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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22583
ORBIT/FR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2874370
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
506 PRUDENTIAL ROAD, HORSHAM, PA 19044
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(215) 674-5100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(B) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained
herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $25,509,460(1). As of March 17, 1998, 6,072,973 shares of
common stock were outstanding.
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's common stock outstanding, reduced by the amount of
the common stock held by the officers, directors and shareholders owning in
excess of 10% of the Company's common stock, multiplied by the last reported
sale price for the Company's common stock on March 17, 1998. The information
provided shall in no way be construed as an admission that any officer,
director, or 10% shareholder in the Company may or may not be deemed an
affiliate of the Company or that he/it is the beneficial owner of the shares
reported as being held by him/it, and any such inference is hereby disclaimed.
The information provided herein is included solely for record keeping purposes
of the Securities and Exchange Commission.
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain portions of the Company's Proxy Statement to be filed in connection with
its 1998 Annual Meeting are incorporated by reference in Part III of this
Report. Certain exhibits to the Company's Registration Statement on Form S-1
(File No. 333-25015) filed with the Commission on April 11, 1997, Amendment No.
1 to the Company's Registration Statement on Form S-1 filed with the Commission
on May 19, 1997, and Amendment No. 2 to the Company's Registration Statement on
Form S-1 filed with the Commission on June 5, 1997 are incorporated by reference
as Exhibits in Part IV of this Report.
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ORBIT/FR, INC.
INDEX
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PART I.
Item 1. Business............................................................................................4
Item 2 Properties.........................................................................................15
Item 3 Legal Proceedings..................................................................................15
Item 4 Submission of Matters to a Vote of Security Holders ...............................................15
Item 4.1 Executive Officers and Key Employees...............................................................16
PART II.
Item 5 Market for the Registrants Common Equity and Related Stockholder Matters...........................17
Item 6 Selected Financial Data............................................................................19
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................................19
Item 7A Quantitative and Qualitative Disclosures About Market Risk.........................................26
Item 8 Financial Statements and Supplementary Data........................................................26
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.........................................................................................26
PART III
Item 10 Directors and Executive Officers of the Registrant.................................................26
Item 11 Executive Compensation.............................................................................26
Item 12 Security Ownership of Certain Beneficial Owners and Management.....................................26
Item 13 Certain Relationships and Related Transactions.....................................................26
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................27
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This report on Form 10-K 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, but not limited to those set forth in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations'" under
the heading "Certain Factors" below and elsewhere in this report on Form 10-K.
The following discussion should be read in conjunction with Part II of this Form
10-K and the Consolidated Financial Statements and notes to the Consolidated
Statements beginning on page F-1.
GENERAL
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,
and manufactures anechoic foam, a microwave absorbing material that is an
external component of microwave test and measurement systems. 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 include 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, BMW and
Boeing; and telecommunications service providers that rely on microwave
technology, such as AT&T, NTT and British Telecom. The Company's customers also
include the United States government and several foreign governments
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.
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.
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RECENT HISTORY
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"), Orbit F.R. Engineering, Ltd.,
an Israeli corporation ("Engineering"), and Advanced Electromagnetics, Inc.
(AEMI) a California corporation. The Company's parent, Orbit-Alchut
Technologies, Ltd., is a publicly traded company in Israel which was founded in
1950 ("Alchut"). In addition to its ownership interest 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.
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.
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.
On June 17, 1997, the Company purchased all of the issued and
outstanding shares of Advanced Electromagnetics, Inc., a California corporation
("AEMI"), contemporaneously with the completion of its initial public offering,
for approximately $1.2 million. One-half of the purchase price was payable in
cash and the other half was payable by issuance of shares of the Company's
Common Stock at the initial offering price of $8.25 per share. AEMI manufactures
anechoic foam, a microwave absorbing material that is an integral component of
microwave test and measurement systems.
In February 1998, the Company announced that it intends to acquire all
of the net assets of RDL, Inc., a Pennsylvania Corporation ("RDL"), subject to
certain conditions, including due diligence and approval of the Board of
Directors of ORBIT/FR. RDL is a supplier of sophisticated microwave test and
measurement products to the wireless communication and cable television
industries. It is also a supplier of microwave defense systems. The Company
intends to purchase the net assets of RDL for approximately $6 to $8 million.
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.
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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 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, 555
communications satellites are expected to be launched 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
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1990's, microwave test and measurement needs within the aerospace/defense
industry are expected to grow steadily for the 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. 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, as it has with acquisitions of Flam & Russell and
AEMI. By acquiring suppliers of key components of microwave test and measurement
systems that the
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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 PRODUCTS 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 45% of the
Company's revenues during 1997 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.
LEVERAGING TECHNOLOGICAL EXPERTISE TO EXPAND INTO COMPLIMENTARY
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.
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,
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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.
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 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 $3 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 human 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
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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.
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
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
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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 330 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, 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.
11
<PAGE> 12
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 feet x 3 feet to over 100 feet x 100
feet.
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.
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 representatives for sales, marketing and customer support in Austria,
Brazil, 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-
12
<PAGE> 13
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 overall
revenues. Representative customers that have purchased systems from the Company
include:
Wireless Communications...............Alcatel, Andrew, AT&T, Bell
Atlantic, Bosch Telecom, British
Telecom, Celwave, Daewoo, Ericsson,
GTE, IBM, ITT, Korea Mobile Telecom,
Lucent Technologies, Motorola, NEC,
Nokia, Northern Telecom, NTT,
Qualcomm, RCA, SiemensPlessey and
Telebras.
Satellite ............................DASA, Elenia Spazio, Harris, Hughes
Space and Communications, Lockheed
Martin, Space Systems/Loral, Matra
Marconi Space, Raytheon and TRW.
Automotive ...........................BMW, Ford, Mitsubishi, SAAB, Samsung
and Toyota.
