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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, 2001
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 $1,335,305 (1). As of March 22, 2002, 6,084,473 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, 2002. 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.
1
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 2002 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
PAGE NO.
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PART I.
Item 1. Business.............................................................................. 4
Item 2 Properties............................................................................ 14
Item 3 Legal Proceedings..................................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders .................................. 15
Item 4.1 Executive Officers and Key Employees.................................................. 15
PART II.
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters............. 17
Item 6 Selected Financial Data............................................................... 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 18
Item 7a Quantitative and Qualitative Disclosure About Market Risk............................. 25
Item 8 Financial Statements and Supplementary Data........................................... 25
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures........................................................................... 25
PART III
Item 10 Directors and Executive Officers of the Registrant.................................... 25
Item 11 Executive Compensation................................................................ 25
Item 12 Security Ownership of Certain Beneficial Owners and Management........................ 25
Item 13 Certain Relationships and Related Transactions........................................ 25
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 26
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PART I
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. As used in this annual report on Form 10-K,
unless the context otherwise requires, "we," "us," "our," "Company," or
ORBIT/FR" refers to ORBIT/FR, Inc.
ITEM 1. BUSINESS
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; aerospace/defense systems integrators and
product manufacturers that incorporate microwave technology, such as Lockheed
Martin, Raytheon, Northrop Grumman, and Boeing; telecommunications service
providers that rely on microwave technology, such as AT&T, NTT and British
Telecom; and automobile and automotive subassembly manufacturers. 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 mail@orbitfr.com 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 FR Engineering, Ltd., an
Israeli corporation ("Engineering"), Orbit FR 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 its 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. Along with providing electro-mechanical
products internally, Engineering is responsible for sales, marketing and
customer support to the Asian market.
In October 1997, Orbit FR Europe, GmbH was incorporated in Germany. The
GmbH develops compact range measurement systems and components, and is
responsible for sales, marketing and customer support to the European market.
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 December 31, 2000, the assets of EMC division were sold under a license
agreement.
On September 13, 1999, the Company announced that it had reached a Plea
Agreement with the U.S. Attorney's Office to settle an investigation of the
Company's export practices. As a result of the plea, the Company's export
license applications for munitions list products became subject to a three year
non-discretionary denial policy under the International Traffic in Arms
Regulations (ITAR). 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.
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On March 6, 2000, the Company received notification, effective March 1,
2000 from the U.S. State Department that a Commodity Jurisdiction request
submitted by the Company in 1998 had been approved, and the vast majority of the
Company's basic Antenna Measurement Software products and systems were removed
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 the Company's license
applications. The Company's 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 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.
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.
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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. Recent growth in
security and defense budgets are expected to provide additional opportunities
for the Company.
The industry's tracking requirements, such as air traffic control and
missile guidance, led to the development of Radar Cross Section ("RCS") and the
test and measurement of radomes. RCS involves the transmission of microwave
signals towards a passive target, such as an aircraft or missile, and then the
creation of an "image" of the target by measuring the energy reflected back
towards the transmit source. Radome testing evaluates the impact of a radome
(the dome-shaped casing that is placed on the leading edge of an aircraft or
missile to protect the radar and direction-finding equipment) on the microwave
signals that pass through it.
THE ORBIT/FR SOLUTION
ORBIT/FR provides its customers with flexible and reliable solutions for
their complex microwave test and measurement needs. The Company focuses its
efforts and resources on developing state-of-the-art microwave test and
measurement systems and products that incorporate specialized technologies and
expertise. The Company's customers have a need for microwave test and
measurement systems and products but often do not have the in-house capabilities
to develop, or the desire to develop, such systems and products themselves.
ORBIT/FR's systems and products provide customers with cost- effective and
user-friendly solutions to their microwave test and measurement needs, thus
allowing them to remain focused on their core competencies. The Company's
systems and products incorporate technological expertise developed and acquired
by the Company over many years.
The Company offers a wide range of standard and custom microwave test and
measurement solutions for cellular/PCS handset testing, cellular base station
testing, satellite testing, automotive testing and specialized
aerospace/defense-related testing. The Company's products include test and
measurement software, microwave receivers, positioner subsystems, as well as
other microwave products, all of which are typically incorporated into the
Company's systems. The Company's proprietary software supports the Company's own
test and measurement products as well as those manufactured by third parties.
The Company's engineers and other technical staff use their broad expertise to
assess and understand their customers' specific microwave test and measurement
needs, process orders quickly, keep delivery time to a minimum, provide
comprehensive customer support and release new software on a regular basis.
THE 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
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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 58% and 52% of the
Company's revenues during 2001 and 2000 respectively 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 5, the vast majority of
the Company's products fall under the jurisdiction of the Commerce Department
and therefore are not be subject to the State Department's non-discretionary
policy of denying the Company's license applications.
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.
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
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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.
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 torso. 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
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technologies and are thus capable of microwave sampling over a wide range of
frequencies. A typical system includes a large mechanical arm that sweeps over a
large turntable. The car being tested rests on the turntable, and both the
turntable and the mechanical arm are set in motion based upon instructions
received from the Company's measurement software. The systems' broad
capabilities are essential given a growing trend by automobile manufacturers to
integrate advanced microwave technologies such as cellular/PCS, GPS-based
direction-finding, data transfer, digital TV and collision-avoidance systems
into their "smart" cars.
RCS Systems. The Company's Radar Cross Section ("RCS") measurement systems
transmit microwave signals towards a passive target and then measure the energy
reflected back towards the transmit source. In an RCS system, the passive target
is typically a model or full scale aircraft or missile that is mounted on a
special "low-RCS" testing pylon capable of rotating the target. Data collected
at various rotation angles and frequencies can be processed to form an
electromagnetic "image" of the target. This type of information enables the
design engineer to assess more accurately the detailed radar signature of the
target. The Company believes that it is a market leader in this field. 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
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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.
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.
