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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, 2002
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 .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes | | No |X|
As of June 28, 2002, the last business day of the Registrant's most
recently completed second fiscal quarter, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the Registrant was
$1,311,460 (based on the closing price of the Common Stock on June 28, 2002 of
$0.55 per share). 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.
As of March 24, 2003, 6,084,473 shares of Common Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain portions of the Company's Proxy Statement to be filed in
connection with its 2003 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, Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed with the Commission on June 5, 1997, the Company's
Annual report on Form 10-K filed on April 1, 2001, and the Company's Quarterly
Report on Form 10-Q filed November 14, 2002 are incorporated by reference as
Exhibits in Part IV of this Report.
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ORBIT/FR, INC.
INDEX
PAGE NO.
--------
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.............................. 26
Item 8 Financial Statements and Supplementary Data............................................ 26
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures............................................................................ 26
PART III
Item 10 Directors and Executive Officers of the Registrant..................................... 26
Item 11 Executive Compensation................................................................. 26
Item 12 Security Ownership of Certain Beneficial Owners and Management......................... 26
Item 13 Certain Relationships and Related Transactions......................................... 26
PART IV
Item 14 Controls and Procedures................................................................ 27
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 27
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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 its 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 62%), 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 provided 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) effective as of November 2, 1999. The Company applied for
reinstatement of its ITAR export privileges and hopes to qualify for such
reinstatement 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 exceed approximately $200
million. Accordingly, sophisticated microwave test and measurement systems are
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critical to satellite and earth station manufacturers, as well as their
subcontractors and sub-assembly manufacturers, to ensure that their products
work properly.
AUTOMOTIVE. The world's major manufacturers of automobiles and automotive
sub-assemblies, driven by competitive pressures, are designing new generations
of "smart" cars and trucks. These vehicles incorporate the latest communications
and safety devices including cellular/PCS, GPS-based direction-finding, data
transfer, digital TV and collision-avoidance systems. Each of these features
requires a specialized, highly-accurate microwave transmission and reception
system. To ensure the performance of these various systems and to assess how
they are impacted by the electromagnetic properties of the car itself,
automotive manufacturers must test the car and these devices as a unit using a
microwave test and measurement system designed for automotive applications.
AEROSPACE/DEFENSE. The need within the aerospace/defense community for
accurate and secure communications and tracking systems led to the emergence of
microwave test and measurement companies in the 1960's. 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
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providing engineering and project management services, by offering an
increasingly broad product line and by maintaining close relationships with
outside component suppliers. Additionally, the Company may periodically acquire
companies with complementary products and services that can be integrated with
the Company's existing or proposed products and systems, as it has with
acquisitions of Flam & Russell and AEMI. By acquiring suppliers of key
components of microwave test and measurement systems that the Company does not
already provide, the Company believes, but cannot assure that it will be able to
increase gross margins.
MAINTAINING TECHNOLOGICAL LEADERSHIP. The Company believes that it has
sophisticated and diversified technological capabilities and intends to
strengthen its technologies by continuously designing and developing new
software releases and hardware upgrades which offer greater performance and
higher precision.
FOCUSING ON STANDARD PRODUCTS AND PROPRIETARY OFF-THE SHELF PRODUCTS.
Given the diversified needs of the Company's customers, no two microwave test
and measurement systems will be identical. However, the Company seeks to keep
the costs of customization to a minimum by designing and delivering specific
types of systems that maximize the use of the Company's proprietary
off-the-shelf products. This approach enables the Company to optimize its
margins while offering its customers tailor-made solutions built around proven
high-quality and reliable products.
