<PAGE>
PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-25015
PROSPECTUS
2,000,000 SHARES
[LOGO OF ORBIT / FR APPEARS HERE]
COMMON STOCK
----------------
All of the 2,000,000 shares of Common Stock offered hereby are being sold by
ORBIT/FR, Inc. Prior to this offering, there has been no public market for the
Common Stock. See "Underwriting" for a description of the factors considered
in determining the initial public offering price. Upon completion of this
offering, the principal stockholder of the Company will beneficially own
approximately 65.6% of the outstanding Common Stock of the Company and will be
in a position to control the outcome of all matters requiring stockholder
approval. See "Risk Factors -- Control by Principal Stockholder."
The Common Stock has been approved for listing on the Nasdaq National
Market, upon notice of issuance, under the symbol "ORFR".
----------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $8.25 $0.615 $7.635
- ---------------------------------------------------------------------------------
Total(3)................................ $16,500,000 $1,230,000 $15,270,000
=================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance of $100,000 payable to the
Representatives of the Underwriters. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of this offering payable by the Company
estimated at $600,000, including the non-accountable expense allowance.
(3) Orbit-Alchut Technologies, Ltd., the sole stockholder of the Company prior
to this offering, has granted to the Underwriters a 30-day option to
purchase up to an additional 300,000 shares of Common Stock solely to
cover over-allotments, if any. If the Underwriters exercise this option in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to the Company and Proceeds to the Stockholder will be
$18,975,000, $1,414,500, $15,270,000 and $2,290,500, respectively. See
"Principal Stockholders" and "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them and subject to their right to reject any order in whole or in part. It is
expected that delivery of the shares will be made at the offices of
Pennsylvania Merchant Group Ltd in West Conshohocken, Pennsylvania on or about
June 20, 1997.
----------------
PENNSYLVANIA MERCHANT GROUP LTD UNTERBERG HARRIS
June 17, 1997
<PAGE>
[Inside Front Cover:]
[A DIAGRAM APPEARS HERE OF A PHOTO-COLLAGE SHOWING A GENERIC CELLULAR TELEPHONE
HANDSET, THE SPACE SHUTTLE, A SATELLITE MOUNTED ON A TESTING MAST, AND AN
AUTOMOBILE.]
"Supplier of microwave test and measurement systems to companies in the
wireless communications, satellite, automotive and aerospace/defense
industries."
[A DIAGRAM APPEARS HERE OF A 3-D REPRESENTATION OF A PLANET IN SPACE WITH AN
ORBITING BAND.]
[THE COMPANY'S LOGO APPEARS HERE.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING INTO STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING".
[Inside Gatefold:]
"Microwave test and measurement solutions for a wireless world."
"System Design . Software . Microwave Implementation. Positioner Subsystems.
Microwave Products"
[A DIAGRAM APPEARS HERE OF A LARGE 3-D REPRESENTATION OF A PLANET IN SPACE WITH
TWO ORBITING BANDS.]
[A PHOTOGRAPH APPEARS HERE OF A LARGE POSITIONER MANUFACTURED BY THE COMPANY.]
[A PHOTOGRAPH APPEARS HERE OF A COMPACT RANGE MANUFACTURED BY THE COMPANY.]
[A PHOTOGRAPH APPEARS HERE OF A RADIAL POWER COMBINER MANUFACTURED BY THE
COMPANY.]
[A PHOTOGRAPH APPEARS HERE OF A TYPICAL TEST AND MEASUREMENT CONTROL ROOM.]
[A PHOTOGRAPH APPEARS HERE OF A LARGE RADAR ANTENNA MANUFACTURED BY THE
COMPANY.]
[A PHOTOGRAPH APPEARS HERE OF A POSITIONING SYSTEM FOR RADOME TESTING
MANUFACTURED BY THE COMPANY.]
"The Company does not manufacture cellular handsets or antennas, aircraft,
satellites or automobiles."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements (including the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus (i)
is based on the initial public offering price of $8.25 per share (the "Offering
Price"), (ii) assumes that the Underwriters' over-allotment option is not
exercised, (iii) reflects the establishment of the Company in December 1996 and
the issuance of 4,000,000 shares of Common Stock to Orbit-Alchut Technologies,
Ltd. ("Alchut"), the Company's sole stockholder prior to this offering, (iv)
reflects the acquisition of Flam & Russell, Inc. ("Flam & Russell") on June 28,
1996 and (v) assumes the acquisition of Advanced Electromagnetics, Inc.
("AEMI") upon the completion of this offering. See "The Company." For
explanations of certain technical terms used in this Prospectus, see "Glossary"
on page 52.
THE COMPANY
ORBIT/FR, Inc. ("ORBIT/FR" or the "Company") develops, markets and supports
sophisticated automated microwave test and measurement systems for the wireless
communications, satellite, automotive and aerospace/defense industries.
Products such as cellular phones, satellites, radio transmitters, global
positioning system ("GPS") receivers and guided missiles depend on the reliable
and efficient transmission and reception of microwave signals in order to
communicate. By utilizing the Company's systems to measure the critical
performance characteristics of microwave signals, wireless manufacturers and
service providers within these industries can improve quality and time-to-
market, lower the risk of failure and underperformance and reduce costs.
Microwave test and measurement systems are used during all stages of a
product's life cycle: product development, pre-production qualification,
production testing and product maintenance.
The need for microwave test and measurement systems and products expanded
rapidly during the 1960's and 1970's in conjunction with the growth and
increased sophistication of the aerospace/defense industry in the United States
and Western Europe. In the last 20 years, the need for microwave test and
measurement has expanded beyond aerospace/defense applications to all aspects
of modern telecommunications, including personal wireless communications
devices, satellite-based communications systems and "smart" automobiles. This
expansion has occurred in conjunction with a growing desire among companies to
focus on their core competencies and, accordingly, outsource many non-core
functions such as the development and manufacture of microwave test and
measurement systems.
Since its founding, the Company has expanded from distributing individual
microwave test and measurement components to providing a wide range of fully
integrated microwave test and measurement solutions. Components of an ORBIT/FR
automated microwave test and measurement system include proprietary software
and hardware products, which can be combined into standard or customized
configurations to meet a customer's specific needs. The Company believes that
its innovative proprietary systems, experienced staff, reputation for quality
and reliability, strong international presence and comprehensive customer
service give it a competitive advantage that will enable it to remain a leading
global supplier of microwave test and measurement systems to a growing number
of companies within the wireless communications, satellite, automotive and
aerospace/defense industries.
The Company markets and sells its systems to customers in the United States
and throughout the world. Within the Company's targeted industries, the
Company's customers since January 1, 1994 have included manufacturers of
wireless systems and products, such as Motorola, Nokia and Ericsson;
manufacturers of systems and products that incorporate microwave technology,
such as Lockheed Martin, Hughes Aircraft, BMW and Boeing; and
telecommunications service providers that rely on microwave technology, such as
AT&T, NTT and Korea Mobile Telecom. The Company's customers also include the
United States government and several foreign governments. In 1996, none of the
Company's customers accounted for more than 5% of the Company's total revenues.
At March 31, 1997, the Company's backlog was approximately $8.5 million,
compared to approximately $3.6 million at March 31, 1996.
The Company's objective is to strengthen its leadership position in automated
microwave test and measurement systems while developing products and systems
for a broader range of microwave applications. The principal elements of the
Company's strategy to reach its objective are: (i) offering comprehensive
solutions to customers, (ii) maintaining its technological leadership, (iii)
focusing on standard systems and proprietary off-the-shelf products, (iv)
pursuing growth in international markets and (v) leveraging its technological
expertise to expand into complementary markets.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......... 2,000,000 shares
Common Stock to be outstanding after the of-
fering..................................... 6,096,970 shares(1)(2)
Use of proceeds............................. For payment of the cash portion
of the purchase price of AEMI and
for working capital and other
general corporate purposes,
including possible acquisitions.
Nasdaq National Market symbol............... "ORFR"
</TABLE>
- --------
(1) Excludes 492,300 shares of Common Stock issuable upon exercise of stock
options to be granted upon completion of this offering at an exercise price
equal to the Offering Price pursuant to the Company's 1997 Equity Incentive
Plan. See "Management--1997 Equity Incentive Plan" and "Shares Eligible for
Future Sale."
(2) Includes a maximum of 96,970 shares of Common Stock that will be issued
contemporaneously with the completion of this offering in connection with
the acquisition of AEMI. See "The Company."
RISK FACTORS
Prospective investors should carefully consider the factors discussed in
detail elsewhere in this Prospectus under the caption "Risk Factors."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1996 1997 1997
------ ------ ------ ------ ------- -------- ------ ------ --------
PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(1)
------------------------------------ -------- ------------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total revenues.......... $1,869 $3,003 $7,171 $8,299 $10,404 $17,012 $1,533 $4,906 $5,839
Gross profit............ 1,050 1,794 1,906 2,853 3,954 5,482 445 1,765 2,170
Operating income
(loss)................. 228 703 (106) 756 1,267 1,698 41 953 1,158
Net income.............. 67 353 84 493 831 1,058 27 586 696
Net income per common
share.................. $ 0.02 $ 0.09 $ 0.02 $ 0.12 $ 0.21 $ 0.26 $ 0.01 $ 0.15 $ 0.17
Weighted average number
of common shares....... 4,000 4,000 4,000 4,000 4,000 4,083 4,000 4,000 4,083
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------------------------
PRO FORMA
AS
ACTUAL ACTUAL PRO FORMA(1) ADJUSTED(2)
----------------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital......... $3,270 $3,922 $3,740 $18,410
Total assets............ 9,903 9,936 11,446 26,116
Total long-term debt.... 2,722 2,722 3,007 3,007
Stockholders' equity.... 1,860 2,446 3,134 17,804
</TABLE>
- --------
(1) Gives effect to the acquisition of AEMI at an assumed purchase price of
$1,377,000, of which one-half will be paid in cash and the other half will
be paid in shares of Common Stock valued at the Offering Price. See
"Unaudited Consolidated Pro Forma Data."
(2) Gives effect to the sale of 2,000,000 shares of Common Stock being offered
by the Company at the Offering Price and the application of the net
proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
Prospectus before purchasing the shares of Common Stock offered hereby.
RAPID TECHNOLOGICAL CHANGE. The microwave test and measurement industry is
characterized by rapid technological change. The Company's future success will
depend upon its ability continually to enhance its current products and to
develop and introduce new products that keep pace with the increasingly
sophisticated needs of its customers and the technological advancements of its
competitors. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that will
adequately meet the requirements of the marketplace. See "Business -- Systems
and Products" and "Business-- Research and Development."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily
dependent upon its proprietary technology. The Company does not currently have
any material patents and relies principally on trade secret and copyright laws
to protect its technology. However, there can be no assurance that these steps
will prevent misappropriation of its technology. Moreover, third parties could
independently develop technologies that compete with the Company's
technologies. Although the Company believes that its products and proprietary
rights do not infringe patents and proprietary rights of third parties, there
can be no assurance that infringement claims, regardless of merit, will not be
asserted against the Company. In addition, effective copyright and trade
secret protection of the Company's proprietary technology may be unavailable
or limited in certain foreign countries. See "Business -- Proprietary Rights."
RISKS ASSOCIATED WITH ACQUISITIONS. In the normal course of business, the
Company evaluates potential acquisitions that would complement or expand its
business. Subject to the completion of this offering, the Company will acquire
AEMI. There can be no assurance that the Company will be able to successfully
integrate the business and operations of AEMI or any other business acquired
in the future. There can be no assurance that the Company will not incur
disruptions and unexpected expenses in integrating such acquisitions. In
attempting to make acquisitions, the Company often competes with other
potential acquirors, many of which have greater financial and operational
resources. Furthermore, the process of evaluating, negotiating, financing and
integrating acquisitions may divert management time and resources. There can
be no assurance that any acquisition, when consummated, will not materially
adversely affect the Company's business, operating results or financial
condition. See "Business -- The ORBIT/FR Strategy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON ALCHUT; OPERATIONS IN ISRAEL. The Company maintains and will
continue to maintain a number of relationships with Alchut, the sole
stockholder of the Company prior to this offering. All of the Company's
electro-mechanical production requirements, primarily in connection with the
production of positioners, are currently subcontracted to Alchut. The amounts
paid by the Company to Alchut for its subcontracted production during 1994,
1995 and 1996 were $1.5 million, $1.4 million and $1.5 million, which
represented 28%, 26% and 23% of the Company's cost of revenues, respectively.
In addition, Alchut provides general and administrative services for the
Company's operations in Israel. Effective January 1, 1997, the Company and
Alchut entered into an agreement under which Alchut will continue to provide
these services for at least one year. See "Certain Transactions." Alchut
maintains its production operations, and the Company maintains part of its
engineering operations, in Israel. As a result, the Company may be directly
influenced by the political, economic and military conditions affecting
Israel. Such conditions may create production delays or stoppages which could
adversely affect the Company's ability to conduct operations.
RISKS OF FIXED-PRICE CONTRACTS. Virtually all of the Company's contracts for
its systems and products are on a fixed-price basis. The profitability of such
contracts is subject to inherent uncertainties as to the cost of
6
<PAGE>
completion. In addition to possible errors or omissions in making initial
estimates, cost overruns may be incurred as a result of unforeseen obstacles,
including both physical conditions and unexpected problems in engineering,
design or testing. Since the Company's business may at certain times be
concentrated in a limited number of large contracts, a significant cost
overrun on any one contract could have a material adverse effect on the
Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH ENTERING NEW MARKETS. The Company has identified and
is evaluating whether to enter into certain complementary markets and may use
a portion of the proceeds of this offering to expand into these markets. The
Company's success in these markets will depend on, among other factors, the
Company's ability to identify markets and develop technologies for such
markets on a timely basis, hire and retain skilled management, financial,
marketing and engineering personnel, successfully manage growth and obtain
capital sufficient to finance such expansion. There can be no assurance that
the Company will successfully enter these markets. See "Use of Proceeds" and
"Business -- The ORBIT/FR Strategy."
MANAGEMENT OF GROWTH. The Company is currently experiencing a period of
rapid growth in the number of employees and in the scope of its business. In
addition, the Company believes that continued growth will be required to
maintain the Company's competitive position. The Company's rapid growth,
coupled with the rapid evolution of the Company's markets, has placed, and is
likely to continue to place, strains on its management, administrative,
operating and financial resources, as well as increased demands on its
internal systems, procedures and controls. For example, as the Company further
expands, existing management will be required to supervise more wide-spread
and diversified operations and additional management personnel will have to be
hired and trained. The Company's ability to manage recent and future growth
will require the Company to devote additional management time to its financial
and management controls, reporting systems and procedures and to expand,
train, motivate and manage its sales and technical personnel. There can be no
assurance that the Company will be able to manage its growth successfully.
Failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 1996, international sales
comprised approximately 52% of the Company's total sales, and the Company
expects its international business to continue to account for a material part
of its revenues. International sales are subject to numerous risks, including
political and economic instability in foreign markets, restrictive trade
policies of foreign governments, inconsistent product regulation by foreign
agencies or governments, imposition of product tariffs and burdens and costs
of complying with a wide variety of international and U.S. export laws and
regulatory requirements. There can be no assurance that the Company will be
able to continue to compete successfully in international markets or that its
international sales will be profitable. Approximately 92% of the Company's
revenues in 1996 were denominated in U.S. dollars, and the Company intends to
continue to enter into U.S. dollar-denominated contracts. Accordingly, the
Company believes that it does not have significant exposure to fluctuations in
currency. However, fluctuations in currency could adversely affect the
Company's customers. See "Business -- The ORBIT/FR Strategy."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's operating results
have varied from quarter to quarter in the past and may vary significantly in
the future depending on factors such as the size and timing of significant
contracts, the mix of third party products and the Company's proprietary
products included in a particular contract, customers' budgetary constraints,
increased competition, the timing of new product announcements and changes in
pricing policies by the Company or its competitors, market acceptance of new
and enhanced versions of the Company's products, changes in operating expenses
and changes in general economic factors. During the five quarters ended March
31, 1997, the Company's revenues were $1.5 million, $1.8 million, $2.8
million, $4.2 million and $4.9 million, respectively, and the Company's net
income was $27,000, $50,000, $193,000, $561,000 and $586,000, respectively.
The Company's expense levels are based, in part, on its expectations as to
future revenue levels. If the Company's revenue levels were to be below
expectations, the Company's operating results would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
DEPENDENCE ON QUALIFIED TECHNICAL PERSONNEL. The Company's operating results
depend in large part upon the efforts of its microwave, software and systems
engineers. The success of the Company's business therefore
7
<PAGE>
depends on its ability to attract and retain engineers and other technical
personnel. There are a limited number of microwave engineers, and such
individuals are sought both by microwave test and measurement companies such
as the Company and by manufacturers of wireless products and
telecommunications service providers. Competition for such personnel is
intense. The Company has at times experienced difficulty in recruiting and
retaining technical personnel, and there can be no assurance that the Company
will not experience difficulties in the future in attracting and in retaining
technical personnel. See "Business -- Employees."
DEPENDENCE ON KEY PERSONNEL. The success of the Company depends to a
significant degree upon the contribution of its executive officers and other
key personnel, including Mr. Aryeh Trabelsi, the Company's President and Chief
Executive Officer. Other than Mr. Trabelsi, none of the Company's executive
officers has an employment agreement with the Company, except that Mr. Moshe
Pinkasy has an agreement that is terminable upon 90 days notice. There can be
no assurance that the Company will be able to retain its managerial and other
key personnel or to attract additional managerial and other key personnel if
required. See "Business -- Employees" and "Management."
PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS. The sale of products and systems
by the Company may entail the risk of product liability and related claims. A
product liability claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. Complex software and system products, such as those offered by the
Company, may contain defects or failures when introduced or when new versions
are released. There can be no assurance that, despite testing by the Company,
errors will not be found in new products after commencement of commercial
shipments, resulting in loss of market share or failure to achieve market
acceptance. The Company maintains product liability insurance in the amount of
$3.0 million and errors and omissions insurance in the amount of $1.0 million,
although there can be no assurance that such coverage will be applicable to a
particular claim or that the amounts of such insurance will be adequate if the
Company experiences a significant claim. Although the Company has not
experienced any significant claims to date related to its systems or products,
the occurrence of such a claim could have a material adverse effect upon the
Company's business, operating results and financial condition.
COMPETITION. The market for automated microwave test and measurement
products, systems and services is highly competitive and is characterized by
continuing advances in products and technologies. In general, competition in
this market comes from major microwave test and measurement vendors, some of
which have a longer operating history, significantly greater financial,
technical and marketing resources, greater name recognition and a larger
installed customer base than the Company. These companies also have
established relationships with current and potential customers of the Company.
The Company also competes, on a limited basis, with the internal development
groups of its existing and potential customers, who may design and develop
parts of their own microwave test and measurement systems. The Company's
business, operating results and financial condition could be materially
adversely affected by such competition. See "Business -- Competition."
FLUCTUATIONS IN CAPITAL SPENDING. The Company is dependent upon the wireless
communications, satellite, automotive and aerospace/defense industries.
Because these industries are characterized by technological change, pricing
and gross margin pressure and, particularly in the aerospace/defense industry,
government budget constraints, they have from time to time experienced sudden
economic downturns. During these periods, capital spending is frequently
curtailed and the number of design projects often decreases. Since the
Company's sales are dependent upon capital spending trends and new design
projects, negative factors affecting these industries could have a material
adverse effect on the Company's business, operating results and financial
condition.
CONTROL BY PRINCIPAL STOCKHOLDER. Upon completion of this offering, Alchut
will beneficially own 65.6% of the outstanding Common Stock of the Company
(60.7% if the Underwriters' over-allotment option is exercised in full). Mr.
Joseph Aviv, Chairman of the Board of the Company, and Mr. Zeev Stein, a
director of the Company, and their families currently own approximately 44.0%
and 42.0% of the outstanding shares of Alchut, respectively. As a result,
these individuals and Alchut will be in a position to control the outcome of
all matters requiring stockholder approval, including the election or removal
of directors, approval of significant corporate transactions and the ability
generally to direct the Company's affairs. Such concentration of ownership may
have the effect of delaying or preventing a change in control of the Company,
including transactions in which the
8
<PAGE>
holders of the Company's Common Stock might otherwise receive a premium over
current market prices for their shares. See "Principal Stockholders."
DISCRETIONARY USE OF PROCEEDS. The Company intends to use the proceeds of
this offering to pay up to $800,000 in connection with the AEMI acquisition
and for working capital and other general corporate purposes, including
possible acquisitions. Accordingly, the Company's management will have broad
discretion with respect to the use of the net proceeds of this offering. See
"Use of Proceeds."
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK
PRICE. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
was determined through negotiations between the Company and the
Representatives of the Underwriters based on several factors and may not be
indicative of the market price of the Common Stock after this offering. See
"Underwriting." The market price of the shares of Common Stock may be
significantly affected by factors such as actual or anticipated fluctuations
in the Company's operating results, announcements of technological
innovations, new products or new contracts by the Company or its competitors,
developments with respect to copyrights or proprietary rights, conditions and
trends in the microwave test and measurement industry, adoption of new
accounting standards affecting the software industry, general market
conditions and other factors. In addition, the stock market has, from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology
companies and that have often been unrelated to the operating performance of
particular companies.
DILUTION. The initial public offering price is substantially higher than the
pro forma net tangible book value per share of Common Stock. Investors
purchasing shares of Common Stock in this offering at the Offering Price will
therefore incur immediate and substantial dilution of $5.49 in pro forma net
tangible book value per share. See "Dilution."
NO DIVIDENDS. The Company has never paid cash dividends on its Common Stock
and does not anticipate that any cash dividends will be declared or paid in
the foreseeable future. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market after this offering may have an adverse effect on
the market price of the Common Stock. Upon completion of this offering, the
Company will have outstanding 6,096,970 shares of Common Stock assuming the
maximum of 96,970 shares are issued in connection with the acquisition of
AEMI. Of these shares, 2,000,000 shares sold in this offering generally will
be freely transferable without restriction. The remaining 4,096,970 shares,
4,000,000 of which are owned by Alchut and a maximum of 96,970 of which will
be issued in connection with the acquisition of AEMI, may not be sold unless
registered under the Securities Act of 1933, as amended (the "Securities
Act"), or an exemption from registration is available, including the exemption
provided by Rule 144 under the Securities Act. Alchut and the Company's
directors and executive officers have agreed that they will not, other than by
Alchut with respect to the over-allotment option, directly or indirectly,
offer, sell, contract to sell, pledge, grant any option for the sale of or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Representatives of the Underwriters, other than in certain
private transactions in which each transferee acquiring an interest in such
Common Stock during such 180-day period agrees in writing to be bound by such
agreement. After such 180-day period, the 4,000,000 shares of Common Stock
held by Alchut will be eligible for sale in the public market in reliance upon
Rule 144 subject to the restrictions contained therein. The current
stockholders of AEMI have agreed with the Company that they will not offer,
sell or otherwise dispose of the maximum of 96,970 shares of Common Stock
issued in connection with the acquisition of AEMI for a period of two years
after the closing date of such acquisition. After such two-year period, the
maximum of 96,970 shares held by such stockholders will be eligible for sale
under Rule 144 subject to the restrictions contained therein. After 180 days
from the date of this Prospectus, the Company intends to register under the
Securities Act 800,000 shares of Common Stock reserved for awards under the
Company's 1997 Equity Incentive Plan. See "Underwriting" and "Shares Eligible
for Future Sale."
9
<PAGE>
ISSUANCE OF PREFERRED STOCK AND COMMON STOCK; ANTI-TAKEOVER PROVISIONS.
Pursuant to its Amended and Restated Certificate of Incorporation, the Company
has an authorized class of 2,000,000 shares of Preferred Stock which may be
issued by the Board of Directors with such terms and such rights, preferences
and designations as the Board may determine and without any vote of the
stockholders, unless otherwise required by law. Issuance of such Preferred
Stock, depending upon the rights, preferences and designations thereof, may
have the effect of delaying, deterring or preventing a change in control of
the Company. Issuance of additional shares Common Stock could result in
dilution of the voting power of the Common Stock purchased in this offering.
In addition, certain "anti-takeover" provisions of the Delaware General
Corporation Law (the "DGCL") among other things, may restrict the ability of
the stockholders to approve a merger or business combination or obtain control
of the Company. See "Description of Securities."