11
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,
its on-line catalog, 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. Through its Customer Service
Response Center ("CSRC") the Company handles warranty support, field service,
technical support, training, service contracts, spare parts and user
documentation issues. 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.
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, BAE, Bosch,
Celwave, Daewoo, Ericsson, GTE, IBM, ITT, Korea Mobile
Telecom, Lucent Technologies, Motorola, NEC, Nokia,
Northern Telecom, NTT, Qualcomm, RCA, SiemensPlessey,
Thales Antennas, Telebras and Tenovis,.
Satellite .......................... Astrium, DASA, Elenia Spazio, Harris, Lockheed Martin,
Space Systems/Loral, Raytheon and TRW.
Automotive. ........................ BMW, Daimler-Chrysler, Ford, Fuba, Mitsubishi, SAAB,
Samsung and Toyota.
12
Aerospace/Defense .................. Aerospatiale, Allgon, Ball Aerospace, Boeing, British
Aerospace, Dassault, Elta, Ericsson Microwave, General
Electric, Israel Aircraft Industry, ITT Avionics, JPL,
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 7 of the Notes to Consolidated Financial Statements for a discussion of the
geographic concentration of the Company's revenues. For the year ended December
31, 2001, two customers accounted for 22% of the Company's revenues. There were
no customers whose revenues exceeded 10% for the year ended December 31, 2000.
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.
BACKLOG
At December 31, 2001 and 2000, the Company's backlog was approximately
$7.0 million and $12.3 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 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. Utilizing its internal research and development
staff, augmented by external consultants, the Company develops all of its
products in-house. 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, 2001, 2000 and 1999 were $1,142,000, $984,000
and $750,000 respectively.
13
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, Inc.,
March Microwave, and ETS.
PROPRIETARY RIGHTS
The Company is heavily dependent on its proprietary technology. The
Company relies on a combination of confidentiality agreements with its
employees, license agreements, copyrights, trademarks and trade secret laws to
establish and protect rights to its proprietary technology. The Company does not
hold any material patents. All of the Company's software is shipped with a
security lock which limits software access to authorized users. Generally, the
Company does not license or release its source code. Effective copyright and
trade secret protection of the Company's proprietary technology may be
unavailable or limited in certain foreign countries.
EMPLOYEES
As of December 31, 2001, the Company had a total of 92 employees. 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 $219,000. 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 $199,000.
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-
14
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.
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.
NAME AGE POSITION
- ---------------------- --- --------------------------------------------------
Ze'ev Stein 49 Chairman
Israel Adan 51 President, Chief Executive Officer
Dave Lubbe 38 Chief Financial Officer
John Aubin 48 Vice President, Chief Technology Officer
Moshe Pinkasy 51 Chief Operating Officer, Engineering,
Marcel Boumans 43 Managing Director, GmbH
Gabriel Sanchez 50 President, AEMI
Mark Bates 31 Vice President, Software Development - USA
Dr. Kevin Flood 39 Vice President Engineering and Project Management
Ze'ev 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.
Israel Adan was named President and Chief Executive Officer in October
2001. From March 2001 through October 2001, Mr. Adan served as the President of
FireMedia Communications Inc., From 1999 to 2001 Mr. Adan was senior vice
president of SigmaOne Communications Corp. where he was responsible for the
worldwide development of wireless location technologies and services. Prior to
that Mr. Adan served as President of Tadiran (USA), a leading telecommunications
equipment and systems provider, operating in numerous capacities during his 15
years at the company.
Dave Lubbe was named Chief Financial Officer in July 2000. From 1997 to
2000 Mr. Lubbe served as the Company's Controller.
John Aubin was recently named Chief Technology Officer, and served as Vice
President of Measurement Systems since 1996 to 2001. 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 Managing Director 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.
15
Marcel Boumans has served as the Managing Director of the GmbH since March
1997. Effective January 1, 2000 Mr. Boumans 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 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.
Mark Bates was named the Company's Vice President of Software Development,
U.S.A. in January 2000, and has served in several software development
capacities since joining the company in 1995.
Dr. Kevin Flood Joined the Company in August 2001 and was named Vice
President Engineering and Project Management in March 2002. He was the Vice
President of Research with The Tolly Group from 1999-2001 and worked for nine
years for LSA, Inc. in Exton, PA where he was the Associate Director of
Research/Senior Engineer
16
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.
2001 2000
---- ----
YEAR ENDED DECEMBER 31, HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $2.44 $1.13 $14.19 $2.75
Second Quarter $2.04 $1.00 $6.63 $2.25
Third Quarter $1.70 $0.68 $3.56 $2.31
Fourth Quarter $1.10 $0.60 $3.00 $0.75
On March 22, 2002, there were 32 holders of record of Common Stock. Based
on information received by the Company from its stock transfer agent, the
Company believes that there are approximately 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.
17
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Operations Data:
(amounts in thousands, except per share data) Year Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------
Contract revenues $ 18,612 $ 16,862 $ 12,923 $ 11,913 $22,055
Cost of revenues 13,589 11,563 11,242 10,563 13,227
-------- -------- -------- -------- -------
Gross profit 5,023 5,299 1,681 1,350 8,828
General and administrative 3,197 2,523 2,512 2,747 1,552
Sales and marketing 2,093 2,471 2,073 1,870 1,527
Research and development 1,142 984 750 890 1,228
Other charges -- -- -- 2,300 --
-------- -------- -------- -------- -------
Total operating expenses 6,432 5,978 5,335 7,807 4,307
-------- -------- -------- -------- -------
Operating income (loss) (1,409) (679) (3,654) (6,457) 4,521
Other income, net 82 286 427 653 379
-------- -------- -------- -------- -------
Income (loss) before income taxes (1,327) (393) (3,227) (5,804) 4,900
Income tax expense (benefit) 669 195 183 (1,673) 1,774
-------- -------- -------- -------- -------
Net income (loss) $ (1,996) $ (588) $ (3,410) $ (4,131) $ 3,126
======== ======== ======== ======== =======
Basic earnings (loss) per share $ (.33) $ (.10) $ (0.57) $ (.68) $ 0.61
======== ======== ======== ======== =======
Diluted earnings (loss) per share $ (.33) $ (.10) $ (0.57) $ (.68) $ 0.60
======== ======== ======== ======== =======
Consolidated Balance Sheet Data:
(amounts in thousands) December 31,
------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working capital $ 7,037 $ 8,626 $ 9,154 $ 12,964 $19,635
Total assets $ 14,126 $ 16,210 $ 17,768 $ 23,005 $28,654
Total long term debt -- -- -- -- $ 2,957
Stockholder's equity $ 9,361 $ 11,383 $ 11,937 $ 15,402 $19,093
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates that affect the amounts reported in the financial statements
and accompanying notes. On an on-going basis, management evaluates its estimates
and judgments, including those related to bad debts, intangible assets, income
taxes, financing operations, warranty obligations, contingencies and litigation.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of
18
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The following accounting policies are the most critical and could impact our
results of operations.