PURSUING GROWTH IN INTERNATIONAL MARKETS. Approximately 62% and 58% of the
Company's revenues during 2002 and 2001 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 6, 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'
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component parts, the Company also integrates the systems and trains its
customers in use of the systems. While most customers purchase fully integrated
turnkey microwave test and measurement systems, the Company also sells its
hardware and software products individually as replacement parts or components
of custom-designed systems. The Company offers seven types of microwave test and
measurement systems. The first, antenna measurement systems, are generic systems
that can be adapted for many uses, and the other types are designed and sold in
response to well-defined microwave test and measurement needs within specific
industries. Prices for a typical ORBIT/FR system range from $50,000 to $500,000,
but large systems have been sold for over $3 million.
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.
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Automotive Systems. ORBIT/FR believes it is a leader in the design and
delivery of high-performance test and measurement systems for automobile
manufacturers and manufacturers of automotive sub-assemblies. The Company's
systems incorporate both near-field and far-field technologies and are thus
capable of microwave sampling over a wide range of frequencies. A typical system
includes a large mechanical arm that sweeps over a large turntable. The car
being tested rests on the turntable, and both the turntable and the mechanical
arm are set in motion based upon instructions received from the Company's
measurement software. The systems' broad capabilities are essential given a
growing trend by automobile manufacturers to integrate advanced microwave
technologies such as cellular/PCS, GPS-based direction-finding, data transfer,
digital TV and collision-avoidance systems into their "smart" cars.
RCS Systems. The Company's Radar Cross Section ("RCS") measurement systems
transmit microwave signals towards a passive target and then measure the energy
reflected back towards the transmit source. In an RCS system, the passive target
is typically a model or full scale aircraft or missile that is mounted on a
special "low-RCS" testing pylon capable of rotating the target. Data collected
at various rotation angles and frequencies can be processed to form an
electromagnetic "image" of the target. This type of information enables the
design engineer to assess more accurately the detailed radar signature of the
target. The Company believes that it is a market leader in this field. Although
current restrictions preclude the Company from obtaining a State Department
license for exporting these systems outside the United States, the Company has
submitted a formal request to the State Department seeking reinstatement of
these export privileges. 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. Although current restrictions preclude the Company from obtaining a
State Department license for exporting these systems outside the United States,
the Company has submitted a formal request to the State Department seeking
reinstatement of these export privileges.
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.
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,
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amplitude, phase, rotary and/or linear motion, polarization, transmit/receive
switching, electrical beam pointing and polarization switching are all
controlled by the Company's measurement software. The multidimensional results
obtained are stored in a computer file for subsequent analysis. The software's
data analysis module processes the acquired data using sophisticated microwave
and signal processing algorithms developed by the Company and the National
Institute of Standards and Technology ("NIST"). The data analysis module
transforms the acquired data into easily-understood numerical information and
graphic representations, thus providing the customer with the data required to
satisfy its internal requirements and those of its own customers. The software's
report writing module can be customized to meet each customer's needs.
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, Chelton, 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, 2002, one customer accounted for 11% of the Company's revenues, while two
customers accounted for 22% of the Company's revenues for the year ended
December 31, 2001.
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, 2002 and 2001, the Company's backlog was approximately
$9.0 million and $7.0 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, 2002, 2001 and 2000 were $1,144,000, $1,142,000
and $984,000 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, 2002, the Company had a total of 80 employees. The
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company occupies approximately 18,000 square feet of space at its
headquarters in Horsham, Pennsylvania under a lease expiring in October 2003.
The current annual base rent is approximately $223,000. 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 $288,000.
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 three
14
year non-discretionary denial policy under the International Traffic in Arms
Regulations (ITAR), effective as of November 2, 1999, as a result of the Plea
Agreement. The Company has submitted a formal request seeking reinstatement of
its export privileges. 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 50 Chairman
Israel Adan 52 President, Chief Executive Officer
Dave Lubbe 39 Chief Financial Officer
John Aubin 49 Vice President, Chief Technology Officer
Moshe Pinkasy 52 Chief Operating Officer, Engineering,
Marcel Boumans 44 Managing Director, GmbH
Gabriel Sanchez 51 President, AEMI
Mark Bates 32 Vice President, Software Development - USA
William Campbell 47 Vice President Engineering and Program Management
Ze'ev Stein has served as Chairman of the Board since October 1998. Mr.