Aerospace/Defense ....................Aerospatiale, Ball Aerospace,
Boeing, British Aerospace, Dassault,
General Electric, Hughes Aircraft,
Israel Aircraft Industry, ITT
Avionics, Lockheed Martin/Loral,
McDonnell Douglas, Mitsubishi Heavy
Industries, NASA, Northrop-Grumman,
Pratt & Whitney, Racal Avionics,
Raytheon E-Systems, Rockwell
International, SAAB Missiles, 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. By
giving three months notice, the Company has the right to select any other
subcontractor.
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 has enabled 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.
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<PAGE> 14
BACKLOG
At December 31, 1997 and 1996, the Company's backlog was approximately
$4.1 million and $10 million, respectively. The Company includes in backlog only
those orders for which it has received and accepted a completed purchase order.
The decrease in the Company's backlog is due mainly to changes in the Company's
product mix to contracts with shorter terms, and due to a slowdown of sales in
Asia. 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 three 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 16
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 1997, 1996
and 1995 were approximately $628,000, $520,000 and $482,000, respectively. In
addition, the Company invested $1,228,000, $581,000 and $239,000, respectively,
during 1997, 1996 and 1995 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.
In the past, the Company benefited from research and development grants
from the Israeli government through the Chief Scientist program, and through
BIRD, a joint United States/Israeli government program. The Company continues to
benefit from research and development grants from the U.S. government through
the SBIR program. The Company believes that its business, operating results and
financial condition would not be materially adversely affected if it 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.
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 MIT (formerly
Scientific Atlanta's microwave division), Nearfield Systems, Aeroflex, System
Planning Corporation and Rantec/ESCO.
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<PAGE> 15
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 December 31, 1997, the Company had a total of 94 employees,
including 20 in software and research and development, 16 in engineering and
program management, 15 in sales, marketing and customer support services, 28 in
production and 15 in administration. Forty nine employees are located at the
Company's headquarters in Horsham, Pennsylvania, 31 are located in California,
11 are located in Israel, and three are 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.
ITEM 2. PROPERTIES
The Company occupies approximately 20,000 square feet of space at its
headquarters in Horsham, Pennsylvania under a lease expiring in October 1998.
Upon expiration of the lease, the Company anticipates moving to a 50,000 square
foot facility in the same vicinity. The current annual base rent is
approximately $182,000. The Company also maintains an engineering facility in
Israel, a technical support and program management center in Germany, and its
manufacturing facilities in Santee, California. The Company's current aggregate
annual rental expenses for these additional facilities are approximately
$136,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter ended December 31, 1997.
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<PAGE> 16
ITEM 4.1 EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the
Company's executive officers, and certain key employees, who are not directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ------------------------- --------------------------------------
<S> <C>
Moshe Pinkasy 47 Chief Executive Officer of Engineering
Marcel Boumans 40 Managing Director of European Operations
Joseph Sullivan 55 Director of Finance and Treasurer
David Farina 37 Vice President, Near-Field SBU
John Aubin 44 Vice President, Far Field/RCS SBU
Sean Mallon 31 Vice President, New Business Development
Gabriel Sanchez 46 Chief Operating Officer, AEMI
</TABLE>
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.
David Farina has served as the Strategic Business Unit Director in
charge of Near Field Systems for the Company and its predecessor since August
1995. 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 Far Field/RCS Strategic Business Unit
Director of the Company since June 1996. 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 New Business Development Strategic
Business Unit Director for the Company and its predecessor since November 1996.
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.
Gabriel Sanchez has served as President of AEMI since its establishment
in March of 1980. Prior to that period, Mr. Sanchez worked for Plessy Microwave
and Emerson and Cumming.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Beginning with the Company's initial public offering on June 17, 1997,
the Company's Common Stock is traded on the National Market of the Nasdaq Stock
Market under the symbol "ORFR." The following table sets forth the high and low
sale prices for the Common stock reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
Second Quarter (beginning June 17, 1997) 10 7/8 8 1/2
Third Quarter 31 3/4 9 1/8
Fourth Quarter 24 3/4 12 5/8
</TABLE>
On March 17, 1998, there were 32 holders of record of Common Stock.
Based on information received by the Company from its stock transfer agent, the
Company believes that there are approximately 451 beneficial owners of its
common stock.
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.
The Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (File N. 333-25015) for the sale of Common
Stock in the Company's initial public offering (the "Offering"). The Company
registered 2,300,000 shares of Common Stock including an over-allotment of
300,000 shares (which was sold by Alchut) at the initial public offering price.
The effective date of the Registration Statement was June 17, 1997. The Offering
commenced June 17, 1997 and was terminated after the sale of all securities
registered. The aggregate price to the public of the 2,300,000 shares of Common
Stock registered was $18,975,000, of which $16,500,000 was raised by the
Company.
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<PAGE> 18
The Company incurred the following expenses in connection with the
issuance and distribution of its Common Stock in the Offering:
<TABLE>
<CAPTION>
<S> <C>
Underwriting Discounts and Commissions................................................$ 1,230,000
Expenses paid to or for Underwriters................................................. 100,000
Other Expenses........................................................................ 1,062,000
----------
Total Expenses.........................................................................$2,392,000
==========
</TABLE>
All payments of expenses were direct or indirect payments to persons
other than directors or officers of the Company or their associates, persons
owning ten percent or more of any class of equity securities of the Company, or
affiliates of the Company.
