Exhibit
      10.3

     

    


    RESTATED
      SECURITY AGREEMENT  

    


    THIS
      AGREEMENT (the “Security
      Agreement”),
      signed February 19, 2004 but retroactively effective January 1, 2004, amends
      and
      restates in its entirety the SECURITY AGREEMENT dated January 13, 2004 between
      and among AROTECH CORPORATION, a Delaware corporation (the “Buyer”),
      FAAC
      INCORPORATED, a Michigan corporation (the “Company”),
      and
      ALAN G. JORDAN and TIM L. CARR, the sole shareholders of the Company
      (respectively “Jordan”
      and
“Carr”
      and
      collectively the “Shareholders”).

    


    WHEREAS,
      pursuant to a STOCK PURCHASE/SALE AGREEMENT dated January 7, 2004 (the
“Agreement”),
      (A) the
      Buyer
      has effective as of January 1, 2004 (the “Closing
      Date”)
      purchased from the Shareholders all of the outstanding shares of Common Stock
      issued by the Company (the “Company
      Common Stock”),
      (B)
      as partial consideration for the Company Common Stock, the Buyer, pursuant
      to
      Section 2.4 of the Agreement, has agreed to pay a portion of the purchase price
      based upon the operations of the Company following the Closing Date (the
“Earnout
      Consideration”)
      and
      (C) to secure payment of that Earnout Consideration, the Buyer has agreed to
      grant to the Shareholders a second priority security interest and other rights
      in the Company Common Stock and a first priority security interest in the
      $6,000,000 in corporate bonds listed in Schedule A and any replacements or
      substitutions thereof as permitted under the terms of this Agreement
      (collectively, the “Debt
      Instruments”).

    


    NOW
      THEREFORE, the Buyer, the Company and the Shareholders (each a “Party”
      and two
      or more collectively the “Parties”)
      agree
      as follows:

    


    1.    Grant
      of Security Interest.
      The
      Buyer hereby grants to the Shareholders a security interest in and to the Debt
      Instruments and the Company Common Stock (the “Security
      Interest”)
      to
      secure the payment by the Buyer when due of all installments of the Earnout
      Consideration. The Security Interest in the Debt Instruments is and will remain
      a first priority security interest. The Security Interest in the Company Common
      Stock is and will remain a second priority security interest, subordinate to
      the
      security interest granted by the Buyer to Smithfield Fiduciary, L.L.C.
      (“Smithfield”)
      but
      will be senior to all other liens or security interests now or hereafter imposed
      upon the Company Common Stock. The rights and obligations of the Buyer and
      the
      Shareholders under the Security Interest will be as prescribed in the Michigan
      Uniform Commercial Code (the “Code”),
      as
      modified by the specific terms of this Agreement. The relative rights and
      obligations of the Shareholders and Smithfield with respect to the Debt
      Instruments and the Company Common Stock will be as prescribed in the LIEN
      SUBORDINATION AND INTERECREDITORS AGREEMENT dated January 13, 2004, as amended
      (the “Intercreditors
      Agreement”)
      between the Shareholders and Smithfield. 

    


    2.     Covenants
      Regarding Company Common Stock.
      For so
      long as any portion of the Earnout Consideration remains unpaid, unless
      otherwise agreed in writing by the Shareholders, the Company shall, and the
      Buyer shall cause the Company to, comply with each of the following covenants
      with respect to the Company Common Stock (each a “Stock
      Covenant”):

    


    (a) Capitalization.
      The
      Company will not issue any capital stock to any party and will not make any
      change to its capital structure.

    


    (b) Dividends
      and Distributions.
      The
      Company will not declare nor pay any dividends or other distributions in respect
      of its capital stock.