Stein served as acting Chief Executive Officer of the Company from October 1998
to October 2001. 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 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. Since January 1, 2000, Mr. Boumans has been 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.
William Campbell joined the Company as Vice President, Engineering and
Program Management in December 2001. Mr. Campbell managed Optical Transponder
development and production activities at JDS Uniphase Transmission Systems
Division from 2000 to 2002. Prior to that Mr. Campbell served as Business Area
Director of High Power Transmission Systems, and other various program
management activities during his 13 years at the company.
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.
2002 2001
---- ----
YEAR ENDED DECEMBER 31, HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter $0.78 $0.45 $2.44 $1.13
Second Quarter $1.06 $0.49 $2.04 $1.00
Third Quarter $0.79 $0.39 $1.70 $0.68
Fourth Quarter $0.48 $0.25 $1.10 $0.60
On March 7, 2003, there were 33 holders of record of the Company's 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,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Contract revenues $ 13,053 $ 18,612 $ 16,862 $ 12,923 $ 11,913
Cost of revenues 9,312 13,589 11,563 11,242 10,563
-------- -------- -------- -------- --------
Gross profit 3,741 5,023 5,299 1,681 1,350
-------- -------- -------- -------- --------
General and administrative 2,764 3,197 2,523 2,512 2,747
Sales and marketing 2,324 2,093 2,471 2,073 1,870
Research and development 1,144 1,142 984 750 890
Other charges -- -- -- -- 2,300
-------- -------- -------- -------- --------
Total operating expenses 6,232 6,432 5,978 5,335 7,807
-------- -------- -------- -------- --------
Operating loss (2,491) (1,409) (679) (3,654) (6,457)
Other income, net 59 82 286 427 653
-------- -------- -------- -------- --------
Loss before income taxes (2,432) (1,327) (393) (3,227) (5,804)
Income tax expense (benefit) 145 669 195 183 (1,673)
-------- -------- -------- -------- --------
Net loss before cumulative effect of
change in accounting principle (2,577) (1,996) (588) (3,410) (4,131)
Cumulative effect of change in
accounting principle (301) -- -- -- --
-------- -------- -------- -------- --------
Net loss $ (2,878) $ (1,996) $ (588) $ (3,410) $ (4,131)
======== ======== ======== ======== ========
Basic and diluted loss per share before cumulative
Effect of change in accounting principle $ (.43) $ (.33) $ (.10) $ (.57) $ (.68)
======== ======== ======== ======== ========
Basic and diluted loss per share $ (.48) $ (.33) $ (.10) $ (.57) $ (.68)
======== ======== ======== ======== ========
Consolidated Balance Sheet Data:
(amounts in thousands) December 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working capital $ 4,749 $ 7,037 $ 8,626 $ 9,154 $ 12,964
Total assets $ 11,875 $ 14,126 $ 16,210 $ 17,768 $ 23,005
Stockholders' equity $ 6,483 $ 9,361 $ 11,383 $ 11,937 $ 15,402
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
18
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 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 additional
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, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues for the year ended December 31, 2002 were approximately
$13.1 million compared to approximately $18.6 million for the year ended
December 31, 2001, a decrease of approximately $5.5 million or 30%. Revenues
from the wireless, defense, EMC, satellite and automotive markets decreased
approximately $3.1 million, $1.6 million, $442,000, $292,000 and $342,000,
respectively. Revenues from the higher education market increased approximately
$234,000. Geographically, revenues from North America, Europe, and Asia
decreased $2.9 million, $2.1 million and $446,000 respectively. The decrease in
revenues related to the wireless, defense, and satellite industries was a result
of significant completion of North American, Asian and European contracts in the
year ended December 31, 2001, not repeated in the year ended December 31, 2002.