The Company used the net proceeds of the Offering ($14,108,000) for
the following purposes:
<TABLE>
<CAPTION>
<S> <C>
Purchase of Advanced Electromagnetics Inc. (partial)................................$ 450,000
Temporary Investments (Dreyfus Treasury Cash
Management Fund)................................................................. 13,658,000
-----------
Net Proceeds of the Offering.........................................................$14,108,000
===========
</TABLE>
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data:
(amounts in thousands, except per share data) December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $22,055 10,404 $ 8,299 $ 7,171 $ 3,003
Cost of revenues 13,227 6,450 5,446 5,265 1,209
------- ------- ------- ------- -------
Gross profit 8,828 3,954 2,853 1,906 1,794
General and administrative 1,552 1,315 864 989 737
Sales and marketing 1,527 791 994 786 265
Research and development 1,228 581 239 237 89
------- ------- ------- ------- -------
Operating income (loss) 4,521 1,267 756 (106) 703
Other income 379 3 38 71 38
------- ------- ------- ------- -------
Income (loss) before income taxes 4,900 1,270 794 (35) 741
Income tax expense (benefit) 1,774 439 301 (119) 388
------- ------- ------- ------- -------
Net income $ 3,126 $ 831 $ 493 $ 84 $ 353
======= ======= ======= ======= =======
Basic earnings per share $ 0.61 $ 0.21 $ 0.12 $ 0.02 $ 0.09
======= ======= ======= ======= =======
Diluted earnings per share $ 0.60 $ 0.21 $ 0.12 $ 0.02 $ 0.09
======= ======= ======= ======= =======
Consolidated Balance Sheet Data:
(amounts in thousands) December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital $19,635 $ 3,270 $ 3,875 $ 3,300 $ 768
Total assets 28,654 9,903 6,799 7,674 2,758
Total long term debt 2,909 2,722 3,220 3,129 164
Stockholder's equity 19,093 1,859 1,028 535 451
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues for the year ended December 31, 1997 were $22.1
million compared to $10.4 million for the year ended December 31, 1996, an
increase of approximately $11.7 million or 112%. Revenues from microwave test
and measurement accounted for all of this increase. Approximately $7.2
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<PAGE> 20
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 (significantly as a result of the acquisition of Flam and
Russell in June 1996) with some growth in the industry's domestic commercial
sector. Approximately $3.9 million of the increase was attributable to the
wireless communications industry, with $.7 million attributable to the satellite
industry. The automotive industry declined by $.1 million. AEMI revenues of
approximately $2.8 million recorded since the June 17, 1997 acquisition are
included in the above amounts.
Cost of revenues. Cost of revenues for the year ended December 31, 1997
were $13.2 million compared to $6.5 million for the year ended December 31,
1996, an increase of approximately $6.7 million or 105%. Gross margins rose from
38% for the year ended December 31, 1996 to 40% for the year ended December 31,
1997, as a result of increased efficiencies in the Company's solution, design,
production and installation stages, as well as increasing use of the Company's
standard off-the-shelf components in its turnkey systems, plus an increased role
for higher margin software sales, and the addition of AEMI's high gross margin
products since June 17, 1997.
General and administrative expenses. General and administrative
expenses for the year ended December 31, 1997 were $1,552,000 compared to
$1,315,000 for the year ended December 31, 1996, an increase of approximately
$237,000 or 18%. AEMI accounts for approximately $254,000 of this increase, and
is offset by a slight decrease in Orbit Advanced Technology Inc.'s general and
administrative expenses. As a percentage of revenues, general and administrative
expenses decreased from 12.6% for the year ended December 31, 1996 to 7% for the
year ended December 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 year
ended December 31, 1997 were $1,527,000 compared to $791,000 for the year ended
December 31, 1996, an increase of approximately $736,000 or 93%. As a percentage
of revenues, sales and marketing expenses were 6.9% for the year ended December
31, 1997, a decrease from 7.6% for the year ended December 31, 1996.
Approximately $226,000 of this increase represents higher commissions due to
increased sales, while approximately $196,000 of this increase is attributable
to AEMI. The opening of the European office accounts for another $86,000, while
the remaining $228,000 reflects increased sales force and marketing activity
around the world.
Research and development expenses. Research and development expenses
for the year ended December 31, 1997 were $1,228,000 compared to $581,000 for
the year ended December 31, 1996, an increase of $647,000 or 111%. This increase
reflected the additional development and improvement of the Company's software
and hardware products for the Company's solutions for the wireless, automotive,
satellite and aerospace markets.
Other Income. Other income for the year increased $376,000 due
principally to the interest earnings on the initial public offering funds.
Income taxes. Income tax expense for the year ended December 31, 1997
was $1,774,000 compared to $439,000 for the year ended December 31, 1996, an
increase of $1,335,000. The Company's effective tax rate increased slightly from
35% for the year ended December 31, 1996 to 36% for the year ended December 31,
1997 due to a lower proportion of the Company's income being generated by its
operations in Israel where the tax rate is lower.
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 sales in the wireless communications and satellite
industries.
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<PAGE> 21
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.
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, which were increased in
June 1997 from $1,150,000. At December 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. The line of credit agreements
21
<PAGE> 22
require the Company to comply with certain financial performance covenants of
which the Company was in compliance at December 31, 1997. At December 31, 1997,
the Note Payable to Parent of $2,722,000 represented a non-interest bearing
promissory note owed by ORBIT/FR Engineering, Ltd. (the Company's Israeli
subsidiary) to Orbit-Alchut Technologies, Ltd., the majority shareholder of the
Company, for the transfer by Alchut of working capital at the end of 1996. The
note is due on December 31, 1999.
Net cash provided by operating activities for the year amounted to
$1,137,000 in 1997 versus $1,119,000 in 1996. Major components of cash provided
by operating activities in 1997 compared to 1996 were an increase in net income
to $3,126,000 in 1997 from $831,000 in 1996, offset by an increase in costs and
estimated earnings in excess of billings on uncompleted contracts ($1,949,000),
and a decrease in billings in excess of costs and estimated earnings on
uncompleted contracts ($746,000).
Net cash used in investing activities decreased to $745,000 in 1997
from $922,000 in 1996. This decrease was principally due to actual cash outlays
for the net assets acquired in the Flam and Russell acquisition in 1996,
exceeding those of the AEMI acquisition in 1997 by approximately $199,000.
Net cash provided by financing activities in 1997 amounted to
$14,108,000 versus $648,000 used in 1996. This change is mainly due to the net
proceeds raised in connection with the Company's initial public offering net of
offering expenses paid.
During the quarter ended June 30, 1997, the Company incurred an
obligation of $1,204,000 for the AEMI acquisition of which $450,000 was paid on
June 20, 1997. The remaining AEMI purchase price of $754,000 is payable in cash
($152,000) and common shares at the initial public offering price of $8.25 per
share ($602,000). The payment was completed in February 1998.
During 1997, the Company also incurred capital expenditures of
approximately $371,000, a portion of which was used to establish the Company's
European office, along with improving the Company's hardware and software tools,
and by investing in information systems for the Company and its subsidiaries.
