Simulating take off
Three years ago, simulator manufacturer BVR was on the verge of closure. Streamlined and under new management, the company gradually turned the corner, and even made its first acquisition. Today, BVR managers can finally talk about plans and potential.
Shiri Habib 11 May 06 17:21
It was just three years ago that BVR Systems Ltd. (OTCBB:BVRSF), a manufacturer of flight simulation systems, was on the verge of closure. Back then, not many people would have been willing to gamble on the company returning to profitability by 2005 and moving on from that to acquire a US company in 2006, with more acquisitions in the pipeline. While the situation of the company from Rosh Ha’ayin with its fairly low market cap on Nasdaq’s bulletin board, is still far from ideal, its latest financials for the fourth quarter of 2005 revealed a quarterly loss of only $308,000, a clear indication that the company is on the right track.
BVR was founded in 1987 by current chairman Aviv Tzidon and his pilot’s course colleague, Yaron Sheinman. The company develops and manufactures training and debriefing simulation systems. The company’s first product was the ‘Unit Training Device’ (UTD), a small in-flight simulator. The company was floated on Nasdaq in 1993. In 1998, it spun off its civilian business from its defense-related activities. A year later, Koor Industries (NYSE: KOR; TASE: KOR) became an investor in BVR, acquiring a 30% share for $35 million, through Elisra Group.
It was an investment that Koor would rather forget, as it caused them considerable losses and aggravation. Following its participation in a number of non-profitable projects, BVR found itself in financial difficulty and published three profit warnings in 2000 alone. At the same time, it also got bogged down in a legal dispute with its former partner, Israel Aircraft Industries Ltd. (IAI).
The background to the dispute stretched back to the early 1990s. In 1992, BVR won its first contract to supply its Ehud ACMI System, a complete onboard real-time and post-flight combat training and debriefing system. The system was co-developed with IAI and was named after a pilot Ehud Falk, who died an aviation accident in 1988. “Falk worked for IAI and was a friend of the founders of BVR,” explains BVR president and CEO Ilan Gillies. “One of the motives behind the founding of the company was to prevent accidents of the type in which he and another pilot, Ram Coller were killed. Both pilots followed all the procedures yet their aircraft still collided mid-air. The system we have developed is meant to prevent such things happening.”
The Ehud system was developed by Tzidon, who then patented it. Under an agreement with IAI’s MLM Division, it was decided that MLM would develop the system’s avionic components. The cooperation between BVR and IAI went well for several years, with the two sides jointly winning a number of tenders for the provision of the Ehud system. But disagreements broke out in 1999, and these led in turn to a legal dispute. BVR claimed that IAI failed to comply with the terms of the agreement, while IAI attempted to prevent two former employees from joining BVR, claiming they had access to confidential information relating to the system.
The two sides eventually reached an original solution in 2001, by dividing up the system’s client countries between them and undertaking not to market the Ehud in regions controlled by the other partner. “There was a time when we argued with IAI over the product, but we now see it as a joint one,” sums up Gillies.
For a decade, BVR supplied advanced training and simulation systems, some of which were patented, but by the beginning of 2000, rival companies were already closing the gap. Caught unprepared for the increasing competition, BVR found itself in financial difficulties and was forced, on more than one occasion, into announcing a streamlining program. At the end of 2002, in an attempt to avoid lay-offs, it announced pay cuts of 2-12% for employees and management, but within less than three months it found itself having to make the first of three rounds of job cuts in 2003. In all, BVR fired 80 employees.
The financial crisis was exacerbated further by BVR’s failure to win a major tender for which it submitted a joint bid together Boeing (NYSE: BA) and which would have generated income totaling $40 million. The same year, BVR published a “going concern” warning as result of debts amounting to millions of dollars to banks and its parent Elisra. By this time, Koor was desperate for someone to come along and relieve it of the burden called BVR. The savior was none other than BVR founder Tzidon, who had sold his holdings to Elisra in 1999-2000 for $4.5-13 a share. In 2003, he acquired BVR stock at a price of $0.18 a share, reflecting a company value of only $1.9 million.
Tzidon also continued the streamlining program, firing half of the company’s workforce, which comprised 60 regular and another 30 external employees. He became company chairman and appointed Gillies, then BVR manager in Singapore, as CEO.
”Two years ago, the company was on the verge of closure. Since then we cut down our size, refocused, and changed our organizational structure, It’s taken time, but we’re now seeing the results,” Gillies told “Globes” several weeks ago, as BVR published its financial reports for 2005. Despite the loss in the fourth quarter of 2005, BVR managed to post its first annual net profit in seven years. Although it only reached the nominal sum of $120,000, the company is nevertheless encouraged by the improvement. It will publish its financial reports for the first quarter of 2006 towards the end of May.