Cost of revenues. Cost of revenues for the year ended December 31, 2002
were approximately $9.3 million compared to approximately $13.6 million for the
year ended December 31, 2001. Gross margin percentage for the year ended
December 31, 2002 increased to 28.7% from 27.0% for the year ended December 31,
2001. This increase is primarily due to the cost revaluations and one time
inventory write-offs recorded in 2001.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 2002 totaled approximately $2.8 million compared
to approximately $3.2 million for the year ended December 31, 2001, a decrease
of approximately $400,000 due primarily to the non recurrence of bad debt
expense recorded during the year ended December 31, 2001. As a percentage of
revenues, general and administrative expenses increased to 21.2 % for the year
ended December 31, 2002 from 17.2% for the year ended December 31, 2001.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 2002 were $2.3 million compared to $2.1 million for the year
ended December 31, 2001. The current year
19
increase is a result of the Company's effort to increase awareness of its
products in the marketplace. As a percentage of revenues, sales and marketing
expenses increased to 17.8% for the year ended December 31, 2002, from 11.2% for
the year ended December 31, 2001.
Research and development expenses. Research and development expenses for
the years ended December 31, 2002 and 2001 were $1.1 million. These costs
represent the Company's continuing efforts in the development of its 959Spectrum
software suite.
Other income. Other income, net, for the year ended December 31, 2002 was
approximately $59,000 compared to $82,000 for the year ended December 31, 2001,
a decrease of approximately $23,000. This decrease is primarily a result of the
reduction in the Company's cash balances available for investment and declining
interest rates.
Income taxes. Income tax expense for the year ended December 31, 2002 was
$145,000 compared to $669,000 of income tax expense for the year ended December
31, 2001, a decrease in expense of $524,000. The decrease is primarily due to
the increase in the Company's income tax valuation allowance recorded in 2001
against its deferred tax assets. The Company records income tax expense on
profitable operations and income tax benefits on losses recorded by its foreign
subsidiaries where applicable.
Cumulative effect of a change in accounting principle. During the three
months ended March 31, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). Under SFAS No. 142, goodwill is no longer amortized over its estimated
useful life, but is subject to an annual fair value based assessment. This fair
value assessment resulted in an impairment of $301,000 at January 1, 2002, which
was accounted for as a cumulative effect of a change in accounting principle
during the year ended December 31, 2002.
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
20
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
During recent years the Company has satisfied its working capital
requirements through cash flows from equity financing.
Net cash used in operating activities during the year ended December 31,
2002 was $1.2 million , compared to $668,000 for the year ended December 31,
2001. The most significant use of cash in operating activities during the year
ended December 31, 2002 came from the Company's $2.9 million net loss. The
Company's most significant contributions to cash provided by operating
activities resulted from reductions in the accounts receivable balances of
approximately $919,000, and the increase in billings in excess of costs and
recognized earnings on uncompleted contracts of $1.0 million.
Net cash used in investing activities during the year ended December 31,
2002 for the purchase of property and equipment was $270,000. Net cash used in
investing activities during the year ended December 31, 2001 was $761,000,
related to purchases of property and equipment was $669,000 and for the
capitalization of software development costs was $92,000.
The Company has exposure to currency fluctuations as a result of billing
certain of its contracts in foreign currency. When selling to customers in
countries with less stable currencies, the Company bills in U.S. dollars. For
the year ended December 31, 2002, approximately 66% of the Company's revenues
were billed in U.S. dollars. Substantially all 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 of a reporting unit is impaired. The
impairment test uses a fair-value based approach, whereby if the implied fair
value of a reporting unit's goodwill is less than its carrying amount, goodwill
is considered to be 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 requires that a benchmark assessment be performed for all
existing reporting units within six months of the
21
date of adoption. SFAS 142 applies not only to goodwill arising from
acquisitions completed after the effective date, but also to goodwill previously
recorded. The Company adopted FASB 142 in the first quarter of 2002 and
determined there was an impairment of $301,000 which was reflected as a
cumulative effect of a change in accounting principle on the statement of
operations for the year ended December 31, 2002.