The Company has exposure to currency fluctuations as a result of
billing certain 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 year ended December 31, 1997, approximately 1% 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.
IMPACT OF YEAR 2000
Some of the Company's older computer systems were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total year
2000 project cost is estimated to be less than $75,000. The project is estimated
to be completed no later than June 30, 1999, which is prior to any anticipated
impact on its operating systems. The Company believes that modifications to
existing software and conversions to new software, the year 2000 issue will not
pose significant operational problems for its computer systems. However, if such
22
<PAGE> 23
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have a material impact on the operations of the Company.
The costs of the project and the date on which the Company believes it
will complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130") and Statement No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"), both of which are required to be adopted on January 1, 1998. SFAS 130
requires financial statement reporting of all non-owner related changes in
equity for the periods presented. SFAS 131 requires disclosure about revenue,
earnings and other financial information pertaining to business segments by
which a company is managed, as well as factors used by management to determine
segments. The Company believes the adoption of SFAS 130 will have no effect on
its financial reporting and is currently evaluating the requirements of SFAS 131
to determine the impact it will have on financial statement disclosures.
CERTAIN FACTORS
Certain information contained in this Form 10-K contains forward
looking statements (as such term is defined in the Securities Exchange Act of
1934 and the regulations thereunder), including without limitation, statements
as to the Company's financial condition, results of operations and liquidity and
capital resources and statements as to management's beliefs, expectations or
options. Such forward looking statements are subject to risks and uncertainties
and may be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors are discussed in Item 1. "Business", Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and those set forth below.
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.
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.
RISKS ASSOCIATED WITH ACQUISITIONS. In the normal course of business,
the Company evaluates potential acquisitions that would complement or expand its
business. The Company entered into an agreement to acquire the net assets of
RDL, Inc. ("RDL"). There can be no assurance that the Company will complete the
acquisition of RDL. There can also be no assurance that the Company will be able
to successfully integrate the business and operations of RDL 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
23
<PAGE> 24
other potential acquirers, 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.
DEPENDENCE ON ALCHUT; OPERATIONS IN ISRAEL. The Company maintains and
will continue to maintain a number of relationships with Alchut, the major
stockholder of the Company. Alchut is the Company's principal subcontractor for
electro-mechanical production, primarily in connection with the production of
positioners. In addition, Alchut provides general and administrative services
for the Company's operations in Israel. Effective January 1, 1998, the Company
and Alchut entered into an agreement under which Alchut will continue to provide
these services for at least one year. 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.
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 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. 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.
MANAGEMENT OF GROWTH. The Company is currently experiencing a period of
rapid growth in the number and complexity of products and in the number of
personnel. 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, significant strains on its management,
administrative, operating and financial resources, as well as increased demands
on its internal systems, procedures and controls. The Company's ability to
manage recent and future growth will require the Company to continue to improve
its financial and management controls, reporting systems and procedures on a
timely basis, to implement new systems as necessary 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 1997, international sales
comprised approximately 45% 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 99% of the Company's sales
in 1997 were denominated in U.S. dollars. 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.
24
<PAGE> 25
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. 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.
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 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.
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 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 other than an agreement 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.
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 $5.0 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.
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
25
<PAGE> 26
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.
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are set forth in this report beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE RGISTRANT
Incorporated by reference from the Company's 1998 Proxy statement to be
filed pursuant to General Instruction G(3) to the Form 10-K, except information
concerning Certain Executive Officers and Key Employees which is set forth in
Item 4.1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1998 Proxy Statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's 1998 Proxy Statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1998 Proxy Statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS FORM 8-K
(a)(1) Financial Statements
Independent Auditors Report
Consolidated Balance Sheets at December 31, 1997 and
1996
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
(a)(3) Exhibits
The exhibits filed as part of this report are listed
under exhibits as subsection (c)of this Item 14
(b) Current Reports on Form 8-K
No report on form 8-K was filed on behalf of the
Registrant during the last quarter of the period
covered by this report
(c) Exhibits
2.1 Stock Purchase Agreement dated March 31, 1997 by and
among Advanced Electromagnetics, Inc., Anechoic
Systems, Inc., Gabriel A. Sanchez, Barbara Sanchez
and the Company. (1)
2.2 Share Exchange Agreement dated December 31, 1996 by
and among Orbit-Alchut Technologies, Ltd., Orbit
Advanced Systems, Ltd. And the Company. (1)
2.3 Asset Acquisition Agreement dated December 31, 1996
by and between Orbit-Alchut Technologies, Ltd. and
Orbit F.R. Engineering, Ltd. (1)
2.4 Inventory Acquisition Agreement dated January 1, 1997
by and between Orbit-Alchut Technologies, Ltd. and
Orbit F.R. Engineering, Ltd. (1)
2.5 Stock Purchase Agreement dated June 28, 1996 by and
among Orbit Advanced Technologies, Inc., The Samuel
T. Russell Trust, Richard P. Flam, Rickey E. Hartman,
Lois A. R. Charles, Dorothy Russell, John Aubin,
Norman D. Kegg and Flam & Russell, Inc. (1)
3.1 Amended and Restated Certificate of Incorporation of
the Company. (2)
3.2 Bylaws of the Company. (2)
4.1 Specimen Common Stock Certificate of the Company. (2)
10.1 Employment Agreement dated February 15, 1997 by and
between the Company and Aryeh Trabelsi. (1)
10.2 Employment Agreement dated January 1, 1997 by and
between the Company and Moshe Pinkasy. (1)
10.3 1997 Equity Incentive Plan. (1)
10.4 Services Agreement dated January 1, 1997 by and among
Orbit-Alchut Technologies, Ltd., Orbit F.R.
Engineering, Ltd. and the Company. (1)
27
<PAGE> 28
21.1 Subsidiaries of the Registrant. (3)
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule (electronic filing only).
(1) Incorporated by reference to the Company's
Registration Statement on Form S-1 (File No.
