrets, intellectual property rights in IES' computer software and computer software products, design rights which may be available, owned or licensed to IES, all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing of IES' rights to proceeds arising from any and all claims for damages by way of past, present and future infringement of any Collateral with the right but not the obligation to sue on behalf of and collect such damages for said use or infringement of the Copyrights, Patents or Trademarks, and IES' rights with respect to licenses granted by IES to third parties or licensed to IES to use any of the Copyrights, domain names, Patents or Trademarks, and all license fees and royalties due to IES arising from such use to the extent permitted by such license or rights, all of which are now or hereafter existing, created, acquired or held. The term "IES Collateral" shall include all of the foregoing items, whether presently owned or existing or hereafter acquired or coming into existence, all of IES' additions and accessions thereto, all of IES' substitutions and replacements thereof, and all of IES' proceeds, products and accounts thereof, including without limitation all proceeds from the licensing or sale or other transfer of Collateral and of insurance covering the same and of any tort claims in connection therewith. (f) "Parent Collateral" means all of the following hereafter acquired or coming into existence as a result of an Acquisition: all of the Parent's right, title and interest in and to all of Trademarks, Patents, Copyrights, domain names and other general intangible property of the Parent, all Parent's trade secrets, Parent's intellectual property rights in Parent's computer software and Parent's computer software products, design rights which may be available, owned or licensed to the Parent, all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing Parent's rights to proceeds arising from any and all claims for damages by way of past, present and future infringement of any Collateral with the right but not the obligation to sue on behalf of and collect such damages for said use or infringement of the Copyrights, Patents or Trademarks, and Parent's rights with respect to licenses granted by Parent to third parties or licensed to Parent to use any of the Copyrights, domain names, Patents or Trademarks, and all license fees and royalties due to the Parent arising from such use to the extent permitted by such license or rights, all of which are now or hereafter existing, created, acquired or held. The term "Parent Collateral" shall include all of the foregoing items, all of Parent's additions and accessions thereto, all of Parent's substitutions and replacements thereof, and all of Parent's proceeds, products and accounts thereof, including without limitation all proceeds from the licensing or sale or other transfer of Collateral and of insurance covering the same and of any tort claims in connection therewith. (g) "Obligations" means all of the Debtors' obligations under this Agreement, the Debentures, the Security Agreement, the Purchase Agreement and the transaction documents contemplated thereby, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Parties as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. (h) "Patents" means all of the Debtors' patents, patent applications, patent licenses, letters patent and like protections of the United States or any other country, including, without limitation, improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, all of which are now or hereafter existing, created, acquired or held and including, without limitation, those registrations and applications set forth on Exhibit B attached hereto and all goodwill associated with or symbolized by any of the foregoing. (i) "Trademarks" means any Debtor trademark or service mark right, whether or not registered, Debtors' applications to register and registrations of the same and like protections, any trademark or service mark licenses and the entire goodwill of the business of the Debtors connected with or symbolized by such trademarks or service marks, including all renewals thereof all of which are now or hereafter existing, created, acquired or held, including, without limitation, those registrations and applications set forth on Exhibit C attached hereto all goodwill associated with or symbolized by any of the foregoing. (j) "UCC" means the Uniform Commercial Code and/or any other applicable law of each jurisdiction in which any Debtor is incorporated or organized (including, without limitation the State of Delaware) and any jurisdiction as to any Collateral located therein. 2. Grant of Security Interest. (a) As an inducement for the Secured Parties to enter into the Purchase Agreement and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, each of the Debtors hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Agent for itself and for the benefit of each of the Secured Parties, a perfected, first priority security interest in, a first lien upon and a right of set-off against all of the Debtors' right, title and interest of whatsoever kind and nature in and to the Parent Collateral (the "First Priority Security Interest"). (b) As an inducement for the Secured Parties to enter into the Purchase Agreement and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, each of the Debtors hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Agent for itself and for the benefit of each of the Secured Parties, a continuing second priority security interest in, and second lien upon and a right of set-off against all of the Debtors' right, title and interest of whatsoever kind and nature in and to the IES Collateral (the "Second Priority Security Interest", and together with the First Priority Security Interest, the "Security Interests"), junior only to the first priority security interest (the "First Investors' Security Interest") in the Parent Collateral in favor of certain investors (the "First Investors") pursuant to that certain IP Security Agreement (the "First Investors' Security Agreement"), dated December 31, 2002, by and among the Parent, its subsidiaries parties thereto and the First Investors. 3. Representations, Warranties, Covenants and Agreements of the Debtors. The Debtors jointly and severally represent and warrant to, and covenant and agree with, the Secured Parties as follows: (a) Each Debtor has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations thereunder. The execution, delivery and performance by each Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of such Debtor and no further action is required by such Debtor. (b) Except for the Security Interests and as set forth in Schedule 3(b) hereto, the Collateral is owned solely by the Debtors (except for non-exclusive licenses granted by the Debtors in the ordinary course of business), free and clear of any liens, security interests or encumbrances, and is fully authorized to grant the Security Interests in and to pledge the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement or transfer or any notice of any of the foregoing (other than those that have been filed in favor of (i) the Secured Parties pursuant to this Agreement and (ii) the First Investors pursuant to the First Investors' Security Agreement with respect to the IES Collateral) covering or affecting any of the Collateral. So long as this Agreement shall be in effect, the Debtors shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Parties pursuant to the terms of this Agreement). (c) Exhibit A sets forth a true and complete list of all Debtors' registrations and applications for Copyrights in existence as of the date of this Agreement. Exhibit B sets forth a true and complete list of all Debtors' registrations and applications for Patents that have been filed as of the date of this Agreement. Exhibit C sets forth a true and complete list of all Debtors' registrations and applications for Trademarks filed as of the date of this Agreement. The Debtors shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Parties in writing of any change in the composition of the Collateral, including, without limitation, any subsequent ownership rights of the Debtors in or to any Copyrights, Patents or Trademarks. (d) Each of the Patents, Trademarks and Copyrights is valid and enforceable, and no part of the Collateral has been judged invalid or unenforceable. No written claim has been received that any of the Patents, Trademarks or Copyrights or the Debtors' use of any Collateral violates the rights of any third party. There has been no adverse decision to the Debtors' claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Debtors' right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of the Debtors, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority. (e) Each Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and may not relocate such books of account and records unless it delivers to the Secured Parties at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interests to create in favor of the Secured Parties a valid, perfected and continuing first priority liens in the Parent Collateral and a valid and continuing second priority lien in the IES Collateral subordinate only to the First Investors' Security Interest. The principal place of business of the Debtors is located at the address set forth in Schedule A hereto, and will not be moved without notice to each Secured Party. (f) This Agreement creates in favor of the Secured Parties a valid security interest in the Collateral, including the Collateral listed on the Exhibits hereto, securing the payment and satisfaction of the Obligations, and, upon making the filings described in the immediately following sentence, (i) a perfected