10
<PAGE>
THE COMPANY
ORBIT/FR, Inc. ("ORBIT/FR" or the "Company") was incorporated in Delaware in
December 1996. The Company is the holding company for Orbit Advanced
Technologies, Inc., a Delaware corporation ("Technologies") and its wholly
owned subsidiary, Flam & Russell, Inc., a Delaware corporation ("Flam &
Russell"), and for Orbit F.R. Engineering, Ltd., an Israeli corporation
("Engineering"). Prior to the completion of this offering, Orbit-Alchut
Technologies, Ltd., a publicly traded company in Israel which was founded in
1950 ("Alchut"), owned all of the 4,000,000 issued and outstanding shares of
the Company. In addition to its ownership interests in the Company, Alchut has
ownership interests in companies operating in the avionics, tracking and
telemetry markets.
Technologies was incorporated in 1985 as a wholly-owned subsidiary of Alchut
to provide sales and customer support for Alchut's products in the United
States, including positioning subsystems. In 1991, Technologies began to focus
on the development and design of its own proprietary microwave test and
measurement products and systems. In 1994, Technologies recognized the
potential for providing customers with fully integrated microwave test and
measurement solutions and began incorporating Technologies' software
technology with hardware from third-party manufacturers, including Alchut.
Technologies continues to subcontract certain production services to Alchut
through Engineering but retains the right to select any other production
subcontractor after January 1, 1998. See "Certain Transactions."
Engineering was incorporated in Israel in December 1996 as a wholly-owned
subsidiary of Alchut at which time Alchut transferred all of the assets
relating to its microwave test and measurement business to Engineering.
Engineering is principally responsible for overseeing the development, design
and production of ORBIT/FR's electro-mechanical products.
Effective December 31, 1996, Alchut transferred or caused to be transferred
to the Company all of the outstanding shares of Technologies and Engineering
in exchange for shares of the Company, thereby making Technologies and
Engineering wholly-owned subsidiaries of the Company.
On June 28, 1996, Technologies purchased all of the issued and outstanding
shares of Flam & Russell for approximately $1,043,000. The acquisition of Flam
& Russell augmented the Company's product mix, staff of microwave and software
engineers and customer base. Flam & Russell has been active in the microwave
test and measurement field since 1981. At the time it was acquired by the
Company, Flam & Russell was one of the Company's direct competitors and
offered products that were both complementary to and competitive with the
Company's products.
On March 31, 1997, the Company entered into an agreement with Advanced
Electromagnetics, Inc., a California corporation ("AEMI"), and its
stockholders, pursuant to which all of the issued and outstanding shares of
AEMI will be sold to the Company, contemporaneously with the completion of
this offering, for up to a maximum of $1.6 million, subject to a possible
downward adjustment based on AEMI's financial performance for the three years
ended March 31, 1997. One-half of the purchase price will be paid in cash and
the other half will be paid by issuance of shares of the Company's Common
Stock valued at the Offering Price. Founded in 1980, AEMI manufactures
anechoic foam, a microwave absorbing material that is used to line indoor test
chambers and that is an integral component of microwave test and measurement
systems. For the year ended December 31, 1996, AEMI had revenues of $3.2
million and a pre-tax profit of $544,000. As of and for the quarter ended
March 31, 1997, AEMI had revenues of $933,000, a pre-tax profit of $205,000,
assets of $1.2 million and net equity of $510,000. The Company believes that
the acquisition of AEMI will enhance its ability to provide comprehensive test
and measurement solutions to its customers.
The Company's principal offices are located at 506 Prudential Road, Horsham,
Pennsylvania 19044. Its telephone number is (215) 674-5100, its e-mail address
is [email protected] and its World Wide Web home page is located at
www.orbitfr.com.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at the Offering Price are estimated
to be approximately $14,670,000 after deducting underwriting discounts and
commissions and estimated offering expenses. The Company intends to use the
net proceeds as follows: (i) up to $800,000 to pay the cash portion of the
purchase price (assuming the maximum purchase price) for the AEMI acquisition
(see "The Company"); and (ii) the balance for working capital and other
general corporate purposes, including the investment in or acquisition of
complementary businesses, products, product development rights or
technologies. Other than the acquisition of AEMI described in "The Company,"
the Company has no current understanding, commitment or arrangement with
respect to any potential investment or acquisition. Pending such uses, the net
proceeds will be invested in short-term, interest-bearing investment grade
securities or commercial paper. The Company will not receive any proceeds from
the sale of Common Stock pursuant to any exercise of the Underwriters' over-
allotment option.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 and as adjusted to reflect the sale of the 2,000,000 shares of Common
Stock offered by the Company at the Offering Price and the application of the
net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(1) ADJUSTED(2)
---------- ---------- -----------
<S> <C> <C> <C>
Long-term debt............................ $2,722,000 $3,006,854 $ 3,006,854
---------- ---------- -----------
Stockholders' equity:
Preferred Stock, $0.01 par value,
2,000,000 shares authorized; no shares
issued or outstanding.................. -- -- --
Common Stock, $0.01 par value,
10,000,000 shares authorized; 4,000,000
actual shares, 4,083,455 pro forma
shares and 6,083,455 pro forma as
adjusted shares issued and
outstanding(3)......................... 40,000 40,835 60,835
Additional paid-in capital.............. 450,256 1,137,921 15,787,921
Retained earnings....................... 1,955,457 1,955,457 1,955,457
---------- ---------- -----------
Total stockholders' equity............ 2,445,713 3,134,213 17,804,213
---------- ---------- -----------
Total capitalization.................. $5,167,713 $6,141,067 $20,811,067
========== ========== ===========
</TABLE>
- --------
(1) Gives effect to the acquisition of AEMI at an assumed purchase price of
$1,377,000, of which one-half will be paid in cash and the other half will
be paid in shares of Common Stock at the Offering Price. See "Unaudited
Consolidated Pro Forma Data."
(2) Gives effect to the sale of 2,000,000 shares of Common Stock being offered
by the Company at the Offering Price and the application of the net
proceeds therefrom. See "Use of Proceeds."
(3) Excludes 492,300 shares of Common Stock issuable upon exercise of stock
options to be granted upon completion of this offering at an exercise
price equal to the Offering Price pursuant to the Company's 1997 Equity
Incentive Plan. See "Management -- 1997 Equity Incentive Plan" and "Shares
Eligible for Future Sale."
12
<PAGE>
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not intend to pay cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to reinvest its earnings, if any, in the
development and expansion of the Company's business. Any future declaration of
cash dividends will be at the discretion of the Company's Board of Directors
and will depend upon the earnings, capital requirements and financial position
of the Company, general economic conditions and other pertinent factors.
DILUTION
At March 31, 1997, the pro forma net tangible book value of the Company was
$2,117,775 or $0.52 per share of Common Stock. Pro forma net tangible book
value per share represents the amount of total tangible assets reduced by the
amount of total liabilities and divided by the number of outstanding shares of
Common Stock, after giving effect to the acquisition of AEMI. After giving
effect to the receipt by the Company of the net proceeds from the sale of the
Common Stock offered by the Company hereby at the Offering Price and after
deducting underwriting discounts and commissions and estimated offering
expenses, the adjusted pro forma net tangible book value of the Company at
March 31, 1997 would have been $16,787,775 or $2.76 per share of Common Stock.
This represents an immediate increase in pro forma net tangible book value of
$2.24 per share to the existing stockholders and an immediate dilution of pro
forma net tangible book value of $5.49 per share to purchasers of the Common
Stock offered hereby. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price.................................. $8.25
Pro forma net tangible book value before this offering....... $0.52
Increase in net tangible book value attributable to new
investors................................................... 2.24
-----
Pro forma net tangible book value after this offering.......... 2.76
-----
Dilution to new investors...................................... $5.49
=====
</TABLE>
The following table sets forth the difference between the existing
stockholders and the purchasers of shares of Common Stock in this offering
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid (before deducting estimated underwriting discounts and offering
expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT NUMBER PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 4,096,970 67.2% $ 1,290,256 7.3% $0.31
New investors................ 2,000,000 32.8 16,500,000 92.7 8.25
--------- ----- ----------- -----
Total...................... 6,096,970 100.0% $17,790,256 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) The sale of shares of Common Stock by Alchut, if the Underwriters' over-
allotment option is exercised in full, would reduce the number of shares
held by existing stockholders to 3,796,970 shares, or approximately 62.3%
of the total number of shares outstanding after this offering, and would
increase the number of shares held by new investors to 2,300,000 shares,
or approximately 37.7% of the total number of shares outstanding after
this offering.
The foregoing table (under existing stockholders) includes a maximum of
96,970 shares of Common Stock that will be issued contemporaneously with the
completion of this offering in connection with the AEMI acquisition. The
foregoing table does not include the exercise of outstanding options.
Effective upon the completion of this offering, the Company has granted
options to purchase an aggregate of 492,300 shares of Common Stock at an
exercise price equal to the Offering Price. The Company has reserved an
additional 307,700 shares of Common Stock for future stock option grants. See
"Management -- 1997 Equity Incentive Plan."
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
consolidated financial statements of ORBIT/FR, Inc. The Company's consolidated
financial statements for each of the three years in the period ended December
31, 1996 have been audited by Ernst & Young LLP, independent auditors. The
balance sheet data as of March 31, 1997 and the statement of operations data
for the three months ended March 31, 1996 and 1997 are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of its operations for these periods. Operating results for the three
months ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1997. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and Notes thereto, and other financial information
included elsewhere herein. All information is in thousands, except per share
data.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ ---------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Contract revenues...... $1,277 $1,852 $7,128 $7,957 $10,267 $ 1,520 $ 4,906
Commission revenues.... 592 1,151 43 342 137 13 --
------ ------ ------ ------ ------- ------- -------
Total revenues........ 1,869 3,003 7,171 8,299 10,404 1,533 4,906
Cost of revenues....... 819 1,209 5,265 5,446 6,450 1,088 3,141
------ ------ ------ ------ ------- ------- -------
Gross profit............ 1,050 1,794 1,906 2,853 3,954 445 1,765
General and
administrative
expenses............... 501 737 989 864 1,315 195 319
Sales and marketing
expenses............... 234 265 786 994 791 112 273
Research and development
expenses............... 87 89 237 239 581 97 220
------ ------ ------ ------ ------- ------- -------
Operating income
(loss)................. 228 703 (106) 756 1,267 41 953
Other income (expense).. -- 38 71 38 3 6 (23)
------ ------ ------ ------ ------- ------- -------
Income (loss) before
income taxes........... 228 741 ( 35) 794 1,270 47 930
Income tax expense
(benefit).............. 161 388 (119) 301 439 20 344
------ ------ ------ ------ ------- ------- -------
Net income.............. $ 67 $ 353 $ 84 $ 493 $ 831 $ 27 $ 586
====== ====== ====== ====== ======= ======= =======
Net income per common
share.................. $ 0.02 $ 0.09 $ 0.02 $ 0.12 $ 0.21 $ 0.01 $ 0.15
====== ====== ====== ====== ======= ======= =======
Weighted average number
of common shares....... 4,000 4,000 4,000 4,000 4,000 4,000 4,000
====== ====== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------- ---------
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................... $ 357 $ 768 $3,300 $3,875 $3,270 $3,922
Total assets...................... 3,843 2,758 7,674 6,799 9,903 9,936
Total long-term debt.............. 380 164 3,129 3,220 2,722 2,722
Stockholder's equity.............. 98 451 535 1,028 1,860 2,446
</TABLE>
14
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA DATA
The following Unaudited Pro Forma Balance Sheets at March 31, 1997 and the
following Unaudited Pro Forma Statements of Operations for the three months
ended March 31, 1997 give effect to the acquisition of AEMI as if it occurred
on January 1, 1997. AEMI's fiscal year end is March 31. The results of AEMI's
operations for the twelve months ended December 31, 1996 have been compiled
and presented on a calendar year basis. The following Unaudited Pro Forma
Statements of Operations for the year ended December 31, 1996 give effect to
the acquisitions of Flam & Russell and AEMI as if they occurred on January 1,
1996. See "Notes to Unaudited Consolidated Pro Forma Data."
The Unaudited Consolidated Pro Forma Data should be read in conjunction with
"Use of Proceeds," "Capitalization," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere herein.
The Unaudited Consolidated Pro Forma Data do not purport to represent what the
Company's actual results of operations or financial position would have been
had such transactions in fact occurred on such dates. The Pro Forma Statements
of Operations for the three months ended March 31, 1997 also do not purport to
project the results of operations of the Company for 1997 or for any other
period.
15
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA DATA
ORBIT/FR, INC.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEETS
MARCH 31, 1997
<TABLE>
<CAPTION>
ADVANCED
ORBIT/FR, ELECTROMAGNETICS
INC. INC. ADJUSTMENTS PRO FORMA
---------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................. $ 801,141 $ 47,198 $(688,500)(1) $ 159,839
Accounts receivable... 3,957,651 752,629 4,710,280
Inventory............. 2,270,970 242,658 2,513,628
Costs and estimated
earnings in excess of
billings on
uncompleted
contracts............ 809,518 809,518
Deferred income
taxes................ 388,000 388,000
Other................. 463,293 463,293
---------- ---------- --------- -----------
Total current
assets............. 8,690,573 1,042,485 (688,500) 9,044,558
---------- ---------- --------- -----------
Property and equipment,
net.................... 946,431 188,412 250,000 (1) 1,384,843
Purchased software,
net.................... 299,437 299,437
Goodwill................ 717,001 (1) 717,001
---------- ---------- --------- -----------
Total assets........ $9,936,441 $1,230,897 $ 278,501 $11,445,839
========== ========== ========= ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...... $1,033,490 $ 398,006 $ $ 1,431,496
Accounts payable--
Alchut............... 379,000 379,000
Accrued expenses...... 1,464,995 10,110 1,475,105
Income taxes payable.. 373,676 21,428 395,104
Customer advances..... 440,000 6,500 446,500
Billings in excess of
costs and estimated
earnings on
uncompleted
contacts............. 420,067 420,067
Deferred income
taxes................ 657,500 100,000 (1) 757,500
---------- ---------- --------- -----------
Total current
liabilities........ 4,768,728 436,044 100,000 5,304,772
Notes payable to
Alchut............... 2,722,000 2,722,000
Notes payable to
officer.............. 284,854 284,854
---------- ---------- --------- -----------
Total liabilities... 7,490,728 720,898 100,000 8,311,626
Stockholders' equity:
Common stock.......... 40,000 2,696 (1,861)(1) 40,835
Additional paid-in
capital.............. 450,256 452,420 235,245 (1) 1,137,921
Retained earnings..... 1,955,457 54,883 (54,883)(1) 1,955,457
---------- ---------- --------- -----------
Total stockholders'
equity............. 2,445,713 509,999 178,501 3,134,213
---------- ---------- --------- -----------
Total liabilities
and stockholders'
equity............. $9,936,441 $1,230,897 $ 278,501 $11,445,839
========== ========== ========= ===========
</TABLE>
See notes to Unaudited Consolidated Pro Forma Data.
16
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA DATA
ORBIT/FR, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
ADVANCED
ORBIT/FR, ELECTROMAGNETICS,
INC. INC. ADJUSTMENTS PRO FORMA
---------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Contract revenues....... $4,906,430 $932,601 $ $5,839,031
Cost of revenues........ 3,141,168 515,037 12,500 (2) 3,668,705
---------- -------- -------- ----------
Gross profit............ 1,765,262 417,564 (12,500) 2,170,326
Operating expenses:
General and adminis-
trative.............. 319,193 99,436 8,963 (3) 427,592
Sales and marketing... 273,362 92,273 365,635
Research and develop-
ment................. 219,390 219,390
---------- -------- -------- ----------
Total operating ex-
penses............. 811,945 191,709 8,963 1,012,617
---------- -------- -------- ----------
Operating income........ 953,317 225,855 (21,463) 1,157,709
Other income (expense):
Interest income....... 9,519 1,174 10,693
Interest expense...... (1,817) (8,300) (10,117)
Other................. (30,854) (14,000) (44,854)
---------- -------- -------- ----------
Total other income
(expense).......... (23,152) (21,126) (44,278)
---------- -------- -------- ----------
Income before income
taxes.................. 930,165 204,729 (21,463) 1,113,431
Income tax expense...... 344,000 21,425 51,881 (4) 417,306
---------- -------- -------- ----------
Net income.............. $ 586,165 $183,304 $(73,344) $ 696,125
========== ======== ======== ==========
</TABLE>
See notes to Unaudited Consolidated Pro Forma Data.
17
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA DATA
ORBIT/FR, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FLAM &
RUSSELL, INC. ADVANCED
ORBIT/FR, 1/1/96- ELECTROMAGNETICS,
INC. 6/28/96 INC. 1996 ADJUSTMENTS PRO FORMA
----------- ------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenues...... $10,267,319 $3,411,347 $3,196,075 $ $16,874,741
Commission revenues.... 136,857 136,857
----------- ---------- ---------- --------- -----------
Total revenues........ 10,404,176 3,411,347 3,196,075 17,011,598
Cost of revenues....... 6,450,177 2,891,779 2,097,163 50,000 (2) 11,529,291
40,172 (5)
----------- ---------- ---------- --------- -----------
Gross profit............ 3,953,999 519,568 1,098,912 (90,172) 5,482,307
Operating expenses:
General and
administrative........ 1,314,684 278,700 398,306 45,015 (3) 2,023,067
4,600 (5)
35,228 (6)
(53,466) (7)
Sales and marketing.... 790,573 129,057 104,019 1,023,649
Research and
development........... 581,266 156,128 737,394
----------- ---------- ---------- --------- -----------
Total operating
expenses............. 2,686,523 563,885 502,325 31,377 3,784,110
----------- ---------- ---------- --------- -----------
Operating income
(loss)................. 1,267,476 (44,317) 596,587 (121,549) 1,698,197
Other income (expense):
Interest income........ 23,024 1,241 24,265
Interest expense....... (19,062) (41,313) (69,330) 41,313 (8) (88,392)
Other.................. (1,372) 15,100 13,728
----------- ---------- ---------- --------- -----------
Total other income
(expense)............ 2,590 (41,313) (52,989) 41,313 (50,399)
----------- ---------- ---------- --------- -----------
Income (loss) before
income taxes........... 1,270,066 (85,630) 543,598 (80,236) 1,647,798
Income tax expense...... 439,000 63,000 88,093 (4) 590,093
----------- ---------- ---------- --------- -----------
Net income (loss)....... $ 831,066 $ (85,630) $ 480,598 $(168,329) $ 1,057,705
=========== ========== ========== ========= ===========
</TABLE>
See notes to Unaudited Consolidated Pro Forma Data.
18
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA DATA
Consolidated Pro Forma Balance Sheets -- March 31, 1997
(1) To record the acquisition of AEMI at an assumed purchase price of
$1,377,000 (calculated pursuant to the agreement with AEMI reflecting AEMI's
financial results as of March 31, 1997). The purchase is assumed to be paid
one-half in shares of Common Stock at the Offering Price and one-half in cash.
The difference between the assumed purchase price and the net assets of AEMI
as of March 31, 1997 is preliminarily allocated to property and equipment for
$250,000, related deferred income tax liabilities for $100,000 and goodwill
for $717,001.
Consolidated Pro Forma Statements of Operations -- Three Months Ended March
31, 1997 and Year Ended December 31, 1996
(2) To record additional depreciation as calculated on the fair values of
property and equipment acquired from AEMI over a five-year life.
(3) To record amortization of goodwill resulting from the AEMI acquisition
over a 20-year life.
(4) To reflect, at 40%, the income tax effect of the pro forma columns and
adjustments.
(5) To record additional depreciation as calculated on the fair values of
the Flam & Russell property and equipment acquired for the period January 1,
1996 through June 28, 1996 over a five-year life.
(6) To record amortization of purchased software acquired from the Flam &
Russell acquisition for the period January 1, 1996 through June 28, 1996 over
a five-year life.
(7) To reflect changes in salaries for key employees subsequent to the
acquisition of Flam & Russell for the period January 1, 1996 through June 28,
1996.
(8) To eliminate interest expense on debt which was not assumed in the
acquisition of Flam & Russell for the period January 1, 1996 through June 28,
1996.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's historical results of operations
and liquidity and capital resources should be read in conjunction with the
Selected Consolidated Financial Data, the Consolidated Financial Statements of
the Company and related Notes thereto and other financial information
appearing elsewhere in this Prospectus. As used in this section, the term
"Company" includes the Company and its predecessors.
BASIS OF PRESENTATION
ORBIT/FR was incorporated in December 1996, is the holding company for
Technologies, Engineering and Flam & Russell, and is a wholly-owned subsidiary
of Alchut. Technologies was incorporated in 1985 and its historical results
are included for all periods presented. In June 1996, Technologies acquired
Flam & Russell in a transaction accounted for as a purchase. Flam & Russell's
results of operations have been consolidated since the date of acquisition. In
August 1994, Alchut established a separate business unit dedicated to
microwave test and measurement which was incorporated as a separate corporate
entity in December 1996 under the name Engineering. Accordingly, since 1994,
the consolidated results of the Company reflect Technologies and Engineering
on an as-if pooled basis for the period that Technologies and Engineering were
under common control. All intercompany accounts and transactions have been
eliminated.
OVERVIEW
Prior to 1994, the Company generated its revenues principally from sales of
microwave test and measurement software and from commission revenues generated
by the sales of Alchut's products in the United States. In 1994, the Company
recognized the potential for providing customers with fully integrated
microwave test and measurement solutions and began incorporating the Company's
software technology with hardware from third-party manufacturers, including
Alchut. Because the Company's systems and products are used as part of its
customers' manufacturing processes, the Company's growth is largely dependent
on the expansion of its customers' product development and production efforts.
The Company's systems and products are sold either under fixed-price or
cost-plus contracts and are accounted for on the percentage of completion
method. Approximately 93.7% of the Company's revenues for the year ended
December 31, 1996 were derived from fixed-price contracts or purchase orders
which require the Company to provide systems and products at pre-negotiated
prices. The Company derived approximately 5.0% of its revenues in the same
period from cost-plus contracts in which customers are charged based on the
costs incurred by the Company. Cost-plus contracts are generally entered into
in connection with research and development projects that are performed for
the United States and Israeli governments. The balance of the Company's
revenues for the year ended December 31, 1996 were commissions generated from
the sales of non-microwave test and measurement systems and products, which
the Company began to de-emphasize in 1996 and will discontinue in mid-1997.
At March 31, 1997, the Company had a backlog of approximately $8.5 million,
compared to a backlog of approximately $3.6 million at March 31, 1996. The
Company's backlog includes only those orders for which it has received and
accepted a completed purchase order. The backlog at March 31, 1997 is expected
to be delivered in 1997. This backlog represents an average sales cycle of
approximately five months.
A significant portion of the Company's research and development expenses has
been incurred while developing the specific requirements for particular
customers' orders and, therefore, are included in the cost of revenues. The
related funding (which includes a profit component) is included in revenues at
such time. The Company believes that its ability to offer a custom solution to
customers is an important competitive advantage. During 1996, the Company
recognized $2.2 million in revenues from this activity, including $520,000 in
customer-funded research and development. Such customer-funded research has
enabled and will continue to
20
<PAGE>
enable the Company to update and expand upon its existing product line. During
the years ended December 31, 1996, 1995 and 1994, 47.2%, 66.8% and 66.5%,
respectively, of the Company's total research and development expenses are
included in the cost of revenues.
Since 1992, the Company has increased its independent research and
development in connection with the development of turnkey microwave test and
measurement products and systems. The Company expects such expenses to
continue to increase as the Company enhances its microwave test and
measurement product line and develops new products for the EMC market and
other microwave-related markets.
In 1994, in connection with its conversion from a distributor for Alchut
products to a full service provider of its own microwave test and measurement
systems and products, the Company began selling its systems and products
overseas. In 1996, while approximately 52.0% of the Company's revenues was
derived from overseas customers, approximately 92.0% of its revenues in 1996
was denominated in U.S. dollars. Accordingly, the Company believes that it
does not have significant exposure to fluctuations in currency.
The Company believes that its future financial performance will depend
substantially on its success in acquiring companies that provide complementary
products and services, capitalizing on global infrastructure development,
providing standard solutions and expanding into complementary markets that
leverage the Company's technological expertise.
The acquisition of Flam & Russell on June 28, 1996 gave the Company greater
price flexibility and also augmented the Company's product mix, staff of
microwave and software engineers and customer base. The acquisition was
accounted for as a purchase transaction with a purchase price of approximately
$1,043,000 and resulted in no recognition of goodwill. Flam & Russell's
backlog at the time of the acquisition was $2.4 million. In connection with
this acquisition, the Company recorded purchased software of $352,000 and
approximately $384,000 in deferred tax assets and credits, which can be used
to offset future taxes.