333-25015), filed with the Commission on April 11,
1997
(2) Incorporated by reference to Amendment 1 of the
Company's Registration Statement on Form S-1, filed
with the Commission on May 19, 1997
(3) Incorporated by reference to Amendment 2 of the
Company's Registration Statement on Form S-1, filed
with the Commission on June 5, 1997
28
<PAGE> 29
ORBIT/FR, INC.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ORBIT/FR, INC
/s/ Aryeh Trabelsi
Date: March 26, 1998 ------------------------------------
Aryeh Trabelsi, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Aryeh Trabelsi and Joseph Aviv and each
of them, his true and lawful attorney-in-fact and agent with full power of
substitution or resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual Report, and to
file the same, with all exhibits thereto, and other documentation in connection
therewith, with the Securities and Exchange Commission , granting unto said
attorney-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the 26th day of March, 1998.
<TABLE>
<CAPTION>
Name Title
- - ---- -----
<S> <C>
/s/ Joseph Sullivan
- - ---------------------------- Director of Finance and Treasurer
Joseph Sullivan (principal accounting and financial officer)
/s/ Aryeh Trabelsi
- - ---------------------------- President, Chief Executive Officer and Director
Aryeh Trabelsi (Principle executive officer)
/s/ Joseph Aviv
- - ---------------------------- Director
Joseph Aviv
/s/ David Ben-Bassat
- - ---------------------------- Director
David Ben-Bassat
/s/ Eric Haskell
- - ---------------------------- Director
Eric Haskell
/s/ Shimon Alon
- - ---------------------------- Director
Shimon Alon
/s/ Zeev Stein
- - ---------------------------- Director
Zeev Stein
</TABLE>
29
<PAGE> 30
Report of Independent Auditors
Stockholders and Board of Directors
ORBIT/FR, Inc.
We have audited the accompanying consolidated balance sheets of ORBIT/FR, Inc.
as of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted auditing standards.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 3, 1998
F-1
<PAGE> 31
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $14,825 $ 325
Accounts receivable, less allowance of $116 and $0 5,887 4,865
in 1997 and 1996, respectively
Inventory 2,269 2,241
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,522 573
Deferred income taxes 455 382
Other 281 206
------- -------
Total current assets 26,239 8,592
Property and equipment, net 1,184 994
Cost in excess of net assets acquired, less
accumulated amortization of $22 in 1997 852 --
Purchased software, less accumulated amortization
of $105 and $35 in 1997 and 1996, respectively 247 317
Other 132 --
------- -------
Total assets $28,654 $ 9,903
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,031 $ 671
Accounts payable--Parent 905 1,052
Accrued expenses 2,679 1,552
Income taxes payable 719 73
Customer advances 190 359
Billings in excess of costs and estimated earnings
on uncompleted contracts 185 932
Deferred income taxes 895 683
------- -------
Total current liabilities 6,604 5,322
Note payable to Parent 2,722 2,722
Other 235 --
------- -------
Total liabilities 9,561 8,044
Stockholders' 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--6,000,000 and
4,000,000 in 1997 and 1996, respectively 60 40
Additional paid-in capital 14,538 450
Retained earnings 4,495 1,369
------- -------
Total stockholders' equity 19,093 1,859
------- -------
Total liabilities and stockholders' equity $28,654 $ 9,903
======= =======
</TABLE>
See accompanying notes.
F-2
<PAGE> 32
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Contract revenues $22,055 $10,267 $ 7,957
Commission revenues -- 137 342
------- ------- -------
Total revenues 22,055 10,404 8,299
Cost of revenues 13,227 6,450 5,446
------- ------- -------
Gross profit 8,828 3,954 2,853
Operating expenses:
General and administrative 1,552 1,315 864
Sales and marketing 1,527 791 994
Research and development 1,228 581 239
------- ------- -------
Total operating expenses 4,307 2,687 2,097
------- ------- -------
Operating income 4,521 1,267 756
Other income, net 379 3 38
------- ------- -------
Income before income taxes 4,900 1,270 794
Income tax expense 1,774 439 301
------- ------- -------
Net income $ 3,126 $ 831 $ 493
======= ======= =======
Basic earnings per share $ .61 $ .21 $ .12
======= ======= =======
Diluted earnings per share $ .60 $ .21 $ .12
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
-------------------- Additional Parent's Total
Number of Paid-In Retained Equity in Stockholders'
Shares Amount Capital Earnings Division Equity
------ ------ ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,000,000 $ 40 $ (30) $ 387 $ 138 $ 535
Net income -- -- -- 581 (88) 493
--------- -------- --------- --------- --------- --------
Balance, December 31, 1995 4,000,000 40 (30) 968 50 1,028
Net income -- -- -- 401 430 831
Parent's equity in division
contributed to paid-in capital -- -- 480 -- (480) --
--------- -------- --------- --------- --------- --------
Balance, December 31, 1996 4,000,000 40 450 1,369 -- 1,859
Issuance of shares in initial public offering
at $8.25 per share (net of offering costs) 2,000,000 20 14,088 14,108
Net income -- -- -- 3,126 -- 3,126
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 6,000,000 $ 60 $ 14,538 $ 4,495 $ 0 $ 19,093
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 34
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,126 $ 831 $ 493
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 347 180 120
Amortization 92 35 --
Deferred income tax provision 200 210 216
Allowance for anticipated losses on uncompleted contracts -- -- (145)
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable (647) (2,322) 482
Inventory 306 627 55
Costs and estimated earnings in excess of billings on
uncompleted contracts (1,949) 421 (12)
Other (172) (57) (26)
Accounts payable and accrued expenses 352 205 30
Accounts payable--Parent (147) 868 (1,730)
Income taxes payable 641 (64) (113)
Customer advances (169) 164 195
Billings in excess of costs and estimated earnings on
uncompleted contracts (746) 21 145
Other liabilities (97) --
-------- -------- --------
Net cash provided by (used in) operating activities 1,137 1,119 (290)
Cash flows from investing activities:
Purchase of property and equipment (371) (349) (128)
Purchase of net assets through businesses acquired,
net of cash acquired (374) (573) --
-------- -------- --------
Net cash used in investing activities (745) (922) (128)
Cash flows from financing activities:
Proceeds from issuance of common stock in initial
public offering, net of offering costs 14,108 -- --
Borrowings on line of credit -- 1,150 --
Net (repayments) proceeds of note payable--Parent -- (498) 91
Repayments on line of credit -- (1,300) --
-------- -------- --------
Net cash provided by (used in) financing activities 14,108 (648) 91
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 14,500 (451) (327)
Cash and cash equivalents at beginning of year 325 776 1,103
-------- -------- --------
Cash and cash equivalents at end of year $ 14,825 $ 325 $ 776
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 893 $ 75 $ 309
======== ======== ========
Cash paid during the year for interest $ 7 $ 16 $ --
======== ======== ========
Purchase price payable relating to AEMI $ 754 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 35
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership and Basis of Presentation
ORBIT/FR, Inc. (the "Company"), was incorporated in Delaware on
December 9, 1996, as 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 and manufactures anechoic foam, a
microwave absorbing material that is an integral component of microwave test and
measurement systems. The Company sells its products to customers throughout
Asia, Europe, Israel, and North and South America.
