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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, 1999
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 $17,437,536(1). As of March 22, 2000, 6,074,473 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 22, 2000. 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 2000 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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PAGE NO.
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PART I.
Item 1. Business............................................................ 4
Item 2 Properties.......................................................... 16
Item 3 Legal Proceedings................................................... 16
Item 4 Submission of Matters to a Vote of Security Holders ................ 16
Item 4.1 Executive Officers and Key Employees................................ 17
PART II.
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters .......................................................... 18
Item 6 Selected Financial Data............................................. 19
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 19
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, and global positioning system
("GPS") receivers 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 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, 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 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 objectives 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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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"), Orbit F.R. Europe, GmbH a German
corporation ("GmbH") 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 (approximately 60%), 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.
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 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.
On May 4, 1998, the Company purchased the principal assets of Quantum
Change/EMC Systems, Inc. The acquisition formed a new division responsible for
Electromagnetic Compatibility ("EMC") Testing Systems. Quantum Change/EMC
Systems provides hardware-independent software solutions to the EMC marketplace.
On August 5, 1998, the Department of State determined that the Company's
AL-2000 antenna measurement systems and software and the AL-8098 radome
measurement systems were licensable commodities within the Department of State's
jurisdiction. Throughout 1999 exports of these systems required licensing from
the State Department.
On September 13, 1999, the Company announced that it had reached a Plea
Agreement with the U.S. Attorney's Office to settle the investigation of the
Company's export practices, originally disclosed by the Company in June 1998.
The Company agreed to plead guilty to two counts of violating the Arms Control
Act arising from its export to China of a defense article and defense services
without the required export licenses, in or about November 1997 and January
1998. Additionally, the Company agreed to pay a $600,000 fine. On November 10,
1999, the Company announced that the U.S. District Court accepted its guilty
plea pursuant to the Plea Agreement with the U.S. Attorney's Office disclosed by
the Company on September 13, 1999.
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On November 2, 1999, the Company announced that pursuant to Section
38(g)(4) of the Arms Export Control Act, its export license applications for
munitions list products were subject to a non-discretionary denial policy under
the International Traffic in Arms Regulations (ITAR) upon entry in court of a
plea agreement as previously announced on September 13, 1999. This denial policy
could last up to three years, but may be suspended by the State Department after
twelve months. The Company hopes to qualify for special exceptions to the denial
policy on a case-by-case basis based upon its present internal policies,
procedures and compliance with all applicable export law.
On March 2, 2000, the Company announced that the U.S. District Court
granted final approval of the agreed upon fine of $600,000 as previously
announced on September 13, 1999 for the U.S. Customs investigation, and the fine
was paid. The Court did not impose any probation on the Company. All proceedings
related to the criminal matter were now concluded.
On March 2, 2000, the Company announced an agreement of non-debarment with
the U.S. Government. The Company entered into an agreement with the Department
of the Navy on behalf of the Department of Defense, which allows the Federal
Government to continue to procure from the Company. The agreement put to rest
any threat of debarment from Federal contracting as a consequence of the
previously announced guilty plea, related to the Company's past export
practices.
On March 6, 2000, the Company announced that it had received
notification, effective March 1, 2000 from the U.S. State Department that the
Commodity Jurisdiction request submitted by the Company in 1998 had been
approved. The approval removes the vast majority of the Company's basic Antenna
Measurement Software products and systems from the U.S. Munitions List. These
products now fall under the jurisdiction of the Commerce Department and
therefore would not be subject to the State Department's non-discretionary
policy of denying license applications which the Company announced on November
2, 1999. The Radar Cross Section ("RCS") and Radome systems remain on the U.S.
State Department's Munitions list.
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 outsource many non-core functions such as
the development and manufacture of microwave test and measurement systems.
Within the wireless communications, satellite, automotive and
aerospace/defense industries, test and measurement products and systems are used
during all stages of a product's life cycle: product development, pre-production
qualification, production testing and product maintenance. Given the broad scope
of testing 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 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. The
Company expects continued growth within the wireless communications industry in
the future due to an increase in available spectrum, the adoption of efficient
new digital technologies and the development of "smart" antennas.
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
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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 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 and 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 approximately $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. These vehicles incorporate the latest communications
and safety devices including cellular/PCS, GPS-based direction-finding, data
transfer, digital TV and collision-avoidance systems. Each of these features
requires a specialized, highly-accurate microwave transmission and reception
system. To ensure the performance of these various systems and to assess how
they are impacted by the electromagnetic properties of the car itself,
automotive manufacturers must test the car and these devices as a unit using a
microwave test and measurement system designed for automotive applications.
AEROSPACE/DEFENSE. The need within the aerospace/defense community for
accurate and secure communications and tracking systems led to the emergence of
microwave test and measurement companies in the 1960's. Despite cutbacks in
United States defense budgets in the late 1980's and early 1990's, microwave
test and measurement needs within the aerospace/defense industry are expected to
provide opportunity 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
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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 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. Within the microwave test
and measurement market, 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 may periodically 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 Company does not already provide, the Company believes, but cannot
assure that it will be able to increase gross margins.
MAINTAINING TECHNOLOGICAL LEADERSHIP. The Company believes that it has
sophisticated and diversified technological capabilities and intends to
strengthen its technologies 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 36% of the
Company's revenues during 1999 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. As fully
detailed under History on page 6, the Company recently received notice that the
State Department approved its Commodity Jurisdiction request submitted in 1998.
The approval removes the vast majority of the Company's basic antenna
measurement software products and systems from the U.S. Munitions List. These
products would not be subject to the State Department's non-discretionary policy
of denying
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license applications for exports announced on November 2, 1999. As a result, the
Company believes that future growth in international markets should improve due
to this recent action.
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.
In light of this strategy, the Company acquired the assets of Quantum Change/EMC
Systems, Inc. on May 4, 1998. The acquisition was key to establishing a new
division responsible for the EMC market.
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." 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 an advantage in this 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, 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 been sold for over
$3 million.
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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 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.
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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. Recent
restrictions preclude the Company from obtaining a State Department license for
exporting these systems outside the United States for a period of three years
pursuant to the Company's guilty plea announced on November 2, 1999. This
product remains on the U.S. State Department's Munitions list.
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. Recent restrictions preclude the Company from obtaining a State
Department license for exporting these systems outside the United States for a
period of three years pursuant to the Company's guilty plea announced on
November 2, 1999. This product remains on the U.S. State Department's Munitions
list.
Custom Systems. From time to time, the Company designs and manufactures
custom microwave test and measurement systems for a wide variety of uses and
applications. To date, most of these systems have been built for the United
States government. The Company's broad microwave and antenna expertise has
enabled it to obtain these contracts, and the Company intends to bid for similar
jobs in the future if the expertise gained in designing such systems is deemed
to be of strategic value to the Company.
MICROWAVE TEST AND MEASUREMENT SOFTWARE PRODUCTS. ORBIT/FR offers
automatic measurement software for microwave test and measurement systems. The
Company's software products are Windows-based programs that provide the customer
with a consistent user-friendly interface with the test and measurement system.
The software products have a robust and modular structure that enables the
Company to easily add features for current and future customers. The software
uses far-field and/or near-field algorithms to generate accurate results, and
the computational methodologies used have gained acceptance throughout the
microwave test and measurement community. The software supports the Company's
own measurement equipment as well as equipment manufactured by third parties.
The Company's software products are designed to be "off-the-shelf" but are
versatile and can be customized by the Company's or the customer's technical
personnel to suit specific needs. The Company has delivered over 300 software
installations worldwide in the price range of $20,000-50,000 each.
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.
11
<PAGE> 12
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. The
Company has available to it a number of vendor solutions for microwave receivers
which it incorporates into the Company's test and measurement systems.
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.
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 component. Working together, the positioner
controller and the PCU act as the "translators" between the microwave software
and the positioner. The positioner controller receives digital instructions from
the microwave software and translates them into analog signals understood by the
PCU. These analog signals are then amplified by the PCU to provide precisely
calibrated DC power to the positioner's electric motors, which then operate at a
user-defined speed to move the antenna or device under test through the desired
positions. The Company offers four positioner controller models, two PCU models
and four models that combine both positioner controller and PCU.
Planar Scanners. A planar scanner is a rectangular device that enables a
probe antenna to be moved along an x- and y-axis so that its position at any
time is known and can be exactly replicated. Planar scanners are typically
mounted vertically to enable the probe to be moved throughout the height and
width dimensions of the scanner. Scanners enable test engineers to accurately
and reliably analyze many aspects of the microwave signals radiating from the
antenna or device under test. The Company offers 24 standard scanners ranging in
size from 3 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.
12
<PAGE> 13
SALES AND MARKETING
The Company markets and sells its products in the United States through
direct regional sales managers and through 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 throughout
Europe and Asia.
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.
CUSTOMER SUPPORT
The Company is committed to providing customer satisfaction through
superior service and support of its products. As part of that commitment,
ORBIT/FR has recently introduced the "Customer Service Response Center"
("CSRC"). The CSRC handles warranty support, field service, technical support,
training, service contracts, spare parts and user documentation. Through a
trained customer service representative and a direct phone number
(1-800-ORBIT59) the Company is positioned to provide solutions upon
notification. ORBIT/FR's customer service capabilities are achieved by providing
comprehensive training through offices located in the U.S., Europe and Israel.