Revenue Recognition. The Company recognizes revenue and profit as work
progresses on long-term, fixed price contracts using the
percentage-of-completion method, which measures the percentage of costs incurred
to date to the estimated total costs for each contract when such costs can be
reasonably estimated. The Company follows this method since reasonably
dependable estimates of the costs applicable to various stages of a contract can
be made. Recognized revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income in
the period in which the facts that give rise to the revision become known.
Bad Debts. The Company maintains an allowance for estimated losses
resulting from the non-payment of accounts receivable. If the estimate is not
sufficient to cover actual losses, the Company is required to take charges to
its earnings.
Deferred Taxes. The Company recorded a deferred tax allowance as a result
of the Company reporting negative operating income and due to uncertainty with
regard to the Company's ability to generate sufficient taxable income in the
future to realize the deferred tax asset.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues for the year ended December 31, 2001 were approximately
$18.6 million compared to approximately $16.9 million for the year ended
December 31, 2000, an increase of approximately $1.7 million or 10 %. The
wireless market produced a $1.8 million increase in annual revenues, followed by
the university, automotive and satellite markets with $386,000, $213,000, and
$172,000 respectively. The Company experienced declines in the defense and
Electromagnetic Compatibility (EMC) markets of $721,000 and $118,000,
respectively. Geographically, the Company's European and Asian revenues
increased $1.7 million and $255,000, while North American revenues decreased
approximately $190,000. The increase in Asian and European revenues resulted
from the continued progress on large wireless contracts, while the decline in
the North American market was due to the significant reduction in work performed
on large U.S. defense contracts during the year ended December 31, 2001,
compared to the year ended December 31, 2000
Cost of revenues. Cost of revenues for the year ended December 31, 2001
were approximately $13.6 million compared to approximately $11.6 million for the
year ended December 31, 2000. Gross margins decreased to 27.0% for the year
ended December 31, 2001 from 31.4% for the year ended December 31, 2000. The
decrease in margins is a result of cost revaluations of large defense related
contracts, and one time inventory write-offs.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 2001 were approximately $3.2 million compared to
approximately $2.5 million for the year ended December 31, 2000, an increase of
approximately $700,000. As a percentage of revenues, general and administrative
expenses increased to 17.2% for the year ended December 31, 2001 from 15.0% for
the year ended December 31, 2000. This increase is due mainly to Company
increasing its allowance for uncollectible accounts receivable during 2001 of
approximately $400,000.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 2001 were approximately $2.0 million compared to
approximately $2.5 million for the year ended December 31, 2000, an decrease of
approximately $500,000 or 20%. As a percentage of revenues, sales and marketing
expenses were 11.2% for the year ended December 31, 2001, a decrease from 14.7%
for the year ended December 31, 2000. The decrease was due to decreased third
party sales commissions, and other cost reductions related to the Company's EMC
business unit.
19
Research and development expenses. Research and development expenses for
the year ended December 31, 2001 were approximately $1.1 million compared to
approximately $1.0 million for the year ended December 31, 2000, an increase of
approximately $100,000.
Income taxes. Income tax expense for the year ended December 31, 2001 was
$669,000, compared to $195,000 for the year ended December 31, 2000. Although no
income tax benefit on losses was recorded during the years ended December 31,
2001 and 2000, the Company's income tax expense for the period reflects income
taxes recorded by certain profitable foreign operations. During the year ended
December 31, 2001, the Company increased its valuation allowance against its
deferred tax asset by approximately $400,000. This allowance was a result of the
Company reporting negative operating income, and 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, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues for the year ended December 31, 2000 were approximately
$16.9 million compared to approximately $12.9 million for the year ended
December 31, 1999, an increase of approximately $4.0 million or 30.4%.
Approximately $1.6 million and $3.0 million of the net increase was attributable
to the wireless and aerospace/defense markets which experienced increases in
contracts worldwide as the Company increased its focus on these markets.
Revenues from the EMC, automotive and satellite markets declined approximately
$0.4 million, $0.2 million, and $0.1 million respectively. Geographically,
revenues from Asia and Europe, increased approximately $3.5 million, $0.6
million, respectively, while North American revenues decreased approximately
$0.2 million. The sharp increase in revenues resulted from significant progress
on major wireless contracts in Asia.
Cost of revenues. Cost of revenues for the year ended December 31, 2000
were approximately $11.6 million compared to approximately $11.2 million for the
year ended December 31, 1999. Gross margins increased to 31.4% for the year
ended December 31, 2000 from 13.0% for the year ended December 31, 1999. The
increased margins are due primarily to improvements in the Company's bid and
proposal and manufacturing processes, and the Company's recognition of export
related and European contract losses recorded during the year ended December 31,
1999. These losses were non-recurring during the year ended December 31, 2000.
General and administrative expenses. General and administrative expenses
for the years ended December 31, 2000 and 1999 were approximately $2.5 million.