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. Effective January 1, 1997, the employees
in the microwave test and measurement division of the Parent became employees of
Engineering. The consolidated results of the Company reflect Technologies and
Engineering on an as-if pooled basis for businesses under common control for
1996 and 1995. Further, the recapitalization of these businesses on December 31,
1996 has retroactively been restated for 1996 and 1995.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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.
Cash and Cash Equivalents
The Company generally classifies as cash equivalents all highly liquid
instruments with original maturities of three months or less at the time of
purchase.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method)
or market.
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.
F-6
<PAGE> 36
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Purchased Software
Purchased software is being amortized on a straight-line basis over
five years.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired represents the excess of costs
over the fair value of the net assets of AEMI (Note 14) and are being amortized
on a straight line basis over twenty years. The carrying value of cost in excess
of net assets acquired is reviewed for impairment whenever events or changes in
circumstances indicate that it may not be recoverable. If such an event
occurred, the Company would prepare projections of future results of operations
for the remaining amortization period. If such projections indicated that the
cost in excess of net assets acquired would not be recoverable, as determined
based on future undiscounted cash flows of the net asset, the Company's carrying
value of cost in excess of net assets acquired would be reduced to fair value.
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 $628, $520, and $482 for the years ended
December 31, 1997, 1996, and 1995, 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, 1997, an irrevocable letter of
credit was posted for one of the Company's foreign customers.
F-7
<PAGE> 37
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 1997, approximately 1% of the Company's
revenue was 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.
Earnings per Share
During 1997 the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share ("SFAS 128") which has been adopted for the year
ended December 31, 1997. SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share is calculated by dividing net income by the weighted average
common shares outstanding for the period. Diluted earnings per share is
calculated by dividing net income by the weighted average common shares
outstanding for the period plus the dilutive effect of stock options. Earnings
per share amounts for all periods have been restated to conform with SFAS 128
requirements.
Stock Based Compensation
The company has elected to follow APB Opinion No. 25 Accounting for
Stock Issued to Employees, ("APB 25") and the related interpretations in
accounting for its stock based compensation plans. Note 15 includes the required
disclosures and pro forma information provided under FASB Statement No. 123
Accounting for Stock-Based Compensation, ("SFAS 123"). Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying common stock at the date of grant, no compensation expense is
recognized.
Fair Value of Financial Instruments
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 upon the borrowing
rates currently available to the Company, the fair value of the Company's note
payable to Parent is approximately $3 million.
F-8
<PAGE> 38
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impact of Recent Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130") and Statement No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"), both of which are required to be adopted on January 1, 1998. SFAS 130
requires financial statement reporting of all non-owner related changes in
equity for the periods presented. SFAS 131 requires disclosure about revenue,
earnings and other financial information pertaining to business segments by
which a company is managed, as well as factors used by management to determine
segments. The Company believes the adoption of SFAS 130 will have no effect on
its financial reporting and is currently evaluating the requirements of SFAS 131
to determine the impact it will have on financial statement disclosures.
2. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income used in basic earnings per share $3,126 $ 831 $ 493
====== ====== =======
Weighted average number of common shares
used in basic earnings per share 5,102 4,000 4,000
Effect of dilutive securities: stock options 149 -0- -0-
------ ------ -------
Weighted number of common shares and
diluted potential common stock used in
diluted earnings per share 5,251 4,000 4,000
====== ====== =======
</TABLE>
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Work-in-process $ 874 $1,211
Parts and components 1,395 1,030
------ ------
$2,269 $2,241
====== ======
</TABLE>
F-9
<PAGE> 39
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------ ------
<S> <C> <C>
Office equipment $ 411 $ 173
Lab and computer equipment 1,378 1,151
Transportation equipment 163 163
Furniture and fixtures 53 44
Leasehold improvements 67 4
------ ------
2,072 1,535
Less accumulated depreciation 888 541
------ ------
Property and equipment, net $1,184 $ 994
====== ======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------ ------
<S> <C> <C>
Purchase price payable relating to AEMI $ 754 $ --
Accrued contract costs 708 414
Accrued compensation 580 436
Accrued commissions 186 92
Accrued royalties 106 87
Accrued warranty 57 81
Other 288 167
Purchase price payable relating to
Flam & Russell, Inc. -- 275
------ ------
$2,679 $1,552
====== ======
</TABLE>
6. RELATED PARTY TRANSACTIONS
Through December 31, 1996 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 were based on
management's estimate of the level of these expenses required to support
Engineering, relative to the reasonable allocation of such costs. Income taxes
for Engineering are in accordance with the statutory rates in Israel net of
adjustments allowable under local law. The "Parents Equity in Division" of
Engineering has been reflected as a contribution of additional paid-in capital
upon its incorporation on December 29, 1996.
Engineering and the Parent have an agreement, whereby Engineering
purchases from the Parent electrical and mechanical production services. In
addition, the Parent provides other administrative services, including but not
limited to, bookkeeping, computer, legal, accounting, cost management,
information systems, and production support. Engineering pays the Parent for
these services based upon a rate of cost of production services plus 31%.