13
<PAGE> 14
CUSTOMERS
The Company has installations with customers in the wireless
communications, satellite, automotive and aerospace/defense industries.
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, Lockheed
Martin, Space Systems/Loral, Raytheon and
TRW.
Automotive. .............. BMW, Ford, Mitsubishi, SAAB, Samsung and
Toyota.
Aerospace/Defense ........ Aerospatiale, Ball Aerospace, Boeing,
British Aerospace, Dassault, General
Electric, Israel Aircraft Industry, ITT
Avionics, Lockheed Martin/Loral, 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,
Thailand, Taiwan, Singapore, Indonesia, Israel, Australia and South Africa). See
Note 8 of the Notes to Consolidated Financial Statements of the Company for a
discussion of the geographic concentration of the Company's revenues.
PRODUCTION AND SUPPLIERS
The Company's engineers, based in the United States, Germany 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, PA, 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.
BACKLOG
At December 31, 1999 and 1998, the Company's backlog was approximately
$6.6 million and $4.4 million, respectively. The Company includes in backlog
only those orders for which it has received and accepted a completed purchase
order. Such orders are generally subject to cancellation by the customer with
payment of a specified charge. The delivery lead time on the Company's products
and systems generally averages approximately three months, but can be as short
as a few days and as long as 12 months or more. Because of the possibility of
customer changes in delivery schedules, cancellation of
14
<PAGE> 15
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 five
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. Research and Development expenses of the Company for fiscal years ended
December 31, 1999, 1998 and 1997 were $750,000, $890,000 and $1,228,000
respectively.
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 MI Technology
(formerly Scientific Atlanta's microwave division), Nearfield Systems, Aeroflex,
System Planning Corporation and Rantec/ESCO.
PROPRIETARY RIGHTS
The Company is heavily dependent on its proprietary technology. The
Company relies on a combination of confidentiality agreements with its
employees, license agreements, copyrights, trademarks and trade secret laws to
establish and protect rights to its proprietary technology. The Company does not
hold any material patents. All of the Company's software is shipped with a
security lock which limits software access to authorized users. Generally, the
Company does not license or release its source code. Effective copyright and
trade secret protection of the Company's proprietary technology may be
unavailable or limited in certain foreign countries.
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<PAGE> 16
EMPLOYEES
As of December 31, 1999, the Company had a total of 79 employees,
including 8 in software and research and development, 26 in engineering and
program management, 16 in sales, marketing and customer support services, 15 in
production and 14 in administration. Thirty three employees are located at the
Company's headquarters in Horsham, Pennsylvania, 21 are located in California,
14 are located in Israel, and 11 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 2003.
The current annual base rent is approximately $215,000. The Company also
maintains sales, engineering, technical support and program management
facilities in Israel and Germany, and its manufacturing facilities in Santee,
California. The Company's current aggregate annual rental expenses for these
additional facilities are approximately $138,000.
ITEM 3. LEGAL PROCEEDINGS
During June 1998 the Company reported it was subject to a pending
investigation by the U.S. Customs Service related to its past export practices.
On November 10, 1999 the Company reported that the U.S. District Court accepted
its guilty plea pursuant to a plea agreement (the "Plea Agreement") with the
U.S. Attorney's Office reached in September 1999. The Company pleaded guilty to
two counts of violating the Arms Control Act arising form its export to China of
a defense article and defense services without the required export licenses, in
or about November 1997 and January 1998. On March 2, 2000, the Company reported
that the U.S. District Court granted final approval of the agreed upon fine of
$600,000 under the Plea Agreement and the fine was paid. The Court did not
impose any probation on the Company.
On November 2, 1999, the Company announced that pursuant to Section
38(g)(4) of the Arms Export Control Act, its export license applications for
Munitions List products were subject to a non-discretionary denial policy under
the International Traffic in Arms Regulations (ITAR) as a result of the Plea
Agreement. This denial policy could last up to three years, but may be suspended
by the State Department after twelve months. As a result of the U.S. State
Department's approval of the Company's Commodity Jurisdiction, announced by the
Company on March 5, 2000, the vast majority of the Company's products are not
subject to the State Department's non-discretionary policy of denying license
applications.
The Company is not currently subject to any additional material legal
proceedings and is not aware of any other 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
None.
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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> <C>
Ze'ev Stein 47 Chairman, Acting Chief Executive Officer
William A. Torzolini 39 VP Finance, Chief Financial Officer
Michael J. Hart, Sr. 47 VP EMC Division
Thomas J. Burke 39 VP Sales and Customer Service
John Aubin 46 VP Measurement Systems
Moshe Pinkasy 49 Chief Operating Officer, Engineering,
Marcel Boumans 42 Managing Director, GmbH
Gabriel Sanchez 48 President, AEMI
Jeff Polan 48 VP Research and Development, Chief
Technology Officer
David S. Bernstein 53 Executive Vice President, Chief
Operating Officer
</TABLE>
Zeev Stein has served as Chairman of the Board and acting Chief Executive
Officer of the Company since October 1998. He has also served as a Director of
the Company and its predecessor since March 1996. Since July 1994, Mr. Stein has
served as a Director of Alchut and since September 1996, Mr. Stein has also
served as the Vice-President of Operations of Alchut. From 1991 to 1996, Mr.
Stein was the General Manager of Stein Special Art, Ltd., located in Ra'anana,
Israel.
William A. Torzolini has served as Vice President of Finance and Chief
Financial Officer for the Company since May of 1998. From 1990 to 1998 Mr.
Torzolini was employed at Novacare, Inc., a national provider of rehabilitation
healthcare services in various senior management roles including Vice President
of Finance and Chief Financial Officer of Novacare's Outpatient Division.
Michael J. Hart, Sr. has served as the Vice President of the EMC
Division since joining the Company in May 1998. Mr. Hart was the President of
Quantum Change/EMC Systems, Inc., a privately held company specializing in
software for the electromagnetic compatibility (EMC) marketplace. The
significant assets of Quantum Change/EMC Systems, Inc. were purchased by the
Company in May 1998. From January 1980 through November 1994, Mr. Hart was
the President of Electro-Mechanics Company, a privately held manufacturer of
EMC components.
Thomas J. Burke has served as Vice President of Sales and Customer Service
for the Company since September 1998. Effective January 1, 2000 Mr. Burke is
responsible for sales and customer support for the U.S. market. From 1996
through 1998, Mr. Burke was employed as the Director - Worldwide Sales and
Customer Service for Robotic Vision Systems Inc. From 1993 through 1996, Mr.
Burke served in various capacities at Kulicke & Soffa Industries, Inc.
John Aubin has served as Vice President of Measurement Systems since June
1996. From 1991 to 1996, Mr. Aubin was Vice President in charge of the Antenna
Measurement Business Area for Flam & Russell.
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 the GmbH since March
1997. Effective January 1, 2000 Mr. Pinkasy is responsible for sales and
customer support for Europe. 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
17
<PAGE> 18
Systems Design Engineer for Dornier GmbH, the communications and defense
subsidiary of Daimler-Benz Aerospace.
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.
Jeffery S. Polan has served as the Company's Vice President, Research
and Development, and Chief Technology Officer since March 1999. During 1998
Mr. Polan served as Vice President of Engineering at Aydin Telemetry. From
1996 to 1998 Mr. Polan served as Vice President Engineering at InterDigital
Communications Corporation. From 1989 to 1996 Mr. Polan was President of
Program Digital Systems Inc.
David S. Bernstein has served with the Company since March 1999. From
1997 to 1998 Mr. Bernstein served as Vice President of Operations at Aydin
Telemetry. From 1995 to 1997 Mr. Bernstein served as VP Operations at Solid
State Devices, Inc. From 1991 to 1995 Mr. Bernstein served as Vice President
and General Manager of Microtran.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Company's initial public offering on June 17, 1997, the
Company's Common Stock has been 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>
1999 1998
---- ----
YEAR ENDED DECEMBER 31, HIGH LOW HIGH LOW
- ----------------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 3 $1 5/8 $ 18 $10 1/4
Second Quarter $3 15/16 $1 9/16 $15 1/4 $ 5
Third Quarter $ 2 7/8 $1 1/8 $ 8 5/8 $ 2
Fourth Quarter $ 5 $ 2 $5 5/8 $1 1/4
</TABLE>
On March 13, 2000, there were 31 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 2,000 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.