    


    (c) Income
      Reinvestment.
      Not
      later than the January 31st
      following the close of each calendar year, the Company will invest Fifty Percent
      (50%) of its after-tax net income realized during that calendar year (as
      determined in accordance with generally accepted accounting principles) in
      a
      debt instrument that meets the requirements detailed in Section 3(d) (an
“Income
      Investment”),
      which
      debt instrument shall constitute an additional Debt Instrument for which the
      Shareholders will have a first priority security interest as further security
      for payment of the Earnout Consideration; and immediately upon making that
      investment, perfect that security interest by the delivery of the original
      copy
      of the certificate or other document evidencing the Debt Instrument evidencing
      that Income Investment to the “Escrow Agent” designated in Section
      4.

    


    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (d) Debt
      Financing.
      The
      Company will not incur any indebtedness other than indebtedness incurred in
      the
      ordinary course of the Company's business or indebtedness under a line-of-credit
      loan from Smithfield or a licensed lending institution provided that the
      proceeds of such loan are used only in the ordinary course of the Company’s
      business and provided that the unpaid principal balance of that loan shall
      at no
      time exceed the lesser of the balance of the Company’s accounts receivable
      securing that loan or $3,000,000.

    


    (e) Fundamental
      Transactions.
      The
      Buyer will refrain from any sale or encumbrance of all or any part of its
      interest in the Company Common Stock and the Company will refrain from entering
      into any merger, consolidation, joint venture or similar transaction and to
      refrain from the sale of any of its assets other than the sale of inventories
      in
      the ordinary course of business.

    


    If
      and as
      requested by the Shareholders from time to time, the Company shall, and the
      Buyer shall cause the Company to, provide confirmation to the Shareholders
      of
      the Company’s compliance of each of these Stock Covenants and will permit the
      Shareholders and their authorized representatives to have reasonable access
      to
      the books and records of the Company to verify that compliance. 

    


    3.    Covenants
      Regarding Debt Instruments.
      For so
      long as any portion of the Earnout Consideration remains unpaid, unless
      otherwise agreed in writing by the Shareholders, the Company shall and the
      Buyer
      shall cause the Company to comply with each of the following covenants regarding
      the Debt Instruments (each a “Debt
      Instrument Covenant”):

     

    (a)
      No
      Assignment.
      Except
      as provided in Section 3(c), the Company will not assign or negotiate any Debt
      Instrument.

     

    (b)
      Interest
      Payments.
      For so
      long as there is no “Event of Default” hereunder (as defined in Section 5), the
      Company will be entitled to receive and retain all interest that is accrued
      and
      paid with respect to the Debt Instruments. If and for so long as any “Event of
      Default” occurs and continues, such interest shall be re-invested in a new Debt
      Instrument that meet the requirements detailed in Section 3(e).

     

    (c) Principal
      Payments.
      Any
      principal payments received with respect to the Debt Instruments shall be
      re-invested in a new Debt Instrument that meet the requirements detailed in
      Section 3(e).

     

    (d)
      Replacement
      Debt Instruments.
      The
      Company reserves the right, following written notice delivered to the
      Shareholders, to negotiate or otherwise liquidate any Debt Instrument and to
      re-invest the entire proceeds from that negotiation or liquidation in a
      substitute Debt Instrument provided that the substitute Debt Instrument meets
      the requirements detailed in Section 3(e) and provided that the original copy
      of
      the Debt Instrument is immediately delivered to the “Escrow Agent" designated in
      Section 4.

     

    (e)
      Debt
      Instrument Requirements.
      Each
      substitute or additional Debt Instrument provided by the Buyer as collateral
      under this Security Agreement shall comply with each of the following
      requirements: (i) the Debt Instrument will be evidenced by a certificate or
      other document that is deliverable to the “Escrow Agent” designated in Section
      4, (ii) the Debt Instrument will qualify as “investment property” under Section
      9-102(49) of the Code, (iii) the issuer of the Debt Instrument will be an entity
      organized under the laws of one of the States of the United States and will
      not
      be the Buyer or any entity which owns more than two percent (2%) of the equity
      securities of the Buyer and (iv) the Debt Instrument will be of an “investment
      grade” having a Standard & Poor’s Rating of “BBB” or better. 