first priority interest in the Parent Collateral that is senior to all existing and hereinafter created security interests and (ii) a second priority security interest in the IES Collateral that is senior to all existing and hereinafter created security interests except for the First Investors' Security Interest. Except for (x) the filing of this Agreement with the United States Patent and Trademark Office with respect to the Patents and Trademarks and the filing of this Agreement with the United States Copyrights Office with respect to the Copyrights, and (y) the filing of financing statements on Form UCC-1 under the UCC with the jurisdictions indicated in Schedule A, attached hereto, no authorization or approval of or filing with or notice to any governmental authority or regulatory body is required either (i) for the grant by the Debtors of, or the effectiveness of, the Security Interests granted hereby or for the execution, delivery and performance of this Agreement by the Debtors or (ii) for the perfection of or exercise by the Secured Parties of its rights and remedies hereunder. The Debtors acknowledge and agree that a copy of this Agreement (or instruments executed and delivered pursuant hereto) will be filed and recorded with each of the United States Patent and Trademark Office and the United States Copyrights Office with respect to the Patents, Trademarks and Copyrights that are now or hereafter in existence. (g) The Debtors acknowledge and agree that on the date of execution of this Agreement, the Secured Parties will: (i) file one or more financing statements under the UCC with respect to the Security Interests for filing with the jurisdictions indicated on Schedule A, attached hereto and in such other jurisdictions the Secured Parties may deem necessary and (ii) one or more executed recordation sheets relating to the filing and recording of this Agreement with each of the United States Patent and Trademark Office and the United States Copyrights Office with respect to the Patents, Trademarks and Copyrights that are now in existence. (h) The execution, delivery and performance of this Agreement does not conflict with or cause a breach or default, or an event that with or without the passage of time or notice, shall constitute a breach or default, under any agreement to which the Debtors are a party or by which the Debtors are bound. No consent (including, without limitation, from stock holders or creditors of the Debtors) is required for the Debtors to enter into and perform their obligations hereunder. (i) The Debtors shall at all times maintain the liens and Security Interests provided for hereunder as valid liens and security interests in the Collateral in favor of each of the Secured Parties to ensure that such liens and Security Interests are and remain senior to all not existing and hereafter created security interests and liens. The Collateral will be kept free of all liens, security interest, claims and encumbrances whatsoever, except for the First Investors' Security Interest. Each Debtor hereby agrees to defend the same against any and all persons. Each Debtor shall safeguard and protect all Collateral for the account of the Secured Parties. At the request of the Agent and/or Secured Parties, the Debtors will sign and deliver to the Secured Parties at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to the Secured Parties and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Secured Parties to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Debtors shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interests hereunder, and the Debtors shall obtain and furnish to the Secured Parties from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interests hereunder. (j) The Debtors will not allow any Collateral to be abandoned, forfeited or dedicated to the public without the prior written consent of the Secured Parties. The Debtors will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by the Debtors in the ordinary course of business), sell or otherwise dispose of any of the Collateral without the prior written consent of the Secured Parties. (k) Each Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the Agent, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Parties' security interest therein. (l) The Debtors shall permit the Secured Parties and its representatives and agents upon reasonable prior notice to inspect the Collateral at any time during normal business hours, and to make copies of records pertaining to the Collateral as may be requested by the Secured Parties from time to time. (m) Each Debtor shall, at its own expense, take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral. (n) Each Debtor shall promptly notify the Agent in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Debtors that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Parties hereunder. (o) Each Debtor shall not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral where violation is reasonably likely to have a material adverse effect on the Secured Parties' rights in the Collateral or Secured Parties' ability to foreclose on the Collateral. (p) The Debtors shall not grant to any person or entity any rights or interests in or to any of the Collateral that are senior to, or pari passu with, the Secured Parties. (q) Each Debtor shall notify the Agent of any change in such Debtor's name, identity, chief place of business, chief executive office or residence within 5 days of such change. (r) All information heretofore, herein or hereafter supplied to the Secured Parties by or on behalf of the Debtors with respect to the Collateral is accurate and complete in all material respects as of the date furnished. 4. Defaults. The following events shall be "Events of Default": (a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures; (b) Any representation or warranty of the Debtors in this Agreement or in the Security Agreement shall prove to have been incorrect in any material respect when made; and (c) The failure by a Debtor to observe or perform any of its obligations hereunder or in the Security Agreement for ten (10) days after receipt by the Debtors of notice of such failure from the Secured Parties. 5. Duty To Hold In Trust. Upon the occurrence and during the continuation of any Event of Default, the Debtors shall, upon receipt by it of any revenue, income or other sums subject to the Security Interests, whether payable pursuant to the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Parties and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Parties for application to the satisfaction of the Obligations. 6. Rights and Remedies Upon Default. Upon the occurrence and during the continuation of any Event of Default, the Agent (on behalf of, and for the benefit of itself and each of the Secured Parties) shall have the right to exercise all of the remedies conferred hereunder, under the Debentures and under the Security Agreements, and the Agent and the Secured Parties shall have all the rights and remedies of a secured party under the UCC. Without limitation, the Secured Parties shall have the following rights and powers: (a) The Agent shall have the right to take possession of all tangible manifestations or embodiments of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Debtors shall assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at the Debtors' premises or elsewhere. (b) The Agent shall have the right to operate the business of the Debtors using the Collateral and shall have the right to assign, sell, or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Agent may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Debtors or right of redemption of the Debtors, which are hereby expressly waived. Upon each such sale, assignment or other transfer of Collateral, the Agent may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Debtors, which are hereby waived and released. (c) The Agent may license or, to the same extent the Debtors is permitted by law and contract to do so, sublicense, whether on an exclusive or non-exclusive basis, any of the Collateral throughout the world for such period, on such conditions and in such manner as the Secured Parties shall, in its reasonable discretion, determine. (d) The Agent may (without assuming any obligations or liabilities thereunder), at any time, enforce (and shall have the exclusive right to enforce) against licensee or sublicensee all rights and remedies of the Debtors in, to and under any license agreement with respect to such Collateral, and take or refrain from taking any action thereunder. (e) The Agent may, in order to implement the assignment, license, sale or other disposition of any of the Collateral pursuant to this Section, pursuant to the authority provided for in Section 12, execute and deliver on behalf of the Debtors one or more instruments of assignment of the Collateral in form suitable for filing, recording or registration in any jurisdictions as the Secured Parties may determine advisable. (f) In the event that any Secured Party shall recover from the Debtors or the Collateral more than its pro rata share of the Obligations owed to all Secured Parties hereunder, whether by agreement, understanding or arrangement with the Debtors or any other Person, set off or other means, such Secured Party shall immediately deliver or pay over to the other Secured Parties their pro rata portion of any such recovery in the form received. (g) Agent may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts have been assigned to Secured Parties and that Secured Parties have a security interest therein and Agent may direct any or all accounts debtors to make payment of Accounts directly to Secured Parties, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or such other obligations, but without any duty to do so, and Agent shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Agent may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Agent's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Secured Parties and are payable directly and only to Secured Parties and the Debtors shall deliver to Agent such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Agent may require. 