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Operations Data:
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 12,923 $11,913 $22,055 10,404 $8,299
Cost of revenues 11,242 10,563 13,227 6,450 5,446
-------- ------ ------- ------ ------
Gross profit 1,681 1,350 8,828 3,954 2,853
General and administrative 2,512 2,747 1,552 1,315 864
Sales and marketing 2,073 1,870 1,527 791 994
Research and development 750 890 1,228 581 239
Other charges -- 2,300 -- -- --
-------- ------ ------- ------ ------
Operating income (loss) (3,654) (6,457) 4,521 1,267 756
Other income 427 653 379 3 38
-------- ------ ------- ------ ------
Income (loss) before income taxes (3,227) (5,804) 4,900 1,270 794
Income tax expense (benefit) 183 (1,673) 1,774 439 301
-------- ------ ------- ------ ------
Net income (loss) $ (3,410) $ (4,131) $ 3,126 $ 831 $ 493
======== ======== ======= ======= ======
Basic earnings (loss) per share $ (0.57) $ (.68) $ 0.61 $ 0.21 $ 0.12
======== ======== ======= ======= ======
Diluted earnings (loss) per share $ (0.57) $ (.68) $ 0.60 $ 0.21 $ 0.12
======== ======== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:
(amounts in thousands) December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Working capital $ 9,674 $12,964 $19,635 $3,270 $3,875
Total assets 17,768 23,005 28,654 9,903 6,799
Total long term debt -- -- 2,957 2,722 3,220
Stockholder's equity 11,937 15,402 19,093 1,859 1,028
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues for the year ended December 31, 1999 were $12.9 million
compared to $11.9 million for the year ended December 31, 1998, an increase of
approximately $1.0 million or 8%. Approximately $2.4 million of the net increase
was attributable to the aerospace/defense market which experienced an increase
in U.S. Government contracts. The EMC market experienced a $0.7 million,
increase, while satellite, and automotive revenues decreased $1.8 million, and
$0.3 million, respectively. Revenues from the U.S. increased approximately $2.2
million while European revenues, affected by export restrictions decreased
approximately $1.2 million.
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<PAGE> 20
Cost of revenues. Cost of revenues for the year ended December 31, 1999
were $11.2 million compared to $10.6 million for the year ended December 31,
1998, an increase of approximately $0.6 million or 6%. Gross margins increased
to 13.0% for the year ended December 31, 1999 from 11.3% for the year ended
December 31, 1998, due mainly to the increased level of revenue.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1999 were $2.5 million compared to $2.7 million
for the year ended December 31, 1998, a decrease of approximately $0.2 million
or 8.0%. As a percentage of revenues, general and administrative expenses
decreased from 23.1% for the year ended December 31, 1998 to 19.4% for the year
ended December 31, 1999. The decrease was primarily due to reduced legal and bad
debt expenses.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 1999 were $2.1 million compared to $1.9 million for the year
ended December 31, 1998, an increase of approximately $0.2 million or 11%. As a
percentage of revenues, sales and marketing expenses were 16.0% for the year
ended December 31, 1999, an increase from 15.7% for the year ended December 31,
1998. The increase stems primarily from the Company's increased sales volume and
activity.
Research and development expenses. Research and development expenses for
the year ended December 31, 1999 were $750 thousand compared to $890 thousand
for the year ended December 31, 1998, a decrease of $140 thousand or 15.7% due
mainly to reduced customer funded R&D projects.
Other charges. Other charges for the year ended December 31, 1998 were
approximately $2.3 million compared to no expenses incurred during the year
ended December 31, 1999. This 1998 expense represented costs associated with the
acquisition of RDL, Inc. which did not occur, expenses stemming from the
Company's internal investigation over the U.S. Customs matter including an
estimate to settle the case with the U.S. Attorney, including related legal
charges and charges related to the Company's requirement to adopt revised export
procedures in light of the new export classification of its products. The
Company's reserve recorded on December 31, 1998 covered all related 1999
expenditures.
Income taxes. Income tax expense for the year ended December 31, 1999 was
$183 thousand compared to a benefit of $1.7 million for the year ended December
31, 1998. A decrease of $1.9 million. This decrease was principally due to the
increase in the valuation allowance recorded against the deferred tax asset of
approximately $1.2 million. The valuation allowance increased as a result of the
Company reporting negative operating income, and due to the uncertainty with
regard to the Company's ability to generate sufficient taxable income in future
periods to realize all of the deferred tax asset.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues for the year ended December 31, 1998 were $11.9 million
compared to $22.1 million for the year ended December 31, 1997, a decrease of
approximately $10.2 million or 46%. Approximately $9.7 million of the decrease
was attributable to the aerospace/defense market which experienced sharp
declines in Asia and U.S. Government contracts along with decreases in the
satellite market of $0.8 million, partially offset by an increase in the
wireless market of $0.4 million. U.S. sales led the biggest decline by
approximately $6.3 million followed by lower Asian sales of $2.6 million and
European sales of $1.3 million. The licensing restrictions imposed on the
Company by the U.S. State Department in 1998 caused delays on many European and
Asian contracts, also leading to the declines. Such licensing restrictions may
continue to cause delays, and in some cases denials, of licenses to export
certain of the Company's products and services.
Cost of revenues. Cost of revenues for the year ended December 31, 1998
were $10.6 million compared to $13.2 million for the year ended December 31,
1997, a decrease of approximately $2.7 million or 20.1%. Gross margins decreased
to 11.3% for the year ended December 31, 1998 from 40.0% for the year ended
December 31, 1997, as a result of losses resulting from delays and uncertainties
on certain exports related to licensing and other related charges combined with
the revenue declines associated with the same and general slowness in the
antenna test and measurement market.
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<PAGE> 21
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1998 were $2.7 million compared to $1.6 million
for the year ended December 31, 1997, an increase of approximately $1.2 million
or 77.0%. As a percentage of revenues, general and administrative expenses
increased from 7.0% for the year ended December 31, 1997 to 23.1% for the year
ended December 31, 1998. The increase was due primarily to a charge of $200,000
relating to the collectability of China receivables, approximately $225,000 of
full period impact for the AEMI acquisition, additional legal expenses of
$130,000, additional bad debts of $65,000 with the remaining difference relating
to investment in senior finance and general management.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 1998 were $1.9 million compared to $1.5 million for the year
ended December 31, 1997, an increase of approximately $0.4 million or 22.5%. As
a percentage of revenues, sales and marketing expenses were 15.7% for the year
ended December 31, 1998, an increase from 6.9% for the year ended December 31,
1997. Additional investment in sales activity in ORBIT/FR Engineering, LTD
(Israel) and ORBIT/FR Europe (Germany) accounted for $120,000 of this increase,
while the full period impact of AEMI accounted for $90,000 and the remaining
difference is attributable to investments in senior management and direct sales
staff.
Research and development expenses. Research and development expenses for
the year ended December 31, 1998 were $890,000 compared to $1,228,000 for the
year ended December 31, 1997, a decrease of $338,000 or 27.5% due mainly to
reduced customer funded R&D projects.
Other charges. Other charges for the year ended December 31, 1998 were
approximately $2.3 million compared to no expense for the year ended December
31, 1997. The expense represented costs associated with the acquisition of RDL,
Inc. which did not occur, expenses stemming from the Company's internal
investigation over the U.S. Customs matter including an estimate to settle the
case with the U.S. Attorney, including related legal charges and charges related
to the Company's requirement to adopt revised export procedures in light of the
new export classification of its products.
Income taxes. Income tax benefit for the year ended December 31, 1998 was
$1.7 million compared to an expense of $1.8 million for the year ended December
31, 1997, a decrease of $3.5 million due principally to the loss incurred during
1998. The Company's effective tax rate decreased from 36.2% for the year ended
December 31, 1997 to 28.8% for the year ended December 31, 1998. This was due
mainly to the non deductibility of certain Other Charges related to the U.S.
Customs matter.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its working capital requirements
through cash flows from its operations. Reductions in revenues and increased
costs associated with the recently completed investigation into the Company's
past export practices and the related commodities jurisdiction, have reversed
this trend and caused negative cash flows from operations for the past two
years. On December 31, 1999, the Note Payable to Parent of $2,722,000 was paid.
It 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 Company experienced several significant changes in net cash provided
by or used in operations. The Company recorded a $3.4 million net loss during
the year ended December 31, 1999 compared to a $4.1 million net loss during the
year ended December 31, 1998. In addition, the Company recorded a deferred
income tax expense of $986 thousand for the year ended December 31, 1999
compared to a $1.9 million deferred income tax benefit for the year ended
December 31, 1998. Accounts receivable used $526,000 in operating cash during
the year ended December 31, 1999 compared to $2.2 million provided during the
year ended December 31, 1998. The Company used no operating cash for income
taxes payable during the year ended December 31, 1999, while income taxes
payable provided $719,000 of operating cash during the year ended December 31,
1998. Billings in excess of costs and estimated
21
<PAGE> 22
earnings on uncompleted contracts provided $734,000 of operating cash during the
year ended December 31, 1999 compared to $11,000 provided during the year ended
December 31, 1998.
Net cash used in investing activities decreased to $431,000 for the year
ended December 31, 1999 from $583,000 for the year ended December 31, 1998 due
mainly to the investment in purchased software and net assets through businesses
acquired net of cash acquired in 1998 and partially offset by the increase in
purchases of property, plant and equipment.
Net cash used in financing activities in 1999 amounted to approximately
$2.8 million, compared to $162,000 used in the year ended December 31, 1998.
This increase is principally due to the Company's repayment of its note payable
- - Parent on December 31, 1999.
During 1999, the Company incurred capital expenditures of approximately
$431,000, a portion of which was used to improve the Company's hardware and
software tools, and by its initial investment in information systems for the
Company and its subsidiaries. In 1999, the Company plans to invest funds on the
implementation of strategic systems.