The Company has an agreement to acquire AEMI upon the completion of this
offering for up to a maximum of $1.6 million, subject to adjustment based on
AEMI's financial performance for the three years ended March 31, 1997. One-
half of the purchase price will be paid in cash and the other half will be
paid by issuance of shares of the Company's Common Stock valued at the
Offering Price. The Company believes that this acquisition will further
broaden its product line and enable it to offer more comprehensive microwave
test and measurement solutions to its customers.
RESULTS OF OPERATIONS
The following table sets forth certain Statement of Operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ------------
1994 1995 1996 1996 1997
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 73.4 65.6 62.0 71.0 64.0
------- ------- ------- ----- -----
Gross profit.......................... 26.6 34.4 38.0 29.0 36.0
General and administrative expenses... 13.8 10.4 12.6 12.7 6.5
Sales and marketing expenses.......... 11.0 12.0 7.6 7.3 5.6
Research and development expenses..... 3.3 2.9 5.6 6.3 4.5
------- ------- ------- ----- -----
Operating income (loss)............... (1.5) 9.1 12.2 2.7 19.4
Other income (loss)................... 1.0 0.5 -- 0.4 (0.5)
------- ------- ------- ----- -----
Income (loss) before income taxes..... (0.5) 9.6 12.2 3.1 18.9
Income tax (benefit) expense.......... (1.7) 3.6 4.2 1.3 7.0
------- ------- ------- ----- -----
Net income............................ 1.2% 6.0% 8.0% 1.8% 11.9%
======= ======= ======= ===== =====
</TABLE>
21
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Revenues. Revenues for the three months ended March 31, 1997 were $4.9
million compared to $1.5 million for the three months ended March 31, 1996, an
increase of approximately $3.4 million or 226.7%. Revenues from microwave test
and measurement accounted for virtually all of the increase. Approximately
$2.0 million of the increase was attributable to the aerospace/defense
industry, which resulted from an improvement in the Company's ability to
capture opportunities within that industry following the acquisition of Flam &
Russell and strong growth in the industry's domestic commercial sector.
Approximately $900,000 of the increase was attributable to the wireless
communications industry and the remaining $500,000 of the increase was
attributable to the satellite industry.
Cost of revenues. Cost of revenues for the three months ended March 31, 1997
were $3.1 million compared to $1.1 million for the three months ended March
31, 1996, an increase of approximately $2.0 million or 181.8%. Gross margins
rose from 29.0% for the three months ended March 31, 1996 to 36.0% for the
three months ended March 31, 1997, as a result of improved efficiencies in the
proposal, production and delivery stages of providing turnkey systems and the
implementation of the Company's strategy to sell standard systems and
proprietary off-the-shelf products, which generate higher margins. Cost of
revenues and gross margin for the three months ended March 31, 1997 were
negatively impacted by the completion of a $540,000 revenue contract with a
relatively low gross margin which the Company assumed when it acquired Flam &
Russell.
General and administrative expenses. General and administrative expenses for
the three months ended March 31, 1997 were $319,000 compared to $195,000 for
the three months ended March 31, 1996, an increase of approximately $124,000
or 63.6%. As a percentage of revenues, general and administrative expenses
decreased from 12.7% for the three months ended March 31, 1996 to 6.5% for the
three months ended March 31, 1997 due to an increase in revenues without a
corresponding increase in general and administrative expenses.
Sales and marketing expenses. Sales and marketing expenses for the three
months ended March 31, 1997 were $273,000 compared to $112,000 for the three
months ended March 31, 1996, an increase of approximately $161,000 or 143.8%.
As a percentage of revenues, sales and marketing expenses were 5.6% for the
three months ended March 31, 1997, a decrease from 7.3% for the three months
ended March 31, 1996. Approximately $65,000 of this increase represents higher
commissions due to increased sales, approximately $64,000 reflects the
addition of the Flam & Russell sales force and approximately $30,000 is
attributable to market research efforts.
Research and development expenses. Research and development expenses for the
three months ended March 31, 1997 were $220,000 compared to $97,000 for the
three months ended March 31, 1996, an increase of $123,000 or 126.8%. This
increase reflects the additional development relating to the modification of
the Flam & Russell software to support the Company's hardware products and the
development required to support the needs of the Company's test and
measurement systems for the "smart" automobile and wireless communications
industries.
Income taxes. Income tax expense for the three months ended March 31, 1997
was $344,000 compared to $20,000 for the three months ended March 31, 1996, an
increase of $324,000. The Company's effective tax rate decreased from 42.6%
for the three months ended March 31, 1996 to 37.0% for the three months ended
March 31, 1997 as a result of the implementation of new domestic tax
strategies designed to reduce its effective tax rate.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues for 1996 were $10.4 million compared to $8.3 million in
1995, an increase of approximately $2.1 million or 25.3%. Revenues from
microwave test and measurement for 1996 were $10.3 million compared to $8.0
million in 1995, an increase of approximately $2.3 million or 28.9%.
Approximately $1.2 million of the increase was attributable to Flam &
Russell's backlog at the time of the acquisition. The Company's initiation of
sales of microwave test and measurement systems to manufacturers of "smart"
automobiles contributed $600,000 to the growth in revenues, and the balance of
the increase was attributable to
22
<PAGE>
sales in the wireless communications and satellite industries. Commission
revenues from non-microwave test and measurement decreased $205,000 from the
prior year as the Company began to phase out the sale of such systems.
Cost of revenues. Cost of revenues for 1996 were $6.5 million compared to
$5.4 million in 1995, an increase of approximately $1.1 million or 20.4%. As a
percentage of microwave test and measurement revenues, cost of revenues
decreased to 62.8% in 1996 from 68.4% in 1995. This increase in gross margin
reflected improved efficiencies in the proposal, production and delivery
stages of providing turnkey systems and illustrated the Company's shift to the
sale of standard systems and proprietary off-the-shelf products. The increased
gross margin was partially offset by an increase of approximately $1.0 million
in the sale of third-party products used as components in the Company's test
and measurement systems. These third-party products generally have a lower
gross margin than the Company's systems and products.
General and administrative expenses. General and administrative expenses for
1996 were $1.3 million compared to $864,000 in 1995, an increase of
approximately $436,000 or 50.5%. As a percentage of revenues, general and
administrative expenses were 12.6% in 1996 and 10.4% in 1995. Approximately
$196,000 of this increase was the result of the expansion and centralization
of the administrative and finance functions related to the growth of the
Company. Approximately $162,000 of this increase was due to the acquisition of
Flam & Russell in June 1996, which included certain transition costs and
temporary redundancies, and approximately $82,000 of the increase was
attributable to legal and accounting fees.
Sales and marketing expenses. Sales and marketing expenses for 1996 were
$791,000 compared to $994,000 in 1995, a decrease of approximately $203,000 or
20.4%. As a percentage of revenues, sales and marketing expenses were 7.6% in
1996 and 12.0% in 1995. This decrease was the result of the Company's decision
during 1996 to consolidate its sales and marketing operations at the Company's
headquarters in Horsham, Pennsylvania as well as lower commissions negotiated
with some of the Company's independent sales representatives in the Far East,
which aggregated approximately $290,000, and lower expenditures on marketing
and advertising of approximately $28,000. This decrease was partially offset
by an increase in the Company's direct sales force and marketing personnel
resulting from the acquisition of Flam & Russell and a decision to expand the
Company's direct sales force in the United States which together increased
sales and marketing expenses by approximately $115,000.
Research and development expenses. Research and development expenses for
1996 were $581,000 compared to $239,000 in 1995, an increase of $342,000 or
143.1%. The increase reflected the additional research and development
relating to the modification of the Flam & Russell software to support the
Company's hardware products of approximately $35,000, the software development
required to support the needs of the Company's test and measurement systems
for the "smart" automobile and wireless communications industries of
approximately $239,000 and additional funds spent on porting the Company's
software products to Windows 95 of approximately $68,000.
Other income. Other income decreased $35,000 in 1996 from 1995 principally
as a result of higher interest expense in 1996.
Income taxes. Income tax expense for 1996 was $439,000 compared to $301,000
in 1995, an increase of $138,000. The Company's effective tax rate decreased
from 37.9% in 1995 to 34.6% in 1996, as a result of a greater percentage of
the Company's income being generated from its subsidiary in Israel where the
tax rate is lower.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues for 1995 were $8.3 million compared to $7.2 million in
1994, an increase of approximately $1.1 million or 15.3%. Revenues from
microwave test and measurement for 1995 were $8.0 million compared to $7.1
million in 1994, an increase of approximately $900,000 or 12.7%. The Company
experienced increased sales to customers within the wireless communications
industry and to customers in the Far East. These increases were partially
offset by the completion of a $2.5 million project in the satellite industry
23
<PAGE>
in 1994 and a decrease in sales in the aerospace/defense industry in the
United States. Commission revenues from non-microwave test and measurement
increased from $43,000 in 1994 to $342,000 in 1995, an increase of $299,000.
In 1994, commission revenues were negatively impacted by a loss in connection
with a large customer contract.
Cost of revenues. Cost of revenues for 1995 were $5.4 million compared to
$5.3 million in 1994, an increase of approximately $100,000 or 2.0%. As a
percentage of microwave test and measurement revenues, cost of revenues
decreased to 68.4% in 1995 from 73.9% in 1994. The increase in cost of
revenues was due to increased sales volume in 1995 resulting in an increase in
cost of revenues of approximately $600,000 which was substantially offset by a
decrease in cost of revenues of approximately $500,000 due to the Company's
on-going effort to develop and build proprietary off-the-shelf products and
increased sales to customers in the Far East of approximately $1.3 million
where sales typically have higher gross margins to offset higher selling
commissions.
General and administrative expenses. General and administrative expenses for
1995 were $864,000 compared to $989,000 in 1994, a decrease of approximately
$125,000 or 12.6%. As a percentage of revenues, general and administrative
expenses were 10.4% in 1995 and 13.8% in 1994. During the transition to
turnkey systems sales in 1994, management from Alchut provided considerable
direct assistance to the Company. By 1995, the Company was able to perform
most of the design and marketing functions of these systems on its own,
thereby decreasing general and administrative expenses by approximately
$100,000. The decrease in general and administrative expenses during this
period was also attributable to greater efficiencies in managerial and
administrative functions.
Sales and marketing expenses. Sales and marketing expenses for 1995 were
$994,000 compared to $786,000 in 1994, an increase of approximately $208,000
or 26.5%. As a percentage of revenues, sales and marketing expenses increased
to 12.0% in 1995 from 11.0% in 1994. This increase was largely the result of
higher sales in the Far East where sales representatives receive higher
commissions. The Company also had increased its expenditures for training,
seminars and other promotions overseas.
Research and development expenses. Research and development expenses
remained unchanged at $239,000 in 1995 compared to $237,000 in 1994. Research
and development expenditures were attributable to developments in the wireless
communications industry in 1995, compared to developments in the satellite
industry and the development of the Company's turnkey systems in 1994.
Other income. Other income decreased $33,000 in 1995 from 1994 as a result
of miscellaneous income received in 1994.
Income taxes. Income tax expense for 1995 was $301,000 compared to a benefit
of $119,000 in 1994. The benefit in 1994 reflects the low effective tax rate
in Israel resulting from adjustments to the statutory rate allowable under
local law.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly results in dollar amounts
and as a percentage of total revenues for each quarter during 1996 and for the
first quarter of 1997. The information has been prepared on a basis consistent
with the Company's annual consolidated financial statements and, in the
opinion of management, includes all adjustments, consisting only of
adjustments of a normal and recurring nature, which, in the opinion of
management, are necessary for a fair presentation of the information for such
periods. The Company's operating results have varied from quarter to quarter
in the past and may vary significantly in the future depending on factors such
as the size and timing of significant contracts, the mix of third party
products and the Company's proprietary products included in a particular
contract, customers' budgetary constraints, increased competition, the timing
of new product announcements and changes in pricing policies by the Company or
its competitors, market acceptance of new and enhanced versions of the
Company's products, changes in operating expenses and changes in general
economic factors. See "Risk Factors--Potential Fluctuations in Quarterly
Results."
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues.................. $1,533 $1,803 $2,821 $4,247 $4,906
Cost of revenues................ 1,088 1,131 1,697 2,534 3,141
------ ------ ------ ------ ------
Gross profit.................... 445 672 1,124 1,713 1,765
General and administrative ex-
penses ........................ 195 256 412 452 319
Sales and marketing expenses ... 112 188 263 228 273
Research and development ex-
penses ........................ 97 149 155 180 220
------ ------ ------ ------ ------
Operating income................ 41 79 294 853 953
Other income (expense).......... 6 (3) -- -- (23)
------ ------ ------ ------ ------
Income before income taxes...... 47 76 294 853 930
Income tax expense.............. 20 26 101 292 344
------ ------ ------ ------ ------
Net income...................... $ 27 $ 50 $ 193 $ 561 $ 586
====== ====== ====== ====== ======
Net income per common share..... $ 0.01 $ 0.01 $ 0.05 $ 0.14 $ 0.15
====== ====== ====== ====== ======
Weighted average number of com-
mon shares..................... 4,000 4,000 4,000 4,000 4,000
====== ====== ====== ====== ======
<CAPTION>
QUARTER ENDED
---------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 71.0 62.7 60.2 59.7 64.0
------ ------ ------ ------ ------
Gross profit.................... 29.0 37.3 39.8 40.3 36.0
General and administrative ex-
penses......................... 12.7 14.2 14.6 10.6 6.5
Sales and marketing expenses.... 7.3 10.4 9.3 5.4 5.6
Research and development ex-
penses......................... 6.3 8.3 5.5 4.2 4.5
------ ------ ------ ------ ------
Operating income................ 2.7 4.4 10.4 20.1 19.4
Other income (expense).......... 0.4 (0.2) -- -- (0.5)
------ ------ ------ ------ ------
Income before income taxes...... 3.1 4.2 10.4 20.1 18.9
Income tax expense.............. 1.3 1.4 3.6 6.9 7.0
------ ------ ------ ------ ------
Net income...................... 1.8% 2.8% 6.8% 13.2% 11.9%
====== ====== ====== ====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its working capital requirements
through cash flows from its operations. The Company has two working capital
bank lines of credit aggregating $2,150,000, increased in June 1997 from
$1,150,000. At March 31, 1997, no amounts under these lines were outstanding.
These lines of credit are renewable annually in April, bear interest at rates
ranging from 0.5% to 1.5% over the bank's prime rate and are secured by
accounts receivable. Additionally, the $2,000,000 line of credit requires
compliance with the following financial performance covenants: a maximum ratio
of debt to tangible net worth which cannot exceed 2.0 to 1.0, a minimum
current ratio of at least 1.2 to 1.0 and a minimum cash flow ratio of at least
3.0 to 1.0. The Company believes that its cash flows from operations together
with the proceeds of this offering will be sufficient to meet its working
capital needs for at least the next 18 months. At March 31, 1997, the
$2,722,000 due to Alchut represents a three-year, non-interest bearing note
owed by Engineering for the transfer by Alchut of working capital at the end
of 1996.
Net cash provided by (used in) operating activities in 1994, 1995 and 1996
amounted to ($1.8 million), ($290,000) and $1.1 million, respectively. The
increase in cash provided by operating activities in 1996
25
<PAGE>
compared to 1995 and 1994 was principally due to the increase in net income to
$831,000 in 1996 from $493,000 and $84,000 in 1995 and 1994, respectively, the
reduction in inventory levels from $2.6 million in 1994 to $2.5 million in
1995 and $2.2 million in 1996 and changes in accounts payable to Alchut in all
periods.
Net cash used in investing activities increased by $794,000 in 1996 compared
to 1995. This increase was principally due to the purchase of property and
equipment of $349,000 in 1996 versus $129,000 in 1995 and the net cash paid
during 1996 for the purchase of Flam & Russell amounting to $573,000.
Net cash provided by (used in) financing activities in 1994, 1995 and 1996
amounted to $3.0 million, $91,000 and ($648,000), respectively. These changes
were principally due to net repayments on the Company's line of credit
agreements amounting to $150,000 in 1996 and fluctuations in the proceeds from
the note payable to Alchut in 1994 and 1995 in the amounts of $3.0 million and
$91,000, respectively, and a net repayment of $498,000 of the note payable to
Alchut in 1996.
During 1996, the Company spent or incurred an obligation for approximately
$1.0 million for the Flam & Russell acquisition, which was paid in its
entirety during May 1997. During 1997, the Company plans to spend up to a
maximum of $1.6 million on the AEMI acquisition, up to $800,000 of which will
be payable in cash, and to have capital expenditures of approximately
$400,000, a portion of which will be used to establish the Company's European
office.
The Company has exposure to currency fluctuations as a result of billing
some of its contracts in foreign currency. When selling to customers in
countries with less stable currencies, the Company bills in U.S. dollars. For
the three months ended March 31, 1997, approximately 3% of the Company's
revenues was billed in currencies other than U.S. dollars. Substantially all
of the costs of the Company's contracts, including costs subcontracted to
Alchut, have been, and will continue to be, U.S. dollar-denominated except for
wages for Engineering employees which are denominated in local currency. The
Company intends to continue to enter into U.S. dollar-denominated contracts.
INFLATION AND SEASONALITY
The Company does not believe that inflation or seasonality has had a
significant effect on the Company's operations to date.
26
<PAGE>
BUSINESS
INTRODUCTION
The Company develops, markets and supports sophisticated automated microwave
test and measurement systems for the wireless communications, satellite,
automotive and aerospace/defense industries. Products such as cellular phones,
satellites, radio transmitters, global positioning system ("GPS") receivers
and guided missiles depend on the reliable and efficient transmission and
reception of microwave signals in order to communicate. By utilizing the
Company's systems to measure the critical performance characteristics of
microwave signals, wireless manufacturers and service providers within these
industries can improve quality and time-to-market, lower the risk of failure
and underperformance and reduce costs.
Since its founding, the Company has expanded from distributing individual
microwave test and measurement components to providing a wide range of fully
integrated microwave test and measurement solutions. Components of an ORBIT/FR
automated microwave test and measurement system include proprietary software
and hardware products, which can be combined into standard or customized
configurations to meet a customer's specific needs. The Company believes that
its innovative proprietary systems, experienced staff, reputation for quality
and reliability, strong international presence and comprehensive customer
service give it a competitive advantage that will enable it to remain a
leading global supplier of microwave test and measurement systems to a growing
number of companies within the wireless communications, satellite, automotive
and aerospace/defense industries.
The Company markets and sells its systems to customers in the United States
and throughout the world. Within the Company's targeted industries, the
Company's customers since January 1, 1994 have included manufacturers of
wireless systems and products, such as Motorola, Nokia and Ericsson;
manufacturers of systems and products that incorporate microwave technology,
such as Lockheed Martin, Hughes Aircraft, BMW and Boeing; and
telecommunications service providers that rely on microwave technology, such
as AT&T, NTT and Korea Mobile Telecom. The Company's customers also include
the United States government and several foreign governments. In 1996, none of
the Company's customers accounted for more than 5% of the Company's total
revenues. At March 31, 1997, the Company's backlog was approximately $8.5
million, compared to approximately $3.6 million at March 31, 1996.
The Company's objective is to strengthen its leadership position in
automated microwave test and measurement systems while developing products and
systems for a broader range of microwave applications. The principal elements
of the Company's strategy to reach its objective are: (i) offering
comprehensive solutions to customers, (ii) maintaining its technological
leadership, (iii) focusing on standard systems and proprietary off-the-shelf
products, (iv) pursuing growth in international markets and (v) leveraging its
technological expertise to expand into complementary markets.
INDUSTRY OVERVIEW
The need for microwave test and measurement systems and products expanded
rapidly during the 1960's and 1970's in conjunction with the growth and
increased sophistication of the aerospace/defense industry in the United
States and Western Europe. In the last 20 years, this need for test and
measurement products and systems has expanded beyond aerospace/defense
applications to all aspects of modern telecommunications, including personal
wireless communications devices, satellite-based communications systems and
"smart" automobiles. This expansion has occurred in conjunction with a growing
desire among companies to focus on their core competencies and accordingly
outsource many non-core functions such as the development and manufacture of
microwave test and measurement systems.
Within the wireless communications, satellite, automotive and
aerospace/defense industries, test and measurement products and systems are
used during all stages of a product's life cycle: product development, pre-
production qualification, production testing and product maintenance. Given
the broad scope of testing
27
<PAGE>
procedures, it is not uncommon for a manufacturer or service provider to own
and operate more than one microwave test and measurement system.
WIRELESS COMMUNICATIONS. The wireless communications industry has grown
rapidly in recent years as a result of the development of cost-effective
digital technologies and the gradual global deregulation of the
telecommunications industry. Wireless communications products include
cellular/PCS handsets, pagers, field service/delivery equipment and
cellular/PCS base stations. Rapid growth within the wireless communications
industry is expected to continue in the future due to an increase in available
spectrum, the adoption of efficient new digital technologies and the
development of "smart" antennas. According to the Cellular Telecommunications
Industry Association ("CTIA"), there were over 44 million wireless subscribers
in the United States alone as of December 31, 1996, up 30.4% over 1995. The
CTIA also reports that wireless companies invested $8.4 billion in capital
improvements in 1996, up 65.2% over 1995, and that during 1996, 7,382 new cell
sites were deployed, 55.6% more than were deployed in 1995. The Company
believes that wireless communications growth in international markets has been
greater than growth experienced in the United States.
Growing worldwide demand for wireless communications products and services
has generated a need among wireless manufacturers and service providers for
systems and products that address their specific microwave test and
measurement needs. These companies operate in highly-competitive, rapidly
changing markets in which the performance and reliability of their systems and
products are essential to achieve and maintain competitive advantages. The
accurate transmission and reception of microwave signals are fundamental to
the performance of wireless systems and products. To ensure the successful
transfer of voice or data from one point to another and to minimize poor
reception, cross talk and dropped calls, manufacturers and service providers
conduct extensive testing for signal quality, direction, strength and
interference.
SATELLITE. Satellite-related markets have grown rapidly over the past
several years, driven by the emergence of advanced communication technologies
offering cost-effective global voice, video and data transmission, GPS,
internet access and tracking capabilities. Satellites provide several
advantages over terrestrial communications networks, including rapid
installation and deployment, no incremental cost as distances increase and
higher rates of data transmission. According to Euroconsult, a market research
firm, between 486 and 555 communications satellites are expected to be
manufactured between July 1996 and December 2006.
To ensure that satellite-based communications systems are effective and
reliable, it is essential that both satellites and "earth stations" transmit
and receive microwave signals accurately. The accuracy requirements for these
satellite systems are critical -- failure to detect a design error could
result in a satellite's "footprint" not covering its intended geographic area.
Satellite manufacturers cannot afford to make this kind of error since the
cost to manufacture, launch and insure a satellite can reach $200 million.
Accordingly, sophisticated microwave test and measurement systems are critical
to satellite and earth station manufacturers, as well as their subcontractors
and sub-assembly manufacturers, to ensure that their products work properly.
AUTOMOTIVE. The world's major manufacturers of automobiles and automotive
sub-assemblies, driven by competitive pressures, are designing new generations
of "smart" cars and trucks that incorporate the latest communications and
safety devices including cellular/PCS, GPS-based direction-finding, data
transfer, digital TV and collision-avoidance systems. Each of these features
requires a specialized, highly-accurate microwave transmission and reception
system. To ensure the performance of these various systems and to assess how
they are impacted by the electromagnetic properties of the car itself,
automotive manufacturers must test the car and these devices as a unit using a
microwave test and measurement system designed for automotive applications.
AEROSPACE/DEFENSE. The need within the aerospace/defense community for
accurate and secure communications and tracking systems led to the emergence
of microwave test and measurement companies in the 1960's. Despite cutbacks in
United States defense budgets in the late 1980's and early 1990's, microwave
test and measurement needs within the aerospace/defense industry are expected
to grow steadily for the
28
<PAGE>
foreseeable future as a result of system upgrades on existing military
platforms, substantial new investments in non-U.S. military programs and the
expansion of civil aviation worldwide.