As a percentage of revenues, general and administrative expenses decreased to
15.0% for the year ended December 31, 2000 from 19.4% for the year ended
December 31, 1999. This decrease is principally due to an increased revenue
base, and level general and administrative costs year over year.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 2000 were approximately $2.5 million compared to
approximately $2.1 million for the year ended December 31, 1999, an increase of
approximately $0.4 million or 16.1%. As a percentage of revenues, sales and
marketing expenses were 14.7% for the year ended December 31, 2000, a decrease
from 16.0% for the year ended December 31, 1999. The increase in sales and
marketing expenses over prior year levels is a result of increased commissions
expense on increased contract revenues, and additional investment in the
Company's North American sales rep network.
Research and development expenses. Research and development expenses for
the year ended December 31, 2000 were approximately $1.0 million compared to
approximately $0.8 million for the year ended December 31, 1999, an increase of
approximately $0.2 million or 31.2% due mainly to continued expenditures on
development activity focused on both full systems design in the wireless and
automotive markets and new software development in the U.S. and Europe.
Income taxes. Income tax expense for the years ended December 31, 2000 and
1999 was $0.2 million. Although no income tax benefit on losses was recorded
during the year ended December 31, 2000, the Company's income tax expense for
the period reflects income taxes recorded by certain profitable foreign
operations. During the year ended December 31, 1999, the Company recorded a
valuation
20
allowance against its deferred tax asset of approximately $1.2 million. This
1999 allowance was a result of the Company reporting negative operating income,
and 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the year ended December 31,
2001 was $668,000, compared to $916,000 for the year ended December 31, 2000.
The Company's $2.0 million net loss in the year ended December 31, 2001, offset
by non cash items relating to depreciation, amortization, and deferred taxes of
$437,000, $351,000, and $369,000 respectively, was the most significant use of
cash in operating activities. Net cash used in operating activities in 2000
resulted from the Company recording a $588,000 net loss, and decrease in
accounts payable and accrued expenses of $1.9 million, relating mainly to the
Company's payment of the $600,000 U.S. Customs fine during March 2000, and
payment of the related accrued legal expenses. The Company's primary offset to
its reductions in operating cash during the year ended December 31, 2000 was the
receipt of approximately $600,000 of income tax refunds.
Net cash used in investing activities during the years ended December 31,
2001, and 2000 was $761,000 and $603,000 respectively. Purchases of property and
equipment comprised $669,000 and $421,000 of the uses of cash in the years ended
December 31, 2001 and 2001, while the Company invested $92,000 and $182,000 in
capitalized software during 2001 and 2000, respectively.
Net cash used in financing activities was $26,000 for the year ended
December 31, 2001 and related to the purchase of treasury stock. Net cash
provided by financing activities was $34,000 for the year ended December 31,
2000 and related to the issuance of common stock options.
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 years ended December 31, 2001, approximately 66% of the Company's revenues
were billed in U.S. dollars. The majority of the costs of the Company's
contracts, including costs subcontracted to the Parent, have been, and will
continue to be, U.S. dollar-denominated except for wages for employees of the
Company's Israeli and German 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 RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No.'s
141 and 142, "Business combinations" and "Goodwill and Other Intangibles." FASB
141 requires all business combinations initiated after July 1, 2001 to be
accounted for using the purchase method. FASB 142 concluded that purchased
goodwill would not be amortized but would be reviewed for impairment when
certain events indicate that the goodwill if a reporting unit is impaired. The
impairment test will use a fair-value based approach, whereby if the implied
fair value of a reporting unit's goodwill is less than its carrying amount,
goodwill would be considered impaired. FASB 142 does not require that goodwill
be tested for impairment upon adoption unless an indicator of impairment exists
at that date. However, it would require that a benchmark assessment be performed
for all existing reporting units within six months of the date of adoption. The
new goodwill applies not only to goodwill arising from acquisitions completed
after the effective date, but also to goodwill previously recorded. The Company
will adopt FASB 142 in the first quarter of 2002 and is in the process of
determining the impact of these pronouncements on its financial position and
results of operations.
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
21
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, adoption of this new standard did not have an 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, 2001, the Company
and Alchut entered into an agreement under which Alchut will continue to provide
these services for at least one year. Alchut maintains its production
operations, and the Company maintains part of its engineering operations, in
Israel. As a result, the Company may be directly influenced by the political,
economic and military conditions affecting Israel.
RISKS OF FIXED-PRICE CONTRACTS. Virtually all of the Company's contracts
for its systems and products are on a fixed-price basis. The profitability of
such contracts is subject to inherent uncertainties as to the cost of
completion. In addition to possible errors or omissions in making initial
estimates, cost
22
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 2001 and 2000, international
sales comprised approximately 58% and 52% of the Company's total sales, and the
Company expects its international business to continue to account for a material
part of its revenues. International sales are subject to numerous risks,
including political and economic instability in foreign markets, restrictive
trade policies of foreign governments, inconsistent product regulation by
foreign agencies or governments, imposition of product tariffs and burdens and
costs of complying with a wide variety of international and U.S. export laws and
regulatory requirements. The 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 US 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 64% of the Company's sales
in 2001 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. 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
23
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
revenues are dependent upon capital spending trends and new design projects,
negative factors affecting these industries could have a material adverse effect
on the Company's business, operating results and financial condition.
NO DIVIDENDS. The Company has never paid cash dividends on its Common
Stock and does not anticipate that any cash dividends will be declared or paid
in the foreseeable future.
ISSUANCE OF PREFERRED STOCK AND COMMON STOCK; ANTI-TAKEOVER PROVISIONS.
Pursuant to its Amended and Restated Certificate of Incorporation, the Company
has an authorized class of 2,000,000 shares of Preferred Stock which may be
issued by the Board of Directors with such terms and such rights, preferences
and designations as the Board may determine and without any vote of the
stockholders, unless otherwise required by law. Issuance of such Preferred
Stock, depending upon the rights, preferences and designations thereof, may have
the effect of delaying, deterring or preventing a change in control of the
Company. Issuance of additional shares Common Stock could result in dilution
24
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.