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, 1999, approximately 2% 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 employees of
the Company's foreign subsidiaries, 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
In prior years, the Company discussed the nature and progress of its plan
to become Year 2000 ready. In late 1999 the Company completed its remediation
and testing of its systems. As a result of those planning and implementation
efforts the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed less than $10,000 in connections with this effort. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products or services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
22
<PAGE> 23
In June 1998 the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivatives and Hedging Activities (SFAS 133), which
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
is effective for fiscal years beginning after June 15, 1999. SFAS 137 deferred
the effective date of SFAS 133 to all fiscal years beginning after June 15,
2000. Because the Company has never used or currently intends to use
derivatives, management does not anticipate that adoption of this new standard
will have a significant impact on the results of operations or the financial
position of the Company.
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. There can also be no assurance that the Company will be able to
successfully integrate the business and operations of any business acquired in
the future. There can be no assurance that the Company will not incur
disruptions and unexpected expenses in integrating such acquisitions. In
attempting to make acquisitions, the Company often competes with other potential
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, 2000, 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
23
<PAGE> 24
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 believes that growth will be required to
maintain the Company's competitive position. Future 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 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 1999, international sales
comprised approximately 36% 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. The recent non discretionary three year denial policy
for Munitions List items stemming from the U.S. Customs Plea agreement, further
restricts future exports. This action was materially limited, when on March 5,
2000, the State Department notified the Company that it's Commodities
Jurisdiction request submitted in 1998 was approved. The approval removes the
vast majority of the Company's antenna measurement software products and systems
from the U.S Munitions List. These products now fall under the jurisdiction of
the Commerce Department and therefore would not be subject to the State
department's non discretionary policy of denying license applications. Although
the export process will become much more efficient under Commerce regulations
effective March 1, 2000, 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 98% of the Company's sales
in 1999 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.
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 and export license delays and
denials.
24
<PAGE> 25
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. 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 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.
25
<PAGE> 26
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 among
other things, may restrict the ability of the stockholders to approve a merger
or business combination or obtain control of the Company.
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 REGISTRANT
Incorporated by reference from the Company's 2000 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 2000 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 2000 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 2000 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 SCHEDULE AND REPORTS FORM 8-K
(a)(1) Financial Statements
Independent Auditors Report
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule filed as part of this report.
II Valuation and Qualifying Accounts
The financial statement schedule should be read in conjunction
with the consolidated financial statements. Financial
statement schedules not included have been omitted because
they are not applicable as the required information is shown
in the consolidated financial statements. (electronic filing
only.)
(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
The following reports on Form 8-K were filed on behalf of the
Company subsequent to the period covered by this report.
On March 10, 2000 the Company filed a report on Form 8-K to
announce an agreement of non-debarment with the U.S.
Government, allowing the Federal Government to continue to
procure from the Company.
On March 10, 2000 the Company filed a report on Form 8-K to
announce that the U.S. District Court granted final approval
of the agreed upon fine of $600,000 as previously announced on
September 13, 1999 for the U.S. Customs investigation. The
Court did not impose any probation on the Company.
On March 10, 2000 the Company filed a report on Form 8-K that
it had received notification, effective March 1, 2000 from the
U.S. State Department that the Commodity Jurisdiction request
submitted by the Company in 1998 was approved. The approval
removes the vast majority of the Company's basic Antenna
27
<PAGE> 28
Measurement Software products and systems from the U.S.
Munitions List. These products now fall under the jurisdiction
of the Commerce Department and therefore would not be subject
to the State Department's non-discretionary policy of denying
license applications, which the company announced on November
2, 1999.
(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)
10.5 ORBIT/FR Inc. non-debarment agreement dated February
15, 2000 (electronic filing only.)
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 (File No.
333-25015), 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 (File No.
333-25015), 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
Date: March 29, 2000 /s/ Ze'ev Stein
------------------
Ze'ev Stein, Acting
President and
Chief Executive Officer
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ze'ev Stein 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 29th day of March, 2000.
Name Title
/s/ Ze'ev Stein Chairman of the Board, Acting Chief
- ------------------------ Executive Officer (principal executive
Ze'ev Stein officer)
/s/ William A. Torzolini Vice President Finance, Chief
- ------------------------ Financial Officer (principal accounting
William A. Torzolini and financial officer)
/s/ Shimon Alon Director
- ------------------------
Shimon Alon
/s/ Uri Jenach Director
- ------------------------
Uri Jenach
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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 8, 2000
F-1
<PAGE> 31
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,353 $ 10,751
Accounts receivable, less allowance of $244 and $491
in 1999 and 1998, respectively 3,190 3,716
Inventory 2,001 2,160
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,140 1,777
Deferred income taxes 651 1,676
Income tax refund receivable 744 225
Other 426 262
-------- --------
Total current assets 15,505 20,567
Property and equipment, net 1,093 1,086
Cost in excess of net assets acquired, less
accumulated amortization of $116 and $68 in 1999
and 1998, respectively 864 912
Purchased software, less accumulated amortization
of $293 and $193 in 1999 and 1998, respectively 206 306
Other 100 134
-------- --------
Total assets $ 17,768 $ 23,005
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,726 $ 1,050
Accounts payable--Parent 364 681
Accrued expenses 2,680 2,784
Billings in excess of costs and estimated earnings
on uncompleted contracts 930 196
Note payable to Parent -- 2,722
Deferred income taxes 131 170
-------- --------
Total current liabilities 5,831 7,603
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 --6,072,973 in 1999 and 1998 61 61
Additional paid-in capital 15,139 15,139
Retained earnings (accumulated deficit) (3,046) 364
Treasury stock--62,200 and 41,800 shares
in 1999 and 1998, respectively (217) (162)
-------- --------
Total stockholders' equity 11,937 15,402
-------- --------
Total liabilities and stockholders' equity $ 17,768 $ 23,005
======== ========
</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,
----------------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Contract revenues $ 12,923 $ 11,913 $22,055
Cost of revenues 11,242 10,563 13,227
-------- -------- -------
Gross profit 1,681 1,350 8,828
Operating expenses:
General and administrative 2,512 2,747 1,552
Sales and marketing 2,073 1,870 1,527
Research and development 750 890 1,228
Other charges -- 2,300 --
-------- -------- -------
Total operating expenses 5,335 7,807 4,307
-------- -------- -------
Operating income (loss) (3,654) (6,457) 4,521
Other income, net 427 653 379
-------- -------- -------
Income (loss) before income taxes (3,227) (5,804) 4,900
Income tax expense (benefit) 183 (1,673) 1,774
-------- -------- -------
Net income (loss) $ (3,410) $ (4,131) $ 3,126
======== ======== =======
Basic earnings (loss) per share $ (.57) $ (.68) $ .61
======== ======== =======
Diluted earnings (loss) per share $ (.57) $ (.68) $ .60
======== ======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Total
-------------- ------------------- Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 4,000 $40 -- -- $ 450 $ 1,369 $ 1,859
Issuance of shares in initial
public offering at $8.25 per
share (net of offering costs) 2,000 20 -- -- 14,088 -- 14,108
Net income -- -- -- -- -- 3,126 3,126
----- --- ----- ----- ------ -------- --------
Balance, December 31, 1997 6,000 60 -- -- 14,538 4,495 19,093
Issuance of shares - AEMI
acquisition 73 1 -- -- 601 -- 602
Purchase of treasury shares -- -- 42 (162) -- -- (162)
Net loss -- -- -- -- -- (4,131) (4,131)
----- --- ----- ----- ------ -------- --------
Balance, December 31, 1998 6,073 61 42 (162) 15,139 364 15,402
Purchase of treasury shares -- -- 20 (55) -- -- (55)
Net loss -- -- -- -- -- (3,410) (3,410)
----- --- ----- ----- ------ -------- --------
Balance, December 31, 1999 6,073 $61 62 $(217) $15,139 $ (3,046) $ 11,937
===== === ===== ===== ======= ======== ========
</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,
-----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,410) $ (4,131) $ 3,126
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 424 429 347
Amortization 182 133 92
Deferred income tax provision 986 (1,946) 200
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable 526 2,171 (647)
Inventory 159 109 306
Costs and estimated earnings in excess of billings on
uncompleted contracts 637 745 (1,949)
Income tax refunds receivable (519) (225)
Other (164) 17 (172)
Accounts payable and accrued expenses 572 536 183
Accounts payable--Parent (317) (224) (147)
Income taxes payable -- (719) 641
Billings in excess of costs and estimated earnings on
uncompleted contracts 734 11 (746)
Other liabilities -- (235) (97)
-------- -------- --------
Net cash provided by (used in) operating activities (190) (3,329) 1,137
Cash flows from investing activities:
Purchase of property and equipment (431) (331) (371)
Investment in purchased software -- (147) --
Purchase of net assets through businesses acquired,
net of cash acquired -- (105) (374)
-------- -------- --------
Net cash used in investing activities (431) (583) (745)
Cash flows from financing activities:
Proceeds from issuance of common stock in initial
public offering, net of offering costs -- -- 14,108
Purchase of treasury stock (55) (162) --
Net repayments of note payable--Parent (2,722) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (2,777) (162) 14,108
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,398) (4,074) 14,500
Cash and cash equivalents at beginning of year 10,751 14,825 325
-------- -------- --------
Cash and cash equivalents at end of year $ 7,353 $ 10,751 $ 14,825
======== ======== ========
Supplemental disclosures of cash flow information:
Net cash paid (received) during the year for income taxes $ (162) $ 1,273 $ 893
======== ======== ========
Cash paid during the year for interest $ -- $ -- $ 7
======== ======== ========
Purchase price payable relating to acquisitions $ -- $ -- $ 754
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 35
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.