The industry's tracking requirements, such as air traffic control and
missile guidance, led to the development of Radar Cross Section ("RCS") and
the test and measurement of radomes. RCS involves the transmission of
microwave signals towards a passive target, such as an aircraft or missile,
and then the creation of an "image" of the target by measuring the energy
reflected back towards the transmit source. Radome testing evaluates the
impact of a radome (the dome-shaped casing that is placed on the leading edge
of an aircraft or missile to protect the radar and direction-finding
equipment) on the microwave signals that pass through it.
THE ORBIT/FR SOLUTION
ORBIT/FR provides its customers with flexible and reliable solutions for
their complex microwave test and measurement needs. The Company focuses its
efforts and resources on developing state-of-the-art microwave test and
measurement systems and products that incorporate specialized technologies and
expertise. The Company's customers have a need for microwave test and
measurement systems and products but often do not have the in-house
capabilities to develop, or the desire to develop, such systems and products
themselves. ORBIT/FR's systems and products provide customers with cost-
effective and user-friendly solutions to their microwave test and measurement
needs, thus allowing them to remain focused on their core competencies. The
Company's systems and products incorporate technological expertise developed
and acquired by the Company over many years.
The Company offers a wide range of standard and custom microwave test and
measurement solutions for cellular/PCS handset testing, cellular base station
testing, satellite testing, automotive testing and specialized
aerospace/defense-related testing. The Company's products include test and
measurement software, microwave receivers, positioner subsystems, as well as
other microwave products, all of which are typically incorporated into the
Company's systems. The Company's proprietary software supports the Company's
own test and measurement products as well as those manufactured by third
parties. The Company's engineers and other technical staff use their broad
expertise to assess and understand their customers' specific microwave test
and measurement needs, process orders quickly, keep delivery time to a
minimum, provide comprehensive customer support and release new software on a
regular basis.
The Company believes that its innovative proprietary systems, experienced
staff, reputation for quality and reliability, strong international presence
and comprehensive customer service give it a competitive advantage that will
enable it to remain a leading global supplier of microwave test and
measurement systems to a growing number of companies within the wireless
communications, satellite, automotive and aerospace/defense industries.
THE ORBIT/FR STRATEGY
The Company's objective is to strengthen its leadership position in
automated microwave test and measurement systems while developing products and
systems for a broader range of microwave applications. The principal elements
of the Company's strategy to reach its objective are:
OFFERING COMPREHENSIVE SOLUTIONS TO CUSTOMERS. As the need for microwave
test and measurement grows, new and existing customers increasingly desire to
purchase comprehensive, turnkey test and measurement systems from a single
provider. A turnkey system is one that has been assembled, integrated and
tested as a fully-operational system prior to a customer's use. The Company
addresses this desire by providing engineering and project management
services, by offering an increasingly broad product line and by maintaining
close relationships with outside component suppliers. Additionally, the
Company intends to acquire companies with complementary products and services
that can be integrated with the Company's existing or proposed products and
systems. For example, the Company expanded its product line with the
acquisition of Flam & Russell and will further expand its product line with
the acquisition of AEMI. By acquiring suppliers of key components of
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microwave test and measurement systems that the Company does not already
provide, the Company believes that it will be able to increase its overall
gross margin.
MAINTAINING TECHNOLOGICAL LEADERSHIP. The Company believes that it has
sophisticated and diversified technological capabilities and intends to
maintain its technological leadership by continuously designing and developing
new software releases and hardware upgrades which offer greater performance
and higher precision.
FOCUSING ON STANDARD SYSTEMS AND PROPRIETARY OFF-THE-SHELF PRODUCTS. Given
the diversified needs of the Company's customers, no two microwave test and
measurement systems will be identical. However, the Company seeks to keep the
costs of customization to a minimum by designing and delivering specific types
of systems that maximize the use of the Company's proprietary off-the-shelf
products. This approach enables the Company to optimize its margins while
offering its customers tailor-made solutions built around proven high-quality
and reliable products.
PURSUING GROWTH IN INTERNATIONAL MARKETS. Approximately 52% of the Company's
revenues during 1996 were derived from international customers. The Company
believes that the growth of the international microwave test and measurement
marketplace over the next several years will be due in large part to worldwide
economic development, governmental policies aimed at improving the
communications infrastructure in developing countries and the increasing
globalization of commerce. The Company is devoting significant efforts to
increasing its share of the international market for microwave test and
measurement systems by strengthening and expanding its sales network through
the establishment of foreign sales and customer service centers and the
appointment of additional international sales representatives. In addition,
the Company believes it has a competitive advantage due to the duty-free
status of its products manufactured in Israel and sold into the European
Union. Approximately 92% of the Company's revenues in 1996 were denominated in
U.S. dollars, and the Company intends to continue to enter into U.S. dollar-
denominated contracts.
LEVERAGING TECHNOLOGICAL EXPERTISE TO EXPAND INTO COMPLEMENTARY MARKETS. The
Company intends to leverage its technological expertise in microwave test and
measurement systems to expand into complementary markets that the Company
believes offer high growth potential and where the Company's technology
provides competitive advantages. The Company has targeted Electromagnetic
Compatibility ("EMC") testing systems, Microwave Non-Destructive Testing
("NDT") systems and certain non-test and measurement microwave products as
potential future markets.
EMC Testing. EMC testing addresses the unintentional interaction between
electronic products due to their electromagnetic radiation. Since this
radiation may adversely affect the operation of electronic equipment, FCC
guidelines in the United States, EMC and Low-Voltage directives in the
European Union and EMC guidelines in most other foreign countries regulate the
level of electromagnetic radiation emitted from these products and require
manufacturers of electronic products to perform EMC testing. The EMC testing
industry has grown rapidly over the past few years as a result of the
proliferation of electronic devices and the resultant transition from
voluntary regulatory "guidelines" to mandatory "directives." In 1996, the
market for EMC-related products and services was estimated at $1.3 billion in
Western Europe alone and is expected to grow by 20-30% annually for the
foreseeable future. The Company has identified certain test and measurement
needs within the overall EMC marketplace that require capabilities similar to
those which the Company has developed in the microwave test and measurement
field. The Company believes that its large customer base among electronic
equipment manufacturers would give it a significant advantage if it determined
to enter the EMC marketplace.
Microwave Non-Destructive Testing. The field of NDT addresses the problem of
assessing the structural integrity of a product without having to damage or
destroy it. Current NDT methods employ ultrasonic and x-ray technologies which
have performance limitations and cannot be used under certain circumstances.
The Company believes that many of the techniques it has developed for
microwave test and measurement can be adapted to fill needs within the NDT
market.
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Other Microwave Products. The Company believes that opportunities exist to
apply the Company's core technologies to the design, manufacture and marketing
of products that incorporate microwave technology. The Company intends to
continue marketing its radial power combiners, amplifiers, antennas and
mixers, and plans to develop and sell additional microwave-based products in
the future. The Company believes its large customer base will give it a
competitive advantage in marketing these products.
SYSTEMS AND PRODUCTS
Since its founding, the Company has expanded from distributing individual
microwave test and measurement components to providing a wide range of
microwave test and measurement solutions. Components of an ORBIT/FR automated
microwave test and measurement system include proprietary software and
hardware products which can be combined into standard or customized
configurations to meet customers' specific needs. One of the Company's
principal strengths is its experienced design team that solves complex
technical and practical problems. A typical automated microwave test and
measurement system is illustrated below:
[A PICTURE APPEARS HERE OF AN AUTOMATED MICROWAVE TEST AND MEASUREMENT SYSTEM,
WHICH INCLUDES A PERSONAL COMPUTER, A MICROWAVE RECEIVER, A SIGNAL SOURCE, A
POWER CONTROL UNIT, A PROBE AND A DEVICE UNDER TEST.]
MICROWAVE TEST AND MEASUREMENT SYSTEMS. The Company designs, manufactures
and markets automated microwave test and measurement systems. In addition to
providing most of these systems' component parts, the Company also integrates
the systems and trains its customers in use of the systems. While most
customers purchase fully integrated turnkey microwave test and measurement
systems, the Company also sells its hardware and software products
individually as replacement parts or components of custom-designed systems.
The Company offers seven types of microwave test and measurement systems. The
first, antenna measurement systems, are generic systems that can be adapted
for many uses, and the other types are designed and sold in
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response to well-defined microwave test and measurement needs within specific
industries. Prices for a typical ORBIT/FR system range from $50,000 to
$500,000, but large systems have sold for as much as $2.5 million.
Antenna Measurement Systems. All products and systems that receive or
transmit microwave signals rely on antennas. Accordingly, items such as
microwave radios, GPS receivers, field service/delivery equipment, satellite
earth stations and guided missiles need to have their antennas tested to
ensure satisfactory performance characteristics. The Company's antenna
measurement systems offer both manufacturers and service providers user-
friendly and cost-effective solutions for their antenna measurement needs. The
systems test for signal quality, direction, strength and interference and can
be adapted to perform testing in each of the stages of a product's life:
development, qualification, production and maintenance. While antenna
measurement systems differ significantly from one application to another, all
of the Company's systems incorporate a personal computer running specialized
proprietary software, a microwave receiver, a positioning subsystem, and at
least one additional antenna or probe. The systems can be designed for use in
a wide variety of different test environments, ranging from a small anechoic
chamber to an outdoor range covering several acres. The Company offers three
types of antenna measurement methods:
. Far-field:Traditional method generally used outdoors
. Near-field:Cost-effective indoor method using mathematical conversion
tools
. Compact Range:High-end indoor method using a microwave reflector
The Company also has developed advanced systems that combine these
measurement methods, such as far-field and near-field, in a single chamber.
Cellular/PCS/Pager Systems. ORBIT/FR believes it is a leader in the design
and delivery of high-performance test and measurement systems for
manufacturers of cellular/PCS handsets and pagers. The Company has developed a
standard system based on its spherical near-field technology that the Company
sells as a turnkey off-the-shelf product. The system consists of the Company's
software, receiver and positioning subsystem built into a small anechoic
chamber together with a mannequin. The positioning subsystem allows a probe to
trace a sphere around the handset or pager held by the mannequin, thus fully
sampling the complete microwave properties of the device under test.
Cellular/PCS Base Station Systems. The Company develops and sells test and
measurement systems used to assess the microwave performance characteristics
of cellular/PCS base stations. These systems enable cellular/PCS base station
antenna manufacturers to design and build efficient and reliable products, and
they allow wireless communications service providers to monitor more
efficiently the performance of their base stations. The existing system design
is based on the Company's cylindrical near-field technology and is designed
for indoor use. Additionally, the Company is investigating the use of an
outdoor mobile testing system for cellular/PCS base stations.
Satellite Systems. The Company develops and sells microwave test and
measurement systems for satellites which test many aspects of satellite
performance including beam location (to assess the satellite's "footprint"),
channel purity and intermodulation, gain, G/T, pattern, EIRP and TMA/TDMA
microwave timing. These systems also test the transmit and receive
characteristics of the active array antennas used on most modern satellites
and can have the ability to identify and diagnose malfunctions within these
complex antennas. The Company's satellite systems utilize either near-field or
compact range technology. Both technologies are equally effective from a test
and measurement viewpoint, but each offers certain benefits. A near-field
system offers diagnostic capabilities and is generally less expensive than a
comparably equipped compact range system, but a compact range system is faster
and easier to use.
Automotive Systems. ORBIT/FR believes it is a leader in the design and
delivery of high-performance test and measurement systems for automobile
manufacturers and manufacturers of automotive sub-assemblies. The Company's
systems incorporate both near-field and far-field technologies and are thus
capable of microwave sampling over a wide range of frequencies. A typical
system includes a large mechanical arm that sweeps over a large turntable. The
car being tested rests on the turntable, and both the turntable and the
mechanical arm are set in motion based upon instructions received from the
Company's measurement software. The systems' broad capabilities are essential
given a growing trend by automobile manufacturers to integrate advanced
microwave
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technologies such as cellular/PCS, GPS-based direction-finding, data transfer,
digital TV and collision-avoidance systems into their "smart" cars.
RCS Systems. The Company's Radar Cross Section ("RCS") measurement systems
transmit microwave signals towards a passive target and then measure the
energy reflected back towards the transmit source. In an RCS system, the
passive target is typically a model or full scale aircraft or missile that is
mounted on a special "low-RCS" testing pylon capable of rotating the target.
Data collected at various rotation angles and frequencies can be processed to
form an electromagnetic "image" of the target. This type of information
enables the design engineer to assess more accurately the detailed radar
signature of the target. The Company believes that it is a market leader in
this field.
Radome Systems. A radome is a dome-shaped casing that is placed on the
leading edge of an aircraft or missile to protect the radar and direction-
finding equipment. A radome is typically manufactured using fiberglass or
other materials that are designed to be "transparent" to microwave signals.
Testing is performed periodically to ensure that microwave signals are not
degraded or deflected as they pass through the radome. The Company's systems
are designed to measure radome performance by analyzing the path of microwave
signals as they pass through the radome and then comparing it to the
propagation path when the radome is not present. Radome systems use far-field
measurement methods but rely on high positioning accuracy normally required by
near-field systems.
Custom Systems. From time to time, the Company designs and manufactures
custom microwave test and measurement systems for a wide variety of uses and
applications. To date, most of these systems have been built for the United
States government. The Company's broad microwave and antenna expertise has
enabled it to obtain these contracts, and the Company intends to bid for
similar jobs in the future if the expertise gained in designing such systems
is deemed to be of strategic value to the Company.
MICROWAVE TEST AND MEASUREMENT SOFTWARE PRODUCTS. ORBIT/FR offers automatic
measurement software for microwave test and measurement systems. The Company's
software products are Windows-based programs that provide the customer with a
consistent user-friendly interface with the test and measurement system. The
software products have a robust and modular structure that enables the Company
to easily add features for current and future customers. The software uses
far-field and/or near-field algorithms to generate accurate results, and the
computational methodologies used have gained acceptance throughout the
microwave test and measurement community. The software supports the Company's
own measurement equipment as well as equipment manufactured by third parties.
The Company's software products are designed to be "off-the-shelf" but are
versatile and can be customized by the Company's or the customer's technical
personnel to suit specific needs. The Company has delivered over 300 software
installations worldwide in the price range of $20,000-50,000 each. The Company
believes that its software products are the industry standard.
While software can vary between systems, it always consists of three primary
modules: data acquisition, data analysis and report writing. The software's
data acquisition module records actual measurements as it controls the
microwave measurement equipment, the positioning subsystem, and often the
source antenna and/or the antenna being measured. Variables such as frequency,
power level, amplitude, phase, rotary and/or linear motion, polarization,
transmit/receive switching, electrical beam pointing and polarization
switching are all controlled by the Company's measurement software. The
multidimensional results obtained are stored in a computer file for subsequent
analysis. The software's data analysis module processes the acquired data
using sophisticated microwave and signal processing algorithms developed by
the Company and the National Institute of Standards and Technology ("NIST").
The data analysis module transforms the acquired data into easily-understood
numerical information and graphic representations, thus providing the customer
with the data required to satisfy its internal requirements and those of its
own customers. The software's report writing module can be customized to meet
each customer's needs.
MICROWAVE RECEIVERS. The microwave receiver is the device in the automated
microwave test and measurement system that measures the microwave signals
received from the antenna or device under test or,
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alternatively, from the antenna collecting the backscatter from an RCS target.
The Company's microwave receivers convert and digitize the signals to put them
into a computer compatible format. They are capable of simultaneously
measuring up to four channels ranging in frequency from 50 MHz to 110 GHz. The
Company believes that its microwave receivers have a high degree of accuracy
and are easy to use. As part of its "Channel Partner" relationship with
Hewlett Packard, the Company uses HP as its preferred source for microwave
receivers incorporated into the Company's test and measurement systems. While
this arrangement with HP has led to a decrease in sales of the Company's own
receivers, the Company believes that the benefits of its relationship with HP,
such as increased visibility, market access and product performance,
substantially outweigh the costs.
POSITIONER SUBSYSTEMS. The positioner subsystem is the collection of
equipment that holds the device under test and causes it to be moved according
to the needs of the test. A typical positioner subsystem may include the
following components:
Positioners. A positioner is the item upon which the device under test is
placed while it is being tested. The Company's positioners are rugged, yet
highly precise, devices that adjust themselves in accordance with the
positioning instructions received from the measurement software. Special
circuitry and mechanical design features built into the positioner enable the
data acquired from the antenna under test to travel efficiently through the
positioner to the computer to be analyzed. The Company's simple positioners
rotate around a single axis, while the Company's more elaborate positioners
incorporate up to three axes. An automated microwave test and measurement
system requires one or more positioners. The Company offers over 200 different
positioner models and believes that its positioners are among the most
accurate in the market.
Positioner Controllers and Power Control Units. The Company manufactures
positioner controllers and power control units ("PCUs") as well as models that
combine these two products into one box. Working together, the positioner
controller and the PCU act as the "translators" between the microwave software
and the positioner. The positioner controller receives digital instructions
from the microwave software and translates them into analog signals understood
by the PCU. These analog signals are then amplified by the PCU to provide
precisely calibrated DC power to the positioner's electric motors, which then
operate at a user-defined speed to move the antenna or device under test
through the desired positions. The Company offers four positioner controller
models, two PCU models and four models that combine both positioner controller
and PCU.
Planar Scanners. A planar scanner is a rectangular device that enables a
probe antenna to be moved along an x- and y-axis so that its position at any
time is known and can be exactly replicated. Planar scanners are typically
mounted vertically to enable the probe to be moved throughout the height and
width dimensions of the scanner. Scanners enable test engineers to accurately
and reliably analyze many aspects of the microwave signals radiating from the
antenna or device under test. The Company offers 24 standard scanners ranging
in size from 3' x 3' to 25' x 80'.
Pylons and Model Towers. Pylons and model towers are used in many microwave
test and measurement applications and range in size from very large to very
small. Large pylons can carry substantial loads in indoor or outdoor
environments, and certain models can even support a full-sized aircraft.
Pylons are almost always used in RCS systems.
OTHER MICROWAVE PRODUCTS. The Company has developed several microwave
products used in the larger microwave industry.
Radial Power Combiners. The Company's radial power combiners offer a highly-
efficient electromagnetic mechanism to combine several identical low-energy
signals together to make a single high-energy signal. Radial power combiners
have many uses, but their most common application is in high-power microwave
transmitters.
Microwave absorber. Following the acquisition of AEMI contemporaneously with
this offering, the Company will add microwave absorber material to its product
line. This material consists of specially-treated
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polyurethane foam which absorbs electromagnetic waves and is an important
component of most microwave test and measurement systems.
Antennas, Probes and Other Microwave Accessories. The Company designs and
manufactures antennas, probes and other microwave accessories. These products
are used in the Company's microwave test and measurement systems, and they are
also sold to customers as stand-alone items.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets and sells its products in the United States through
three regional sales managers and through two independent sales
representatives that target specific geographic and strategic markets.
Internationally, the Company has established sales and customer service
centers in Israel and Germany and has distributors and representatives for
sales, marketing and customer support in Austria, China, Denmark, France,
Germany, India, Italy, Japan, Singapore, South Korea, Spain, Sweden,
Switzerland, Taiwan and the United Kingdom.
The Company's engineers and other technical staff support the efforts of the
sales force. Since a customer's engineers typically play an important role in
the procurement decision, the Company's engineers work closely with them to
help them understand the advantages of the Company's products and systems.
Additional business from existing customers is pursued through the joint
efforts of both the sales force and the engineers and other technical staff
who have worked closely with the customer's engineers and who understand the
customer's needs. If a customer has already purchased a microwave test and
measurement system from ORBIT/FR, the Company believes it has an advantage
over competitors in obtaining orders for system upgrades as well as any
additional systems that the customer may wish to purchase at a later date.
Typically, a substantial portion of the Company's revenues in a given year is
generated by customers for whom the Company has previously provided products
or systems.
The Company generates sales leads for new customers through referrals from
existing customers and other industry suppliers, its reputation in the
industry, advertising in trade publications and on the World Wide Web and
participation in conferences and trade shows. In addition, the Company is in
the process of establishing marketing alliances with two major manufacturers
of products and systems that incorporate microwave technology, pursuant to
which the Company will provide test and measurement system upgrades and
support free of charge in return for referral business. As a Hewlett Packard
"Channel Partner," the Company receives referrals and recommendations from
HP's worldwide sales force, and the Company believes that it thereby obtains
greater visibility in the microwave test and measurement market.
The Company devotes significant resources to provide comprehensive customer
support. Customer support is provided under warranty for the first year on all
products sold by ORBIT/FR. Beyond the first year, customer support on products
sold by ORBIT/FR is provided on an as-needed basis. The Company also provides
a technical support line and, for an additional fee, on-site and in-house
training for all of its products and systems. The Company encourages its
employees to be customer service-oriented because it relies to a large degree
on its reputation to attract and retain customers. Furthermore, the Company
believes that its comprehensive customer support program gives it a
competitive advantage in the microwave test and measurement market.
CUSTOMERS
The Company has over 1,000 installations with customers in the wireless
communications, satellite, automotive and aerospace/defense industries. In
1994, Raytheon, and in 1995, Matra Marconi, each accounted for more than 10%
of the Company's total revenues; however, the Company believes the loss of
either customer would not have a material adverse effect on the Company's
revenues. In 1996, none of the Company's customers accounted for more than 5%
of the Company's total revenues. Representative customers that have purchased
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systems from the Company and its predecessor, either directly or through its
sales representatives and distributors, in an amount of at least $25,000 since
January 1, 1994, include:
Wireless Communications.... Andrew, AT&T, Bosch Telecom, Celwave, Ericsson,
GTE, Korea Mobile Telecom, Lucent Technologies,
Motorola, NEC, Nokia, Northern Telecom, NTT,
Qualcomm, Siemens Plessey, Sierra Com, Telebras
and Toshiba.
Satellite.................. Canadian Space Agency, DASA, Harris, Hughes Space
and Communications, Lockheed Martin, Space
Systems/Loral, Matra Marconi, Raytheon and TRW.
Automotive................. BMW, FUBA, Honda, SAAB and Samsung.
Aerospace/Defense.......... Ball, Boeing, British Aerospace, General
Electric, Hughes Aircraft, Israel Aircraft
Industry, ITT Avionics, Lockheed Martin/Loral,
McDonnell Douglas, Mitsubishi Heavy Industries,
NASA, Northrop-Grumman, Pratt & Whitney, Raytheon
E-Systems, Rockwell International, SAAB Military
Aircraft, SPAR Aerospace, Texas Instruments,
Tracor/AEL and the United States Air Force, Army
and Navy.
The Company's customers are located in the Americas (the United States,
Canada, Brazil and Argentina), Europe (the United Kingdom, France, Germany,
Italy, Holland, Spain, Austria, Denmark, Poland, Finland, Norway, Sweden,
Switzerland and Portugal) and throughout the rest of the world (Japan, Korea,
China, Thailand, Taiwan, Singapore, Indonesia, Israel, Australia and South
Africa).
PRODUCTION AND SUPPLIERS
The Company's engineers, based in both Horsham, Pennsylvania and Israel, are
responsible for product design and development and for overseeing the
production of the Company's products. While the Company maintains a production
facility in Horsham, most of the production of the Company's products is
performed by subcontractors. Alchut is currently the Company's principal
subcontractor for electro-mechanical production, primarily in connection with
the manufacturing of positioners. The Company believes that Alchut currently
offers the best available combination of quality, reliability and price. After
the expiration of its one-year service contract with Alchut, the Company has
the right to select any other subcontractor. See "Certain Transactions."
While the Company produces most of the component parts for its microwave
test and measurement systems, it purchases certain components from outside
vendors for turnkey microwave test and measurement systems, including personal
computers, shielded enclosures and microwave absorbers. The acquisition of
AEMI will enable the Company to add microwave absorbers to its product line,
and part of the Company's strategy is to seek future acquisitions that will
further reduce its dependence on outside suppliers.
AEMI ACQUISITION
On March 31, 1997, the Company entered into an agreement with Advanced
Electromagnetics, Inc., a California corporation ("AEMI"), and its
stockholders, pursuant to which all of the issued and outstanding shares of
AEMI will be sold to the Company, contemporaneously with the completion of
this offering, for up to a maximum of $1.6 million, subject to adjustment
based on AEMI's financial performance for the three years ended March 31,
1997. One-half of the purchase price will be paid in cash and the other half
will be paid by the issuance of shares of the Company's Common Stock valued at
the Offering Price. Founded in 1980 and based in San Diego, California, AEMI
manufactures anechoic foam, a microwave absorbing material that is used to
line indoor test chambers and that is an integral component of microwave test
and measurement systems. As of March 31, 1997, AEMI had a total of 30
employees.