CONTINUED LISTING ON NASDAQ. On February 14, 2002, the staff (the "Staff")
of The Nasdaq Stock Market, Inc. notified the Company that it was not in
compliance with Marketplace Rule 4310(c)(4) because the minimum closing bid
price for its Common Stock had been below $1.00 per share for a period of thirty
consecutive days. The Staff advised the Company that it would be given a period
of one hundred and eighty days until August 13, 2002 within which to comply with
the minimum bid price requirement in order to maintain its listing on The Nasdaq
SmallCap Market. The Staff further advised the Company that if the Company fails
to demonstrate compliance by such date, but the Company otherwise meets the
initial listing criteria for The Nasdaq SmallCap Market, the Staff would grant
the Company an additional 180 days grace period to demonstrate compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements
and schedule are set forth in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's 2002 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 Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 2002 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 2002 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 2002 Proxy Statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999
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.
(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.
26
Hartman, Lois A. R. Charles, Dorothy Russell, John Aubin,
Norma 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) (4)
10.6 Consulting agreement dated July 24, 2001 by and between the
Company and Gurion Meltzer. (5)
10.7 Employment agreement dated September 5, 2001 by and between
the Company and Ze'ev Stein. (5)
10.8 Employment agreement dated October 15, 2001 by and between the
Company and Israel Adan. (5)
21.1 Subsidiaries of the Registrant. (3)
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (included on signature page).
(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
(4) Incorporated by reference to the Company's annual report on
Form 10-K Filed on March 30, 2001
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed November 19, 2001
27
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: April 1, 2002 /s/ Ze'ev Stein
---------------
Ze'ev Stein
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 first day of April, 2002.
Name Title
- ---- -----
/s/ Ze'ev Stein Chairman of the Board
- -------------------------
Ze'ev Stein
/s/ Israel Adan President and Chief Executive Officer
- ------------------------- (principal executive officer)
Israel Adan
/s/ Dave Lubbe Chief Financial Officer
- ------------------------- (principal accounting and financial officer)
Dave Lubbe
/s/ Uri Jenach Director
- -------------------------
Uri Jenach
/s/ Gurion Meltzer Director
- -------------------------
Gurion Meltzer
/s/ Doron Ginat Director
- -------------------------
Doron Ginat
28
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, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, 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 14, 2002
F-1
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 4,413 $ 5,868
Accounts receivable, less allowance of $427 and $184
in 2001 and 2000, respectively 5,079 4,572
Inventory 1,600 1,976
Costs and estimated earnings in excess of billings
on uncompleted contracts 477 583
Deferred income taxes 64 170
Other 169 284
-------- --------
Total current assets 11,802 13,453
Property and equipment, net 1,329 1,097
Deferred income taxes 217 520
Cost in excess of net assets acquired, less
accumulated amortization of $192 and $150 in 2001
and 2000, respectively 682 724
Software development costs -- 182
Other 96 234
-------- --------
Total assets $ 14,126 $ 16,210
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 794 $ 742
Accounts payable--Parent 699 368
Accrued expenses 2,048 1,756
Customer advances 727 504
Income taxes payable 12 48
Billings in excess of costs and estimated earnings
on uncompleted contracts 417 1,301
Deferred income taxes 68 108
-------- --------
Total current liabilities 4,765 4,827
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 --6,084,473 61 61
Additional paid-in capital 15,173 15,173
Accumulated deficit (5,630) (3,634)
Treasury stock--82,900 and 62,200 shares in 2001 and 2000 (243) (217)
-------- --------
Total stockholders' equity 9,361 11,383
-------- --------
Total liabilities and stockholders' equity $ 14,126 $ 16,210
======== ========
See accompanying notes.
F-2
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
---- ---- ----
Contract revenues $ 18,612 $ 16,862 $ 12,923
Cost of revenues 13,589 11,563 11,242
----------- ----------- -----------
Gross profit 5,023 5,299 1,681
Operating expenses:
General and administrative 3,197 2,523 2,512
Sales and marketing 2,093 2,471 2,073
Research and development 1,142 984 750
----------- ----------- -----------
Total operating expenses 6,432 5,978 5,335
----------- ----------- -----------
Operating loss (1,409) (679) (3,654)
Other income, net 82 286 427
----------- ----------- -----------
Loss before income taxes (1,327) (393) (3,227)
Income tax expense 669 195 183
----------- ----------- -----------
Net loss $ (1,996) $ (588) $ (3,410)
=========== =========== ===========
Basic and diluted loss per share $ (.33) $ (.10) $ (.57)
=========== =========== ===========
Weighted average number of common
shares outstanding 6,008,311 6,017,145 6,022,043
=========== =========== ===========
See accompanying notes.