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 accounting
principles generally accepted in the United States 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 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
F-6
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment -- 5-7 years; lab equipment -- 5 years; furniture and fixtures -- 7
years; transportation equipment -- 5 years; leasehold improvements -- 5 years.
Purchased Software
Purchased software 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 businesses acquired and is 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 $530, $457, and $628 for the years ended
December 31, 1999, 1998, and 1997, respectively.
F-7
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of accounts receivable. 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 certain foreign commercial customers, the
Company generally requires irrevocable letters of credit in the amount of the
total contract. At December 31, 1999 there were no irrevocable letters of credit
posted for the Company's foreign customers.
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 functional currency for operations in Israel is the U.S.
dollar. Other foreign operations' functional currency is the local currency in
the country in which the subsidiary is located. Foreign currency transaction
gains and losses, which are not material, are recognized currently in the
consolidated statements of operations.
For the years ended December 31, 1999, and 1998, approximately 2% and 3%,
respectively, 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 (Loss) per Share
Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average common shares outstanding for the period. Diluted
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average common shares outstanding for the period plus the dilutive
effect of stock options. The dilutive effect of stock options is not included in
1999 or 1998 as inclusion of such options is antidilutive.
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)
Stock-Based Compensation
The Company follows 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 16 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 and cash equivalents, accounts receivable, other current assets,
accounts payable, accrued expenses and note payable to Parent reported in the
consolidated balance sheets equal or approximate fair value due to their short
maturities.
Comprehensive Income
SFAS 130, Reporting Comprehensive Income, established the standards for
reporting and display of comprehensive income and its components in the
financial statements. The only item of other comprehensive income (loss) which
the Company reports is the foreign currency translation adjustments, which have
been insignificant to date.
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivatives and Hedging Activities (SFAS 133), which
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
is effective for fiscal years beginning after June 15, 1999. SFAS 137 deferred
the effective date of SFAS 133 to all fiscal years beginning after June 15,
2000. Because the Company has never used or currently intends to use
derivatives, management does not anticipate that adoption of this new standard
will have a significant impact on the results of operations or the financial
position of the Company.
F-9
<PAGE> 39
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. EARNINGS (LOSS) PER SHARE
The following data show the amounts used in computing earnings (loss) per
share and the effect on net income (loss) and the weighted average number of
shares of dilutive potential common stock.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Net income (loss) used in basic
earnings (loss) per share $ (3,410) $ (4,131) $ 3,126
=========== =========== ==========
Weighted average number of common shares
used in basic earnings (loss) per share 6,022,043 6,059,000 5,102,000
Effect of dilutive securities: stock options -- -- 149,000
----------- ----------- ----------
Weighted Average number of common shares
and diluted potential common stock used in
diluted earnings (loss) per share 6,022,043 6,059,000 5,251,000
=========== =========== ==========
</TABLE>
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------ ------
<S> <C> <C>
Work-in-process $ 860 $ 906
Parts and components 1,141 1,254
------ ------
$2,001 $2,160
====== ======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------ ------
<S> <C> <C>
Lab and computer equipment $1,491 $1,249
Office equipment 939 841
Transportation equipment 193 179
Furniture and fixtures 63 60
Leasehold improvements 116 74
------ ------
2,802 2,403
Less accumulated depreciation 1,709 1,317
------ ------
Property and equipment, net $1,093 $1,086
====== ======
</TABLE>
F-10
<PAGE> 40
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------ ------
<S> <C> <C>
Accrued Other Charges $ 901 $1,455
Accrued contract costs 272 280
Accrued compensation 562 454
Accrued commissions 182 151
Accrued royalties 133 115
Accrued warranty 139 192
Other accruals 491 137
------ ------
$2,680 $2,784
====== ======
</TABLE>
6. RELATED PARTY TRANSACTIONS
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 21%.
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.
The Company paid $240, $320 and $360 in 1999, 1998 and 1997, respectively,
to the Parent for administrative services.
Note payable -- Parent reflected the amount due to the Parent for the net
working capital required by Engineering. As of December 31, 1998 the balance was
$2,722. This non-interest-bearing promissory note payable was repaid to the
Parent on December 31, 1999.
Included in cost of revenues for the years ended December 31, 1999, 1998,
and 1997 are approximately $1,104, $1,249, and $1,677, respectively, relating to
the production services provided by the Parent.
7. COMMITMENTS
The Company leases its operating facilities and certain equipment under
noncancelable operating lease agreements which expire in various years through
2003. Rent expense for the years ended December 31, 1999, 1998, and 1997 was
approximately $489, $447, and $372, respectively. Future minimum lease payments
under noncancelable operating leases with initial terms of one year or more are
as follows at December 31, 1999: $318 in 2000; $292 in 2001; $293 in 2002; and
$201 in 2003.
F-11
<PAGE> 41
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates exclusively in one industry segment, the business of
developing, marketing and supporting sophisticated automated microwave test and
measurement systems. In addition to its principal operations and markets in the
United States, the Company conducts sales, customer support and service
operations out of other geographic locations in Europe, Asia, and North America.
The following table represents financial information by geographic region for
the years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 North America Europe Asia Total
- ---- ------------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 8,253 $ 2,433 $ 2,237 $12,923
Cost of Sales to unaffiliated customers 6,724 3,024 1,494 11,242
------- ------- -------- -------
Gross profit unaffiliated customers $ 1,529 $ (591) $ 743 $ 1,681
======= ======= ======== =======
Net property, plant and equipment $ 587 $ 506 $ -- $ 1,093
======= ======= ======== =======
Total assets $15,463 $ 2,305 $ -- $17,768
======= ======= ======== =======
1998
Sales to unaffiliated customers $ 6,036 $ 3,643 $ 2,234 $11,913
Cost of Sales to unaffiliated customers 5,588 3,297 1,678 10,563
------- ------- -------- -------
Gross profit unaffiliated customers $ 448 $ 346 $ 556 $ 1,350
======= ======= ======== =======
Net property, plant and equipment $ 584 $ 502 $ -- $ 1,086
======= ======= ======== =======
Total assets $17,849 $ 5,156 $ -- $23,005
======= ======= ======== =======
1997
Sales to unaffiliated customers $12,130 $ 4,852 $ 5,073 $22,055
======= ======= ======== =======
Net property, plant and equipment $ 845 $ 339 $ -- $ 1,184
======= ======= ======== =======
Total assets $25,529 $ 3,125 $ -- $28,654
======= ======= ======== =======
</TABLE>
In table above "North America" includes all domestic operations, and
"Europe" includes subsidiaries in Germany and Israel. It was impractical to
obtain cost of sales to unaffiliated customers and gross profit unaffiliated
customers for 1997 as such costs were not available in order to provide the
disclosure requirements.
F-12
<PAGE> 42
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. CONTINGENCIES AND OTHER CHARGES
On June 23, 1998 the Company reported that it was subject to a pending
investigation by the U.S. Customs Service, related to its past export practices.
The Company subsequently announced the conclusion of this matter on March 2,
2000. The estimated reserves recorded in the Company's 1998 financial statements
were sufficient to cover the costs associated with this matter. On March 6,
2000 the Company announced the favorable State Department ruling on its
Commodities Jurisdiction request.
10. INCOME TAXES
Pretax income (loss) for the years ended December 31 was taxed in the
following jurisdictions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Domestic $(3,363) $(6,083) $3,265
Foreign 136 279 1,635
------- ------- ------
$(3,227) $(5,804) $4,900
======= ======= ======
</TABLE>
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,
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards $ 1,404 $ 239
Long-term contracts 84 1,141
Accrued compensation 57 94
Foreign and reserves 304 242
------- -------
Total deferred tax assets 1,849 1,716
------- -------
Deferred tax liabilities:
Prepaid (7) (46)
Purchase accounting basis differences (124) (124)
------- -------
Total deferred tax liabilities (131) (170)
------- -------
Net deferred tax asset 1,718 1,546
Valuation allowance (1,198) (40)
------- -------
Net deferred tax asset $ 520 $ 1,506
======= =======
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $3,510 for federal income tax purposes which begin to expire in
2019. The Company also has a German net operating loss carryforward of
approximately $369 which will be available indefinitely.
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $283 and tax credits of approximately $114, 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 through 2009.