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Revenues of AEMI for the year ended December 31, 1996 were $3.2 million.
Cost of revenues and gross profit were $2.1 million, or 65.6% of total
revenues, and $1.1 million, or 34.4% of total revenues, respectively, for the
same period. AEMI's total operating expenses for the year ended December 31,
1996 were $502,000 or 15.7% of total revenues. AEMI's general and
administrative and sales and marketing expenses comprised 79.2% and 20.8%,
respectively, of total operating expenses for the year ended December 31,
1996. AEMI's net income for the year ended December 31, 1996 was $481,000,
which represented 15.0% of AEMI's total revenues for the year.
Revenues for AEMI for the three months ended March 31, 1997 were $933,000.
Cost of revenues and gross profit were $515,000, or 55.2% of total revenues,
and $418,000, or 44.8% of total revenues, respectively, for the three months
ended March 31, 1997. Total expenses for the three months ended March 31, 1997
were $192,000, or 20.6% of total revenues, while general and administrative
and sales and marketing expenses comprised 52.0% and 48.0%, respectively, of
total operating expenses for the quarter. Net income for the three months
ended March 31, 1997 was $183,000 or 19.9% of AEMI's total revenues for the
quarter.
The Company believes that the acquisition of AEMI will enhance its ability
to provide comprehensive test and measurement solutions to its customers.
BACKLOG
At March 31, 1996 and 1997, the Company's backlog was approximately $3.6
million and $8.5 million, respectively. The Company includes in backlog only
those orders for which it has received and accepted a completed purchase
order. Such orders are generally subject to cancellation by the customer with
payment of a specified charge. The delivery lead time on the Company's
products and systems averages approximately five months, but can be as short
as a few days and as long as 12 months. Because of the possibility of customer
changes in delivery schedules, cancellation of orders and potential shipment
delays, the Company's backlog as of any particular date may not be
representative of actual sales for any succeeding period.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to adapt
to rapidly changing technological circumstances within the industries it
serves and to continue to meet the needs of its customers. Accordingly, the
timely development and introduction of new products is essential to maintain
the Company's competitive position. The Company develops all of its products
in-house and currently has a research and development staff which includes 14
engineers. A significant portion of the Company's research and development
efforts has been conducted in direct response to the specific requirements of
customers' orders, and, accordingly, such amounts are included in the cost of
sales when incurred and the related funding is included in net revenues at
such time. Revenues for customer-funded research and development during 1994,
1995 and 1996 were approximately $472,000, $482,000 and $520,000,
respectively, and approximately $110,000 and $127,000, respectively, for the
three months ended March 31, 1996 and 1997. In addition, the Company invested
$237,000, $239,000 and $581,000 during 1994, 1995 and 1996, respectively, and
approximately $97,000 and $219,000 for the three months ended March 31, 1996
and 1997, respectively, on independent research and development, which is not
directly funded by a third party. Customer-funded research and development
contains a profit component and is therefore not directly comparable to
independent research and development.
The Company continues to benefit from research and development grants from
the Israeli government through the Chief Scientist program, from the United
States government through the SBIR program and through BIRD, a joint United
States/Israeli government program. While the Company has already received
significant benefits from these programs throughout the initial development
stages of its core technology base, the Company believes that its business,
operating results and financial condition would not be materially adversely
affected if the Company were to lose its ability to obtain research and
development funding through these programs in the future. The Company plans to
leverage this technology base to develop additional products for commercial
applications.
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COMPETITION
The Company believes that its current systems and products compete
effectively with the systems and products offered by its competitors on the
basis of product functionality, speed and accuracy, reliability, price, ease
of use and technical support. The market for automated microwave test and
measurement products, systems and services, however, is highly competitive and
is characterized by continuing advances in products and technologies. In
general, competition in this market comes from major microwave test and
measurement vendors, some of which have a longer operating history,
significantly greater financial, technical and marketing resources, greater
name recognition and a larger installed customer base than the Company. These
companies also have established relationships with current and potential
customers of the Company. The Company also competes, on a limited basis, with
the internal development groups of its existing and potential customers, many
of whom design and develop parts of their own microwave test and measurement
systems. The Company's business, operating results and financial condition
could be materially adversely affected by such competition. The Company's
primary competitors in the microwave test and measurement market are
Scientific Atlanta, Nearfield Systems, Aeroflex, System Planning Corporation
and Rantec/ESCO.
PROPRIETARY RIGHTS
The Company is heavily dependent on its proprietary technology. The Company
relies on a combination of confidentiality agreements with its employees,
license agreements, copyrights, trademarks and trade secret laws to establish
and protect rights to its proprietary technology. The Company does not hold
any material patents. All of the Company's software is shipped with a security
lock which limits software access to authorized users. Generally, the Company
does not license or release its source code. Effective copyright and trade
secret protection of the Company's proprietary technology may be unavailable
or limited in certain foreign countries.
EMPLOYEES
As of March 31, 1997, the Company had a total of 67 employees, including 22
in software and research and development, 16 in engineering and program
management, 12 in sales, marketing and customer support services, eight in
production and nine in administration. Fifty-two employees are located at the
Company's headquarters in Horsham, Pennsylvania, 14 are located in Israel and
one is located in Germany. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company experienced any work
stoppage. The Company considers its relations with its employees to be good.
LITIGATION
The Company is not a party to any litigation and is not aware of any
threatened litigation, unasserted claims or assessments that could have a
material adverse effect on the Company's business, operating results or
financial condition.
FACILITIES
The Company occupies approximately 20,000 square feet of space at its
headquarters in Horsham, Pennsylvania under a lease expiring in October 1997.
Upon expiration of the lease, the Company anticipates moving to a 40,000 to
50,000 square foot facility in the same vicinity. The current annual base rent
is approximately $179,000. The Company also maintains an engineering facility
in Israel and is in the process of establishing a technical support and
program management center in Germany. The Company's current aggregate annual
rental expenses for these additional facilities are approximately $60,000.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
executive officers, directors and certain key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph Aviv....... 60 Chairman of the Board of Directors
Aryeh Trabelsi.... 39 President, Chief Executive Officer and Director
Moshe Pinkasy..... 46 Chief Executive Officer of Engineering
Marcel Boumans.... 39 Managing Director of European Operations
Joseph Sullivan... 54 Director of Finance and Treasurer
David Farina...... 37 Vice President, Near-Field Strategic Business Unit
John Aubin........ 43 Vice President, Far Field/RCS Strategic Business Unit
Sean Mallon....... 30 Vice President, Business Development
Zeev Stein........ 45 Director
David Ben-Bassat.. 51 Director
Eric Haskell...... 50 Director Nominee
</TABLE>
Joseph Aviv has served as Chairman of the Board of Directors of the Company
and its predecessor and of Alchut since March 1996. Since 1994, Mr. Aviv has
been the General Manager of Aviron Engineers Ltd., a holding company located
in Ra'anana, Israel. From April 1992 to July 1994, Mr. Aviv was a member of
the Board of Directors of Alchut. From 1985 to 1994, Mr. Aviv was the Chairman
of the Board of Directors of Paz-Chen, Ltd., a publicly-traded jewelry company
located in Tel-Aviv, Israel.
Aryeh Trabelsi has served as the President and Chief Executive Officer of
the Company and its predecessor since September 1996, and as a Director of the
Company since December 1996. From July 1995 to September 1996, Mr. Trabelsi
was the Senior Vice-President and Chief Executive Officer of Technologies.
From 1995 to 1996, in his various capacities, Mr. Trabelsi was responsible for
the worldwide management of Alchut's Microwave Test and Measurement Strategic
Business Unit. From 1991 to 1995, Mr. Trabelsi served as Microwave Test and
Measurement Business and Product Development Manager for Alchut and
Technologies.
Moshe Pinkasy has served as the Chief Executive Officer of Engineering since
January 1997. From February 1996 to December 1996, Mr. Pinkasy was Alchut's
Manager of the Microwave Test and Measurement Business in Israel. From 1992 to
1996, Mr. Pinkasy served, in various capacities, as the Mechanical Engineering
Department Manager for Alchut.
Marcel Boumans has served as the Managing Director of European Operations of
the Company since March 1997. From June 1995 to March 1997, Mr. Boumans was a
Systems Design Engineer for Dornier Satelliten Systeme GmbH, the satellite
systems subsidiary of Daimler-Benz Aerospace. From 1990 to 1995, Mr. Boumans
was a Systems Design Engineer for Dornier GmbH, the communications and defense
subsidiary of Daimler-Benz Aerospace.
Joseph Sullivan has served as the Director of Finance and Treasurer of the
Company since December 1996. From March 1996 to October 1996, Mr. Sullivan was
the Finance Director for CME Information Services, Inc., a privately held
medical education company located in Mount Laurel, New Jersey. From January
1995 to June 1995, Mr. Sullivan was the Finance Director for the animal health
business group of the International Division of Pfizer, Inc., a publicly-
traded pharmaceutical company. From 1969 to December 1994, Mr. Sullivan was
the Finance Director for the animal health business group of the International
Division of SmithKline Beecham plc, a publicly-traded pharmaceutical company.
39
<PAGE>
David Farina has served as the Vice President of the Near-Field Strategic
Business Unit of the Company since May 1997. From August 1995 to May 1997, Mr.
Farina served as the Director of such Unit for the Company and its
predecessor. From 1994 to 1995, Mr. Farina was employed as a Department
Manager for Flam & Russell, managing large engineering projects. From 1987 to
1994, Mr. Farina was Project Manager for Flam & Russell.
John Aubin has served as the Vice President of the Far Field/RCS Strategic
Business Unit of the Company since May 1997. From June 1996 to May 1997, Mr.
Aubin served as the Director of such Unit for the Company and its predecessor.
From 1991 to 1996, Mr. Aubin was Vice-President in charge of the Antenna
Measurement Business Area for Flam & Russell.
Sean Mallon has served as the Vice President of Business Development of the
Company since May 1997. From November 1996 to May 1997, Mr. Mallon served as
the Director of Business Development for the Company and its predecessor. From
1993 to 1996, Mr. Mallon was the President and Chief Executive Officer of RDI
International, Inc., a company co-founded by Mr. Mallon, which designed,
manufactured and marketed a line of TV/FM antennas and accessories.
Zeev Stein has served as a Director of the Company and its predecessor since
March 1996. Since July 1994, Mr. Stein has served as a Director of Alchut and
since September 1996, Mr. Stein has also served as the Vice-President of
Operations of Alchut. From 1991 to 1996, Mr. Stein was the General Manager of
Stein Special Art, Ltd., a manufacturer of costume jewelry located in
Ra'anana, Israel. Mr. Stein is the son-in-law of Mr. Aviv.
David Ben-Bassat has served as a Director of the Company and its predecessor
since December 1996. Since 1995, Mr. Ben-Bassat has been the General Manager
of Radius, Ltd., a radio station located in Rosh Hain, Israel. From 1990 to
1995, Mr. Ben-Bassat was the General Manager of Mascom, Ltd., a communications
company located in Ra'anana, Israel.
Eric Haskell will be appointed to the Board of Directors of the Company upon
the completion of this offering. Since July 1990, Mr. Haskell has served as
Senior Vice President, Finance and Administration, Treasurer and Chief
Financial Officer of Systems & Computer Technology Corporation, a public
company located in Malvern, Pennsylvania that provides information technology
services and administrative application software in the higher education,
local government, utilities and manufacturing/distribution markets.
BOARD OF DIRECTORS
The Company's Bylaws provide that the Board of Directors shall consist of
not less than three nor more than thirteen members, the exact number to be
fixed and determined from time to time by the Board. The Company's Board of
Directors is presently composed of four directors. The Board of Directors is
elected by the stockholders at the annual meeting of the stockholders of the
Company.
The Company has nominated Mr. Haskell as an independent director who will be
appointed to the Board upon the completion of this offering. The Company
intends to appoint two additional independent directors to the Board promptly
after the completion of this offering and is currently in preliminary
discussions with individuals regarding such appointments. The Company intends
to grant each independent director upon his appointment to the Board an option
to purchase 30,000 shares of Common Stock at an exercise price of not less
than the fair market value per share of the Common Stock on the date of grant,
which option will vest in five equal annual installments beginning 12 months
after the date of grant.
Directors currently do not receive any compensation for services on the
Board of Directors. The Board of Directors may, however, establish
compensation for, and reimburse the expenses of, the directors.
Under the Company's 1997 Equity Incentive Plan, effective upon the
completion of this offering, Mr. Ben-Bassat will be granted an option to
purchase 20,000 shares of Common Stock at the Offering Price. This option will
vest in four equal annual installments beginning 24 months after the
completion of this offering.
40
<PAGE>
BOARD COMMITTEES
The Board of Directors has established an Audit Committee to review, act on
and report to the Board of Directors with respect to various auditing and
accounting matters, including the internal accounting procedures of the
Company and the services provided by the Company's independent public
accountants. The Board of Directors also has established a Compensation
Committee to set compensation and bonuses for management. The Company's Audit
Committee and Compensation Committee each will be composed of at least three
directors, a majority of which will be independent directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Company did not have a Compensation Committee of the Board
of Directors, and with the exception of Mr. Aviv's compensation, which was set
by the Board of Directors, compensation decisions were made by Mr. Aviv and
Mr. Trabelsi.
EXECUTIVE COMPENSATION
The following table summarizes the compensation earned by the Company's
Chief Executive Officer for the year ended December 31, 1996. No other
executive officer of the Company received compensation in excess of $100,000
during the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Aryeh Trabelsi............. 1996 $ 108,786 $ 15,000 -- $440(1)
President and Chief
Executive Officer
</TABLE>
- --------
(1) Represents life insurance premiums paid on behalf of Mr. Trabelsi.
Mr. Aviv divides his time between Alchut and each of its subsidiaries,
including the Company. In addition to his compensation from Alchut, since
November 1, 1996, Mr. Aviv has been compensated for the portion of his time
spent on matters involving the Company. During the year ended December 31,
1996, Mr. Aviv received compensation of $14,000 for such services. Mr. Aviv
will receive compensation of $84,000 for services to be rendered to the
Company in 1997.
OPTION GRANTS
No stock options were granted to or exercised by any executive officer
during the year ended December 31, 1996.
EMPLOYMENT AGREEMENTS
Aryeh Trabelsi. Effective February 15, 1997, the Company entered into an
employment agreement with Aryeh Trabelsi, the President and Chief Executive
Officer of the Company, for an initial term of two years and thereafter
terminable by either the Company or Mr. Trabelsi on 90 days' notice. Pursuant
to the terms of Mr. Trabelsi's employment agreement, Mr. Trabelsi is entitled
to receive (i) an annual base salary of $154,216 or such higher amount as the
Company's Board of Directors may determine from time to time, (ii) an annual
cash bonus based on the Company's net income before taxes, excluding any gains
from the sale of securities, and (iii) an annual cash bonus based on the
Company's achievement of specified levels of net income before taxes excluding
capital gains.
Mr. Trabelsi has been granted, effective upon the completion of this
offering, a stock option to purchase up to 171,000 shares of the Common Stock
at a per share exercise price equal to the Offering Price. This option will
vest in four equal annual installments beginning 24 months after the
completion of this offering.
41
<PAGE>
Mr. Trabelsi's employment agreement may be terminated by the Company for
cause, which is defined as the material breach of the employment agreement by
Mr. Trabelsi or if Mr. Trabelsi commits a material act of dishonesty or a
material breach of trust or a fiduciary obligation with respect to the
Company. The employment agreement may be terminated by Mr. Trabelsi for good
reason, which includes, among other things, a material breach of the
employment agreement by the Company, the demotion or removal of Mr. Trabelsi,
a material diminishment of Mr. Trabelsi's responsibilities, a reduction in his
base salary, the relocation of Mr. Trabelsi's primary place of employment by
more than 100 miles (other than a relocation to Israel after December 1998)
without his consent or any failure of the Company to obtain the assumption of
the agreement by any successor or assign of the Company.
Under the employment agreement, Mr. Trabelsi is subject to certain non-
disclosure, non-solicitation and non-competition covenants. The employment
agreement provides that during the period of non-competition and non-
solicitation, Mr. Trabelsi will receive his base salary reduced by up to one-
half of any salary received by Mr. Trabelsi from another employer during the
period of non-competition or non-solicitation.
Moshe Pinkasy. Effective January 1, 1997, Engineering entered into an
employment agreement with Moshe Pinkasy, the Chief Executive Officer of
Engineering, which is terminable by either Engineering or Mr. Pinkasy on 90
days notice. Pursuant to the terms of Mr. Pinkasy's employment agreement, Mr.
Pinkasy is entitled to receive (i) an annual base salary of $57,000 and (ii)
an annual cash bonus based on the Company's net profits. Mr. Pinkasy has been
granted, effective upon the completion of this offering, a non-qualified stock
option to purchase up to 51,000 shares of the Common Stock at a per share
exercise price equal to the Offering Price. This option vests annually in four
equal increments beginning 24 months after the completion of this offering.
Under the employment agreement, Mr. Pinkasy is subject to certain non-
disclosure, non-solicitation and non-competition covenants.
1997 EQUITY INCENTIVE PLAN
On March 17, 1997, the Board of Directors adopted and the Company's
stockholder approved the Company's 1997 Equity Incentive Plan (the "Incentive
Plan"). The purposes of the Incentive Plan are to attract and retain key
employees and certain other persons who are in a position to make significant
contributions to the success of the Company, to reward these employees and
other persons for their contributions, to provide additional incentive to
these employees and other persons to continue making similar contributions and
to further align the interests of these employees and other persons with those
of the Company's stockholders. To achieve these purposes, the Incentive Plan
permits grants of incentive stock options ("ISOs"), options not intended to
qualify as incentive stock options ("Non-ISOs"), stock appreciation rights
("SARs"), restricted and unrestricted stock awards, performance awards, loans
and supplemental cash awards and combinations of the foregoing (all referred
to as "Awards").
The Incentive Plan permits Awards to be granted for a total of 800,000
shares of the Company's Common Stock. Shares issuable under Awards that
terminate unexercised, shares issuable under Awards that are payable in stock
or cash but are paid in cash and shares issued but later forfeited will be
available for future Awards under the Incentive Plan. The Company has granted,
effective upon the completion of this offering, options to purchase an
aggregate of 492,300 shares of Common Stock at the Offering Price, including
options granted to Mr. Trabelsi and Mr. Ben-Bassat to purchase 171,000 shares
and 20,000 shares, respectively. By their terms, these options are not
exercisable until 24 months after the completion of this offering. In
addition, the Company intends to grant each independent director, including
Mr. Haskell, upon his appointment to the Board of Directors, options to
purchase 30,000 shares of Common Stock at an exercise price of not less than
the fair market value per share of Common Stock on the date grant, which
options will vest in five equal annual installments beginning 12 months after
the date of grant.
All current and future employees of the Company, and other persons who, in
the opinion of the Board of Directors, are in a position to make significant
contributions to the success of the Company, such as consultants and non-
employee directors, are eligible to receive Awards under the Incentive Plan.
The Incentive Plan is administered by the Board of Directors, which
determines, among other things and subject to certain conditions, the persons
eligible to receive Awards, the persons who actually receive Awards,
42
<PAGE>
the type of each Award, the number of shares of Common Stock subject to each
Award, the date of grant, exercise schedule, vesting schedule and other terms
and conditions of each Award, whether to accelerate the exercise or vesting
schedule or waive any other terms or conditions of each Award, whether to
amend or cancel an Award and the form of any instrument used under the
Incentive Plan. The Board of Directors has the right to adopt rules for the
administration of the Incentive Plan, settle all controversies regarding the
Incentive Plan or any Award, and construe and correct defects and omissions in
the Incentive Plan or any Award. The Incentive Plan may be amended, suspended
or terminated by the Board of Directors, subject to certain conditions,
provided that stockholder approval will be required whenever necessary for the
Incentive Plan to continue to satisfy the requirements of certain securities
and tax laws, rules and regulations.
Recipients of stock options under the Incentive Plan will have the right to
purchase shares of Common Stock at an exercise price, during a period of time
and on such other terms and conditions as are determined by the Board of
Directors. For ISOs, the recipient must be an employee, the exercise price
must be at least 100% (110% if issued to a 10% or greater stockholder of the
Company) of the fair market value of the Company's Common Stock on the date of
grant and the term cannot exceed ten years (five years if issued to a 10% or
greater stockholder of the Company) from date of grant. If permitted by the
Board of Directors and subject to certain conditions, an option exercise price
may be paid by delivery of shares of the Company's Common Stock that have been
outstanding, a promissory note, a broker's undertaking to promptly deliver the
necessary funds or by a combination of those methods. If permitted by the
Board of Directors, options (other than those granted in tandem with SARs) may
be settled by the Company, paying to the recipient, in cash or shares of
Common Stock (valued at the then fair market value of the Company's Common
Stock), an amount equal to such fair market value minus the exercise price of
the option shares.
SARs may be granted under the Incentive Plan either alone or in tandem with
stock options. Generally, recipients of SARs are entitled to receive, upon
exercise, cash or shares of Common Stock (valued at the then fair market value
of the Company's Common Stock) equal to such fair market value on the date of
exercise minus such fair market value on the date of grant of the shares
subject to the SAR, although certain other measurements also may be used. A
SAR granted in tandem with a stock option is exercisable only if and to the
extent that the option is exercised.
The Incentive Plan provides for restricted and unrestricted stock awards.
Stock awards allow the recipient to acquire shares of the Company's Common
Stock for their par value or any higher price determined by the Board of
Directors. In the case of restricted stock awards, the shares acquired are
subject to a vesting schedule and other possible conditions determined by the
Board of Directors.
The Incentive Plan provides for performance awards entitling the recipient
to receive stock options, stock awards or other types of Awards conditional
upon achieving performance goals determined by the Board of Directors.
Performance goals may involve overall corporate performance, operating group
or business unit performance, personal performance or any other category of
performance determined by the Board of Directors. Financial performance may be
measured by revenue, operating income, net income, earnings per share, Common
Stock price, price-earnings multiple or other financial factors determined by
the Board of Directors.
Under the Incentive Plan, loans or supplemental cash awards may be granted
to recipients of Awards to help defray taxes due as a result of the Awards.
The terms and conditions of loans and supplemental cash awards, including the
interest rate, which may be zero, and whether any loan will be forgiven, are
determined by the Board of Directors.
Generally, upon termination of a recipient's employment or other
relationship with the Company, stock options and SARs remain exercisable for a
period of three months (one year if termination is due to death or disability)
to the extent that they were exercisable at the time of termination, except as
otherwise agreed between the employee and the Company, unvested shares under
outstanding restricted stock awards vest immediately except in the case of a
voluntary resignation or termination for cause (as defined in the Incentive
Plan). Stock options, SARs and other Awards that are not exercisable at the
time of termination automatically terminate, and payments or benefits under
deferred stock awards, performance awards and supplemental cash awards that
are not irrevocably due at the time of termination are forfeited.
43
<PAGE>
CERTAIN TRANSACTIONS
In December 1996, Alchut incorporated Engineering and transferred the assets
of its microwave test and measurement unit to Engineering in exchange for
shares of Engineering and a three-year, non-interest bearing note in the
principal amount of $2,722,000. In December 1996, Alchut transferred or caused
to be transferred to the Company all of the issued and outstanding shares of
Technologies and Engineering in exchange for 4,000,000 shares of Common Stock
of the Company. See "The Company."
The Company, Engineering and Alchut have entered into a one-year services
agreement, commencing January 1, 1997, pursuant to which: (i) Alchut will
supply administrative services and office space to Engineering in Israel, (ii)
the Company will supply administrative services and office space to Alchut
through Alchut's divisions or subsidiaries in Horsham, Pennsylvania and (iii)
Engineering will purchase certain electro- mechanical production services
required in Israel from Alchut. Alchut will receive (i) $360,000 per year as
compensation for the provision of its administrative services to Engineering,
(ii) cost of the production services plus 5% as compensation for the provision
of its production services to Engineering and (iii) $22.80 per square foot per
year as rent (approximately $51,000 for 1997). The Company will receive (i)
reimbursement for the cost of the administrative services it provides to
Alchut and (ii) $2,000 per month as rent. The compensation to be received by
the Company and Alchut for the provision of office space includes all taxes,
utilities and maintenance. After the expiration of the one-year term of the
agreement, Alchut's and the Company's compensation is subject to negotiation,
and the entire agreement is terminable on 90 days notice.