7. Applications of Proceeds. The proceeds of any such sale, lease, license or other disposition of the Collateral hereunder shall be applied provided that any apportionment and application under this Section 7 shall be subject to any apportionment among the First Investors of the proceeds of the IES Collateral under the First Investors' Security Agreements (i) first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, (ii) to the reasonable attorneys' fees and expenses incurred by the Agent and/or Secured Parties in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, (iii) to satisfaction of the Obligations, and (iv) to the payment of any other amounts required by applicable law, after which the Secured Parties shall pay to the Debtors any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Parties are legally entitled, the Debtors will be liable for the deficiency, together with interest thereon, at the rate of 12% per annum or the lesser amount permitted by applicable law (the "Default Rate"), and the reasonable fees of any attorneys employed by the Agent and/or Secured Parties to collect such deficiency. To the extent permitted by applicable law, each Debtor waives all claims, damages and demands against the Secured Parties arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Agent and/or Secured Parties. 8. Costs and Expenses. The Debtors agree to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including, without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Agent. The Debtors shall also pay all other claims and charges which in the reasonable opinion of the Agent and/or Secured Parties might prejudice, imperil or otherwise affect the Collateral or the Security Interests therein. The Debtors will also, upon demand, pay to the Agent and/or Secured Parties the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Agent and/or Secured Parties may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Parties under the Debentures. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debentures and shall bear interest at the Default Rate. 9. Responsibility for Collateral. Each Debtor assumes all liabilities and responsibility in connection with all Collateral, and the obligations of such Debtor hereunder, under the Debentures or under the Security Agreement shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 10. Security Interests Absolute. All rights of the Secured Parties and all Obligations of the Debtors hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures, the Security Agreement or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures, the Security Agreement or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Parties to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Debtors, or a discharge of all or any part of the Security Interests granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Parties shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. Each Debtor expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Parties hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Parties, then, in any such event, the Debtors' obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. Each Debtor waives all right to require the Secured Parties to proceed against any other person or to apply any Collateral which the Secured Parties may hold at any time, or to marshal assets, or to pursue any other remedy. Each Debtor waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby. 11. Term of Agreement. This Agreement and the Security Interests shall terminate on the date on which all payments under the Debentures have been made in full or otherwise converted pursuant to the terms thereof and all other Obligations have been paid or discharged. Upon such termination, the Secured Parties, at the request and at the expense of the Debtors, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement. 12. Power of Attorney; Further Assurances. (a) Each Debtor authorizes the Secured Parties, and does hereby make, constitute and appoint it, and its respective officers, agents, successors or assigns with full power of substitution, as the Debtors' true and lawful attorney-in-fact, with power, in its own name or in the name of the Debtors, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Parties; (ii) to sign and endorse any UCC financing statement or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Parties, and at the Debtors' expense, at any time, or from time to time, all acts and things which the Secured Parties deem necessary to protect, preserve and realize upon the Collateral and the Security Interests granted therein in order to effect the intent of this Agreement, the Debentures and the Security Agreement, all as fully and effectually as the Debtors might or could do; and each Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. (b) On a continuing basis, each Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording places in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule A, attached hereto, all such instruments, including appropriate financing and continuation statements and collateral agreements and filings with the United States Patent and Trademark Office and the United States Copyrights Office, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Parties, to perfect the Security Interests granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Parties the grant or perfection of the Security Interests in all the Collateral. (c) Each Debtor hereby irrevocably appoints the Secured Parties as such Debtors' attorney-in-fact, with full authority in the place and stead of such Debtor and in the name of such Debtor, from time to time in the Secured Parties' discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) To modify, in its sole discretion, this Agreement without first obtaining the Debtors' approval of or signature to such modification by amending Exhibit A, Exhibit B and Exhibit C, hereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by the Debtors after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which the Debtors no longer has or claims any right, title or interest; and (ii) To file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Debtors where permitted by law. 13. Agent. (a) Actions The Agent shall at all times act upon and in accordance with written instructions received from a Majority-in-Interest (as defined in Section 16) time to time. The Agent shall be deemed to be authorized on behalf of each Secured Party to act on behalf of such Secured Party under this Agreement and the Security Agreement and, in the absence of written instructions from a Majority-in-Interest (with respect to which the Agent agrees that it will, subject to the last two sentences of this Section, comply, except as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. The Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement or Security Agreement by the Debtors. By accepting their Debentures, each Secured Party shall be deemed to have agreed to indemnify the Agent (which agreement shall survive any termination of such Secured Party's percentage), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement, the Debentures and the Security Agreement, including the reimbursement of the Agent for all out-of-pocket expenses (including attorneys' fees) incurred by the Agent hereunder or in connection herewith or in enforcing the Obligations of the Debtors under this Agreement, the Debentures or the Security Agreement, in all cases as to which the Agent is not reimbursed by the Debtors; provided that no Secured Party shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or willful misconduct. The Agent shall not be required to take any action hereunder, under the Debentures or under Security Agreement, or to prosecute or defend any suit in respect of this Agreement or under the Debentures or under the Security Agreement, unless the Agent is indemnified to its reasonable satisfaction by the Secured Parties against loss, costs, liability and expense. If any indemnity in favor of the Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. (b) Exculpation. Neither the Agent nor any of its directors, officers, partners, members, shareholders, employees or agents shall be liable to any Secured Party for any action taken or omitted to be taken by it under this Agreement, the Debentures or the Security Agreement, or in connection herewith or therewith, except for its own willful misconduct or gross negligence or be responsible for the consequences of any error in judgment. Neither the Agent nor any of its directors, officers, partners, members, shareholders, employees or agents has any fiduciary relationship with any Secured Party by virtue of this Agreement or the Security Agreement. The Agent shall not be responsible to any Secured Party for any recitals, statements, representations or warranties herein or in any certificate or other document delivered in connection herewith or for the authorization, execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, or sufficiency this Agreement, the Debentures or the Security Agreement, the financial condition of the Debtors or the condition or value of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Debentures or the Security Agreement, the financial condition of the Debtors or the existence or possible existence of any default or event of default. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which it believes to be genuine and to have presented by a proper person. (c) Obligations Held by the Agent. The Agent shall have the same rights and powers with respect to any Debentures held by it or any of its affiliates, as any Secured Party and may exercise the same as if it were not the Agent. Each of the Debtors and the Secured Parties hereby waives, and each successor to any Secured Party shall be deemed to waive, any right to disqualify any Secured Party from serving as the Agent or any claim against that Secured Party for serving as Agent. (d) Copies, etc. The Agent shall give prompt notice to each Secured Party of each notice or request required or permitted to be given to the Agent by the Debtors pursuant to the terms of this Agreement. The Agent will distribute to each Secured Party each instrument and other agreement received for its account and copies of all other communications received by the Agent from a Debtor for distribution to the Secured Parties by the Agent in accordance with the terms of this Agreement. Notwithstanding anything herein contained to the contrary, all notices to and communications with the Debtors under this Agreement shall be effected by the Secured Parties through the Agent. (e) Resignation of Agent. The Agent may resign as such at any time upon at least thirty (30) days' prior notice to the Debtors and all the Secured Parties, such resignation not to be effective until a successor Agent is in place. If the Agent at any time shall resign, a Majority-in-Interest may jointly appoint another Secured Party as a successor Agent which shall thereupon become the Agent hereunder. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges, and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. (f) Replacement of Agent. A Majority-in-Interest may at any time and for any reason replace the Agent with a successor Agent jointly selected by them, upon at least ten days written notice to the Debtors and the other Secured Parties. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the terminated Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges, and duties of the retiring Agent, and the terminated Agent shall be discharged from its duties and obligations under this Agreement. 14. Notices. All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given when (i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof, (iii) if sent by nationally recognized overnight delivery service (receipt requested), the next business day or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses: If to the Debtors: Arotech Corporation 632 Broadway, Suite 1200 New York, NY 10012 Facsimile No.: (646) 654-2187 Attn: Chief Executive Officer With a copy to: Electric Fuel (E.F.L.) Ltd. One HaSolela Street, POB 641 Western Industrial Park Beit Shemesh 99000, Israel Facsimile No.: 011-972-2-990-6688 Attn.: General Counsel If to Secured Parties: To the address set forth under such Secured Parties' name on the signature pages hereto. 15. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Parties shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Parties' rights and remedies hereunder. 16. Actions by Secured Parties. Any action required or permitted hereunder to be taken by or on behalf of the Secured Parties shall, for such action to be valid, require the approval of the Majority-in-Interest prior to the taking of such action. If the consent, approval or disapproval of the Secured Parties is required or permitted pursuant to this Agreement, such consent, approval or disapproval shall only be valid if given by the Majority-in-Interest. "Majority-in-Interest" means the Secured Party or Secured Parties (as the case may be) holding in excess of a majority of the outstanding aggregate principal amount under the Debentures, determined on a cumulative basis. 17. Miscellaneous. (a) No course of dealing between the Debtors and the Secured Parties, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties, any right, power or privilege hereunder, under the Debentures or under the Security Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) All of the rights and remedies of the Secured Parties with respect to the Collateral, whether established hereby, by the Debentures, by the Security Agreement or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement signed by the parties. (d) In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. (e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement. (h) This Agreement shall be construed in accordance with the laws of the State of New York, except to the extent the validity, perfection or enforcement of a security interest hereunder in respect of any particular Collateral which are governed by a jurisdiction other than the State of New York in which case such law shall govern. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of any New York State or United States Federal court sitting in New York county over any action or proceeding arising out of or relating to this Agreement, and the parties hereto hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such New York State or Federal court. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto further waive any objection to venue in the State of New York and any objection to an action or proceeding in the State of New York on the basis of forum non convenient. If either party shall commence an action or a proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. (i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. (j) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. * * * * * * * * * * * IN WITNESS WHEREOF, the parties hereto have caused this IP Security Agreement to be duly executed on the day and year first above written. Arotech Corporation By: ----------------------------------------------- Name: Title: I.E.S. DEFENSE SERVICES, INC. By: ------------------------------------------------- Name: Title: IES INTERACTIVE TRAINING, INC. By: ------------------------------------------------- Name: Title: IN WITNESS WHEREOF, the parties hereto have caused this IP Security Agreement to be duly executed on the day and year first above written. SMITHFIELD FIDUCIARY LLC By:_____________________________________ Name: Title: Address for Notice: c/o Highbridge Capital Management, LLC 9 West 57th Street, 27th Floor New York, New York 10019 Attention: Ari J. Storch / Adam J. Chill Facsimile No.: (212) 751-0755 Telephone No.: (212) 287-4720 With a copy to: Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Facsimile No.: (212) 593-5955 Telephone No.: (212) 756-2376 Attention: Eleazer Klein, Esq. IN WITNESS WHEREOF, the parties hereto have caused this IP Security Agreement to be duly executed on the day and year first above written. OMICRON MASTER TRUST By:_____________________________________ Name: Title: Address for Notice: c/o Omicron Capital L.P. 810 Seventh Avenue 39th Floor New York, New York 10019 Attention: Brian Daly Facsimile: (212) 803-5269 Telephone: (212) 803-5263 IN WITNESS WHEREOF, the parties hereto have caused this IP Security Agreement to be duly executed on the day and year first above written. PORTSIDE GROWTH AND OPPORTUNITY FUND By:______________________________ Name: Title: Address for Notice: c/o Ramius Capital Group, L.L.C. 666 Third Avenue, 26th Floor New York, New York 10006 Facsimile No.: (212) 845-7999 Telephone No.: (212) 845-7917 Attention: Jeffrey Solomon Jeffrey Smith IN WITNESS WHEREOF, the parties hereto have caused this IP Security Agreement to be duly executed on the day and year first above written. MAINFIELD ENTERPRISES INC. By:_____________________________________ Name: Title: Address for Notice: c/o Cavallo Capital Corp. 660 Madison Avenue, 18th Floor New York, New York 10021 Attention: Mor Sagi Facsimile: (212) 651-9010 Telephone: (212) 651-9005 IN WITNESS WHEREOF, the parties hereto have caused this IP Security Agreement to be duly executed on the day and year first above written. CRANSHIRE CAPITAL L.P. By:_____________________________________ Name: Title: Address for Notice: c/o Downsview Capital, Inc. The General Partner 666 Dundee Road, Suite 1901 Northbrook, IL 60062 Attention: Mitchell D. Kopin Facsimile: (847) 562-9031 Telephone: (847) 562-9030 IN WITNESS WHEREOF, the parties hereto have caused this IP Security Agreement to be duly executed on the day and year first above written. CLEVELAND OVERSEAS LTD. By:_________________________________ Name: Title: Address for Notice: ------------------------------------ ------------------------------------ ------------------------------------ Facsimile No.: (___) ___-____ Telephone No.: (___) ___-____ Attention: _________________ EXHIBIT A Copyrights Registration Registration Description Number Date - ------------------ ----------------------------- ----------------------- EXHIBIT B Patents Registration Registration Description Number Date - ------------------ ----------------------------- ----------------------- EXHIBIT C Trademarks Registration Registration Description Number Date - ------------------ ----------------------------- ----------------------- SCHEDULE A Jurisdictions: EX-4.6 8 v00188_ex4-6.txt Exhibit 4.6 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of September 30, 2003, by and among Arotech Corporation, a Delaware corporation (the "Company"), and the investors signatory hereto (each a "Purchaser" and collectively, the "Purchasers"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "Purchase Agreement"). The Company and the Purchasers hereby agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "Debenture" means the 8% secured convertible debentures issued or issuable to the Purchasers under the Purchase Agreement. "Effective Date" means with respect to any Registration Statement, the date that such Registration Statement is first declared effective by the Commission. "Effectiveness Date" means, (a) with respect to the Registration Statement required to be filed hereunder relating to the Initial Debentures and Initial Warrants, the earlier of (1) the 120th day following the Initial Closing Date, and (2) the fifth Trading Day following the date on which the Company is notified by the Commission that such Registration Statement will not be reviewed or is no longer subject to further review and comments, (b) with respect to the Registration Statement required to be filed hereunder relating to Additional Debentures and Additional Warrants, the earlier of (1) the 120th day following the applicable Additional Closing Date, and (2) the fifth Trading Day following the date on which the Company is notified by the Commission that such Registration Statement will not be reviewed or is no longer subject to further review and comments, and (c) with respect to any additional Registration Statements that may be required pursuant to Section 2(c), the 90th day following the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required under such Section. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Filing Date" means (i) with respect to the Registration Statement required to be filed hereunder relating to the Initial Debentures and Initial Warrants, the 60th day following the Initial Closing Date, (ii) with respect to a Registration Statement required to be filed hereunder relating to any Additional Debentures and Additional Warrants, the 60th day following the earlier of (x) each Additional Closing Date at which an aggregate of at least $750,000 in principal amount of Additional Debentures are purchased by one or more Purchasers or their successors or assigns or after which there is an aggregate of at least $750,000 in principal amount of Additional Debentures that have purchased by one or more Purchasers or their successors or assigns that have not had their related Registrable Securities previously registered hereunder or (y) such time after any Additional Debentures are purchased that no additional Additional Debentures are available or are permitted to be purchased pursuant to the Purchase Agreement, and (iii), with respect to any additional Registration Statements that may be required pursuant to Section 2(c), the 30th day following the date on which the Company first knows, or reasonably should have known that such additional Registration Statement is required under such Section. "Holder" or "Holders" means the holder or holders, as the case may be, from time to time of Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 5(c). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Losses" shall have the meaning set forth in Section 5(a). "New Warrants" shall have the meaning set forth in the Warrants. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Securities" means (i) the Underlying Shares, and (ii) the shares of Common Stock issuable upon exercise of the Warrants in case relating to the Debentures and Warrants previously sold at an applicable Closing. "Registration Statement" means any registration statement required to be filed hereunder and any additional registration statements contemplated by Section 2(c), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. -2- "Rule 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended. "Underlying Shares" means the shares of Common Stock issuable upon conversion in full of the Debentures, including the shares of Common Stock issued and issuable in respect of interest on the Debentures. "Special Counsel" means Schulte Roth & Zabel LLP. "Warrants" means (i) the Warrants issued or issuable under the Purchase Agreement, and (ii) any New Warrants issuable under the Warrants. 2. Registration. (a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the resale of all previously unregistered Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. Each Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) and shall contain (except if otherwise directed by the Holders) the "Plan of Distribution" substantially in the form attached hereto as Annex A. The Company shall use its best efforts to cause each Registration Statement to be declared effective under the Securities Act but in no event later than Effectiveness Date, and shall use its best efforts to keep each Registration Statement continuously effective under the Securities Act until the date which is two years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "Effectiveness Period"). (b) If: (i) any Registration Statement is not filed on or prior to the Filing Date (if the Company files such Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) hereof, the Company shall not be deemed to have satisfied this clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be "reviewed," or not subject to further review, or (iii) the Company fails to respond to any comments made by the Commission within ten Trading Days after the receipt of such comments (or 15 Trading Days with respect to comments regarding solely to accounting matters), or (iv) after its Effective Date, -3- such Registration Statement ceases to be effective and available to the Holders thereunder as to all Registrable Securities to which it is required to relate (whether upon the delivery of an Advice pursuant to Section 6(d) or otherwise) at any time prior to the expiration of its Effectiveness Period without being succeeded within fifteen Trading Days by an amendment to such Registration Statement or by a subsequent Registration Statement filed with and declared effective by the Commission, or (v) an amendment to a Registration Statement is not filed by the Company with the Commission within fifteen Trading Days of the Commission's notifying the Company that such amendment is required in order for such Registration Statement to be declared effective, or (vi) the Common Stock is not listed or quoted, or is suspended from trading on the Nasdaq National Market or another Trading Market for a period of three Trading Days (which need not be consecutive Trading Days), or (vii) the conversion or exercise rights of the Holders pursuant to the Debentures or Warrants, as the case may be, are suspended for any reason, or (viii) any Registration Statement shall not be declared effective by the Commission on or prior to the applicable Effectiveness Date (any such failure or breach being referred to as an "Event," and for purposes of clause (i), (vii) or (viii) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five Trading Day period is exceeded, or for purposes of clause (iii) the date which such ten day-period is exceeded, of for purposes of clauses (iv) or (v) the date which such fifteen Trading Day-period is exceeded, or for purposes of clause (vi) the date on which such three Trading Day period is exceeded, being referred to as "Event Date"), then, in addition to any other rights available to the Holders: (x) on each such Event Date the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement; and (y) on the first monthly anniversary of each such Event Date thereof (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1.5% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement and (z) on each monthly anniversary thereafter of each such Event Date thereof (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 2% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement. If the Company fails to pay any liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The liquidated damages pursuant to the terms hereof shall apply on a pro rata basis for any portion of a month prior to the cure of an Event. (c) Notwithstanding anything herein to the contrary, the Company shall prepare and file a supplement to the appropriate Registration Statement (if permitted for such purpose under the Securities Act) within 5 Trading Days following the issuance of a New Warrant, or (if such supplement is not permitted for such purposes under the Securities Act), a new Registration Statement within 15 Trading Days following the issuance of a New Warrant. 3. Registration Procedures -4- In connection with the Company's registration obligations hereunder, the Company shall: (a) Not less than two Trading Days prior to the filing of a Registration Statement or any related Prospectus or any amendment or supplement thereto, the Company shall, (i) furnish to the Holders and their Special Counsel copies of all such documents proposed to be filed (including documents incorporated or deemed incorporated by reference, to the extent that such documents are not available on EDGAR) which documents will be subject to the review of such Holders and their Special Counsel, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities and their Special Counsel shall reasonably object in good faith. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event within ten days, to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and, as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold and their Special Counsel as promptly as reasonably possible (and, in the case of (i)(A) below, not less than three Trading Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any -5- Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (v) of the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) Furnish to each Holder and their Special Counsel, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (f) Promptly deliver to each Holder and their Special Counsel, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request. The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (g) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (h) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the -6- Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request. (i) Upon the occurrence of any event contemplated by Section 3(c)(v), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (j) Comply with all applicable rules and regulations of the Commission. (k) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if requested by the Commission, the controlling person thereof, and any other information about such Holder required to be included in the Registration Statement pursuant to the rules and regulations of the Commission. 