F-13
<PAGE> 43
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES (CONTINUED)
The Company recognized $1,506 of a net deferred tax asset in the balance
sheet at December 31, 1998. The Company increased its valuation allowance on its
deferred tax asset during 1999 as a result of the Company reporting negative
operating income, and due to the uncertainty with regard to the Company's
ability to generate sufficient taxable income in the future to realize the
entire deferred tax asset. A valuation allowance has also been recorded due to
the uncertainty with respect to the ultimate realization of the deferred tax
asset recorded in connection with the Company's German subsidiary.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ (874) $ 120 $ 862
State (65) 10 174
Foreign 136 143 538
------- ------- -------
(803) 273 1,574
Deferred:
Federal 891 (1,727) 170
State 75 (264) 59
Foreign 20 45 (29)
------- ------- -------
986 (1,946) 200
------- ------- -------
Total income tax expense (benefit) $ 183 $(1,673) $ 1,774
======= ======= =======
</TABLE>
F-14
<PAGE> 44
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES (CONTINUED)
A reconciliation of income tax expense (benefit) at the U.S. Federal
statutory tax rate and the actual income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. Federal rate $(1,097) $(1,973) $ 1,663
State taxes, net 6 (168) 185
Permanent differences 19 364
Increase in valuation allowance 1,158 40
Foreign rate difference (9) 57 (47)
Other, net 106 7 (27)
------- ------- -------
$ 183 $(1,673) $ 1,774
======= ======= =======
</TABLE>
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, 1999, 1998
and 1997, royalties under this program were approximately $0, $10 and $10,
respectively. At December 31, 1999 and 1998, the Company had an outstanding
contingent obligation to BIRD in the amount of $62. 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, 1999, 1998 and 1997, royalties under
this program were approximately $22, $44 and $75, respectively. At December 31,
1999, the Company had an outstanding contingent obligation to the Chief
Scientist of $828.
12. RETIREMENT PLANS
The Company has retirement plans which cover substantially all 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, 1999, 1998 and 1997, the Company's contributions to the plans were
$99, $75 and $59, respectively.
F-15
<PAGE> 45
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the
percentage-of-completion method are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------- -------
<S> <C> <C>
Accumulated expenditures on uncompleted contracts $ 12,114 $10,720
Estimated earnings (loss) thereon (98) 821
-------- -------
12,016 11,541
Less: applicable progress billings 11,806 9,960
-------- -------
Total $ 210 $ 1,581
======== =======
</TABLE>
The long-term contracts are shown in the accompanying balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------- -------
<S> <C> <C>
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 1,140 $ 1,777
Billings on uncompleted contracts in excess of
costs and estimated earnings (930) (196)
------- -------
$ 210 $ 1,581
======= =======
</TABLE>
14. ACQUISITIONS
On May 4, 1998, the Company purchased the principal assets of Quantum
Change/EMC Systems, Inc. The acquisition formed a new division responsible for
Electromagnetic Compatibility (EMC) Testing Systems. Quantum Change/EMC Systems
provides hardware and independent software solutions to the EMC marketplace.
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 was payable in cash and the other
half was payable by the issuance of shares of the Company's common stock valued
at the initial public offering price of $8.25. During 1998, the Company issued
72,973 shares of common stock in connection with the final purchase price
payable of $602. The acquisition was accounted for as a purchase and,
accordingly, the results of operations from June 17, 1997 are included in the
Company's consolidated results of operations. The purchase price at December 31,
1997 was 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. The acquisition was accounted for as a purchase. The
purchase price of approximately $1,043 was allocated to the net assets acquired
based upon their estimated fair market values, principally as follows:
F-16
<PAGE> 46
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. ACQUISITIONS (CONTINUED)
$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 pro-forma information represents a summary of
consolidated results of operations of the Company and the AEMI acquisition for
the year ended December 31, 1997, as if it had occurred at the beginning of
1997:
<TABLE>
<S> <C>
Total revenues $23,492
Net income $ 3,044
Basic earnings per share $ .60
</TABLE>
15. STOCK OPTION PLAN
During March 1997, the Board of Directors adopted, and the Company's
Stockholders 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 five years and typically have a life of ten
years. The purpose 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-17
<PAGE> 47
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 at December
31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options Authorized 800,000 800,000 800,000
======= ======= =======
Outstanding, beginning of year 784,400 $ 3.00 486,800 $ 8.25 --
Options Granted 70,500 3.00 877,900 3.64 492,300 $ 8.25
Options Forfeited (139,700) 3.00 (580,300) 8.25 (5,500) 8.25
-------- ----------- ------- ----------- ------- -----------
Options Outstanding, end of year 715,200 $ 3.00 784,400 $ 3.00 486,800 $ 8.25
======== =========== ======= =========== ======= ===========
Options Exercisable, end of year 245,800 $ 3.00 189,000 $ 3.00 --
======== =========== ======= =========== =======
Weighted average fair
value of options granted
at market value $ 1.69 $ 6.69 $ 5.36
=========== =========== ===========
Weighted average fair
value of options granted
above market value $ -- $ 1.53 $ --
=========== =========== ===========
</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 or
exceeds 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 1999, 1998 and 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 107.5%, 122.5%
and 60.0%; 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
F-18
<PAGE> 48
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. STOCK OPTION PLAN (CONTINUED)
opinion, the Black-Scholes model does not necessarily provide a reliable measure
of the fair value the Company's stock options.
In response to a sharp decline in the Company's share price and as a
long-term incentive to its employees, the Company repriced all options
outstanding on October 23, 1998 to $3 per share. The new option price of $3
exceeded the current market price of the underlying shares at the time of
repricing.
For purposes of pro-forma disclosure under FASB 123, the estimated fair
value of the Company's options is amortized over the options vesting period. The
impact of the repricing has been considered in the pro-forma information. The
Company's pro-forma information for 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net income (loss) as reported under APB 25 $(3,410) $(4,131) $ 3,126
Stock option expense per FASB 123 (216) (283) (732)
------- ------- -------
Pro-forma net income (loss) $(3,626) $(4,414) $ 2,394
======= ======= =======
Pro-forma basic earnings (loss) per share $ (0.60) $ (0.73) $ 0.47
======= ======= =======
Pro-forma diluted earnings (loss) per share $ (0.60) $ (0.73) $ 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.
F-19
<PAGE> 49
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. STOCKHOLDERS' EQUITY (CONTINUED)
Treasury Stock
On June 24, 1998, the Company's Board approved the repurchase of up to
300,000 shares of its stock. The Company has repurchased 62,200 shares for $217
as of December 31, 1999. The treasury shares have been recorded at cost.
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 overallotment 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-20
<PAGE> 50
Schedule II - Valuation and Qualifying Accounts
ORBIT/FR, Inc. and Subsidiaries
December 31, 1999
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of period Expenses Deductions period
--------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts $490,810 $ 23,000 269,401 $244,409
Year ended December 31, 1998
Allowance for doubtful accounts$ 115,773 $375,037 -- $490,810
Year ended December 31, 1997
Allowance for doubtful accounts -- 115,773 -- $115,773
</TABLE>
<PAGE> 1
EXHIBIT 10.5 - NON DE-DEBARMENT AGREEMENT
BETWEEN ORBIT/FR, INC.
AND
THE DEPARTMENT OF THE NAVY
1. This Agreement is entered into between the Department of the Navy, on behalf
of the Department of Defense, and Orbit/FR, Inc. (hereinafter "Orbit"). The sole
purpose of this Agreement is to evince that Orbit is presently responsible to
contract with the Federal Government by insuring that Orbit has and will
continue a program of acceptable contracting practices and procedures, and by
establishing and implementing a program of compliance reviews, audits, and
reports. For purpose of this Agreement, Orbit shall mean Orbit as a body
corporate, its, successors, subsidiaries, and/or divisions and all directors,
officers, employees and/or consultants of any of the aforesaid entities.
2. Pursuant to a plea Agreement filed in the United States District Court for
the Eastern District of Pennsylvania, on November 10, 1999, Orbit entered a plea
of guilty to counts one and two of a criminal information charging it with
violating the Arms Export Control Act, 22 U.S.C. Section 2778(b)(2) and (c). The
information and plea Agreement are attached to this Agreement as Annex I. By
presentations beginning on September 2, 1999, Orbit has presented to the Navy
information demonstrating its present responsibility, notwithstanding the
conviction, including cooperation with investigators, changes in corporate
management, and establishment of compliance programs and procedures since the
time of the underlying conduct. The Navy has determined under the authority of
FAR 9.406 that the terms and conditions of this Agreement provide adequate
assurances that Orbit's future dealings with the Government will be conducted
with a high degree of honesty and integrity, and that suspension or debarment of
Orbit is not necessary to protect the Government's interest.
3. This Agreement affects only those causes for debarment arising from the facts
and circumstances referred to in Annex I. Except as provided in paragraph 16, or
as otherwise authorized in writing by the Debarring Official, or an appointee
thereof (hereinafter "the Navy Debarring Authority"), this Agreement shall not
be used for any purpose with regard to any criminal, civil, or administrative
charge, claim, or action by or against Orbit related to or arising out of any
criminal or civil investigation conducted by any component of the Department of
Justice or the Department of Defense.
4. By this Agreement, Orbit recognizes its corporate responsibility to ensure
that Orbit fully complies with all federal procurement laws and regulations when
contracting, directly or indirectly, with the United States Government. In this
regard, all aspects of Orbit's corporate and business operations shall be
conducted according to the highest code of corporate ethics, generally
prevailing lawful and honest behavior, and the guidelines set by the letter and
the spirit of this Agreement.