F-3
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Retained
Common Stock Additional Earnings Treasury Stock Total
------------ Paid-in (Accumulated -------------- Stockholders'
Shares Amount Capital Deficit) Shares Amount Equity
------ ------ ------- -------- ------ ------ ------
Balance, December 31, 1998 6,073 61 15,139 364 42 (162) 15,402
Purchase of treasury shares -- -- -- -- 20 (55) (55)
Net loss -- -- -- (3,410) -- -- (3,410)
----- --- ------- ------- -- ----- --------
Balance, December 31, 1999 6,073 $61 15,139 (3,046) 62 (217) 11,937
Exercise of stock options 11 -- 34 -- -- -- 34
Net loss -- -- -- (588) -- -- (588)
----- --- ------- ------- -- ----- --------
Balance, December 31, 2000 6,084 $61 $15,173 $(3,634) 62 $(217) $ 11,383
Purchase of treasury shares -- -- -- -- 21 (26) (26)
Net loss -- -- -- (1,996) -- -- (1,996)
----- --- ------- ------- -- ----- --------
Balance, December 31, 2001 6,084 $61 $15,173 $(5,630) 83 $(243) $ 9,361
===== === ======= ======= == ===== ========
See accompanying notes
F-4
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net loss $(1,996) $ (588) $ (3,410)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 437 411 424
Amortization 351 182 182
Deferred income tax provision 369 (62) 986
Changes in operating assets and liabilities:
Accounts receivable (507) (1,346) 526
Inventory 376 25 159
Costs and estimated earnings in excess of billings on
uncompleted contracts 106 557 637
Income tax refunds receivable -- 744 (519)
Other 218 142 (164)
Accounts payable and accrued expenses 344 (1,908) 572
Accounts payable--Parent 331 4 (317)
Income taxes payable (36) 48 --
Customer advances 223 504 --
Billings in excess of costs and estimated earnings on
uncompleted contracts (884) 371 734
------- ------- --------
Net cash used in operating activities (668) (916) (190)
Cash flows from investing activities:
Purchase of property and equipment (669) (421) (431)
Capitalization in software development costs (92) (182) --
------- ------- --------
Net cash used in investing activities (761) (603) (431)
Cash flows from financing activities
Proceeds from issuance of common stock -- 34 --
Purchase of treasury stock (26) -- (55)
Net repayments of note payable--Parent -- -- (2,722)
------- ------- --------
Net cash provided by (used in) financing activities (26) 34 (2,777)
------- ------- --------
Net decrease in cash and cash equivalents (1,455) (1,485) (3,398)
Cash and cash equivalents at beginning of year 5,868 7,353 10,751
------- ------- --------
Cash and cash equivalents at end of year $ 4,413 $ 5,868 $ 7,353
======= ======= ========
Supplemental disclosures of cash flow information:
Net cash paid (received) during the year for income taxes $ 103 $ (596) $ (162)
======= ======= ========
Sale of net assets in exchange for note receivable $ -- $ 169 $ --
======= ======= ========
See accompanying notes.
F-5
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership and Basis of Presentation
ORBIT/FR, Inc. (the "Company"), was incorporated in Delaware on December
9, 1996, as a wholly-owned subsidiary of Orbit-Alchut Technologies, Ltd., an
Israeli publicly traded corporation (hereinafter referred to as the "Parent").
The Company develops, markets, and supports sophisticated automated microwave
test and measurement systems for wireless communications, satellite, automotive,
and aerospace/defense industries and manufactures anechoic foam, a microwave
absorbing material that is an integral component of microwave test and
measurement systems. ORBIT/FR, Inc., a holding company, supports its world wide
customers through its subsidiaries ORBIT/FR Engineering, LTD (hereinafter
referred to as "Engineering", Israel), ORBIT/FR Europe, (Germany), Advanced
Electromagnetics, Inc. ("AEMI", San Diego, CA), and Orbit Advanced Technologies,
Inc. and Flam and Russell, Inc, (Horsham, PA).
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 of the Company and its wholly-owned subsidiaries 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.
F-6
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on
accelerated methods for both financial reporting and income tax reporting
purposes over the estimated useful lives as follows: office equipment -- 5-7
years; lab equipment -- 5 years; furniture and fixtures -- 7 years;
transportation equipment -- 5 years; leasehold improvements -- 5 years.
Software Development Costs
Costs incurred in the research and development of new software products
and enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional development costs are capitalized in accordance
with SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed. Capitalization ceases when the product is available for
general release to customers and amortization over a three year period will
commence. During the years ended December 31, 2001 and 2000 the Company
capitalized $92 and $182 of software development costs in connection with the
development of its 959+ Nearfield software package. During the fourth quarter of
2001, the Company determined that the software is not saleable without
substantial modification and upgrade to the existing program. As such, the
Company determined that the net realizable value of the software in its current
form as of December 31, 2001 is zero and wrote-off the remaining unamortized
balance.
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 in connection with the
Company's acquisition of Advanced Electromagnetics, Inc. (AEMI) in 1997. Such
amount 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. No indications of impairment existed at December
31, 2001.
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
F-7
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $135, $212, and $530 for the years ended
December 31, 2001, 2000, and 1999, respectively.
Concentrations of Credit Risk and Significant Customers
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, 2001, there were no irrevocable letters of credit
posted for the Company's foreign customers. For the year ended December 31,
2001, two customers accounted for 22% of the Company's contract revenues. There
were no customers whose contract revenues exceeded 10% for the year ended
December 31, 2000.
Warranty Expense
The Company provides for warranty costs on sales of its own product.
Product warranty periods 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. The Company's functional currency for operations of its German
subsidiary is the local currency. Translation adjustments for this subsidiary
were not significant during 2001, 2000, and 1999. Foreign currency transaction
gains and losses, are recognized currently in the consolidated statements of
operations and are not material to operations.
F-8
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the years ended December 31, 2001, and 2000, approximately 34% and
18%, 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.
Loss Per Share
Basic loss per share is calculated by dividing the net loss by the
weighted average common shares outstanding for the period. Diluted loss per
share is calculated by dividing net 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 2001, 2000 or 1999 as
inclusion of such options is antidilutive.
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 14 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, accounts payable, and
accrued expenses reported in the consolidated balance sheets equal or
approximate fair value due to their short maturities.
Reclassification
Certain amounts for December 31, 2000 have been reclassified for
comparative purposes.
Impact of Recent Accounting Pronouncements
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business combinations" and "Goodwill and Other Intangibles."
FASB 141 requires all business combinations initiated after July 1, 2001 to be
accounted for using the purchase method. FASB 142 concluded that purchased
goodwill would not be amortized but would be reviewed for impairment when
certain events indicate that the goodwill of a reporting unit is impaired. The
impairment test will use a fair-value based approach, whereby if the implied
fair value of a reporting unit's goodwill is less than its carrying amount,
goodwill would be considered impaired. FASB 142 does not require that goodwill
be tested for impairment upon adoption unless an indicator of impairment exists
at that date. However, it would require that a benchmark assessment be performed
for all existing reporting units within six months of the date of adoption. The
new goodwill applies not only to goodwill arising from acquisitions completed
after the effective date, but also to goodwill previously recorded. The Company
will adopt FASB 142 in the first quarter of 2002 and is in the process of
determining the impact of these pronouncements on its financial position and
results of operations.