4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with Nasdaq National Market or any other Trading Market, and (B) in compliance with applicable state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and $10,000 for the fees and disbursements of Special Counsel (which amount shall be paid to the Special Counsel concurrent with the initial delivery of the Registration Statement to the Holders and their Special Counsel pursuant to Section 3(a) hereof), (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. Expenses of any Registration Statement abandoned prior to the effectiveness thereof due to the request of the Holders shall be borne by the Holders. 5. Indemnification -7- (a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable costs of preparation and reasonable attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holders have approved Annex A hereto for this purpose) or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon: (x) such Holder's failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by -8- such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or to the extent that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holders have approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the "Indemnifying Party") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to -9- indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. Miscellaneous (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. -10- (b) No Piggyback on Registrations. Except as and to the extent specified in Schedule 6(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right to any of its security holders. Except as and to the extent specified in Schedule 6(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person which have not been fully satisfied. (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. (e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of registration rights. (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of all of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates, provided, -11- that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (g) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Arotech Corporation 632 Broadway, Suite 1200 New York, NY 10012 Facsimile No.: (646) 654-2187 Telephone No.: (646) 654-2107 Attn: Chief Executive Officer With a copy to: Electric Fuel (E.F.L.) Ltd. One HaSolela Street, POB 641 Western Industrial Park Beit Shemesh 99000, Israel Facsimile No.: 011-972-2-990-6688 Telephone No.: 011-972-2-990-6623 Attn.: General Counsel If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto. With a copy to: Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Facsimile No.: (212) 593-5955 Telephone No.: (212) 756-2376 Attn: Eleazer Klein, Esq. If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. -12- (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of this Agreement), and hereby irrevocably waives, and agrees not to assert in any suit, action or Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or Proceeding is has been commenced in an improper or inconvenient forum. Each party hereto (including its affiliates, agents, officers, directors and employees) hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal Proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence an action or Proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or Proceeding shall be reimbursed by the other party for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or Proceeding. (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. -13- (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (n) Independent Nature of Purchasers' Obligations and Rights. The obligations of each Purchaser hereunder are several and not joint with the obligations of any other Purchaser hereunder, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Purchaser shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES FOLLOW] -14- IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. AROTECH CORPORATION By:_________________________________ Name: Title: [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASERS FOLLOW] -15- IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. SMITHFIELD FIDUCIARY LLC By:_____________________________________ Name: Title: Address for Notice: c/o Highbridge Capital Management, LLC 9 West 57th Street, 27th Floor New York, New York 10019 Attention: Ari J. Storch / Adam J. Chill Facsimile No.: (212) 751-0755 Telephone No.: (212) 287-4720 With a copy to: Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Facsimile No.: (212) 593-5955 Telephone No.: (212) 756-2376 Attention: Eleazer Klein, Esq. -16- IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. OMICRON MASTER TRUST By:_____________________________________ Name: Title: Address for Notice: c/o Omicron Capital L.P. 810 Seventh Avenue 39th Floor New York, New York 10019 Attention: Olivier Morali Facsimile: (212) 803-5269 Telephone: (212) 803-5262 -17- IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. PORTSIDE GROWTH AND OPPORTUNITY FUND By:______________________________ Name: Title: Address for Notice: c/o Ramius Capital Group, L.L.C. 666 Third Avenue, 26th Floor New York, New York 10006 Facsimile No.: (212) 845-7999 Telephone No.: (212) 845-7917 Attention: Jeffrey Solomon Jeffrey Smith -18- IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. MAINFIELD ENTERPRISES INC. By:_____________________________________ Name: Title: Address for Notice: c/o Cavallo Capital Corp. 660 Madison Avenue, 18th Floor New York, New York 10021 Attention: Mor Sagi Facsimile: (212) 651-9010 Telephone: (212) 651-9005 -19- IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. CRANSHIRE CAPITAL L.P. By:_____________________________________ Name: Title: Address for Notice: c/o Downsview Capital, Inc. The General Partner 666 Dundee Road, Suite 1901 Northbrook, IL 60062 Attention: Mitchell D. Kopin Facsimile: (847) 562-9031 Telephone: (847) 562-9030 -20- IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. CLEVELAND OVERSEAS LTD. By:_________________________________ Name: Title: Address for Notice: ------------------------------------- ------------------------------------- ------------------------------------- Facsimile No.: (___) ___-____ Telephone No.: (___) ___-_______ Attention: ____________________ Annex A Plan of Distribution The Selling Stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; o short sales; o broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling stockholder may from time to time pledge or grant a security interest in some or all of the Shares or common stock or Warrant owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Selling Stockholders have informed the Company that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. The Company is required to pay all fees and expenses incident to the registration of the shares and up to $10,000 of the fees and disbursements of Special Counsel. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. EX-4.7 9 v00188_ex4-7.txt EXHIBIT 4.7 VOTING AGREEMENT VOTING AGREEMENT, dated as of September 30, 2003 (this "Agreement"), by the shareholders of Arotech Corporation, a Delaware corporation (f/k/a Electric Fuel Corporation, the "Company") listed on the signature pages hereto under the heading "Shareholders" (each, a "Shareholder" and collectively, the "Shareholders"), the Company and the investors listed on the signature pages hereto under the heading "Investors") (each, an "Investor" and collectively, the "Investors"). WHEREAS, the Investors and the Company have entered into a (i) Securities Purchase Agreement, dated as of the date hereof (the "Securities Purchase Agreement"), pursuant to which, among other things, the Company has agreed to issue and sell to the Investors and the Investors have agreed to purchase, an aggregate of up to $11 million of 8% secured convertible debentures of the Company (together with any debentures issued in replacement or exchange thereof in accordance with the terms thereof, the "Debentures"), which Debentures shall be convertible into shares of Common Stock, par value $0.01 per share, of the Company (the "Common Shares"), in accordance with the terms of the Debentures; WHEREAS, as of the date hereof, the Shareholders own collectively 688,166 Common Shares, which represent in the aggregate approximately 1.7% of the total issued and outstanding capital stock of the Company; and WHEREAS, as a condition to the willingness of the Investors to enter into the Securities Purchase Agreement and to consummate the transactions contemplated thereby (collectively, the "Transaction"), the Investors have required that the Shareholders agree, and in order to induce the Investors to enter into the Securities Purchase Agreement, the Shareholders have agreed, to enter into this Agreement with respect to all the Common Shares now owned and which may hereafter be acquired by the Shareholders (the "Shares") and any other securities, if any, which the Shareholders are entitled to vote at any meeting of sharehoholders of the Company (the "Other Securities"). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I PROXY OF THE STOCKHOLDERS SECTION 1.01. Voting Agreement. Each Shareholder hereby agrees that at any meeting of the stockholders of the Company, however called, and in any action by consent of the Company, each of the Shareholders shall vote the Shares and the Other Securities: (a) in favor of any matters relating to the Transaction, including, without limitation the matters described in Section 4.11 of the Securities Purchase Agreement; and (b) against any proposal or any other corporate action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under Section 4.11 of the Securities Purchase Agreement or which could result in any of the conditions to the Company's obligations under Section 4.11 of the Securities Purchase Agreement not being fulfilled. Each Shareholder acknowledges receipt and review of a copy of the Securities Purchase Agreement and the Debentures. The obligations of the Shareholders under this Section 1.01 shall terminate immediately following the occurrence and tabulation of votes at the shareholder meeting of the Company contemplated by Section 4.11 of the Securities Purchase Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS Each Shareholder hereby represents and warrants, severally but not jointly, to the Investors as follows: SECTION 2.01. Authority Relative to This Agreement. Each Shareholder has all necessary power and authority to execute and deliver this Agreement, to perform his or its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by such Shareholder and constitutes a legal, valid and binding obligation of such Shareholder, enforceable against such Shareholder in accordance with its terms. SECTION 2.02. No Conflict. (a) The execution and delivery of this Agreement by such Shareholder do not, and the performance of this Agreement by such Shareholder shall not, (i) conflict with or violate any federal, state or local law, statute, ordinance, rule, regulation, order, judgment or decree applicable to such Shareholder or by which the Shares or the Other Securities owned by such Shareholder are bound or affected or (ii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the Shares or the Other Securities owned by such Shareholder pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which such Shareholder is a party or by which such Shareholder or the Shares or Other Securities owned by such Shareholder are bound or affected. (b) The execution and delivery of this Agreement by such Shareholder do not, and the performance of this Agreement by such Shareholder shall not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental entity. SECTION 2.03. Title to the Shares. As of the date hereof, each Shareholder is the beneficial owner of the number of Common Shares set forth opposite such Shareholder's name on Appendix A hereto entitled to vote, without restriction, on all matters brought before holders of capital stock, which Shares represent on the date hereof the percentage of the outstanding Common Shares set forth on such Appendix. Such Shares are all the securities of the Company owned, either of record or beneficially, by such Shareholder. Such Shares are owned free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on such Shareholder's voting rights, charges and other encumbrances of any nature whatsoever. No Shareholder has appointed or granted any proxy, which appointment or grant is still effective, with respect to the Shares or Other Securities owned by such Shareholder. 2 ARTICLE III COVENANTS SECTION 3.01. No Disposition or Encumbrance of Shares. Each Shareholder hereby covenants and agrees that, except as contemplated by this Agreement, such Shareholder has not, and shall not offer or agree to sell, transfer, tender, assign, hypothecate or otherwise dispose of, grant a proxy or power of attorney with respect to, or create or permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, limitation on any Shareholder's voting rights, charge or other encumbrance of any nature whatsoever ("Encumbrance") with respect to the Shares or Other Securities, directly or indirectly, initiate, solicit or encourage any person to take actions which could reasonably be expected to lead to the occurrence of any of the foregoing; provided, that such Shareholder may assign, sell or transfer any Shares or Other Securities provided that any such recipient of such Shares or Other Securities has delivered to the Company and each Investor a written agreement in a form reasonably satisfactory to the Investors that such recipient shall be bound by and the Shares and/or Other Securities so transferred, assigned or sold shall remain subject to this Agreement. SECTION 3.02. Company Cooperation. The Company hereby covenants and agrees that it will not (and each Shareholder irrevocably and unconditionally acknowledges and agrees that the Company will not (and waives any rights against the Company in relation thereto) recognize any Encumbrance or agreement on any of the Shares or Other Securities subject to this Agreement unless the provisions of Section 3.01 have been complied with. The Company agrees to use its best efforts to ensure that at any time in which any shareholder approval is required pursuant to Section 4.11 of the Securities Purchase Agreement, it will cause holders of Common Shares or Other Securities representing the percentage of outstanding capital stock required to vote in favor of the Transaction in order for the Company to comply with its obligations under Section 4.11 of the Securities Purchase Agreement to become party to and bound by the terms and conditions of this Agreement and the Common Shares of the Company and Other Securities held by such holders to be subject to the terms and conditions of this Agreement. ARTICLE IV MISCELLANEOUS SECTION 4.01. Further Assurances. Each Shareholder will execute and deliver all such further documents and instruments and take all such further action as may be necessary in order to consummate the transactions contemplated hereby. SECTION 4.02. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that any Investor (without being joined by any other Investor) shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. Any Investor shall be entitled to its reasonable attorneys' fees in any action brought to enforce this Agreement in which it is the prevailing party. SECTION 4.03. Entire Agreement. This Agreement constitutes the entire agreement between the Investors, the Shareholders and the Company (other than the Securities Purchase Agreement) with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and 3 oral, among the Investors, the Shareholders and the Company with respect to the subject matter hereof. SECTION 4.04. Amendment. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 4.05. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the terms of this Agreement remain as originally contemplated to the fullest extent possible. SECTION 4.06. Governing Law. The parties hereby agree that all actions or proceedings arising directly or indirectly from or in connection with this Agreement shall be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York located in New York County, New York. The parties consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by registered mail, return receipt requested, directed to the party being served at its address set forth in this Agreement (and service so made shall be deemed complete three (3) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. Each of the Company and the Shareholders irrevocably waive, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action, or proceeding brought in such a court and any claim that suit, action, or proceeding has been brought in an inconvenient forum. Each of the Company and the Shareholders hereby waive any right to a jury trial in connection with any litigation pursuant to this Agreement. 4 IN WITNESS WHEREOF, each Shareholder and the Company has duly executed this Agreement. THE COMPANY: AEROTECH CORPORATION By: --------------------------- Name: Title: Dated: September __, 2003 SHAREHOLDERS: Dated: September __, 2003 -------------------------------- Robert S. Ehrlich Agreed and Accepted as of: September __, 2003 INVESTORS: SMITHFIELD FIDUCIARY LLC By: --------------------------------------------------------------- Name: Title: OMICRON MASTER TRUST By: --------------------------------------------------------------- Name: Title: PORTSIDE GROWTH AND OPPORTUNITY FUND By: --------------------------------------------------------------- Name: Title: MAINFIELD ENTERPRISES INC. By: --------------------------------------------------------------- Name: Title: CRANSHIRE CAPITAL L.P. By: --------------------------------------------------------------- Name: Title: CLEVELAND OVERSEAS LTD. By: --------------------------------------------------------------- Name: Title: APPENDIX A Percentage of Shares Shareholder Shares Outstanding ----------- ------ ----------- Robert S. Ehrlich 688,166 1.7% EX-4.8 10 v00188_ex4-8.txt EXHIBIT 4.8 VOTING AGREEMENT VOTING AGREEMENT, dated as of September 30, 2003 (this "Agreement"), by the shareholder of Arotech Corporation, a Delaware corporation (f/k/a Electric Fuel Corporation, the "Company") listed on the signature pages hereto under the heading "Shareholder" (the "Shareholder"), the Company and the investors listed on the signature pages hereto under the heading "Investors") (each, an "Investor" and collectively, the "Investors"). WHEREAS, the Investors and the Company have entered into a (i) Securities Purchase Agreement, dated as of the date hereof (the "Securities Purchase Agreement"), pursuant to which, among other things, the Company has agreed to issue and sell to the Investors and the Investors have agreed to purchase, an aggregate of up to $11 million of 8% secured convertible debentures of the Company (together with any debentures issued in replacement or exchange thereof in accordance with the terms thereof, the "Debentures"), which Debentures shall be convertible into shares of Common Stock, par value $0.01 per share, of the Company (the "Common Shares"), in accordance with the terms of the Debentures; WHEREAS, as of the date hereof, the Shareholder owns 3,037,869 Common Shares and is co-trustee of the Rose Gross Charitable Foundation (the "Foundation") which owns 450,665 Common Shares, which represent in the aggregate 8.8% of the total issued and outstanding capital stock of the Company ; and WHEREAS, as a condition to the willingness of the Investors to enter into the Securities Purchase Agreement and to consummate the transactions contemplated thereby (collectively, the "Transaction"), the Investors have required that the Shareholder agree, and in order to induce the Investors to enter into the Securities Purchase Agreement, the Shareholder has agreed, to enter into this Agreement with respect to all the Common Shares now owned and which may hereafter be acquired by the Shareholders (the "Shares") and any other securities, if any, which the Shareholder is entitled to vote at any meeting of shareholders of the Company (the "Other Securities"). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I PROXY OF THE STOCKHOLDERS SECTION 1.01. Voting Agreement. The Shareholder hereby agrees that at any meeting of the stockholders of the Company, however called, and in any action by consent of the Company, of the shareholders shall vote the Shares and the Other Securities (to the extent the Shareholder has the right to vote such Other Securities) in favor of any matters relating to the Transaction, including, without limitation the matters described in Section 4.11 of the Securities Purchase Agreement. The obligations of the Shareholder under this Section 1.01 shall terminate on the later to occur of (i) the occurrence and tabulation of votes at the shareholder meeting of the Company contemplated by Section 4.11 of the Securities Purchase Agreement and (ii) the date that is December 31, 2004. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS The Shareholder hereby represents and warrants to the Investors as follows: SECTION 2.01. Authority Relative to This Agreement. Each Shareholder has all necessary power and authority to execute and deliver this Agreement, to perform his or its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by such Shareholder and constitutes a legal, valid and binding obligation of such Shareholder, enforceable against such Shareholder in accordance with its terms. SECTION 2.02. No Conflict. (a) The execution and delivery of this Agreement by such Shareholder do not, and the performance of this Agreement by such Shareholder shall not, (i) conflict with or violate any federal, state or local law, statute, ordinance, rule, regulation, order, judgment or decree applicable to such Shareholder or by which the Shares or the Other Securities owned by such Shareholder are bound or affected or (ii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the Shares or the Other Securities owned by such Shareholder pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which such Shareholder is a party or by which such Shareholder or the Shares or Other Securities owned by such Shareholder are bound or affected. (b) The execution and delivery of this Agreement by such Shareholder do not, and the performance of this Agreement by such Shareholder shall not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental entity except for filings by the Shareholder with the Securities and Exchange Commission (which shall include an amendment to the Shareholder's 13D filing, including attached a copy of this Agreement as an exhibit thereto). SECTION 2.03. Title to the Shares. As of the date hereof, each Shareholder is the beneficial owner of the number of Common Shares set forth opposite such Shareholder's name on Appendix A hereto entitled to vote, without restriction, on all matters brought before holders of capital stock, which Shares represent on the date hereof the percentage of the outstanding Common Shares set forth on such Appendix. Such Shares are all the securities of the Company owned, either of record or beneficially, by such Shareholder other than stock options for the purchase of up to 35,000 Common Shares of the Company. Such Shares are owned free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on such Shareholder's voting rights, charges and other encumbrances of any nature whatsoever other than the Voting Agreement, dated September 30, 1996 (the "Shareholder Voting Agreement"), as amended among the Shareholder, Robert Ehrlich and Yehuda Harats and, with respect to the Shares held by the Foundation, the Shareholder is only the co-trustee of the Foundation and the Shares would be subject to any applicable restrictions contained in the indenture of trust creating the Foundation. No Shareholder has appointed or granted any proxy, which appointment or grant is still effective, with respect 2 to the Shares or Other Securities owned by such Shareholder except as may be provided in the Shareholder Voting Agreement. ARTICLE III COVENANTS SECTION 3.01. Company Cooperation. The Company agrees to use its best efforts to ensure that at any time in which any shareholder approval is required pursuant to Section 4.11 of the Securities Purchase Agreement, it will cause holders of Common Shares or Other Securities representing the percentage of outstanding capital stock required to vote in favor of the Transaction in order for the Company to comply with its obligations under Section 4.11 of the Securities Purchase Agreement to become party to and bound by the terms and conditions of this Agreement and the Common Shares of the Company and Other Securities held by such holders to be subject to the terms and conditions of this Agreement. ARTICLE IV MISCELLANEOUS SECTION 4.01. Further Assurances. Each Shareholder will execute and deliver all such further documents and instruments and take all such further action as may be necessary in order to consummate the transactions contemplated hereby. SECTION 4.02. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that any Investor (without being joined by any other Investor) shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. SECTION 4.03. Entire Agreement. This Agreement constitutes the entire agreement between the Investors, the Shareholders and the Company (other than the Securities Purchase Agreement) with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the Investors, the Shareholders and the Company with respect to the subject matter hereof. SECTION 4.04. Amendment. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 4.05. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the terms of this Agreement remain as originally contemplated to the fullest extent possible. 3 SECTION 4.06. Jurisdiction. The parties hereby agree that all actions or proceedings arising directly or indirectly from or in connection with this Agreement shall be litigated only in the state and federal courts located in Philadelphia, Pennsylvania. The parties consent to the jurisdiction and venue of the foregoing courts and consent that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of Pennsylvania by registered mail, return receipt requested, directed to the party being served at its address set forth in this Agreement (and service so made shall be deemed complete three (3) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. Each of the Company and the Shareholder irrevocably waive, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action, or proceeding brought in such a court and any claim that suit, action, or proceeding has been brought in an inconvenient forum. Each of the Company and the Shareholder hereby waive any right to a jury trial in connection with any litigation pursuant to this Agreement. SECTION 4.07 Notice. A copy of all notices to the Shareholder shall be sent to the Shareholder's counsel at the following address: Steven M. Plon, Esquire Plon & Associates, P.C. 1835 Market Street, Suite 1215 Philadelphia, PA 19103 Fax No. 215-979-7619 Email: splon@plonlaw.com SECTION 4.08. Successors/Transferees. This Agreement shall be binding upon the parties' respective successors, heirs, personal representatives and assigns; provided, however, that this Agreement shall not be binding upon any purchasers of Shareholder's Shares or Other Securities who purchased the Shareholder's Shares or Other Securities in a bona fide arms-length transaction, which may include such a private or public sale of such Shares or Other Securities. 4 IN WITNESS WHEREOF, the Shareholder and the Company has duly executed this Agreement. THE COMPANY: AEROTECH CORPORATION By: ___________________________ Name: Title: Dated: September __, 2003 5 SHAREHOLDER: Dated: September 30, 2003 ___________________________ Leon S. Gross 6 Agreed and Accepted as of: September __, 2003 INVESTORS: SMITHFIELD FIDUCIARY LLC By: --------------------------------------------------------------- Name: Title: OMICRON MASTER TRUST By: --------------------------------------------------------------- Name: Title: PORTSIDE GROWTH AND OPPORTUNITY FUND By: _________________________ Name: Title: MAINFIELD ENTERPRISES INC. By: _________________________ Name: Title: CRANSHIRE CAPITAL L.P. By: _________________________ Name: Title: CLEVELAND OVERSEAS LTD. By: _________________________ Name: Title: 9 APPENDIX A
Shareholder Shares Other Securities Total Percentage of - ----------- ------ ---------------- Shares Outstanding ----------- Leon S. Gross, as co trustee 450,665 of the Rose Gross Charitable Foundation Leon S. Gross 3,037,869 TOTAL 3,488,534 8.8% (in the aggregate, including Foundation's shares)
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