5. To fulfill its corporate responsibilities, Orbit has begun and shall, in
accordance with the Schedule attached hereto as Annex II (hereinafter "the
Schedule"), fully implement a Compliance Program by which Orbit can and will
adhere to lawful and ethical procedures and practices in all areas of and
relating to its provision of goods and services as a Government
<PAGE> 2
contractor and/or subcontractor. This Compliance Program shall have the
following components:
5.1 A WRITTEN CODE OF ETHICS: Orbit has established a written Code of
Ethics as part of its Employee Handbook, which provides notice to all employees
that the highest standard of business ethics is mandated. A copy of the Code of
Ethics is attached as Annex III.
5.1.1 The Code of Ethics shall be maintained, reviewed on an
annual basis by Orbit's duly appointed legal counsel, and updated as required
for compliance with statutory and/or regulatory changes.
5.1.2 All Orbit directors, officers, employees, and
consultants shall be required to sign a certificate stating that they have read
the Employee Handbook and agree to abide by its provisions.
5.2 COMPLIANCE OFFICER: Orbit has established and shall, for at least
the duration of this Agreement, maintain a position designated as the Compliance
Officer.
5.2.1 The Compliance Officer reports to and is responsible
only to the Board of Directors of Orbit. To facilitate implementation of this
Agreement, the Compliance Officer also reports on a dotted line to the Senior
Corporate Officer.
5.2.2 The identification and qualifications of the current
Compliance Officer are set forth in Annex IV. The signature of the Navy's
Debarring Official on this Agreement shall signify acceptance of the current
Compliance Officer.
5.2.3 Should the current or any subsequently appointed
Compliance Officer leave the position, that fact shall be reported to the Navy
Debarring Authority, in writing, within 10 days of said leaving. A replacement
shall be selected by Orbit and reported to the Navy Debarring Authority within
forty-five calendar days of said leaving. Appointment of a replacement
Compliance Officer shall be subject to approval by the Navy Debarring Authority,
which approval shall be solely within the discretion of the Navy Debarring
Authority, but will not be unreasonably withheld or denied. The Navy agrees to
advise Orbit of the reasons for its denial so that Orbit can address the Navy's
concerns. Should the Navy deny approval of any replacement Compliance Officer,
Orbit shall promptly select another and report its selection to the Navy
Debarring Authority. Failure to comply with the provisions of this paragraph
shall be deemed a material breach of this Agreement.
5.2.4 The Compliance Officer shall assist Orbit in identifying
and reporting violations of its Code of Ethics.
5.2.5 Investigation Reports - The Compliance Officer shall
investigate all instances of suspected misconduct and, at the conclusion of the
investigation, shall report in writing the findings to the Board of Directors
and Senior Corporate Officer for management response. Said management response
shall be in writing and shall be provided to the
-2-
<PAGE> 3
Compliance Officer within thirty days of the receipt by management of the
Compliance Officer's report. If the Compliance Officer finds no merit to
allegations of misconduct, no written management response shall be required.
5.2.5.1 The Compliance Officer's investigation shall
begin within five working days of the receipt of the notice of actual or
suspected misconduct.
5.2.5.2 In addition to the final investigation report
during the course of the investigation, the Compliance Officer shall prepare a
quarterly report to the Board of Directors, chronicling the progress of the
investigation then to date.
5.2.5.3 The Compliance Officer shall provide to the
Navy Debarring Authority copies of all reports of investigations and
management's response within ten working days of when said documents were
created or received by the Compliance Officer. The quarterly report to the Board
of Directors, alternatively, may be included in the Quarterly Report referenced
in paragraph 6 below.
5.2.6 Quarterly Reports - The Compliance Officer shall, within
10 working days after the end of each fiscal quarter, prepare and deliver to the
Navy Debarring Authority a synopsis of each instance of suspected and/or
confirmed misconduct which became known to the Compliance Officer during the
fiscal quarter. This synopsis shall be made without regard to the degree to
which the Compliance Officer has been able, as of the due date of the report, to
investigate the misconduct. This synopsis shall include disclosure of any
remedial action taken to date.
5.3 A HOT LINE: Orbit has established and shall, for at least the
duration of this Agreement, maintain a "hot line" to facilitate the reporting of
misconduct by or within Orbit. The policies and procedures of this component are
fully presented in Annex V. Execution of this Agreement by the Navy Debarring
Official shall evidence approval of this component by the Navy Debarring
Authority.
5.4 A WRITTEN CONTRACT COMPLIANCE MANUAL: Orbit has developed and
implemented an Employee Handbook containing the regulatory standards and
acceptable practices for doing business with the Government and/or Government
prime contractors. These practices and procedures shall be applied to all of
Orbit's business dealings involving Government contracts or subcontracts.
5.4.1 A copy of the Employee Handbook is attached as Annex VI.
5.4.2 Execution of this Agreement by the Navy Debarring
Official shall evidence approval of this component by the Navy Debarring
Authority.
5.4.3 In addition to any other provisions, Orbit's Employee
Handbook includes a requirement that employees comply with Orbit's Export
Control Manual.
-3-
<PAGE> 4
5.5 A WRITTEN AUDIT AND COMPLIANCE REVIEW PROCEDURE: Orbit shall
establish and, for at least the duration of this Agreement, maintain an Audit
and Compliance Review Procedure.
5.5.1 Orbit's Audit and Compliance Review Procedure for export
controls is set forth in the attached Annex VII. Execution of this Agreement by
the Navy Debarring Official shall evidence approval of this component by the
Navy Debarring Authority.
5.5.2 Orbit's Audit and Compliance Review Procedure for
corporate compliance is set forth in Annex VIII. Execution of this Agreement by
the Navy Debarring Official shall evidence approval of this component by the
Navy Debarring Authority.
5.5.3 In addition to any other provision that the corporate
compliance audit and review procedures may have, these procedures shall provide
for yearly audits of each component of this Compliance Program.
5.5.3.1 The audits shall be conducted by the Compliance
Officer in conjunction with the appropriate Orbit management personnel.
5.5.3.2 The annual audits shall begin no earlier than
January 1, and shall be completed no later than March 31 of each calendar year
during the term of this Agreement.
5.5.3.3 A report which describes and discusses the
findings made during the audits shall be part of the Compliance Officer's
Quarterly Report for the quarter during which the audits were conducted.
5.6 EXPORT COMPLIANCE: Orbit has established and implemented an export
compliance procedure (hereinafter "Export Control Manual") that will, to the
greatest extent practicable, preclude repetition of the incidents set forth in
the information and plea Agreement and that meet or exceed the requirements of
all pertinent and applicable professional and/or government mandated standards.
5.6.1 The full version of Orbit's Export Control Manual is set
forth in a separate binder provided to the Navy Debarring Official, which is
incorporated herein by reference.
5.6.2 The signature of the Navy's Debarring Official on this
Agreement shall signify acceptance of Orbit's Export Control Manual.
5.7 RECURRING, CLASSROOM STYLE TRAINING: Orbit shall create and
implement a curriculum of classroom style training designed to familiarize each
of its directors, officers, employees, and consultants with the concepts and
precepts of each component of this Compliance Program. This training shall begin
no earlier than January 1 and shall be completed no later than March 30 of each
calendar year during which this Agreement continues.
-4-
<PAGE> 5
5.7.1 The curriculum to be used for training with regard to
each of the components of the Compliance Program is attached hereto as Annex IX
of this Agreement.
5.7.2 Execution of this Agreement by the Navy Debarring
Official shall evidence approval of this component by the Navy Debarring
Authority.
5.7.3 Training of Orbit's employees on compliance with export
regulations governing the company's business has been conducted by an outside
consultant. A copy of the curriculum is attached as Annex X. Execution of this
Agreement by the Navy Debarring Official shall evidence approval of this
component of Orbit's Compliance Program.
5.7.4 In addition to any other training they may receive, each
director, officer, employee, and/or consultant who misses the training given on
the dates indicated on the Schedule, and any director, officer, employee, and/or
consultant who joins, is hired by, or contracts with Orbit after said training
is completed shall be trained individually within thirty days of their
association with Orbit, by the Compliance Officer. In addition, the Compliance
Officer shall, as part of each Quarterly report, identify each such person,
state the date when the person joined Orbit, and state whether the person has
been trained in accordance with this section.
5.7.5 In addition to any other training, each Orbit director,
officer, employee, and consultant shall be informed of any change to any
component of this Compliance Program, which took place since the last previous
training session.
6. Orbit further agrees to:
6.1 Complete all compliance actions identified by this Agreement on or
before the date stated in the Schedule.
6.2 Orbit's Compliance Officers shall, within ten (10) working days
after the end of each fiscal quarter [March, June, September, and December],
prepare and provide a report to the Navy Debarring Authority, describing Orbit's
implementation of this Agreement. This report may be combined with the
Compliance Officer's Quarterly Report described in subparagraph 5(B)(6).
6.3 The Compliance Officer's report shall include, with respect to the
company, the status of: (1) All instances of disciplinary action for violations
of any law and/or the Code of Ethics; (2) all known, ongoing criminal
investigations; (3) all known qui tam suits; (4) all known or suspected
defective pricing cases; and (5) any other matter which might affect Orbit's
present responsibility status, including but not limited to actual or potential
suspension and/or debarment actions by other Government and quasi-governmental
agencies.
