INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

                                                                     Exhibit 4.6

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                                                               EXECUTION VERSION

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                    INTELLECTUAL PROPERTY SECURITY AGREEMENT

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      INTELLECTUAL PROPERTY SECURITY AGREEMENT,  dated as of September 29, 2005,

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  Senior  Secured  Convertible  Notes,  par value  $0.01 per share  (the

"Notes") and warrants (as described in the Purchase  Agreement)  (the `Warrants"

and together with the Notes, the "Securities");

 

      WHEREAS,  each of IDS and IES (each a "Guarantor"  and  collectively,  the

"Guarantors")  shall have  executed and  delivered to the  Collateral  Agent the

"Guaranty"  (as defined  therein) with respect to the  obligations of the Parent

under the  Purchase  Agreement  and the  Securities  (as  amended,  restated  or

otherwise modified from time to time, the "Guaranty")

 

      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  Notes  and  related  transaction

documents and the Guarantor's obligations under the Guaranty; and

 

      WHEREAS,  it is  contemplated  that the Secured Parties shall be granted a

second priority security interest in the Collateral (as defined below) to 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.

 

 

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            (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,  the IES Collateral and the

IDS 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) "IDS Collateral"  means all right,  title and interest in and to

all  of  Trademarks,   Patents,  Copyrights,  domain  names  and  other  general

intangible property of IDS, all trade secrets,  intellectual  property rights in

IDS' computer software and computer software  products,  design rights which may

be  available,  owned or licensed to IDS,  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 IDS' 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 IDS'  rights with  respect to licenses  granted by IDS to third

parties or licensed to IDS to use any of the Copyrights,  domain names,  Patents

or  Trademarks,  and all license fees and royalties due to IDS 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 "IDS Collateral" shall

include  all of the  foregoing  items,  whether  presently  owned or existing or

hereafter  acquired  or  coming  into  existence,  all  of  IDS'  additions  and

accessions thereto, all of IDS' substitutions and replacements  thereof, and all

of IDS' 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) "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.

 

 

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            (g)  "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.

 

            (h) "Obligations"  means all of the Debtors'  obligations under this

Agreement,  the  Guaranty,  the Notes,  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.

 

            (i)   "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.

 

 

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            (j)  "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.

 

            (k)  "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,  second 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 Collateral"),  junior only to the first

priority security interest (the "First  Investors'  Security  Interest") in such

Collateral in favor of certain  investors  (the "First  Investors")  pursuant to

that certain IP Security Agreement (the "First Investors' Security  Agreement"),

dated  September 30, 2003,  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 and

(iii) Permitted  Liens 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) and Permitted Liens.

 

 

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            (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  written  notice  of such

relocation  and the new  location  thereof  (which  must be  within  the  United

States).  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,  a

perfected  second  priority  interest  in the  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.

 

 

<PAGE>

 

            (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 and  Permitted  Liens.  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.

 

 

<PAGE>

 

            (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.