Engineering is leasing office space from the Parent on an annual basis, for a
rental of $51 per year. These agreements are to be evaluated on an annual basis.
F-10
<PAGE> 40
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
Note payable -- Parent reflects the amount due to the Parent for the
net working capital required by Engineering. As of December 31, 1997 and 1996,
the balance was $2,722. This non-interest bearing promissory note payable is due
in 1999.
Included in cost of revenues for the years ended December 31, 1997,
1996, and 1995 are approximately $1,677, $1,496, and $1,423, respectively,
relating to the production services provided by the Parent.
The Company paid $360 to the Parent for administrative services
pursuant to a fixed price contract in place during 1997.
7. LINE OF CREDIT AGREEMENTS
During June 1997, the Company entered into two new working capital line
of credit agreements which increased its available funds to $2,150. At December
31, 1997, no amounts under these lines were outstanding. These lines 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. The line of
credit agreements require the Company to comply with certain financial
performance covenants of which the Company was in compliance at December 31,
1997.
8. COMMITMENTS
The Company leases its operating facilities and certain equipment under
noncancelable operating lease agreements which expire in various years through
2000. Rent expense for the years ended December 31, 1997, 1996, and 1995 was
approximately $372, $120, and $48, respectively. Future minimum payments under
noncancelable operating leases with initial terms of one year or more is as
follows at December 31, 1997: $332 in 1998; $111 in 1999; and $8 in 2000. During
1997 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: $44 in 1998; and $7 in 1999.
9. CERTAIN CONCENTRATIONS
The Company's contract revenues were concentrated in the following
markets and geographic regions as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States
Commercial 37% 37% 20%
Government 18 11 12
--- --- ---
55 48 32
Foreign
Commercial 43 45 58
Government 2 7 10
--- --- ---
45 52 68
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
F-11
<PAGE> 41
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. CERTAIN CONCENTRATIONS (CONTINUED)
The Company's foreign contract revenues were concentrated in the
following geographic regions as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Asia 23% 24% 36%
Europe 22 22 32
Americas -- 6 --
-- -- --
45% 52% 68%
== == ==
</TABLE>
Included in the consolidated balance sheets at December 31, 1997 and
1996 are net assets of the Company's foreign subsidiary, Engineering, which
aggregated $1,663 and $480, respectively.
10. INCOME TAXES
Pretax income for the years ended December 31 was taxed in the following
jurisdictions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic $3,265 $ 678 $ 990
Foreign 1,635 592 (196)
------ ------ ------
$4,900 $1,270 $ 794
====== ====== ======
</TABLE>
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,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards $ 283 $ 314
Accrued compensation 44 54
Foreign and reserves 128 14
----- -----
Total deferred tax assets 455 382
----- -----
Deferred tax liabilities:
Accounting for long-term contracts (628) (393)
Prepaid and foreign (106) (55)
Purchase accounting basis differences (209) (235)
----- -----
Total deferred tax liabilities (943) (683)
----- -----
Net deferred tax liabilities $(488) $(301)
===== =====
</TABLE>
F-12
<PAGE> 42
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES (CONTINUED)
Deferred tax assets at December 31, 1997 and 1996 arise from net
operating losses of approximately $283 and $395, respectively, and tax credits
of approximately $142 which the Company acquired in its acquisition of Flam &
Russell, Inc. 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 expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ 862 $ 67 $ 138
State 174 -- 55
Foreign 538 162 (108)
------- ------- -------
1,574 229 85
Deferred
Federal 170 141 163
State 59 69 53
Foreign (29) -- --
------- ------- -------
200 210 216
------- ------- -------
Total income tax expense $ 1,774 $ 439 $ 301
======= ======= =======
</TABLE>
A reconciliation of income tax expense at the U.S. Federal statutory
tax rate and the actual income tax expense is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Federal rate $ 1,663 $ 432 $ 270
State taxes, net 185 47 71
Foreign rate difference (47) (39) (41)
Other, net (27) (1) 1
------- ------- -------
$ 1,774 $ 439 $ 301
======= ======= =======
</TABLE>
F-13
<PAGE> 43
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. 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,
1997, 1996 and 1995, royalties under this program were approximately $10, $39
and $42, respectively. At December 31, 1997, the Company had an outstanding
contingent obligation to BIRD in the amount of $25. 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, 1997, 1996 and 1995, royalties under
this program were approximately $75, $78 and $64, respectively. At December 31,
1997, the Company had an outstanding contingent obligation to the Chief
Scientist of $894.
12. 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 3 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, 1997, 1996 and 1995, the Company's
contributions to the plans were $59, $18 and $1, respectively.
13. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the percentage of
completion method are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Accumulated expenditures on uncompleted contracts $ 8,447 $ 8,914
Estimated earnings thereon 2,700 1,031
-------- --------
11,147 9,945
Less: applicable progress billings 8,810 10,304
-------- --------
Total $ 2,337 $ (359)
======== ========
</TABLE>
The long-term contracts are shown in the accompanying balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 2,522 $ 573
Billings on uncompleted contracts in excess of
costs and estimated earnings (185) (932)
------- -------
$ 2,337 $ (359)
======= =======
</TABLE>
F-14
<PAGE> 44
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. ACQUISITIONS
On June 17, 1997, contemporaneously with the completion of the
Company's initial public offering of its common stock, (Note 16) the Company
acquired all of the issued and outstanding shares of Advanced Electromagnetics,
Inc. (AEMI) (a manufacturer of anechoic foam) for a purchase price of $1.2
million, which was based on AEMI's financial performance for the three years
ended March 31, 1997. One-half of the final purchase price is payable in cash
and the other half is payable by the issuance of shares of the Company's common
stock valued at the initial public offering price of $8.25. The acquisition was
accounted for as a purchase, and accordingly, the results of operations from
June 17, 1997 through December 31, 1997 are included in the Company's
consolidated results of operations. The purchase price at December 31, 1997 has
been preliminarily allocated to the net assets acquired based on their estimated
fair market values as follows: $166 to property and equipment, $874 to cost in
excess of net assets acquired, and $160, net, to other current assets and
liabilities.