6.4 Allow designated representatives of the Department of Defense to
interview Orbit personnel and to examine Orbit's financial books, records, and
other company documents for the
-5-
<PAGE> 6
purpose of evaluating Orbit's compliance with the terms of this Agreement. Such
materials described above shall be made available by Orbit after reasonable
notice for inspection, audit and/or reproduction, provided, however, the
Department of Defense shall not be entitled to examine documents properly
subject to the attorney-client or attorney work product privileges, nor to copy:
(1) Documents containing technical data or computer software, except in
accordance with government contract data rights provisions, or (2) Documents
containing trade secrets.
6.5 In addition to the reports made pursuant to paragraph 6.B. and C.,
disclose, within 30 calendars days of its alleged occurrence, to the Department
of Defense and to the prime Government customer if such customer is not a DoD
component, all instances in which there are reasonable grounds to believe that
Orbit, its directors, officers, employees, consultants, suppliers and/or
Government personnel have violated Federal laws or regulations relating to U.S.
Government procurements. Further, Orbit shall take immediate corrective measures
to remedy the matter disclosed, and to notify the Department of Defense, and the
prime Government customer, if the matter relates to a non-DoD contract, of the
corrective action taken and Orbit's opinion regarding any impact the matter may
have on the Government.
6.6 Cooperate fully with any investigation by the Department of Justice
or the Department of Defense of which Orbit knows or learns in the future.
6.7 Upon conviction of Orbit for violation of any Federal criminal
statute, take appropriate disciplinary action against all responsible
individuals.
6.8 Upon indictment of, or the entering of a guilty plea or plea of
nolo contendere by any director, officer, employee or consultant of Orbit for
violation of any criminal statute, which violation occurred in connection with
the individuals performance of duties for or on behalf of Orbit, immediately
remove the director, officer, employee or consultant from active status with the
Company relating to any dealings with the U.S. Government.
6.9 Upon unappealed conviction of, or after an unsuccessful appeal by
any current director, officer, employee or consultant of Orbit for violation of
any criminal statute, which violation occurred in connection with the
individuals performance of duties for or on behalf of Orbit, take prompt action
to terminate the employment of such officer, employee or consultant, or as
appropriate to remove such director from the Orbit Board of Directors in
recognition of Title 10, U.S.C. Section 2408.
6.10 Treat all costs associated with the termination, severance and/or
removal of any director, officer, employee or consultant of Orbit under
paragraph I, above, which are incurred subsequent to the execution of this
Agreement; as unallowable for Federal Government Contract purposes.
7. During the term of this Agreement, Orbit shall not knowingly employ, engage
or accept the services of an individual who is listed by a Federal Agency as
debarred, suspended, or
-6-
<PAGE> 7
otherwise ineligible for Federal contracting. Reasonable inquiry shall be made
into the suspension/debarment status of any potential employee or consultant
prior to the offer of employment or engagement of services. Further, Orbit shall
promptly terminate the employment of or contract for services with any
individual who was suspended or debarred as of the effective date of their
association with Orbit. Moreover, Orbit shall immediately remove such individual
from responsibility for or involvement with Government contract matters until
the resolution of any question there might be regarding their suspension or
debarment status as of the time of their association with Orbit.
8. During the term of this Agreement, Orbit shall not knowingly enter into any
subcontract or other business relationship relating to Federal Government
contracts with any individual or business entity (hereinafter "prospective
business associate") listed as debarred, suspended, or otherwise ineligible for
contracting by a Federal Agency (hereinafter "listed contractor") without prior
approval by the Navy Debarring Authority.
8.1 Orbit shall make reasonable inquiry into the listed contractor
status of each prospective business associate.
8.2 Whenever the inquiry required by the preceding paragraph "A"
reveals that the prospective business associate is a listed contractor, Orbit
shall submit a notice to the Navy Debarring Authority in form and content as
specified in FAR 9.405-2(b).
8.3 Orbit shall also give written notice of the prohibition effected by
this paragraph 8 to each prospective business associate at the earliest
practicable date.
8.4 Navy Debarring Authority approval of Orbit's association with any
listed contractor shall be deemed given if notice of disapproval is not received
by Orbit within fifteen (15) business days after receipt by the Navy Debarring
Authority of the notice prescribed in paragraph 8(B).
8.5 Orbit shall notify each prospective business associate that neither
actual nor "deemed" approval of Orbit's association with a listed contractor
shall be grounds for any party to assert that the Navy has found the listed
contractor to be presently responsible to contract with any Agency of the
Federal Government. Orbit shall further notify each prospective business
associate that such approval shall mean only that the protections afforded the
Government by Orbit, as stated in its notice to the Navy Debarring Authority
referred to in paragraph 8(B), have been found sufficient to protect the
interests of the Government.
8.6 If this paragraph 8 or any of its subparts in any way conflicts
with the restrictions and/or requirements of FAR 9.405-2, the latter shall
govern.
9. In addition to those costs stated in paragraphs 6.J and 10, Orbit agrees that
the costs described below shall be unallowable for United States Government
contract purposes and shall not be charged directly or indirectly to any such
contract or subcontract:
-7-
<PAGE> 8
9.1 All costs of performing the remedial actions set forth in this
Agreement accomplished by Orbit subsequent to the execution of this Agreement.
9.2 All costs of legal services whether performed by in-house or
private counsel, administrative and clerical services, services of accountants
and consultants, salaries and wages of employees, officers, and directors,
travel, and any costs directly related to the aforesaid, incurred in the
implementation of and/or continued compliance with the terms of this Agreement.
10. Within thirty days of the anniversary of the effective date of this
Agreement, and each year for the duration of the Agreement, Orbit will remit the
sum of $5,000.00, made payable to the Treasury of the United States, as and for
final payment of the costs of monitoring, reviewing, enforcing, and
administering this Agreement.
11. Except as provided in paragraph 16, the execution of this Agreement by the
Navy in no way waives any criminal, civil, contractual, or administrative remedy
or right that the Government may have for the acts described in the Notice, or
for any other conduct that would give rise to such remedies.
12. Material breach by Orbit of the terms of this Agreement, if not cured to the
reasonable satisfaction of the Navy Debarring Authority within 30 working days,
or as otherwise permitted by the Navy Debarring Authority after receipt by Orbit
of written notice of such breach, shall constitute a cause for debarment subject
to the procedures established by the Federal Acquisition Regulation and any
other applicable statute or regulation.
13. By execution of this Agreement, Orbit releases the United States, its
employees, agents, and instrumentalities, in both official and personal
capacities, of any and all liability arising out of or otherwise related to this
Agreement. Further, Orbit agrees not to file any claim against the United
States, its employees, agents, and instrumentalities, in both official and
personal capacities, in any forum or jurisdiction, with regard to any matter
arising out of or otherwise related to this Agreement.
14. By execution of this Agreement, Orbit avers that any adverse action taken or
to be taken against any Orbit director, officer, employee, consultant, or agent,
with regard to any matter arising out of or related to the facts and
circumstances set forth in the Notice, are the result solely of Orbit's
initiatives and decisions, and are not the result of any action by or on behalf
of the United States, its employees, agents or instrumentalities.
15. Orbit agrees to indemnify the Government against, and hold the Government
harmless from, any and all claims, liabilities, obligations, and causes of
action of whatsoever kind or nature for damages sustained by, or injury to or
death of any person, and for any injury or damage to or destruction of any
property, arising out of or as a result of the facts which form the basis for
this Agreement, even if the Government's liability to any person arises out of
the acts or
-8-
<PAGE> 9
omissions of the Government, its employees, agents, invitees, or representatives
of any other description whatsoever.
16. In recognition of the actions by and covenants of Orbit set forth herein,
the Navy, on behalf of the Department of Defense, will not suspend or debar
Orbit based on the facts and circumstances set forth in Annex I.
17. This Agreement is subject to the Freedom of Information Act and may only be
distributed by the Navy throughout the Executive Branch of the Government and to
other interested parties in accordance with the exemptions to FOIA.
18. Modification to this Agreement may be made but shall have no effect until
the terms of the Modification are expressly incorporated in a writing which has
been executed by both parties. Neither party shall seek or accept the benefit of
a judicial or quasi-judicial order directing the other to execute a writing
which would, if executed, modify this Agreement.
19. For purposes of interpretation of this Agreement or any part hereof by a
court of competent jurisdiction (or any other judicial or quasi-judicial body),
this Agreement shall be deemed to have been drafted equally by all parties
hereto.
20. This Agreement shall become effective on the date of the last signature
hereto and shall continue thereafter for three years, or should Orbit for any
reason cease to be in full compliance with the letter and spirit of this
Agreement, for a period of three years following reestablishment of full
compliance as determined by the Navy Debarring Authority, whichever period is
longest.
21. This Agreement constitutes the entire Agreement between the parties and
supersedes all prior Agreements and understandings, oral or written, with
respect to the subject matter hereof. This Agreement shall inure to the benefit
of, and be binding upon, the parties and their respective successors and
assigns.
- ------------------------------ ------------------------------
U.S. Navy Debarring Official David Bernstein
Executive Vice President and
Chief Operating Officer
Orbit/FR, Inc.
-9-
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