The Company has acted as a distributor for certain systems manufactured by
Alchut. During the years ended December 31, 1994, 1995 and 1996 and for the
three months ended March 31, 1996 and 1997, the Company's commission revenues
were approximately $43,000, $342,000, $137,000 and $13,000 and $0,
respectively. The Company has also subcontracted certain manufacturing
services to Alchut. Included in the Company's cost of revenues for the years
ended December 31, 1994, 1995 and 1996 and for the three months ended March
31, 1996 and 1997 are approximately $1,492,000, $1,423,000, $1,496,000 and
$298,000 and $323,000, respectively, relating to the production services
provided by Alchut.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 17, 1997 and as adjusted to
reflect the sale of the Common Stock offered hereby, by (i) each stockholder
known by the Company to be the beneficial owner of five percent or more of the
outstanding Common Stock, (ii) each director, director nominee and the
executive officer of the Company named in the Summary Compensation Table
individually and (iii) all directors, director nominees and executive officers
as a group. Except as otherwise indicated in the footnotes below, the Company
believes that each of the beneficial owners of the Common Stock listed in the
table, based on information furnished by such owner, has sole investment and
voting power with respect to such shares. The following table includes a
maximum of 96,970 shares of Common Stock that will be issued contemporaneously
with the completion of this offering in connection with the AEMI acquisition.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
----------------------------------------
PERCENT PRIOR PERCENT AFTER
NAME OF BENEFICIAL OWNER NUMBER TO THIS OFFERING THIS OFFERING
- ------------------------ --------- ---------------- -------------
<S> <C> <C> <C>
Orbit-Alchut Technologies, Ltd.(2).... 4,000,000 100.0% 65.6%
P.O. Box 3171
Industrial Zone
Netanya 42131
Israel
Joseph Aviv(3)........................ 4,000,000 100.0 65.6
Aryeh Trabelsi(4)..................... -- -- --
Zeev Stein(5)......................... 4,000,000 100.0 65.6
David Ben-Bassat(6)................... 4,000,000 100.0 65.6
Eric Haskell(7)....................... -- -- --
All directors, director nominees and
executive officers as a group
(8 persons)(8)....................... 4,000,000 100.0 65.6
</TABLE>
- --------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they
may include securities owned by or for, among others, the spouse and/or
minor children of the individual and any other relative who has the same
home as such individual, as well as other securities as to which the
individual has or shares voting or investment power or has the right to
acquire under outstanding stock options within 60 days after the date of
this table. Beneficial ownership may be disclaimed as to certain of the
securities.
(2) Alchut has granted to the Underwriters an option to purchase up to an
additional 300,000 shares of Common Stock to cover over-allotments at the
Offering Price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus. See "Underwriting." If this option
is exercised in full, Alchut will beneficially own 60.7% of the Company's
Common Stock after this offering.
(3) Represents 4,000,000 shares held by Alchut. Mr. Aviv is a director and
44.0% beneficial stockholder of Alchut.
(4) Does not include 171,000 shares of Common Stock issuable upon the exercise
of an option to be granted to Mr. Trabelsi effective upon the completion
of this offering, which option becomes exercisable in four cumulative
annual installments commencing 24 months after the completion of this
offering.
(5) Represents 4,000,000 shares held by Alchut. Mr. Stein is a director and
42.0% beneficial stockholder of Alchut.
(6) Represents 4,000,000 shares held by Alchut. Mr. Ben-Bassat is a director
of Alchut. Does not include 20,000 shares of Common Stock issuable upon
the exercise of an option to be granted to Mr. Ben-Bassat effective upon
the completion of this offering, which option becomes exercisable in four
cumulative annual installments commencing 24 months after the completion
of this offering.
(7) Does not include 30,000 shares of Common Stock issuable upon the exercise
of an option to be granted to Mr. Haskell effective upon his appointment
to the Board of Directors of the Company, which option becomes exercisable
in five cumulative annual installments commencing 12 months after the date
of grant.
(8) Includes the information contained in the notes above, as applicable. Does
not include 81,000 shares of Common Stock issuable upon the exercise of
options to be granted to the three other executive officers effective upon
the completion of this offering, which options become exercisable in four
cumulative annual installments commencing 24 months after the completion
of this offering.
45
<PAGE>
DESCRIPTION OF SECURITIES
Under the Company's Amended and Restated Certificate of Incorporation, the
authorized capital stock of the Company is 12,000,000 shares, consisting of
10,000,000 shares of Common Stock, $0.01 par value per share, and 2,000,000
shares of undesignated Preferred Stock, $0.01 par value per share. As of the
date of this offering, 4,000,000 shares of Common Stock are issued and
outstanding and held of record by Alchut. Upon the completion of this
offering, 6,096,970 shares of Common Stock will be issued and outstanding
(assuming the issuance of a maximum of 96,970 shares of Common Stock in
connection with the acquisition of AEMI).
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to outstanding shares of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior liquidation
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive conversion rights or other subscription rights. There are no
redemption or sinking funds provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be outstanding upon completion of this offering will
be fully paid and non-assessable.
PREFERRED STOCK
Upon completion of this offering, no shares of Preferred Stock will be
outstanding. The Board of Directors will have the authority to issue up to
2,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon
such Preferred Stock, including dividend rights, conversion rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the stockholders unless otherwise required by law.
The Board of Directors can issue Preferred Stock with voting, dividend,
conversion, redemption and liquidation rights which could adversely affect the
rights of the holders of Common Stock. The issuance of Preferred Stock could
have the effect of delaying, deferring or preventing a change in control of
the Company. The Company has no present plan to issue any shares of Preferred
Stock.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the DGCL, the Company's Amended and Restated Certificate of
Incorporation provides that no director of the Company will be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except (i) for any breach of the directors' duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions not
in good faith or involving intentional misconduct or a knowing violation of
law, (iii) with respect to certain unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL or
(iv) for any transaction from which the director derives any improper personal
benefit. In addition, the Company's Bylaws provide that the Company may
indemnify any director or officer, to the fullest extent permitted by the
DGCL, who was or is a party to any action or proceeding by reason of his or
her services to the Company.
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the DGCL. In
general, Section 203 prohibits a public Delaware corporation from engaging in
a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. Generally, a "business combination" includes mergers, asset
sales and other transactions resulting in a financial benefit to the
stockholder. An "interested
46
<PAGE>
stockholder" is a person who, together with his affiliates and associates,
owns (or within three years, did own) 15% or more of a corporation's voting
stock. The statute could have the effect of delaying, deferring or preventing
a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
6,096,970 shares of Common Stock. Of these shares, the 2,000,000 shares sold
in this offering will be freely transferable by persons other than
"affiliates" of the Company without restriction or further registration under
the Securities Act. The remaining 4,096,970 shares of Common Stock
outstanding, 4,000,000 of which are owned by Alchut and a maximum of 96,970 of
which will be issued in connection with the acquisition of AEMI, are
"restricted securities" ("Restricted Shares") within the meaning of Rule 144
under the Securities Act and may not be sold unless registered under the
Securities Act or an exemption from registration is available, including the
exemption afforded by Rule 144.
Alchut and the Company's executive officers and directors have entered into
"lock-up" agreements with the Representatives of the Underwriters pursuant to
which neither Alchut nor such persons will, directly or indirectly, offer,
sell, contract to sell, pledge, grant any option for the sale of or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent
of the Representatives, other than in certain private transactions in which
each transferee acquiring an interest in such Common Stock during such 180-day
period agrees in writing to be bound by such agreement. After such 180-day
period, the 4,000,000 shares of Common Stock held by Alchut will be eligible
for sale in the public market in reliance upon Rule 144 subject to the
restrictions contained therein. The stockholders of AEMI have agreed with the
Company that they will not offer, sell or otherwise dispose of the maximum of
96,970 shares of Common Stock issued in connection with the acquisition of
AEMI for a period of two years after the closing date of such acquisition.
After such two-year period, the maximum of 96,970 shares held by such
stockholders will be eligible for sale under Rule 144 subject to the
restrictions contained therein. After 180 days from the date of this
Prospectus, the Company intends to register under the Securities Act 800,000
shares of Common Stock reserved for awards under the Company's Incentive Plan.
Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose shares are aggregated) who has beneficially
owned Restricted Shares for at least one year but less than two years is
entitled to sell, commencing 90 days after the date of this Prospectus, within
any three-month period a number of shares that does not exceed the greater of
one percent of the then outstanding shares of Common Stock (60,970 shares
immediately after the completion of this offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 also are subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not an "affiliate" of
the Company at any time during the three months preceding a sale, and who has
beneficially owned Restricted Shares for at least two years, is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above.
Since there has been no public market for the Company's shares of the Common
Stock, the Company is unable to predict the effect that sales made pursuant to
Rule 144 or otherwise may have on the prevailing market price at such times
for shares of the Common Stock. Nevertheless, sales of a substantial amount of
the Common Stock in the public market, or the perception that such sales could
occur, could adversely affect market prices. See "Risk Factors -- Shares
Eligible for Future Sale."
Under the Company's Incentive Plan, the Company has granted, effective upon
the completion of this offering, options to purchase 492,300 shares of Common
Stock at the Offering Price. By their terms, these options are not exercisable
until 24 months after the completion of this offering. In addition, there are
307,700 shares available for options which the Company may grant in the future
under the Incentive Plan.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") have severally agreed to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names in the table below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
----------- ----------------
<S> <C>
Pennsylvania Merchant Group Ltd............................. 500,500
Unterberg Harris............................................ 500,500
Alex. Brown & Sons Incorporated............................. 45,000
Cowen & Company............................................. 45,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 45,000
A.G. Edwards & Sons, Inc.................................... 45,000
Hambrecht & Quist LLC....................................... 45,000
Lehman Brothers Inc. ....................................... 45,000
Montgomery Securities....................................... 45,000
Oppenheimer & Co., Inc. .................................... 45,000
PaineWebber Incorporated.................................... 45,000
William Blair & Company, L.L.C. ............................ 25,000
J.C. Bradford & Co. ........................................ 25,000
Cruttenden Roth Incorporated................................ 25,000
EVEREN Securities, Inc. .................................... 25,000
Fahnestock & Co. Inc. ...................................... 25,000
Friedman, Billings, Ramsey & Co., Inc. ..................... 25,000
Furman Selz LLC............................................. 25,000
Gruntal & Co., L.L.C. ...................................... 25,000
Janney Montgomery Scott Inc. ............................... 25,000
Legg Mason Wood Walker, Incorporated........................ 25,000
McDonald & Company Securities, Inc. ........................ 25,000
Morgan Keegan & Company, Inc. .............................. 25,000
Piper Jaffray Inc. ......................................... 25,000
Raymond James & Associates, Inc. ........................... 25,000
The Robinson-Humphrey Company, Inc. ........................ 25,000
Roney & Co. ................................................ 25,000
Stephens Inc. .............................................. 25,000
Tucker Anthony Incorporated................................. 25,000
Brean Murray & Co., Inc. ................................... 18,000
Ferris, Baker Watts, Inc. .................................. 18,000
Hanifen, Imhoff Inc. ....................................... 18,000
ISG Capital Markets, LLC.................................... 18,000
Parker/Hunter Incorporated.................................. 18,000
Scott & Stringfellow, Inc. ................................. 18,000
The Seidler Companies Incorporated.......................... 18,000
Southcoast Capital Corp. ................................... 18,000
---------
Total................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. The nature of the Underwriters'
obligation is such that they are committed to purchase all shares of Common
Stock offered hereby if any of such shares are purchased.
The Company has been advised by the Underwriters, for whom Pennsylvania
Merchant Group Ltd and Unterberg Harris are acting as representatives (the
"Representatives"), that the Underwriters propose initially to offer the
shares of Common Stock directly to the public at the Offering Price set forth
on the cover page of this
49
<PAGE>
Prospectus and to certain dealers (which may include Underwriters) at such
public offering price less a concession not to exceed $0.36 per share. The
Underwriters may allow, and such dealers may reallow, a discount not to exceed
$0.10 per share in sales to certain other dealers. After the public offering,
the public offering price and concessions and discounts may be changed by the
Representatives.
Alchut has granted to the Underwriters an option, exercisable not later than
30 business days after the date of this Prospectus, to purchase up to an
additional 300,000 shares of Common Stock to cover over allotments, at the
Offering Price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by it shown in the table above bears to the
number of shares of Common Stock offered hereby, and Alchut will be obligated
pursuant to the option to sell such shares to the Underwriters. The
Underwriters may exercise the option only for the purposes of covering over-
allotments, if any, made in connection with the distribution of the shares of
Common Stock to the public.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of shares of the Common Stock offered hereby to any
accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Upon the completion of this offering, Alchut and the Company's directors and
executive officers have agreed not to sell, offer to sell, contract to sell or
otherwise dispose of any of its shares of Common Stock or any other security
convertible into or exchangeable for, or options or warrants to purchase or
acquire, shares of Common Stock without the prior written consent of the
Representatives for a period of 180 days after the date of this Prospectus. In
addition, the Company has agreed not to sell, issue, contract to sell, offer
to sell or otherwise dispose of any shares of Common Stock or any other
security convertible into or exchangeable for shares of Common Stock without
the prior written consent of the Representatives during the same period,
subject to certain exceptions including the issuance and sale of Common Stock
or securities convertible into or exchangeable for Common Stock in connection
with acquisitions and of the grant of options under the Incentive Plan. See
"Shares Eligible For Future Sale."
Prior to this offering, there has been no public market for the Common
Stock. The offering price to the public has been determined by negotiations
between the Company and the Representatives. The factors considered in
determining such public offering price included the Company's historical and
pro forma operations, the industry in which the Company operates, the
Company's prospects, assets, earnings, financial condition and management and
the market prices for securities of companies in businesses similar to that of
the Company.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or the effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection
with this offering. A penalty bid means an arrangement that permits the
Underwriters to reclaim a selling concession otherwise accruing to an
Underwriter or a syndicate member in connection with this offering when shares
of Common Stock sold by such Underwriter or syndicate member are purchased in
syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of $100,000 at closing.
50
<PAGE>
One or more of the Underwriters have informed the Company that they
currently intend to make a market in the Common Stock subsequent to the date
of this Prospectus, but there can be no assurance that an active trading
market will develop or continue after this offering.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania. Certain
legal matters will be passed upon for the Underwriters by Duane, Morris &
Heckscher LLP Philadelphia, Pennsylvania. Matters of Israeli law will be
passed upon by Jacob Sabo, Esquire, Israeli counsel for the Selling
Stockholder.
EXPERTS
The consolidated financial statements of ORBIT/FR, Inc. at December 31, 1995
and 1996, and for each of the three years in the period ended December 31,
1996, appearing in this Prospectus and in the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Flam & Russell, Inc. at June 30, 1995 and June
28, 1996, and for each of the three years in the period ended June 28, 1996,
appearing in this Prospectus and in the Registration Statement have been
audited by Messina, Ceci, Archer & Company, P.C., independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
A Registration Statement on Form S-1 under the Securities Act, including
amendments thereto, relating to the Common Stock offered hereby has been filed
by the Company with the Commission, Washington D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement and exhibits and schedules filed as a part thereof. A
copy of the Registration Statement may be inspected by anyone without charge
at the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
fees. The Commission maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such Web Site is
http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to herein represent materially complete
summaries of such contents. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
As a result of this offering, the Company will be subject to the
informational requirements of the Exchange Act. So long as the Company is
subject to periodic reporting requirements of the Exchange Act, it will
continue to furnish the reports and other information required thereby to the
Commission. The Company will furnish to its stockholders annual reports
containing consolidated financial statements audited by its independent
auditors and will make available copies of quarterly reports for the first
three quarters of each fiscal year containing unaudited consolidated financial
information.
51
<PAGE>
GLOSSARY
Anechoic chamber -- An enclosure that has been fitted with materials that
absorb electromagnetic waves. Anechoic chambers provide an interference-free
environment for microwave test and measurement systems.
BIRD -- Binational Research and Development Foundation. An Israeli-American
organization that funds research and development work conducted by Israeli-
American companies. Sales of products developed with BIRD funds are, under
certain circumstances, subject to royalties.
Chief Scientist Program -- A program sponsored by the Israeli government in
which export-oriented Israeli companies can apply for research and development
grants.
Compact range -- A compact range relies on a highly accurate machined
parabolic reflector to create a planar radiated electromagnetic wave. A
spherical wave radiating from the transmit antenna strikes the parabola and is
reflected as a planar wave toward the receive antenna. Since the receive
antenna sees a planar wave, the collected data can be analyzed using standard
far-field methods. A compact range system offers a primary benefit of far-
field testing (i.e. no complex mathematical transformations) as well as one of
the main benefits of near-field testing (i.e. indoor range). Compact range
systems are generally more expensive than standard far-field or near-field
systems.
Far-Field -- A microwave measurement is said to be conducted in the far-
field when the distance between the transmitting antenna and the receiving
antenna is large enough that planar electromagnetic waves reach the receiving
antenna. In other words, the distance between the two antennas is far enough
that the transmitting antenna's spherical radiation has become practically
planar. Under certain conditions far-field measurements can be taken in an
indoor test chamber (e.g. electrically small antenna and/or low frequencies).
However, the more versatile far-field facilities use large outdoor test
ranges. A majority of the Company's far-field test and measurement systems are
used on outdoor test ranges.
Frequency -- The number of waves transmitted each second.
GPS -- Global Positioning System. A digital geographic positioning system
incorporating a network of geo-stationary satellites and mobile earth-based
receivers. GPS technology is being used for land, air and sea-based direction-
finding and locator systems.
Microwave -- Electromagnetic waves with frequencies ranging from 3 GHz to 30
GHz. For simplicity, the Company has used the word "microwave" in this
Prospectus to describe waves throughout the radio frequency (RF) spectrum.
Near-Field -- A measurement is said to be conducted in the near-field when
the receiving antenna is within close proximity to the transmitting antenna
such that the measured electromagnetic waves retain their spherical
characteristics. Using proven, stable algorithms, near-field software
mathematically translates measured near-field data into data which is
equivalent to that which would be collected on a larger far-field range.
Because near-field data can be collected with only a very short distance
between the transmit and receive antennas, near-field systems can always be
installed in indoor test chambers. This is a significant benefit given that
indoor chambers provide a "cleaner" electromagnetic and meteorological test
environment. Near-field systems can also incorporate diagnostic tools for use
on certain complex microwave products such as satellite antennas, a feature
that far-field systems do not offer.
PCS -- Personal Communication Systems. Digital wireless ground-based
personal voice and data communication services.
Radome -- A radome is a dome-shaped casing that is placed on the leading
edge of an aircraft or missile to protect the radar and direction-finding
equipment. A radome is typically manufactured using fiberglass or other
52
<PAGE>
materials that are transparent to microwave signals. Testing is performed
periodically to ensure that microwave signals are not deflected as they pass
through the radome.
RCS -- Radar Cross Section. The radar "signature" of an aircraft or missile.
RCS measurement techniques record and analyze the electromagnetic reflectivity
of an aircraft or missile (or a scale model thereof), and then quantify and
qualify that object's RCS.
RPC -- Radial Power Combiner. A solid-state device that adds several
identical low-energy signals together to make a single high-energy signal.
RPCs have many uses, but their most common application is in microwave
transmitters.
SBIR -- Small Business Innovative Research. A program sponsored by the
United States government under which companies with fewer than 500 employees
can obtain project-specific research and development grants.
Shielded enclosure -- A room or chamber designed to prevent the entry or
escape of electromagnetic energy.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ORBIT/FR, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and as of
March 31, 1997 (Unaudited).............................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995, and 1996 and for the three months ended March 31, 1996 and
1997 (Unaudited)........................................................ F-4
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1994, 1995 and 1996 and for the three months ended March
31, 1997 (Unaudited).................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and for the three months ended March 31, 1996 and
1997 (Unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
FLAM & RUSSELL, INC. FINANCIAL STATEMENTS
Independent Auditor's Report............................................. F-17
Balance Sheets as of June 30, 1995 and June 28, 1996..................... F-18
Statements of Income for the years ended July 1, 1994, June 30, 1995 and
June 28, 1996........................................................... F-19
Statements of Changes in Stockholders' Equity for the years ended July 1,
1994, June 30, 1995 and June 28, 1996................................... F-20
Statements of Cash Flows for the years ended July 1, 1994, June 30, 1995
and June 28, 1996....................................................... F-21
Notes to Financial Statements............................................ F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholder and Board of Directors
ORBIT/FR, Inc.