In August 2001, the FASB issued SFAS No.143 "Accounting For Asset
Retirement Obligations." This statement addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period incurred. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company has not yet determined
the impact, if any, of adopting this standard.
In August 2001, the FASB issued SFAS No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes both SFAS No.
121, , "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," related to the disposal of a segment of a business (as previously
defined in that Opinion). SFAS No. 144 retains the fundamental provisions in
SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS No. 121. The
Company does not expect the adoption of SFAS No. 144 to have material impact on
its financial position, results of operations or cash flows.
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.
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
22
production of positioners. In addition, Alchut provides general and
administrative services for the Company's operations in Israel. Effective
January 1, 2002, the Company and Alchut entered into an agreement under which
Alchut will continue to provide these services for at least one year. Alchut
maintains its production operations, and the Company maintains part of its
engineering operations, in Israel. As a result, the Company may be directly
influenced by the political, economic and military conditions affecting Israel.
RISKS OF FIXED-PRICE CONTRACTS. Virtually all of the Company's contracts
for its systems and products are on a fixed-price basis. The profitability of
such contracts is subject to inherent uncertainties as to the cost of
completion. In addition to possible errors or omissions in making initial
estimates, cost overruns may be incurred as a result of unforeseen obstacles,
including both physical conditions and unexpected problems in engineering,
design or testing. Since the Company's business may at certain times be
concentrated in a limited number of large contracts, a significant cost overrun
on any one contract could have a material adverse effect on the Company's
business, operating results and financial condition.
RISKS ASSOCIATED WITH ENTERING NEW MARKETS. The Company has identified and
is evaluating whether to enter into certain complementary markets. The Company's
success in these markets will depend on, among other factors, the Company's
ability to identify markets and develop technologies for such markets on a
timely basis, hire and retain skilled management, financial, marketing and
engineering personnel, successfully manage growth and obtain capital sufficient
to finance such expansion. There can be no assurance that the Company will
successfully enter these markets.
MANAGEMENT OF GROWTH. The Company 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 2002 and 2001, international
sales comprised approximately 62% and 58% 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 85% of the Company's sales
in 2002 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
23
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 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.
24
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 of Common Stock could result in dilution
of the voting power of the Common Stock purchased in this offering. In addition,
certain "anti-takeover" provisions of the Delaware General Corporation Law among
other things, may restrict the ability of the stockholders to approve a merger
or business combination or obtain control of the Company.
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.
On August 14, 2002, the Staff further advised the Company that in light of
its compliance with the initial listing requirements for the Nasdaq SmallCap
market related to stockholders' equity, the Company has been granted an
additional 180 days' grace period to demonstrate compliance. This additional
grace period expired on February 10, 2003.
On November 5, 2002, the Company received an additional notice from the
Staff notifying the Company that it was not in compliance with the minimum
public float market value requirement due to the fact that market value of the
Company's public float had fallen below $1 million for the previous 30 trading
days. The market value of the Company's public float is the aggregate market
value of all shares of Common Stock outstanding that are not held, directly or
indirectly, by any officer or director of the Company or by any other person who
is the beneficial owner of more than 10% of the total shares outstanding. The
Staff advised the Company that it would be given until February 3, 2003 to
comply with the minimum public float requirement in order to maintain its
listing on The Nasdaq SmallCap Market.
In December 2002, the Company's Board of Directors approved an amendment
to the Company's Certificate of Incorporation for submission to the Company's
stockholders to effect a 1-for-4 reverse stock split in order to effect an
increase in the trading price per share of the Company's Common Stock. The
proposed amendment was submitted for stockholder approval at a special meeting
of the Company's stockholders on January 23, 2003. At the special meeting,
stockholders representing a majority of the Company's issued and outstanding
shares of Common Stock voted in favor of the proposed amendment and granted the
Board of Directors the authority to effectuate the reverse stock split at the
Board's discretion. In light of the Company's inability to meet the minimum
public float market value requirement, the Board has elected not to proceed with
the reverse stock split at this time.