F-9
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1999, 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 No.
133 is effective for fiscal years beginning after June 15, 2000. Under SFAS No.
133, accounting for changes in fair value of a derivative depends on its
intended use and designation. The Company adopted SFAS No. 133 during the first
quarter of 2001. Because the Company has never used or currently intends to use
derivatives, the adoption of this new standard did not have an impact on the
results of operations or the financial position of the Company.
2. INVENTORY
Inventory consists of the following:
DECEMBER 31,
2001 2000
------ ------
Work-in-process $ 763 $ 797
Parts and components 837 1,179
------ ------
$1,600 $1,976
====== ======
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
2001 2000
------ ------
Lab and computer equipment $1,856 $1,575
Office equipment 1,042 1,067
Transportation equipment 314 319
Furniture and fixtures 45 65
Leasehold improvements 317 123
------ ------
3,574 3,149
Less accumulated depreciation 2,245 2,052
------ ------
Property and equipment, net $1,329 $1,097
====== ======
F-10
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
2001 2000
------ ------
Accrued contract costs $ 537 $ 259
Accrued compensation 740 688
Accrued commissions 116 129
Accrued royalties 119 118
Accrued warranty 281 224
Other accruals 255 338
------ ------
$2,048 $1,756
====== ======
5. 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 $55 per year. These agreements are to be evaluated on an annual basis,
and are intended to be at market value.
The Company paid $302, $242 and $240 in 2001, 2000 and 1999, respectively,
to the Parent for administrative services.
Included in cost of revenues for the years ended December 31, 2001, 2000,
and 1999 are approximately $1,359, $1,117, and $1,104, respectively, relating to
the production services provided by the Parent.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities and certain equipment under
noncancelable operating lease agreements which expire in various years through
2012. Rent expense for the years ended December 31, 2001, 2000, and 1999 was
approximately $537, $546, and $489, respectively. Future minimum lease payments
under noncancelable operating leases with initial terms of one year or more are
as follows at December 31, 2002: $491 in 2003; $384 in 2004; $179 in 2005; $166
in 2006; $163, and $858 thereafter.
During June 1998, the Company reported it was subject to an investigation
by the U.S. Customs Service related to past export practices. During March 2000
the Company reported that the U.S. District Court granted final approval of the
agreed upon fine of $600 in connection with this matter under a plea agreement.
The fine was paid in 2000.
F-11
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. 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, 2001, 2000, and 1999:
2001 North America Europe Asia Total
------------- ------ ---- -----
Sales to unaffiliated customers $ 7,831 $ 4,745 $6,036 $18,612
Cost of Sales to unaffiliated customers 6,396 3,649 3,544 13,589
------- ------- ------ -------
Gross profit unaffiliated customers $ 1,435 $ 1,096 $2,492 $ 5,023
======= ======= ====== =======
Net property and equipment $ 565 $ 764 $ -- $ 1,329
======= ======= ====== =======
Total assets $ 8,311 $ 5,815 $ -- $14,126
======= ======= ====== =======
2000 North America Europe Asia Total
------------- ------ ---- -----
Sales to unaffiliated customers $ 8,040 $ 3,041 $5,781 $16,862
Cost of Sales to unaffiliated customers 5,088 2,659 3,816 11,563
------- ------- ------ -------
Gross profit unaffiliated customers $ 2,952 $ 382 $1,965 $ 5,299
======= ======= ====== =======
Net property and equipment $ 488 $ 609 $ -- $ 1,097
------- ------- ------ -------
Total assets $11,088 $ 5,122 $ -- $16,210
======= ======= ====== =======
1999
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 (loss) unaffiliated customers $ 1,529 $ (591) $ 743 $ 1,681
======= ======= ====== =======
Net property and equipment $ 587 $ 506 $ -- $ 1,093
======= ======= ====== =======
Total assets $15,463 $ 2,305 $ -- $17,768
======= ======= ====== =======
In table above "North America" includes all domestic operations, and
"Europe" includes subsidiaries in Germany and Israel.
8. INCOME TAXES
Pretax loss for the years ended December 31 was taxed in the following
jurisdictions:
2001 2000 1999
------- ------- -------
Domestic $(1,679) $ (947) $(3,363)
Foreign 352 554 136
------- ------- -------
$(1,327) $ (393) $(3,227)
======= ======= =======
F-12
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of deferred tax assets and liabilities consist of the following:
DECEMBER 31,
2001 2000
------- -------
Deferred tax assets:
Net operating loss and credit carryforwards $ 2,176 $ 1,664
Long-term contracts 102 131
Accrued compensation 50 60
Foreign and reserves 569 358
------- -------
Total deferred tax assets 2,897 2,213
======= =======
Deferred tax liabilities:
Prepaid (2) (10)
Purchase accounting basis differences (124) (124)
------- -------
Total deferred tax liabilities (126) (134)
------- -------
Net deferred tax asset 2,771 2,079
Valuation allowance (2,558) (1,497)
------- -------
Net deferred tax asset $ 213 $ 582
======= =======
As of December 31, 2001, the Company has net operating loss carryforwards
of approximately $5,784 for federal income tax purposes which begin to expire in
2019. The Company also has a German net operating loss carryforward of
approximately $1,102 which will be available indefinitely.
As of December 31, 2001, 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. These net operating loss
and credit carryforwards expire during various dates through 2009.
The Company increased its valuation allowance on its deferred tax asset
during 2001 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.