On June 28, 1996, the Company acquired 100% of the outstanding stock of
Flam & Russell, Inc. (Flam & Russell) for cash of approximately $768, including
direct acquisition costs of $75. The purchase agreement also provided for
contingent payments, subject to offsets, over a two-year period. In March 1997,
the Company reached a settlement on the contingent purchase price in the amount
of $275. Such amount is included in accrued expenses as of December 31, 1996.
The acquisition was accounted for as a purchase. The results of operations are
included in the Company's results of operations from June 29, 1996. The purchase
price of approximately $1,043 has been allocated to the net assets acquired
based upon their estimated fair market values, principally as follows: $452 to
property and equipment, $352 to purchased software, $384 to deferred tax assets,
$249 to deferred tax liabilities and $104, net, to other current assets and
liabilities.
The following unaudited proforma information represents a summary of
consolidated results of operations of the Company and these acquisitions for the
years ended December 31, 1997 and 1996, as if these acquisitions had occurred at
the beginning of 1996:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Total revenues $23,492 $17,012
Net income $ 3,044 $ 1,088
Basic earnings per share $ .60 $ .27
</TABLE>
15. 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") which provides for awards of 800,000 shares of the Company's stock.
Options granted generally vest over four years. 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").
F-15
<PAGE> 45
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. STOCK OPTION PLAN (CONTINUED)
Detail information concerning the Incentive Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Option Price Average
Options Per Share Exercise Price
------- --------- --------------
<S> <C> <C> <C>
Options Authorized 800,000
=======
Options Granted - June 17, 1997 492,300 $ 8.25 $ 8.25
Options Cancelled (5,500) 8.25 8.25
-------- -------- ---------
Options Outstanding - December 31, 1997 486,800 $ 8.25 $ 8.25
======== ======== =========
Options Exercisable - December 31, 1997 - 0 -
========
</TABLE>
The Company has elected to follow APB 25 and the related
interpretations in accounting for stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, requires the use
of option valuation models that were not developed for use in valuing stock
options. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying common stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for stock options under the fair value method of
SFAS 123. The fair value for the Company's stock options granted is estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997; risk-free interest rate of 5.5%; no
expected dividend payments; volatility factor of the expected price of the
Company's common stock, based on historical volatility, of 0.60; and a
weighted-average expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. As noted above, the Company's stock options are
vested over an extended period. In addition, option models require the input of
highly subjective assumptions including future stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value the Company's stock options.
F-16
<PAGE> 46
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. STOCK OPTION PLAN (CONTINUED)
For purposes of proforma disclosure under FASB 123, the estimated fair
value of the Company's options is amortized over the options vesting period. The
Company's proforma information for 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net income as reported under APB 25 $ 3,126
Stock option expense per FASB 123 (732)
-------
Proforma net income $ 2,394
=======
Proforma basic earnings per share $ 0.47
=======
Proforma diluted earnings per share $ 0.46
=======
</TABLE>
16. STOCKHOLDERS' 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 stockholders, 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.
Initial Public Offering
On June 17, 1997, the Company filed a Form S-1 Registration Statement
with the Securities and Exchange Commission whereby 2,300,000 shares of its
common stock (including an over allotment of 300,000 shares sold by the Parent)
were offered and sold at $8.25 per share (less underwriting discounts and
commissions). The Company generated net proceeds of $14,108 in connection with
this offering.
F-17
<PAGE> 47
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows:
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31 June 30 Sept. 30 Dec. 31
1997 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues $4,906 $5,314 $6,298 $5,537
Gross Profit 1,765 2,174 2,861 2,028
Net Income 586 865 1,193 482
Earnings per Share - Basic .15 .20 .20 .08
Earnings per Share - Diluted .15 .20 .19 .08
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31 June 30 Sept. 30 Dec. 31
1996 1996 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues $1,533 $1,803 $2,821 $4,247
Gross Profit 445 672 1,124 1,713
Net Income 27 50 193 561
Earnings per Share - Basic .01 .01 .05 .14
Earnings per Share - Diluted .01 .01 .05 .14
</TABLE>
18. EVENTS "UNAUDITED" SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
In February 1998, the Company announced that it intends to acquire all of the
net assets of RDL, Inc., a Pennsylvania Corporation ("RDL"), subject to certain
conditions, including due diligence and approval of the Board of Directors of
ORBIT/FR. RDL is a supplier of sophisticated microwave test and measurement
products to the wireless communication and cable television industries. It is
also a supplier of microwave defense systems. The Company intends to purchase
the net assets of RDL for approximately $6 to $8 million.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037115
<NAME> ORBIT/FR INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,825
<SECURITIES> 0
<RECEIVABLES> 5,887
<ALLOWANCES> 116
<INVENTORY> 2,269
<CURRENT-ASSETS> 26,239
<PP&E> 2,072
<DEPRECIATION> 888
<TOTAL-ASSETS> 28,654
<CURRENT-LIABILITIES> 6,604
<BONDS> 0
0
0
<COMMON> 60
<OTHER-SE> 19,033
<TOTAL-LIABILITY-AND-EQUITY> 28,654
<SALES> 22,055
<TOTAL-REVENUES> 22,055
<CGS> 13,227
<TOTAL-COSTS> 13,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,900
<INCOME-TAX> 1,774
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,126
<EPS-PRIMARY> .61
<EPS-DILUTED> .60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001037115
<NAME> ORBIT/FR, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 15,241
<SECURITIES> 0
<RECEIVABLES> 5,256
<ALLOWANCES> 0
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<PP&E> 2,651
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<TOTAL-ASSETS> 28,507
<CURRENT-LIABILITIES> 6,947
<BONDS> 0
0
0
<COMMON> 60
<OTHER-SE> 18,571
<TOTAL-LIABILITY-AND-EQUITY> 28,507
<SALES> 16,518
<TOTAL-REVENUES> 16,518
<CGS> 9,719
<TOTAL-COSTS> 9,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,099
<INCOME-TAX> 1,455
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,644
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.54
</TABLE>