In recent years, BVR has been developing what it describes as its flagship product, the “Embedded Virtual Avionics” system (EVA). Developed from its earlier product suite, the EVA is a virtual tactical simulation suite for trainer aircraft and operates through a form of plug and play mode, meaning that its capabilities are supported by one ground-based PC station. The EVA system was exhibited at the Singapore air show several months back, which means that it is still not available for commercial use. BVR is hoping that this product will enable it to capture the world, or at least, the training and simulation market.
Alongside this, the company is continuing to develop its older products. “To enable pilots to train with full confidence, an aircraft must carry the following three critical components,” explains Gillies. “It must have a simulation computer, a system for transmitting data via the network between the aircraft and the ground and other aircraft and navigation system. In addition, we have also developed plug and play systems, which can be integrated in the aircraft and are not location-dependent. This method was not commonly accepted practice when we first began offering our systems, but it is the standard today.”
Since 1995, BVR has offered an avionics simulation system, which is patented. How does it work? You take a trainer aircraft whose price and operating costs are cheap compared with those of fighter aircraft, and use the simulation system to upgrade its training capabilities to that of a fighter aircraft. “It was such an innovative idea when we first offered it, that we seriously thought of buying an aircraft and fitting it with the system to prove that it works,” recalls Gillies. BVR also began offering simulators for naval craft, which use the concept developed in the Ehud system for aircraft.
BVR currently employs 80 people, nearly all of whom are in Israel. The company’s headquarters and software team are located at Rosh Ha’ayin, with a small hardware development team in Ashdod. In January this year, it made the first ever acquisition when it bought US company Blue Ridge Simulations for $3 million in cash and $2 million in shares. “Our growth strategy is based on three elements,” says Gillies. “The first is organic growth, meaning company stability. The second is protecting our intellectual property rights and patents and registering new patents. The third is mergers and acquisitions.
"We realize that there are a lot of companies of BVR’s size, so our goal is to push back the boundaries imposed by our size. The Blue Ridge acquisition is not enough on its own to bring us to the size we are aiming for, so we will be continuing to look for other acquisition targets, although we don’t have anything specific in the pipeline at present.”
Globes: What has Blue Ridge given you?
Gillies:”Blue Ridge’s product suite complements our own. They are experts in radar-based simulation, but what is more important for us is the fact that Blue Ridge is a US company. Our sales, up to this point, have been to any country other than Israel or the US, although we did have a small amount of sales to US buyers, in cooperation with US companies. The demand in the US amounts to half the training and simulation market, and we are building on this acquisition to give us access to it. We are not engaging in any double dealing here, and we aim to comply with the regulations of the US Department of Defense.”
Anyone wondering how BVR will finance the acquisition of Blue Ridge, with only $3 million in cash and another $2.8 million in limited bank deposits, got the answer a month ago when a group of investors headed by former Eden Springs CEO Nir Dor, acquired a 17% stake in BVR for $3.6 million. BVR issued 20 million ordinary shares, which Dor bought at the market price of $0.18, the same price that Tzidon paid for his stock back in 2003. “The group joined us because it believes in BVR’s vision,” says Gillies. “I believe Nir can be of great help to the company, aside from the money. The group will not join BVR’s management but Nir is an excellent businessman who can put his advice and contacts to good use on our behalf.”
You aim to become a leading player in the training simulation market, but exactly how big is it?
BVR VP marketing Gilad Yavetz:” According to surveys carried out by research organizations, the training and simulation market reaches an annual total of $8 billion. Although we consider this to be a conservative estimate, we accept it. It includes everything related to training and simulation in all countries and in all related fields although it is a fairly segmented market and not all of it is applicable to us. We expect that 10,000 trainer aircraft will be build and upgraded in the next 10 years, which translates into potential revenue of hundreds of millions of dollars. This is just one of our growth engines and we also operate in other fields and have substantial growth potential.”
You noted that you don’t have any sales in Israel. Why is this?
Gillies:”We are not well known in the local sector, and in Israeli defense industries as a whole. This is because Israel relies on US aid and is required, under related agreements, to channel most of the budget for defense procurement into procurement from US companies. Another part of the defense budget is earmarked for salaries and pensions, which means the budget is in effect blocked. Any available funds are extremely limited and used to buy a range of products, usually ones that are more operational than ours. The expenditure on training and simulation in Israel is estimated at no more than $60-70 million, so BVR cannot rely on the Israeli market, which is small in comparison with our aims. We have set our sights on Europe and the US.”
Do you aim to meet the terms for listing on Nasdaq, rather than just the bulletin board?
”We are currently traded on the bulletin board. It was important that first we position our products and stabilize the company and only then start to think about what has to be done if we want to be traded on Nasdaq.”
Published by Globes [online], Israel business news - www.globes.co.il - on May 11, 2006
http://www.globes.co.il/serveEN/globes/docView.asp?did=1000090824&fid=1724
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