    


    4.    Escrow
      of Debt Instruments.
      In order
      to perfect the Shareholders’ security interest in the Debt Instruments, the
      Buyer, upon the issuance of each Debt Instrument, will promptly deliver or
      cause
      the issuer to promptly deliver to HSBC Bank USA, 452 Fifth Avenue, New
      York, New York 10018, ABA No. 021-001-088 (the “Escrow Agent”) the original copy
      of the certificate or other document evidencing that Debt Instrument. If and
      at
      each time that the Buyer desires to replace or substitute a Debt Instrument,
      the
      Shareholders will promptly cooperate with the Buyer in the release by the Escrow
      Agent of the original copy of the certificate or other document evidencing
      an
      existing Debt Instrument in exchange for the delivery to the Escrow Agent of
      the
      original copy of the certificate or other document evidencing the replacement
      or
      substitute Debt Instrument. Each Debt Instrument will be held in escrow by
      the
      Escrow Agent pursuant to the terms of the ESCROW AGREEMENT signed on the date
      of
      this Security Agreement between and among the Company, the Buyer, the
      Shareholders and the Escrow Agent (the “Escrow Agreement”). If and upon payment
      in full of the Earnout Consideration and the release by the Escrow Agent to
      the
      Buyer of the original copies of the Debt Instruments pursuant to the Escrow
      Agreement, the Shareholders will promptly sign and deliver to the Buyer any
      document reasonably required by the Buyer to confirm that the Shareholders
      have
      no further security interest or other interest in the Debt
      Instruments. 

    


    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    5.    Default.
      The
      following shall constitute events of default under this Security Agreement
      (and
“Event
      of Default”):

    


    (a) Breach
      of Covenants.
      The
      breach by the Company of any Stock Covenant or Debt Instrument Covenant under
      this Security Agreement and the failure to remedy such breach within ten (10)
      days after written demand is delivered by the Shareholders to the Company and
      the Buyer; or

    


    (b) Failure
      to Pay Earnout Consideration.
      The
      failure of the Buyer to pay any installment of the Earnout Consideration on
      or
      before its due date under the Agreement and the failure of the Buyer to remedy
      such nonpayment within ten (10) days after written demand thereafter is
      delivered by the Shareholders to the Buyer and the Company. 

    


    6.    Remedial
      Rights.
      Upon the
      occurrence of an Event of Default under this Security Agreement, the
      Shareholders, by written notice to the Buyer and the Company, may elect one
      or
      the other (but not both) of the following rights:

    


    (a) Code
      Rights.
      The
      Shareholders shall have the right to exercise all remedial rights against the
      Buyer and with respect to the either or both of the Debt Instrument(s) and
      the
      Company Common Stock as are accorded to a creditor and secured party under
      the
      provisions of the Code and other applicable law, but subject to the rights
      of
      Smithfield under its senior security interest with respect to the Company Common
      Stock and subject to the commitment of the Shareholders in the Intercreditor
      Agreement to first seek recourse for the Event of Default through the proceeds
      of the Debt Instrument(s) and only thereafter through the Company Common Stock
      in accordance with the provisions of the Intercreditor Agreement. If the
      Shareholders elect to exercise their remedial rights under this Section, then,
      in addition to any other actions that may be permitted under the Code (as
      limited by the Intercreditor Agreement), the Shareholders may deliver written
      notice to the Buyer and Escrow Agent identifying the Event of Default, affirming
      that such Event of Default has not been remedied as permitted and required
      under
      this Security Agreement and demanding a release to the Shareholders of the
      Debt
      Instruments then held by the Escrow Agent under the Escrow Agreement (a “Demand
      Notice”). Unless the Buyer, within twenty (20) days after the date of delivery
      of the Demand Notice, delivers its written notice to the Shareholders and the
      Escrow Agent stating that no Event of Default exists under this Security
      Agreement, detailing specifically the basis for that statement and objecting
      to
      the release of the Debt Instruments to the Shareholders (an “Objection Notice”),
      then the Escrow Agent shall within thirty (30) days after the date of delivery
      of the Demand Notice release to the Shareholders the original copies of the
      certificates or other documents evidencing the Debt Instruments then held under
      the Escrow Agreement. If the Buyer delivers an Objection Notice within such
      period, then the Escrow Agent shall refrain from the release of the Debt
      Instruments to the Shareholders unless and until directed to do so by a written
      directive signed by the Buyer and the Shareholders or the Order of a court
      of
      competent jurisdiction. If and at such time as the original copies of the
      certificates or other documents evidencing the Debt Instruments are released
      to
      the Shareholders, the Shareholder shall promptly liquidate those Debt
      Instruments in a commercially reasonable manner to the extent required to pay
      any portion of the Earnout Consideration then due and payable and any Debt
      Instruments not required to be liquidated for such purposes and any proceeds
      of
      liquidation of the Debt Instruments not required for such payment shall be
      promptly returned or remitted to the Escrow Agent for holding and release as
      otherwise provided in the Escrow Agreement.