F-13
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES (continued)
The components of income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ----- -------
Current:
Federal $ -- $ -- $ (874)
State -- -- (65)
Foreign 300 257 136
------- ----- -------
300 257 (803)
Deferred:
Federal 317 -- 891
State 18 -- 75
Foreign 34 (62) 20
------- ----- -------
369 (62) 986
------- ----- -------
Total income tax expense $ 669 $ 195 $ 183
======= ===== =======
A reconciliation of income tax expense at the U.S. Federal statutory tax
rate and the actual income tax expense is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ----- -------
Statutory U.S. Federal rate $ (451) $(132) $(1,097)
State taxes, net 1 3 6
Permanent differences 33 20 19
Increase in valuation allowance 1,061 299 1,158
Foreign rate difference 73 5 (9)
Other, net (48) -- 106
------- ----- -------
$ 669 $ 195 $ 183
======= ===== =======
9. 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, 2001, 2000,
and 1999 royalties under this program were approximately $7, $9, and $0,
respectively. At December 31, 2001 and 2000 the Company had outstanding
contingent obligations to BIRD of $46 and $53, respectively. Under the terms of
the Chief Scientist grant, the Company is obligated to pay royalties at a rate
of 2% of revenues generated from the sale of certain products up to the amount
of the grant. For the years ended December 31, 2001, 2000, and 1999, royalties
under this program were approximately $57, $81 and $22, respectively. At
December 31, 2001, and 2000, the Company had an outstanding contingent
obligations to the Chief Scientist of $690 and $747 respectively. Such
contingent obligations are payable in future periods based upon annual sales of
products developed under the grants.
F-14
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. 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, 2001, 2000 and 1999, the Company's contributions to the plans were
$67, $98 and $99, respectively.
11. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the
percentage-of-completion method are as follows:
DECEMBER 31,
2001 2000
-------- --------
Accumulated expenditures on uncompleted contracts $ 12,687 $ 12,078
Estimated earnings thereon 1,087 225
-------- --------
13,774 12,303
Less: applicable progress billings 13,714 13,021
-------- --------
Total $ 60 $ (718)
======== ========
The long-term contracts are shown in the accompanying balance sheets as follows:
DECEMBER 31,
2001 2000
-------- --------
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 477 $ 583
Billings on uncompleted contracts in excess of
costs and estimated earnings (417) (1,301)
-------- --------
$ 60 $ (718)
======== ========
12. SALE OF DIVISION
On May 4, 1998, the Company purchased the principal assets of Quantum
Change/EMC Systems, Inc. which resulted in 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
December 31, 2000, the principle assets of the EMC division were sold for
approximately $169, representing the net book value of the assets sold.
F-15
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. 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").
Detail information concerning the Incentive Plan is as follows at December
31:
2001 2000 1999
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Options Authorized 800,000 800,000 800,000
======== ======== ========
Outstanding, beginning of year 600,500 $ 3.40 715,200 $ 3.00 784,400 $ 3.00
Options granted 122,500 3.00 168,000 4.80 70,500 3.00
Options exercised -- -- (11,500) 3.00 -- --
Options forfeited (109,150) 3.33 (271,200) 3.03 (139,700) 3.00
-------- -------- -------- -------- -------- --------
Options outstanding, end of year 613,850 $ 3.33 600,500 $ 3.40 715,200 $ 3.00
-------- -------- -------- -------- -------- --------
Options exercisable, end of year 275,000 $ 3.27 188,500 $ 3.46 189,000 $ 3.00
======== ======== ======== ======== ======== ========
F-16
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLAN (CONTINUED)
2001 2000 1999
----- ----- -----
Weighted average remaining
contractual life (years) 7.03 7.35 7.86
----- ----- -----
Weighted average fair
value of options granted
at market value $1.28 $5.45 $1.69
----- ----- -----
Weighted average fair
value of options granted
above market value $ -- $1.92 $ --
----- ----- -----
Range of exercise prices per share,
options outstanding $3.00 $3.00 - $6.63 $3.00
===== ============= =====
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 2001, 2000 and 1999; 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 108.1%, 115.8%
and 107.5%; and a weighted-average expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. As noted above, the Company's stock options are
vested over an extended period. In addition, option models require the input of
highly subjective assumptions including future stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value the Company's stock options.
F-17
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. STOCK OPTION PLAN (CONTINUED)
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 is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ----- -------
Net loss as reported under APB 25 $(1,996) $ (588) $(3,410)
Stock option expense per FASB 123 (124) (299) (216)
------- ------ -------
Pro-forma net loss $(2,120) $ (887) $(3,626)
======= ====== =======
Pro-forma basic and diluted loss per share $(0.35) $(0.15) $ (0.60)
======= ====== =======
14. 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.
Treasury Stock
On June 24, 1998, the Company's Board approved the repurchase of up to
300,000 shares of its stock. The Company repurchased 82,900 shares for $243 as
of December 31, 2001. The treasury shares have been recorded at cost.
F-18
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows:
Quarter Ended
-------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
2001 2001 2001 2001
------- ------- ------- -------
Contract revenues $4,903 $4,820 $4,640 $4,249
Gross profit 1,421 1,609 854 1,139
Net loss 8 (17) (1,131) (856)
Loss per share - basic and diluted (.00) (.00) (.19) (.14)
Quarter Ended
-------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
2001 2001 2001 2001
------- ------- ------- -------
Contract revenues $4,199 $4,359 $4,268 $4,036
Gross profit 1,396 1,251 1,252 1,400
Net loss (48) (186) (270) (84)
Loss per share - basic and diluted (.01) (.03) (.04) (.01)
F-19
Schedule II - Valuation and Qualifying Accounts
ORBIT/FR, Inc. and Subsidiaries
December 31, 2001
Balance at Charged to Balance at
Beginning Costs and End of
of period Expenses Deductions period
--------- -------- ---------- ------
Year ended December 31, 2001
Allowance for doubtful accounts $184,473 $ 345,000 $102,000 $427,473
Year ended December 31, 2000
Allowance for doubtful accounts $244,409 $50,064 $110,000 $184,473
Year ended December 31, 1999
Allowance for doubtful accounts $490,810 $ 23,000 $269,401 $244,409