We have audited the accompanying consolidated balance sheets of ORBIT/FR,
Inc. as of December 31, 1995 and 1996, and the related consolidated statements
of operations, stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ORBIT/FR, Inc. at December 31, 1995 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 12, 1997
F-2
<PAGE>
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- -----------
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................... $ 775,732 $ 325,039 $ 801,141
Accounts receivable........................ 2,053,907 4,864,415 3,957,651
Inventory.................................. 2,503,212 2,241,234 2,270,970
Costs and estimated earnings in excess of
billings on uncompleted contracts......... 846,865 573,345 809,518
Deferred income taxes...................... 112,000 381,500 388,000
Other...................................... 134,348 206,063 463,293
---------- ---------- ----------
Total current assets..................... 6,426,064 8,591,596 8,690,573
Property and equipment, net................. 373,355 994,280 946,431
Purchased software, less accumulated
amortization of $35,228 at December 31,
1996 and $52,841 at March 31, 1997......... -- 317,050 299,437
---------- ---------- ----------
Total assets................................ $6,799,419 $9,902,926 $9,936,441
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable........................... $ 394,502 $ 671,051 $1,033,490
Accounts payable -- Parent................. 183,610 1,051,683 379,000
Accrued expenses........................... 584,195 1,551,813 1,464,995
Income taxes payable....................... 109,253 72,667 373,676
Customer advances.......................... 195,000 359,000 440,000
Billings in excess of costs and estimated
earnings on uncompleted contracts......... 717,377 931,664 420,067
Deferred income taxes...................... 367,000 683,500 657,500
---------- ---------- ----------
Total current liabilities................ 2,550,937 5,321,378 4,768,728
Note payable to Parent...................... 3,220,000 2,722,000 2,722,000
Stockholder's equity:
Preferred stock: $.01 par value:
Authorized shares -- 2,000,000
Issued and outstanding shares -- none
Common stock: $.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares --
4,000,000............................... 40,000 40,000 40,000
Additional paid-in capital................. (29,744) 450,256 450,256
Retained earnings.......................... 968,226 1,369,292 1,955,457
Parent's equity in division................ 50,000 -- --
---------- ---------- ----------
Total stockholder's equity............... 1,028,482 1,859,548 2,445,713
---------- ---------- ----------
Total liabilities and stockholder's
equity.................................. $6,799,419 $9,902,926 $9,936,441
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenues...... $7,127,810 $7,957,033 $10,267,319 $1,520,373 $4,906,430
Commission revenues.... 43,098 341,896 136,857 12,512 --
---------- ---------- ----------- ---------- ----------
Total revenues....... 7,170,908 8,298,929 10,404,176 1,532,885 4,906,430
Cost of revenues....... 5,265,002 5,445,607 6,450,177 1,088,273 3,141,168
---------- ---------- ----------- ---------- ----------
Gross profit............ 1,905,906 2,853,322 3,953,999 444,612 1,765,262
Operating expenses:
General and
administrative........ 988,605 864,023 1,314,684 195,363 319,193
Sales and marketing.... 785,851 994,010 790,573 111,497 273,362
Research and
development........... 237,456 239,370 581,266 97,000 219,390
---------- ---------- ----------- ---------- ----------
Total operating
expenses............ 2,011,912 2,097,403 2,686,523 403,860 811,945
---------- ---------- ----------- ---------- ----------
Operating income
(loss)................. (106,006) 755,919 1,267,476 40,752 953,317
Other income (expense):
Interest income........ 37,349 36,826 23,024 5,666 9,519
Interest expense....... -- -- (19,062) -- (1,817)
Other.................. 33,745 1,518 (1,372) 224 (30,854)
---------- ---------- ----------- ---------- ----------
Total other income
(expense)........... 71,094 38,344 2,590 5,890 (23,152)
---------- ---------- ----------- ---------- ----------
Income (loss) before
income taxes........... (34,912) 794,263 1,270,066 46,642 930,165
Income tax (benefit)
expense................ (119,000) 301,000 439,000 19,688 344,000
---------- ---------- ----------- ---------- ----------
Net income.............. $ 84,088 $ 493,263 $ 831,066 $ 26,954 $ 586,165
========== ========== =========== ========== ==========
Net income per common
share.................. $ 0.02 $ 0.12 $ 0.21 $ 0.01 $ 0.15
========== ========== =========== ========== ==========
Weighted average number
of common shares....... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
========== ========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ADDITIONAL PARENT'S TOTAL
NUMBER OF PAID-IN RETAINED EQUITY IN STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS DIVISION EQUITY
--------- ------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 4,000,000 $40,000 $(29,744) $ 604,875 $(164,000) $ 451,131
Net income............. -- -- -- (217,912) 302,000 84,088
--------- ------- -------- ---------- --------- ----------
Balance, December 31,
1994................... 4,000,000 40,000 (29,744) 386,963 138,000 535,219
Net income............. -- -- -- 581,263 (88,000) 493,263
--------- ------- -------- ---------- --------- ----------
Balance, December 31,
1995................... 4,000,000 40,000 (29,744) 968,226 50,000 1,028,482
Net income............. -- -- -- 401,066 430,000 831,066
Parent's equity in
division contributed to
paid-in capital........ -- -- 480,000 -- (480,000) --
--------- ------- -------- ---------- --------- ----------
Balance, December 31,
1996................... 4,000,000 40,000 450,256 1,369,292 -- 1,859,548
Net income
(Unaudited)........... -- -- -- 586,165 -- 586,165
--------- ------- -------- ---------- --------- ----------
Balance, March 31, 1997
(Unaudited)............ 4,000,000 $40,000 $450,256 $1,955,457 $ -- $2,445,713
========= ======= ======== ========== ========= ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- --------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 84,088 $ 493,263 $ 831,066 $ 26,954 $ 586,165
Adjustments to
reconcile net income
to net cash (used in)
provided by operating
activities:
Depreciation.......... 107,965 119,716 179,985 32,833 77,701
Amortization.......... -- -- 35,228 -- 17,613
Deferred income tax
(benefit) provision.. (367,000) 216,000 210,000 9,450 (12,000)
Allowance for
anticipated losses on
uncompleted
contracts............ 144,500 (144,500) -- -- --
Changes in operating
assets and
liabilities (net of
effects of
acquisition):
Accounts receivable.. (1,559,700) 482,459 (2,321,724) 657,965 906,764
Inventory............ (2,344,738) 55,586 627,001 169,365 (29,736)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts........... (579,053) (11,809) 420,674 79,283 (236,173)
Other assets......... (37,475) (26,356) (56,917) (29,026) (257,230)
Accounts payable and
accrued expenses.... 713,796 29,874 205,138 (122,720) 275,621
Accounts payable --
Parent............. 1,543,504 (1,730,175) 868,073 176,089 (672,683)
Income taxes
payable............. 127,361 (113,375) (64,259) 10,238 280,509
Customer advances.... -- 195,000 164,000 63,845 81,000
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts........... 365,550 144,664 21,122 (295,653) (511,597)
----------- ----------- ----------- --------- ---------
Net cash (used in)
provided by
operating
activities......... (1,801,202) (289,653) 1,119,387 778,623 505,954
Cash flows from
investing activities:
Purchase of property
and equipment......... (408,147) (128,352) (348,910) (53,000) (29,852)
Purchase of net assets
through acquisition of
Flam & Russell, Inc.,
net of cash acquired.. -- -- (573,170) -- --
----------- ----------- ----------- --------- ---------
Net cash used in
investing
activities......... (408,147) (128,352) (922,080) (53,000) (29,852)
Cash flows from
financing activities:
Borrowings on line of
credit................ -- -- 1,150,000 -- --
Repayments of line of
credit................ -- -- (1,300,000) -- --
Net proceeds
(repayments) from note
payable to Parent..... 2,965,000 91,000 (498,000) (866,000) --
----------- ----------- ----------- --------- ---------
Net cash provided by
(used in) financing
activities......... 2,965,000 91,000 (648,000) (866,000) --
----------- ----------- ----------- --------- ---------
Net increase (decrease)
in cash................ 755,651 (327,005) (450,693) (140,377) 476,102
Cash at beginning of
period................. 347,086 1,102,737 775,732 775,732 325,039
----------- ----------- ----------- --------- ---------
Cash at end of period... $ 1,102,737 $ 775,732 $ 325,039 $ 635,355 $ 801,141
=========== =========== =========== ========= =========
Supplemental disclosures
of cash flow
information
Cash paid during the
period for income
taxes................. $ 107,374 $ 309,353 $ 75,033 $ 62,131 $ 63,415
=========== =========== =========== ========= =========
Cash paid during the
period for interest... $ -- $ -- $ 16,238 $ -- $ 637
=========== =========== =========== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership and Basis of Presentation
ORBIT/FR, Inc. (the "Company"), incorporated in Delaware on December 9,
1996, is a wholly-owned subsidiary of Orbit-Alchut Technologies, Ltd., an
Israeli publicly traded corporation (hereinafter referred to as the "Parent").
The Company develops, markets and supports sophisticated automated microwave
test and measurement systems for wireless communications, satellite,
automotive and aerospace/defense industries. The Company also is a distributor
of certain systems, which are manufactured by the Parent which has provided
the Company with all of its commission revenues. During the first half of
1997, the Company will phase out its sales arrangement with the Parent for the
distribution of such systems. The Company sells its products to customers
throughout Asia, Europe, Israel and North and South America (Note 8).
On December 31, 1996, as part of a corporate restructuring and in exchange
for 4,000,000 shares of the Company, the Parent transferred or caused to be
transferred to the Company, all of its issued and outstanding shares of two of
its subsidiaries, Orbit Advanced Technologies, Inc. ("Technologies"), a
Delaware corporation established in 1985, and Orbit F.R. Engineering, Ltd.
("Engineering"), an Israeli company incorporated on December 29, 1996. Both of
these subsidiaries are responsible for the microwave test and measurement
business. Prior to its incorporation on December 29, 1996, Engineering
operated as a separate division of the Parent (see Related Party Transactions
in Note 5). Effective January 1, 1997, the personnel formerly employed in the
microwave test and measurement division of the Parent are employed by
Engineering.
The consolidated results of the Company reflect Technologies and Engineering
on an as-if pooled basis for businesses under common control for all periods
presented. Further, the recapitalization of these businesses on December 31,
1996 has retroactively been restated for common stock for all periods
presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries (Note 13). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Interim Financial Information
The consolidated financial statements and disclosures included herein for
the three months ended March 31, 1996 and 1997 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance
with generally accepted accounting principles and include all adjustments,
consisting of adjustments of a normal and recurring nature, which in the
opinion of management, are necessary for a fair presentation of the Company's
financial position and the results of its operations and cash flows for these
periods.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
F-7
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on
accelerated methods for both financial reporting and income tax purposes over
the estimated useful lives as follows: office equipment -- 5-7 years; lab
equipment -- 5 years; furniture and fixtures -- 7 years; transportation
equipment -- 5 years; leasehold improvements -- 5 years.
Purchased Software
Purchased software was acquired in connection with the acquisition described
in Note 13 and is being amortized on a straight-line basis over five years.
Revenue and Cost Recognition
The Company's principal sources of contract revenues are from engineering
and design services and the production of electro-mechanical equipment.
Revenues from long-term fixed-price development contracts performed
principally under the Company's control are recognized on the percentage-of-
completion method, measured by the percentage of costs incurred to date to
estimated total costs for each contract when such costs can be reasonably
estimated. Contract costs include all direct material, labor and subcontractor
costs and those indirect costs related to contract performance such as
indirect labor, supplies and tool costs. General and administrative costs are
charged to expense as incurred. Changes in job performance, job conditions,
and estimated profitability, including those arising from contract penalty
provisions and final contract settlements may result in revisions to costs and
revenue and are recognized in the period in which the revisions are
determined. Revenues from electro-mechanical equipment sold to customers which
are not part of a larger contract are recognized when the contract is
substantially completed. Revenues recognized in excess of amounts billed are
classified under current assets as costs and estimated earnings in excess of
billings on uncompleted contracts. Amounts received from clients in excess of
revenues recognized to date are classified under current liabilities as
billings in excess of costs and estimated earnings on uncompleted contracts.
Research and Development
Internally funded research and development costs are charged to operations
as incurred. Included in cost of revenues is customer funded research and
development costs of approximately $472,000, $482,000 and $520,000 for the
years ended December 31, 1994, 1995, and 1996, respectively, and $110,000 and
$127,000 for the three months ended March 31, 1996 and 1997, respectively.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of accounts receivable and
cash. To reduce credit risk relating to the Company's sales in the U.S. and
overseas, the Company performs ongoing credit evaluations of its commercial
customers' financial condition, but generally does not require collateral for
government and domestic commercial customers. For its foreign commercial
customers, the Company generally requires irrevocable letters of credit in the
amount of the total contract. At December 31, 1996 and March 31, 1997,
irrevocable letters of credit were posted for three and six of the Company's
foreign customers, respectively.
Warranty Expense
The Company provides for warranty costs on sales of its own product. Product
warranty periods vary, but generally extend for one year from the date of
sale.
F-8
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company uses the liability method to account for income taxes.
Accordingly, deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts reportable for income tax
purposes. The Company files a consolidated federal income tax return with its
domestic subsidiaries.
Foreign Currency Translation
The Company's foreign operations' functional currency is the U.S. dollar.
Foreign currency transaction gains and losses, which are not material, are
recognized currently in the consolidated statements of operations. For the
year ended December 31, 1996 and for the three months ended March 31, 1997,
approximately 8% and 3%, respectively, of the Company's revenues were billed
in currencies other than the U.S. dollar. Substantially all of the costs of
the Company's contracts, including costs subcontracted to the Parent, have
been U.S. dollar denominated transactions, except for wages of Engineering
which are denominated in local currency.
Net Income Per Share
Net income per share is computed using the weighted average number of common
shares outstanding during the period. The common shares outstanding for all
periods have been restated to reflect the corporate restructuring described in
Note 1.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December 31,
1997. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of the Company's primary and fully diluted earnings
per share is not expected to be material.
Long-Lived Assets
During the year ended December 31, 1996, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of." SFAS 121 did not have an impact on the Company's financial
condition or results of operations.
Accounting for Stock Options
During the year ended December 31, 1996, the Company adopted the Financial
Accounting Standards Board Statement No. 123 (SFAS 123), "Accounting for Stock
Based Compensation." SFAS 123 provides companies with a choice to follow the
provision of SFAS 123 in the determination of stock-based compensation
expenses or to continue with the provisions of APB 25, "Accounting for Stock
Issued to Employees." The Company will continue to follow APB 25 and will
provide pro forma disclosures as required by SFAS 123. SFAS 123 did not have
an impact on the Company's financial condition or results of operations.
Fair Value of Financial Instruments
Financial Accounting Standards Board Statement No. 107, Disclosures About
Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. Cash, accounts receivable, other
current assets, accounts payable and accrued expenses reported in the
consolidated balance sheets equal or approximate fair value due to their short
maturities. Based on the borrowing rates currently available to the Company,
the fair value of the Company's long-term debt is approximately $3 million.
F-9
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- -----------
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Work-in-process..................... $1,600,000 $1,211,000 $1,164,320
Parts and components................ 903,212 1,030,234 1,106,650
---------- ---------- ----------
$2,503,212 $2,241,234 $2,270,970
========== ========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1995 1996 1997
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment.......................... $364,812 $ 656,432 $ 694,284
Lab and computer equipment................ 188,367 667,430 667,430
Transportation equipment.................. 111,359 163,161 155,161
Furniture and fixtures.................... 57,161 44,359 44,359
Leasehold improvements.................... 12,915 4,142 4,142
-------- ---------- ---------
734,614 1,535,524 1,565,376
Less accumulated depreciation............. 361,259 541,244 618,945
-------- ---------- ---------
Property and equipment, net............... $373,355 $ 994,280 $ 946,431
======== ========== =========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1995 1996 1997
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation.................... $371,330 $ 435,930 $ 456,115
Accrued contract costs.................. 41,676 413,430 462,822
Purchase price payable relating to Flam
& Russell, Inc. ....................... -- 275,000 275,000
Accrued commissions..................... -- 92,128 --
Accrued royalties....................... 21,072 87,185 85,585
Accrued warranty........................ 15,000 81,000 81,000
Other accrued expenses.................. 135,117 167,140 104,473
-------- ---------- ----------
$584,195 $1,551,813 $1,464,995
======== ========== ==========
</TABLE>
F-10
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED PARTY TRANSACTIONS
The financial results of Engineering include all contract revenue of the
microwave test and measurement business unit of the Parent, direct contract
costs, direct personnel costs, electrical and mechanical production services
in an amount equal to the Parent's cost of providing such services plus 5% and
pro rata allocations of administrative expenses from the Parent to
Engineering. Such allocations of administrative expenses are based on
management's estimate of the level of these expenses required to support
Engineering, relative to the reasonable allocation of such costs. Interest
expense on intercompany debt has not been provided. The average balance of the
intercompany debt for the three years ended December 31, 1996 was
approximately $3.0 million. Income taxes for Engineering are in accordance
with the statutory rates in Israel net of adjustments allowable under local
law. The "Parent's Equity in Division" of Engineering has been reflected as a
contribution of additional paid-in capital upon its incorporation on December
29, 1996.
Note payable -- Parent reflects the amount due to the Parent for the net
working capital required by Engineering. At December 31, 1996, the balance of
$2,722,000 was converted into a three year, non-interest bearing promissory
note payable due in 1999.
Included in cost of revenues for the years ended December 31, 1994, 1995,
1996 and for the three months ended March 31, 1996 and 1997, are approximately
$1,492,000, $1,423,000, $1,496,000, and $298,000 and $323,000, respectively,
relating to the production services provided by the Parent. Commission revenue
results from amounts earned as a distributor of certain systems manufactured
by the Parent. Accounts payable -- Parent reflects the balance outstanding
relating to these transactions with the Parent.
Effective January 1, 1997, Engineering and the Parent entered into an
agreement, whereby Engineering will purchase from the Parent electrical and
mechanical production services. Engineering will pay the Parent the cost of
providing such services plus 5%. The Parent will provide other administrative
services, including but not limited to, bookkeeping, computer, legal,
accounting, cost management, information systems, and production support for a
fixed amount of $360,000 during 1997. This amount will be evaluated and
determined on an annual basis. Engineering is leasing office space from the
Parent on an annual basis, for a rental of $51,000 per year.
6. LINE OF CREDIT AGREEMENTS
The Company has a $1,000,000 line of credit with a bank of which no amounts
were outstanding at December 31, 1995 and 1996, respectively. The line is
renewable annually in April, bears interest at .5% over the bank's prime rate
(8.75% at December 31, 1996), is secured by accounts receivable, and requires
compliance with certain financial performance covenants. At December 31, 1996,
$500,000 was not available to the Company as it was being held for a letter of
credit. During May 1997, the $500,000 letter of credit was terminated in
connection with the final payment of the Flam & Russell purchase price
(Note 13).
The Company also has a $150,000 line of credit with a bank of which the
entire amount is available at December 31, 1996. The line is renewable
annually in April and bears interest at 1.5% over the bank's prime rate (9.75%
at December 31, 1996). The line is secured by accounts receivable.
7. COMMITMENTS
The Company leases its operating facilities and certain equipment under
noncancelable operating lease agreements which expire in various years through
1999. Rent expense for the years ended December 31, 1994, 1995, and 1996 was
approximately $43,000, $48,000, and $120,000, respectively and for the three
months ended March 31, 1996 and 1997 was approximately $10,500 and $55,000
respectively. Future minimum payments under noncancelable operating leases
with initial terms of one year or more is as follows at December 31, 1996:
$179,000 in 1997; $45,000 in 1998; $9,500 in 1999 and $2,500 in 2000.
Subsequent to December 31, 1996 the Company entered into a sublease agreement
for one of its operating facilities. Future minimum rentals to be received
under this sublease are as follows: $37,000 in 1997; $44,000 in 1998 and
$7,400 in 1999.
F-11
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CERTAIN CONCENTRATIONS
The Company's contract revenues were concentrated in the following markets
as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States
Commercial............................ 55% 20% 37% 18% 48%
Government............................ 10 12 11 6 14
--- --- --- ------- -------
65 32 48 24 62
Foreign
Commercial............................ 24 58 45 66 33
Government............................ 11 10 7 10 5
--- --- --- ------- -------
35 68 52 76 38
--- --- --- ------- -------
100% 100% 100% 100% 100%
=== === === ======= =======
</TABLE>
The Company's foreign contract revenues were concentrated in the following
geographic regions as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asia.................................... 22% 36% 24% 61% 22%
Europe.................................. 9 25 18 8 13
Israel.................................. 4 7 4 7 3
Americas................................ -- -- 6 -- --
--- --- --- ------- -------
35% 68% 52% 76% 38%
=== === === ======= =======
</TABLE>
Included in the consolidated balance sheets at December 31, 1995 and 1996
and at March 31, 1997 are net assets of the Company's foreign subsidiary,
Engineering, which aggregated $50,000, $480,000 and $641,000, respectively.
Sales to one customer exceeded 10% of total revenues during each of the
years ended December 31, 1994 and 1995. There were no sales to any customer
exceeding 10% of total revenues during the year ended December 31, 1996.
9. INCOME TAXES
Pretax income (loss) from continuing operations was taxed in the following
jurisdictions:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------- -----------------
1994 1995 1996 1996 1997
--------- --------- ---------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Domestic..................... $(356,912) $ 990,263 $ 678,066 $(1,358) $678,165
Foreign...................... 322,000 (196,000) 592,000 48,000 252,000
--------- --------- ---------- ------- --------
$ (34,912) $ 794,263 $1,270,066 $46,642 $930,165
========= ========= ========== ======= ========
</TABLE>
F-12
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES (CONTINUED)
The Company has indicated that all profits of Engineering, its Israeli
subsidiary, are permanently invested overseas.
The tax effects of temporary differences that give rise to a significant
portion of deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Operating loss and credit
carryforwards...................... $ -- $ 313,600 $ 297,000
Allowance for losses on contracts... 60,000 8,100 --
Accrued compensation................ 45,000 53,700 85,000
Other............................... 7,000 6,100 6,000
--------- --------- ---------
Total deferred tax assets........... 112,000 381,500 388,000
--------- --------- ---------
Deferred tax liabilities:
Accounting for long-term contracts.. (352,000) (393,500) (393,500)
Prepaid and other................... (15,000) (55,000) (39,000)
Purchase accounting basis
differences........................ -- (235,000) (225,000)
--------- --------- ---------
Total deferred tax liabilities........ (367,000) (683,500) (657,500)
--------- --------- ---------
Net deferred tax liabilities.......... $(255,000) $(302,000) $(269,500)
========= ========= =========
</TABLE>
Deferred tax assets at December 31, 1996 arise from net operating losses of
approximately $395,000 and tax credits of approximately $142,000 which the
Company acquired in its acquisition of Flam & Russell, Inc. (Note 13). The tax
benefit of these losses and credits may be limited both in time and amount due
to limitations imposed by Section 382 of the Internal Revenue Code. Net
operating loss and credit carryforwards expire during various dates from 1999
through 2011.
The components of income tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ -----------
1994 1995 1996 1997
--------- --------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal.................... $ 163,000 $ 138,000 $ 67,000 $220,000
State...................... 65,000 55,000 -- 45,000
Foreign.................... 20,000 (108,000) 162,000 91,000
--------- --------- -------- --------
248,000 85,000 229,000 356,000
Deferred
Federal.................... (261,000) 163,000 141,000 (8,000)
State...................... (106,000) 53,000 69,000 (4,000)
Foreign.................... -- -- -- --
--------- --------- -------- --------
(367,000) 216,000 210,000 (12,000)
--------- --------- -------- --------
Total income tax (benefit)
expense..................... $(119,000) $ 301,000 $439,000 $344,000
========= ========= ======== ========
</TABLE>
F-13
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of income tax (benefit) expense at the U.S. Federal
statutory tax rate and the actual income tax expense is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1994 1995 1996 1997
--------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory U.S. Federal rate.......... $ (12,000) $270,000 $432,000 $316,000
State taxes, net..................... (31,000) 71,000 47,000 27,000
Foreign rate difference.............. (89,000) (41,000) (39,000) 5,000
Other, net........................... 13,000 1,000 (1,000) (4,000)
--------- -------- -------- --------
$(119,000) $301,000 $439,000 $344,000
========= ======== ======== ========
</TABLE>
10. RESEARCH AND DEVELOPMENT
Prior to 1994, the Company received research and development funding from
the Binational Industrial Research and Development Foundation ("BIRD") and the
Chief Scientist of the Ministry of Industry and Trade ("Chief Scientist").
Under terms of the BIRD grants, the Company is obligated to repay 100% to 150%
of the funding received at rates ranging from 2 1/2% to 5% of the annual sales
of the product developed under the grants. For the years ended December 31,
1994, 1995 and 1996, royalties under this program were approximately $41,000,
$42,000 and $39,000, respectively, and approximately $3,000 in each of the
three-month periods ended March 31, 1996 and 1997. At December 31, 1996 and
March 31, 1997, the Company had an outstanding contingent obligation to BIRD
in the amount of $34,000 and $31,000, respectively. Under the terms of the
Chief Scientist grant, the Company is obligated to pay royalties at a rate of
2% of revenues generated from the sale of certain products up to the amount of
the grant. For the years ended December 31, 1994, 1995 and 1996, royalties
under this program were approximately $64,000, $64,000 and $78,000,
respectively, and for the three months ended March 31, 1996 and 1997, $12,000,
and $13,000, respectively. At December 31, 1996 and March 31, 1997, the
Company had an outstanding contingent obligation to the Chief Scientist of
$976,000 and $963,000, respectively.
11. RETIREMENT PLAN
The Company has 401(k) savings plans which cover substantially all U.S.
employees who have attained the age of 21 and have completed 12 months of
service. Eligible employees make voluntary contributions to the plans up to
specified percentages of their annual compensation as defined in the plans.
Under the plans, the Company makes discretionary matching contributions
determinable each plan year and additional contributions based on annual
eligible compensation for each participant. The plans are funded on a current
basis. For the years ended December 31, 1994, 1995 and 1996 and for the three
months ended March 31, 1996 and 1997, the Company's contributions to the plans
were $8,000, $1,000 and $18,000, and $2,000 and $21,000, respectively.
F-14
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the percentage of
completion method are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- -----------
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accumulated expenditures on
uncompleted contracts............. $4,567,586 $ 8,913,893 $ 8,126,470
Estimated earnings thereon......... 647,941 1,031,484 1,711,848
---------- ----------- -----------
5,215,527 9,945,377 9,838,318
Less: applicable progress
billings.......................... 5,086,039 10,303,696 9,448,867
---------- ----------- -----------
Total.............................. $ 129,488 $ (358,319) $ 389,451
========== =========== ===========
</TABLE>
The long-term contracts are shown in the accompanying balance sheets as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Costs and estimated earnings on
uncompleted contracts in excess of
billings........................... $ 846,865 $ 573,345 $809,518
Billings on uncompleted contracts in
excess of costs and estimated
earnings........................... (717,377) (931,664) (420,067)
--------- --------- --------
$ 129,488 $(358,319) $389,451
========= ========= ========
</TABLE>
At December 31, 1995 and 1996 and at March 31, 1997, as a result of delays
and other production and delivery difficulties, the Company has provided for
$10,000, $20,000, and $0, respectively, of anticipated losses on contracts in
process and nearing completion. These amounts are included in accrued expenses
at December 31, 1995 and 1996 and at March 31, 1997.
13. ACQUISITION OF FLAM & RUSSELL, INC.
On June 28, 1996, the Company acquired 100% of the outstanding stock of Flam
& Russell, Inc. (Flam & Russell) for cash of approximately $768,000, including
direct acquisition costs of $74,900. The purchase agreement also provided for
contingent payments, subject to offsets, over a two-year period. At December
31, 1996, the Company had a letter of credit in the amount of $500,000 against
its line of credit (Note 6) relating to the contingent purchase price. In
March 1997, the Company reached a settlement on the contingent purchase price
for $275,000. Such amount has been provided for in accrued expenses as of
December 31, 1996 and March 31, 1997, and was paid in May 1997.
The acquisition was accounted for as a purchase. The results of operations
from June 29, 1996 through December 31, 1996 are included in the Company's
results of operations. At December 31, 1996, the purchase price of
approximately $1,043,000 has been preliminarily allocated to the net assets
acquired based upon their estimated fair market values, principally as
follows: $452,000 to property and equipment, $352,000 to purchased software,
$384,000 to deferred tax assets, $249,000 to deferred tax liabilities and
$104,000, net, to current assets and liabilities.