    


    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    (b) Option
      To Reacquire Stock.
      Subject
      to the commitments of the Shareholders and the rights of Smithfield in the
      Intercreditors Agreement, the Shareholders shall have the right to declare
      a
      forfeiture under the Security Interest and to reacquire the Company Common
      Stock
      (the “Reacquisition
      Option”)
      by (i)
      waiving any right to any further payments of the Earnout Consideration under
      the
      Agreement and (ii) paying to Smithfield $6,000,000 in order to secure a release
      of Smithfield’s security interest in the Company Common Stock (the “Release
      Payment”).
      As a
      condition to the Shareholder’s exercise of the Reacquisition Option, the
      Shareholders shall deliver a pre-exercise notice to the Buyer, the Company
      and
      Smithfield (the “Pre-Exercise
      Notice”)
      identifying the Event of Default, specifying the action(s) that will be required
      to remedy that Event of Default and advising that if such remedial actions
      are
      not completed in sixty (60) days following the date of delivery of that
      Pre-Exercise Notice, the Shareholders will have the right to exercise the
      Reacquisition Option. Unless the remedial actions specified in the Pre-Exercise
      Notice have been fully implemented within such sixty-day period, the
      Shareholders, by further written notice to the Buyer, the Company and Smithfield
      (the “Exercise
      Notice”)
      may
      exercise the Reacquisition Option. (Alternatively, the Shareholders may elect
      at
      such time not to exercise the Reacquisition Option and, instead, to exercise
      their remedial rights under Section 6(a).) If the Shareholders exercise the
      Reacquisition Option, the closing of the reacquisition shall occur at the
      offices of the Company on the tenth (10th)
      business day following the date of delivery of the Exercise Notice. At that
      closing, the Buyer will endorse and deliver to the Shareholders the original
      Stock Certificate(s) representing the Company Common Stock and will execute
      and
      deliver to the Shareholders such other documents and will take such other
      actions as the Shareholders reasonably require to confirm that the Buyer has
      no
      further interest in the Company as a shareholder, lender or otherwise. At that
      closing, the Shareholders will sign and deliver to the Buyer and will take
      any
      other actions as the Buyer may reasonably require to confirm the waiver by
      the
      Shareholders of any right to any further payments of the Earnout Consideration.
      At that closing, the Shareholders will remit the Release Payment to Smithfield
      by wire transfer to an account designated by Smithfield and Smithfield will
      sign
      and deliver to the Shareholders and will take any other actions reasonably
      required by the Shareholders to confirm that Smithfield has released and
      discharged any security interest, lien or other interest that Smithfield holds
      in the Company Common Stock. At that closing, any individuals designated by
      the
      Buyer to serve as directors or officers of the Company shall tender their
      resignations from such positions. Time shall be of the essence with respect
      to
      the exercise and the implementation of the Reacquisition Option. The Buyer
      and
      the Company acknowledge that the availability of the Reacquisition Option is
      of
      the essence to the Shareholders in their agreeing to be bound by the Agreement
      and this Security Agreement; that if the Shareholders have exercised the rights
      of the Reacquisition Option that the damages that the Shareholders will or
      may
      incur if the reacquisition is not completed may be irreparable or not
      susceptible to monetary determination; and that as a consequence of such
      damages, the obligations of the Buyer and the Company under the Reacquisition
      Option shall be specifically enforceable by injunctive relief through a court
      of
      competent jurisdiction. 