F-15
<PAGE>
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
13. ACQUISITION OF FLAM & RUSSELL, INC. (CONTINUED)
The following unaudited pro forma information represents a summary of
consolidated results of operations of the Company and Flam & Russell for the
years ended December 31, 1995 and 1996, as if the acquisition had occurred at
the beginning of 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Total revenues.................................. $13,454,000 $13,816,000
=========== ===========
(Loss) income before extraordinary items........ $ (59,000) $ 789,000
=========== ===========
Net income...................................... $ 342,000 $ 789,000
=========== ===========
Net income per common share..................... $ 0.09 $ 0.20
=========== ===========
</TABLE>
14. STOCKHOLDER'S EQUITY
Common Stock
The holders of shares of Common Stock are entitled to one vote for each
share on record on any matters to be voted on by the stockholder. The holders
of Common Stock are entitled to receive dividends if declared by the Board of
Directors and to share ratably in the assets of the Company legally available
for distribution to its stockholders in the event of liquidation, dissolution
or winding-up of the Company. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights.
Preferred Stock
The Company's Board of Directors may, without further action by the
Company's stockholder, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The holders of Preferred
Stock would normally be entitled to receive a preference payment in the event
of any liquidation, dissolution or winding-up of the Company before any
payment is made to the holders of the Common Stock. The issuance of Preferred
Stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of Common Stock.
Stock Option Plan
During March 1997, the Board of Directors adopted, and the Company's
Stockholder approved, the Company's 1997 Equity Incentive Plan (the "Incentive
Plan"). The purposes of the Incentive Plan is to promote the long-term
retention of the Company's key employees and certain other persons who are in
a position to make significant contributions to the success of the Company.
The Incentive Plan permits grants of incentive stock options ("ISOs"), options
not intended to qualify as ISOs ("nonqualified options"), stock appreciation
rights ("SARs"), restricted, unrestricted and deferred stock awards,
performance awards, loans and supplemental cash awards, and combinations of
the foregoing (all referred to as "Awards").
The Incentive Plan provides for awards of 800,000 shares of the Company's
Common Stock of which 492,300 shares will be granted at the initial public
offering price and will vest over four years. Future shares will be granted at
the fair market value on the date of grant and will vest over four years.
15. EVENTS "UNAUDITED" SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
In April 1997, the Board of Directors of the Company authorized the filing
of a Registration Statement with the Securities and Exchange Commission for
the offer and sale of up to 2,000,000 shares of its Common Stock.
On March 31, 1997, the Company entered into an agreement with Advanced
Electromagnetics, Inc., a California corporation ("AEMI"), pursuant to which
all of the issued and outstanding shares of AEMI will be sold to the Company,
contemporaneously with the completion of this offering, for up to a maximum of
$1.6 million, subject to adjustment based on AEMI's financial performance for
the three years ended March 31, 1997. One-half of the purchase price will be
paid in cash and the other half will be paid by issuance of shares of the
Company's Common Stock valued at the Offering Price.
During June 1997, the Company renegotiated its line of credit agreements
increasing the available funds from $1,150,000 to $2,150,000 through April
1998.
F-16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Flam & Russell, Inc.
Horsham Pennsylvania
We have audited the accompanying balance sheets of Flam & Russell, Inc. (a
wholly-owned subsidiary of Orbit Advanced Technologies, Inc.) as of June 30,
1995 and June 28, 1996 and the related statements of income, changes in
stockholders' equity and cash flows for each of the three fiscal years in the
period ended June 28, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flam & Russell, Inc. as of
June 30, 1995 and June 28, 1996 and the results of its operations and its cash
flows for each of the three fiscal years in the period ended June 28, 1996 in
conformity with generally accepted accounting principles.
/s/ Messina, Ceci, Archer & Company, P.C.
Stamford, Connecticut
August 2, 1996
(except as to Note P, which
is as of March 14, 1997)
F-17
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 28,
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................... $ 58,499 $ 194,401
Accounts receivable, net of allowance of $6,228 in
1996............................................. 629,857 577,467
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 200,376 256,584
Inventories....................................... 677,202 365,023
Deferred income taxes............................. 7,500 --
Other current assets.............................. 5,482 17,237
---------- ----------
1,578,916 1,410,712
---------- ----------
Property and equipment............................. 270,801 185,431
---------- ----------
Other assets
Deferred income taxes............................. 56,820 --
Deposits.......................................... 2,433 1,298
---------- ----------
59,253 1,298
---------- ----------
$1,908,970 $1,597,441
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................. $ 381,348 $ 341,014
Notes payable..................................... 450,000 150,000
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 48,475 72,518
Customer advances................................. 97,700 2,538
Accrued expenses.................................. 132,500 119,842
Capital lease obligations......................... 31,081 32,568
Other current liabilities......................... 25,419 31,533
---------- ----------
1,166,523 750,013
---------- ----------
Other liabilities
Notes payable..................................... 650,000 --
Capital lease obligations......................... 50,402 17,834
---------- ----------
700,402 17,834
---------- ----------
Stockholders' equity
Common stock...................................... 75,900 116,700
Additional paid-in capital........................ 670,597 1,139,797
Accumulated deficit............................... (689,083) (410,112)
---------- ----------
57,414 846,385
Treasury stock, at cost........................... (15,369) (16,791)
---------- ----------
42,045 829,594
---------- ----------
$1,908,970 $1,597,441
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
STATEMENTS OF INCOME
PERIODS ENDED JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales..................................... $5,656,497 $5,863,918 $6,057,951
Cost of goods sold........................ 4,473,052 5,293,725 5,331,574
---------- ---------- ----------
Gross profit............................ 1,183,445 570,193 726,377
---------- ---------- ----------
Expenses
Bid and proposal........................ 718,642 651,727 330,536
Research and development................ 599,964 850,140 362,284
---------- ---------- ----------
1,318,606 1,501,867 692,820
---------- ---------- ----------
Income (loss) from operations............. (135,161) (931,674) 33,557
---------- ---------- ----------
Other income (expense)
Interest income......................... 6,768 4,051 8,989
Interest expense........................ (55,221) (32,814) (102,297)
Miscellaneous........................... 1,224 3,889 --
---------- ---------- ----------
(47,229) (24,874) (93,308)
---------- ---------- ----------
Loss before taxes and extraordinary
gains.................................... (182,390) (956,548) (59,751)
Benefit (provision) for income taxes...... 90,541 -- (64,320)
---------- ---------- ----------
Loss before extraordinary gains........... (91,849) (956,548) (124,071)
Extraordinary gains....................... -- 400,902 403,042
---------- ---------- ----------
Net income (loss)......................... $ (91,849) $ (555,646) $ 278,971
========== ========== ==========
Earnings (loss) per common share:
Loss before extraordinary gains......... $ (1.22) $ (12.94) $ (1.73)
Extraordinary gains..................... -- 5.42 5.62
---------- ---------- ----------
Net income (loss)....................... $ (1.22) $ (7.52) $ 3.89
========== ========== ==========
Common shares used in computing per share
amounts.................................. 75,200 73,925 71,675
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PERIODS ENDED JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY ACCUMULATED
STOCK CAPITAL STOCK DEFICIT TOTAL
-------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, July 2, 1993...... $ 75,900 $ 670,597 $ (2,925) $ (41,588) $701,984
Net loss.................. -- -- -- (91,849) (91,849)
-------- ---------- -------- --------- --------
Balance, July 1, 1994...... 75,900 670,597 (2,925) (133,437) 610,135
Purchase of 2,550 shares
of common stock for
treasury................. -- -- (12,444) -- (12,444)
Net loss.................. -- -- -- (555,646) (555,646)
-------- ---------- -------- --------- --------
Balance June 30, 1995...... 75,900 670,597 (15,369) (689,083) 42,045
Purchase of 1,950 shares
of common stock for
treasury................. -- -- (1,422) -- (1,422)
Conversion of trust debt
to common stock.......... 40,800 469,200 -- -- 510,000
Net income................ -- -- -- 278,971 278,971
-------- ---------- -------- --------- --------
Balance, June 28, 1996..... $116,700 $1,139,797 $(16,791) $(410,112) $829,594
======== ========== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
STATEMENTS OF CASH FLOWS
PERIODS ENDED JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................. $(91,849) $(555,646) $ 278,971
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation................................. 124,665 142,210 121,251
Deferred income taxes........................ (90,541) -- 64,320
Extraordinary gain........................... -- (400,902) (403,042)
Gain on sale of equipment.................... -- (2,057) --
Allowance for bad debts...................... -- -- 6,228
Interest converted to stock.................. -- -- 63,042
Changes in assets and liabilities:
Accounts receivable......................... (442,435) 206,629 46,163
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... 122,648 67,470 (56,208)
Inventories................................. (132,996) 56,913 312,179
Other assets................................ 64,739 16,212 (10,620)
Accounts payable............................ (85,531) 242,534 (40,334)
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... 127,854 (467,805) 24,043
Customer advances........................... -- 72,694 (95,162)
Accrued expenses............................ 12,416 20,800 (12,658)
Other liabilities........................... 38,279 7,985 6,114
-------- --------- ---------
Net cash provided (used) by operating
activities................................ (352,751) (592,963) 304,287
-------- --------- ---------
Cash flows from investing activities
Acquisition of property and equipment......... (180,166) (76,019) (35,881)
Proceeds from equipment sale.................. -- 5,948 --
-------- --------- ---------
Net cash used by investing activities...... (180,166) (70,071) (35,881)
-------- --------- ---------
Cash flows from financing activities
Purchase of treasury stock.................... -- (12,444) (1,422)
Repayment of notes payable.................... -- -- (300,000)
Repayment of capital leases................... -- (10,904) (31,082)
Increase in notes payable..................... -- 450,000 200,000
-------- --------- ---------
Net cash provided (used) by financing
activities................................ -- 426,652 (132,504)
-------- --------- ---------
Net increase (decrease) in cash............ (532,917) (236,382) 135,902
Cash at beginning of period................ 827,798 294,881 58,499
-------- --------- ---------
Cash at end of period...................... 294,881 $ 58,499 $ 194,401
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS
JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Flam and Russell, Inc.
(the Company) is presented to assist in the understanding of the financial
statements.
Organization and Nature of Operations
The Company was incorporated in the State of Delaware on July 8, 1980 and
became a wholly owned subsidiary of Orbit Advanced Technologies, Inc. on June
28, 1996. It is an engineering firm specializing in research, development, and
design services in the areas of microwave, antenna, and related technology.
The Company markets its product and services worldwide.
Use of Estimate
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by
the average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
straight-line and accelerated methods over the estimated useful lives of the
assets.
Revenue Recognition
The Company accounts for certain contracts on the percentage-of-completion
method in which income is recognized in the ratio that costs incurred bears to
estimated total costs. Adjustments to cost estimates are made periodically,
and losses expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of costs
incurred and income recognized on uncompleted contracts in excess of related
billings is shown as a current asset, and the aggregate of billings on
uncompleted contracts in excess of related costs incurred and income
recognized is shown as a current liability.
Deferred Income Taxes
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. These differences related
principally to the Company recognizing revenue on the percentage of completion
method for financial reporting purposes and the completed contract method for
income tax purposes. Deferred taxes are also recognized for operating losses
that are available to offset future taxable income and tax credits that are
available to offset future federal income taxes.
NOTE B -- CREDIT RISK
The Company maintains cash deposits, at primarily one financial institution
that may at times exceed the $100,000 federally insured limits. At June 28,
1996, the Company has uninsured cash deposits of $119,042.
F-22
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
Concentration of credit with respect to trade accounts receivable include
amounts due from large foreign and nationally established corporations and
various government agencies in the high tech industry group. Credit is issued
under binding contracts to these companies and government agencies and
generally collateral is not required.
NOTE C -- UNCOMPLETED CONTRACTS
Cost, estimated earnings, and billings on uncompleted contracts are as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cost incurred on uncompleted contracts........ $ 2,784,473 $ 5,281,584
Estimated earnings............................ 317,679 330,829
Billings to date.............................. (2,950,251) (5,428,347)
----------- -----------
$ 151,901 $ 184,066
=========== ===========
Included in accompanying balance sheet under
the following captions:
Cost and estimated earnings in excess of
billings on uncompleted contracts............ $ 200,376 $ 256,584
Billings in excess of costs and estimated
earnings on uncompleted contracts............ (48,475) (72,518)
----------- -----------
$ 151,901 $ 184,066
=========== ===========
</TABLE>
NOTE D -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Finished goods.......................................... $ -- $ 53,645
Work in progress........................................ 104,296 49,462
Raw materials........................................... 572,906 261,916
-------- --------
$677,202 $365,023
======== ========
</TABLE>
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Furniture and fixtures.......................... $ 83,409 $ 83,409
Office equipment................................ 110,392 113,402
Lab equipment................................... 647,508 672,336
Computer equipment.............................. 919,456 927,499
Automobiles..................................... 49,750 40,806
----------- -----------
1,810,515 1,837,452
Accumulated depreciation........................ (1,539,714) (1,652,021)
----------- -----------
$ 270,801 $ 185,431
=========== ===========
</TABLE>
F-23
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
Depreciation expense was $121,251, $142,210 and $124,665 for the three years
presented.
NOTE F -- NOTES PAYABLE
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Line of credit with a bank up to a maximum of
$750,000. Interest is payable monthly at prime
plus 3/4% (9.0% in 1996 and 9.75% in 1995).
Secured by substantially all the assets of the
Company and limited by 80% of acceptable accounts
receivable. In addition, the bank required a 5%
compensating balance totalling $37,500. The line
of credit was paid in full in July, 1996......... $ 450,000 $ 150,000
Promissory notes payable to Samuel T. Russell
Revocable Trust (the "Trust"), a related entity,
ranging from $50,000 to $200,000, with interest
at 8%. These notes were to mature on various
dates from July 22, 1997 through July 9, 1998.... 650,000 --
---------- ---------
1,100,000 150,000
Current portion................................... (450,000) (150,000)
---------- ---------
Long-term debt.................................... $ 650,000 $ --
========== =========
</TABLE>
During 1995, the accrued interest of $400,902 on the Trust note was forgiven
as discussed in Note K.
On June 28, 1996, with the approval of the Board of Directors, the Trust note
plus accrued interest was converted into stock, and the remainder was recorded
as an extraordinary gain as discussed in Note K.
NOTE G -- TAXES
The benefit from (provision for) income taxes consist of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ---- --------
<S> <C> <C> <C>
Federal
Current.......................................... $ -- $ -- $ --
Deferred......................................... 78,592 -- (25,300)
------- ---- --------
78,592 -- (25,300)
------- ---- --------
State
Current.......................................... -- -- --
Deferred......................................... 11,949 -- (39,020)
------- ---- --------
11,949 -- (39,020)
------- ---- --------
$90,541 $ -- $(64,320)
======= ==== ========
</TABLE>
F-24
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
A reconciliation of the income tax benefit (provision) at the federal
statutory rate to the income tax benefit (provision) at the effective rate is
as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- --------
<S> <C> <C> <C>
Benefit (provision) computed at the
federal statutory rate................. $ 62,013 $ 188,920 $(94,850)
State taxes (net of federal benefit).... 15,047 45,841 (23,015)
Adjustment to estimated deferred rate... (30,322) (92,376) 46,379
Permanent differences................... -- 102,731 103,279
Change in valuation allowance........... -- (111,838) (89,709)
Reinstatement of Pennsylvania NOL
deduction.............................. -- (106,997) --
Other individually immaterial items..... 43,803 (26,281) (6,404)
-------- --------- --------
$ 90,541 $ -- $(64,320)
======== ========= ========
</TABLE>
The components of deferred taxes consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory valuation................................ $ -- $ 52,617
Provision for bad debts............................ -- 1,503
Net operating losses............................... 199,663 133,268
Investment tax credits............................. 35,899 35,899
Research and development........................... 96,331 106,347
--------- ---------
331,893 329,634
Deferred tax liability:
Long-term contract................................. (46,159) (18,511)
--------- ---------
285,734 311,123
Less valuation allowance............................ (221,414) (311,123)
--------- ---------
Net deferred tax asset.............................. 64,320 --
Less short term portion............................. (7,500) --
--------- ---------
Long-term portion................................... $ 56,820 $ --
========= =========
</TABLE>
The Company has available at June 28, 1996, investment tax credits of
$35,899; research and development tax credits of $106,347; and net operating
loss carryforwards of approximately $402,000 for federal and $797,000 for
State of Pennsylvania. The tax credits and net operating losses will expire
through the year 2009 for federal and the year 1997 for the State of
Pennsylvania.
NOTE H -- RETIREMENT PLAN
The Company has a cash deferred savings plan covering substantially all its
employees. Employees with a minimum of one year of service during the plan
year are eligible to participate in the plan. This type of plan allows a
participating employee to contribute, and therefore defer, a portion of their
compensation up to eight percent each plan year. The Company matches employee
contributions up to a maximum of three percent of the employees' compensation.
The Company's contributions were $33,851, $66,952 and $65,546 for each of the
three periods ended.
F-25
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
NOTE I -- TREASURY STOCK
Treasury stock consists of Class A non-voting common stock and is as
follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
------ -------
<S> <C> <C>
Balance, July 1, 1994...................................... 700 $ 2,925
Purchase................................................. 2,550 12,444
----- -------
Balance, June 30, 1995..................................... 3,250 15,369
Purchase................................................. 1,950 1,422
----- -------
Balance, June 28, 1996..................................... 5,200 $16,791
===== =======
</TABLE>
NOTE J -- COMMON STOCK
The Company's outstanding shares of common stock is comprised of the
following:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Class A -- nonvoting -- par value $1 per share, 20,000
shares authorized, 16,700 shares issued in 1996 and
13,400 issued in 1995.................................. 13,400 16,700
Class B -- voting -- par value $1 per share, 100,000
shares authorized, 100,000 shares issued in 1996 and
62,500 shares issued in 1995........................... 62,500 100,000
</TABLE>
NOTE K -- RELATED PARTY TRANSACTIONS AND EXTRAORDINARY GAIN
The Company has had certain transactions with the Trust. Prior to the
Company becoming a wholly owned subsidiary of Orbit Advanced Technologies,
Inc. certain stockholders of the Company were beneficiaries of the Trust.
On June 30, 1995, the trustees of the Trust agreed to waive and forgo the
payments of accrued interest through that date. This transaction resulted in
an extrordinary gain of $400,902.
On June 28, 1996, with the approval of the Board of Directors, the
outstanding balance of the notes payable to the Trust of $850,000, and accrued
interest of $63,042 was converted to 3,300 shares of Class A common stock and
37,500 shares of Class B common stock of the Company, in the amount of
$510,000, and the remainder was recorded as an extraordinary gain of $403,042.
The Company valued each share issued at $12.50, which was equivalent to the
amount received by the Company's shareholders in connection with the sale of
their shares on June 28, 1996.
NOTE L -- SUPPLEMENTARY DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Cash paid for interest and income taxes for each of the periods ended were
as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Interest........................................... $3,358 $29,158 $41,786
Income taxes....................................... 8,160 -- --
</TABLE>
F-26
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
Noncash investing and financing transactions are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ----
<S> <C> <C> <C>
Note payable and accrued interest of $913,042,
net of extraordinary gain of $403,042, converted
to capital...................................... $510,000 $ -- $ --
Capital lease obligation......................... -- 92,387 --
-------- ------- ----
$510,000 $92,387 $ --
======== ======= ====
</TABLE>
NOTE M -- LEASING ARRANGEMENTS
Operating Leases
The Company has leased facilities in Pennsylvania, Florida and the
Netherlands. The Pennsylvania lease is a noncancelable operating lease, which
expires October 31, 1997. The Netherlands office is leased on a month to month
basis and is cancelable with six months notice. The Florida lease expired in
1995.
The Company also leased a vehicle under a noncancelable operating lease
which expired in April of 1996.
Lease expense was $171,179, $204,123 and $195,907 for each of the periods
ended.
Capital lease
The Company leases equipment under a capital lease agreement which expires
in 1998. The obligation has been recorded in the accompanying financial
statements at the present value of the future minimum lease payments. The
capitalized costs and the accumulated amortization are included in equipment
and accumulated depreciation, respectively. Amortization is included in
depreciation expense. At the expiration of this lease, the title to this
equipment transfers to the Company upon payment of the purchase option price.
Information with respect to this lease as of June 28, 1996 and for the year
then ended is as follows:
<TABLE>
<S> <C>
Capital costs.................................................... $92,387
=======
Accumulated amortization......................................... $48,041
=======
Amortization expense............................................. $26,564
=======
</TABLE>
Future minimum lease payments for all leases at June 28, 1996 are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
<S> <C> <C>
1997................................................. $147,167 $ 36,951
1998................................................. 51,567 18,476
-------- --------
Total minimum lease payments......................... $198,734 55,427
========
Amount representing interest......................... (5,025)
Current portion of capital lease..................... (32,568)
--------
$ 17,834
========
</TABLE>
F-27
<PAGE>
FLAM & RUSSELL, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ORBIT ADVANCED TECHNOLOGIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JULY 1, 1994, JUNE 30, 1995 AND JUNE 28, 1996
NOTE N -- CONTINGENT LIABILITY
The State of California is currently examining the Company's liability for
back sales tax and has proposed certain adjustments that aggregate
approximately $28,000 of additional sales tax. The Company does not agree with
the basis upon which the adjustments are calculated. The ultimate resolution
is not presently determinable.
NOTE O -- SALE OF BUSINESS
On June 28, 1996, the Company's stockholders sold all their shares of the
Company to Orbit Advanced Technologies, Inc.
NOTE P -- ADJUSTMENTS TO FINANCIAL STATEMENTS ISSUED PREVIOUSLY
At the time that the original financial statements were issued for the
period ended June 28, 1996, management had determined that the extraordinary
gain, as more fully described in Note K, should be presented net of applicable
taxes. The current facts no longer support this position, as management has
determined that this gain is a permanent difference for tax purposes. The
financial statements for this period have been adjusted as follows:
<TABLE>
<CAPTION>
ACCUMULATED NET
DEFICIT INCOME
----------- --------
<S> <C> <C>
As previously reported.............................. $(422,105) $266,978
Adjustment to provision for taxes................... 11,993 11,993
--------- --------
As adjusted......................................... $(410,112) $278,971
========= ========
</TABLE>
In addition, certain reclassifications have been made to all the previously
presented financial statements to conform to the current presentation. Such
reclassifications have had no effect on net income as previously reported,
except as mentioned above.
F-28
<PAGE>
[Inside Back Cover:]
[A DIAGRAM APPEARS HERE OF A 3-D REPRESENTATION OF A PLANET IN SPACE WITH AN
ORBITING BAND.]
"Automotive" [A PHOTOGRAPH APPEARS HERE OF AN AUTOMOBILE BEING TESTED IN AN
ANECHOIC CHAMBER MANUFACTURED BY AEMI.]
"Aerospace/Defense" [A PHOTOGRAPH APPEARS HERE OF AN AIRCRAFT BEING TESTED ON A
MAST AND POSITIONING SYSTEM MANUFACTURED BY THE COMPANY.]
"Satellite" [A PHOTOGRAPH APPEARS HERE OF A SATELLITE BEING TESTED ON A
POSITIONING SYSTEM MANUFACTURED BY THE COMPANY.]
"Wireless Communications" [A PHOTOGRAPH APPEARS HERE OF A CELLULAR BASE STATION
ANTENNA BEING TESTED IN A MEASUREMENT SYSTEM MANUFACTURED BY THE COMPANY.]
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OF-
FERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITA-
TION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME, SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
---------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 11
Use of Proceeds.......................................................... 12
Capitalization........................................................... 12
Dividend Policy.......................................................... 13
Dilution................................................................. 13
Selected Consolidated Financial Data..................................... 14
Unaudited Consolidated Pro Forma Data.................................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
Management............................................................... 39
Certain Transactions..................................................... 44
Principal Stockholders................................................... 45
Description of Securities................................................ 46
Shares Eligible for Future Sale.......................................... 48
Underwriting............................................................. 49
Legal Matters............................................................ 51
Experts.................................................................. 51
Available Information.................................................... 51
Glossary................................................................. 52
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL JULY 12, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
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2,000,000 SHARES
[LOGO OF ORBIT/FR APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
PENNSYLVANIA MERCHANT GROUP LTD
UNTERBERG HARRIS
JUNE 17, 1997
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