    


    7.    Miscellaneous.
      

    


    (a) Applicable
      Law.
      This
      Security Agreement is being made under and shall be interpreted in accordance
      with the laws of the State of Michigan. 

    


    (b) Notice.
      Any
      notice permitted or required under this Security Agreement shall be in writing
      and shall be deemed delivered in the time and manner specified in the
      Agreement.

    


    (c) Entire
      Agreement/Modification.
      This
      five (5) page document, together with the Agreement, constitutes the entire
      agreement between the Parties with respect to the subject matter hereof and
      shall not be cancelled or amended unless by a subsequent writing signed by
      each
      of the Parties. This document amends and replaces the SECURITY AGREEMENT between
      and among the Parties signed January 13, 2004 and effective January 1,
      2004.

    


     

    SIGNATURES
      ON NEXT PAGE

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    
      	 	 	 
	COMPANY:	FAAC
              INCORPORATED
	 
 	 
 	 
 
	 	By:  	/s/ 
	 	
              
Alan
              G. Jordan
	 	President


    

    


    
      	 	 	 
	BUYER	AROTECH
              CORPORATION
	 
 	 
 	 
 
	 	By:  	/s/ 
	 	
              
Yaakov
              Har-Oz
	 	Vice
              President & General Counsel


    

    


    
      	 	 	 
	SHAREHOLDERS:	 
	 
 	 
 	 
 
	 	By:  	/s/ 
	 	
              
Alan
              G. Jordan
	 	 




    
      	 	 	 
	 	By:  	/s/ 
	 	
              
Timothy
              L. Carr
	 	 


    

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    


     

    SCHEDULE
      A

    


    Ford
      Motor Credit Co.

    face
      value: 1,000,000

    coupon:
      7.75%

    maturity:
      3/15/05

    price:
      105.827

    interest
      accrued: $31,000.00

    total
      cost: $1,089,270.00

    yield:
      2.350%

    trade
      date: 2/04/04

    settlement
      date: 2/09/04

    rating:
      A3/BBB-

    


    Disney
      Co

    face
      value: 1,000,000

    coupon:
      7.3%

    maturity:
      2/8/05

    price:
      105.69910

    interest
      accrued: $202.78

    total
      cost: $1,057,193.78

    yield:
      1.520%

    trade
      date: 2/04/04

    settlement
      date: 2/09/04

    rating:
      Baa1/BBB+

    


    Federal
      Loan Home Bank

    face
      value: 1,000,000

    coupon:
      1.41%

    maturity:
      3/2/05

    price:
      100.00

    total
      cost: $1,000,000.00

    yield:
      1.410%

    trade
      date: 2/04/04

    settlement
      date: 3/02/04

    rating:
      AAA

    non
      call
      three month - callable quarterly thereafter.

    


    Newcourt
      Cr Group (leasing industry)

    face
      value: 1,000,000

    coupon:
      6.875%

    maturity:
      2/16/05

    price:
      105.423

    interest
      accrued: $33,229.17

    total
      cost: $1,087,459.17

    yield:
      1.480%

    trade
      date: 2/05/04

    settlement
      date: 2/10/04

    rating:
      A2/A

    


    Gannett
      Co (publishing industry)

    face
      value: 660,000

    coupon:
      4.95%

    maturity:
      4/1/05

    price:
      103.950

    interest
      accrued: $11,706.75

    total
      cost: $697,776.75

    yield:
      1.447%

    trade
      date: 2/05/04

    settlement
      date: 2/10/04

    rating:
      A2/A

    


    General
      Motors Co.

    face
      value: 1,000,000

    coupon:
      6.25%

    maturity:
      5/1/05

    price:
      104.914

    interest
      accrued: $17,187.50

    total
      cost: $1,066,327.50

    yield:
      2.160%

    trade
      date: 2/05/04

    settlement
      date: 2/10/04

    rating:
      Baa1/BBB