On February 4, 2003, the Company received a determination from the Staff
indicating that the Company failed to comply with the minimum market value of
public float requirement for continued listing and that the Company's shares of
Common Stock would, therefore, be subject to delisting from The Nasdaq SmallCap
Market. In response to the Staff's determination, the Company requested a
hearing before a Nasdaq Listing Qualifications Panel to review the Staff
determination and present its case for maintaining the Company's shares on The
Nasdaq SmallCap Market. The hearing was held before the Panel on March 13, 2003,
and the Company is currently awaiting the decision of the Panel.
25
The Company's Common Stock will continue trading on The Nasdaq SmallCap Market
until the Panel has reached a decision.
If the Panel does not grant the Company's request for continued listing,
sales of shares of the Company's Common Stock will likely be conducted in the
over-the-counter market, such as the OTC Bulletin Board, or potentially on
regional exchanges. This may have a negative impact on the liquidity and price
of the Common Stock and investors may find it more difficult to purchase or
dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The reports 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 2003 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 2003 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 2003 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 2003 Proxy Statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
26
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within
90 days of filing date of this annual report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company would be made known to them by others within the
Company, particularly during the period in which this annual report was being
prepared. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect the Company's internal
controls and procedures subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such internal controls and procedures
requiring corrective actions.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
Independent Auditors' Report
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000
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 15.
(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.
27
(c) Exhibits
2.1 Stock Purchase Agreement dated March 31, 1997 by and among
Advanced Electromagnetics, Inc., Anechoic Systems, Inc.,
Gabriel A. Sanchez, Barbara Sanchez and the Company. (1)
2.2 Share Exchange Agreement dated December 31, 1996 by and among
Orbit-Alchut Technologies, Ltd., Orbit Advanced Systems, Ltd.
And the Company. (1)
2.3 Asset Acquisition Agreement dated December 31, 1996 by and
between Orbit-Alchut Technologies, Ltd. and Orbit F.R.
Engineering, Ltd. (1)
2.4 Inventory Acquisition Agreement dated January 1, 1997 by and
between Orbit-Alchut Technologies, Ltd. and Orbit F.R.
Engineering, Ltd. (1)
2.5 Stock Purchase Agreement dated June 28, 1996 by and among
Orbit Advanced Technologies, Inc., The Samuel T. Russell
Trust, Richard P. Flam, Rickey E. Hartman, Lois A. R. Charles,
Dorothy Russell, John Aubin, 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)
10.9 Management Agreement dated January 1, 2003 by and between the
Company and Ze'ev Stein Properties, LTD.
21.1 Subsidiaries of the Registrant. (3)
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (included on signature page).
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Israel Adan, President and Chief Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Dave Lubbe, Chief Financial Officer.
(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) Incorporate by reference to 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
28
ORBIT/FR, INC.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ORBIT/FR, INC
Date: March 31, 2003 /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 31st day of March 2003.
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
/s/ Dan Goffer Director
- ---------------------
Dan Goffer
29
ACKNOWLEDGMENT BY AGENT
I, Ze'ev Stein, have read the above power of attorney and am the person
identified as the attorney-in-fact and agent for the principals whose signatures
appear above. I hereby acknowledge that in the absence of a specific provision
to the contrary in the power of attorney or in the Pennsylvania Probate, Estates
and Fiduciaries Code (20 Pa. C.S.) when I act as an attorney-in-fact and agent:
I shall exercise the power for the benefit of the principals.
I shall keep the assets of the principals separate from my assets.
I shall exercise reasonable caution and prudence.
I shall keep a full and accurate record of all actions, receipts and
disbursements on behalf of the principals.
March 31, 2003
/s/ Ze'ev Stein
Ze'ev Stein
Attorney-in-fact
30
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Israel Adan, Chief Executive Officer of ORBIT/FR, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of ORBIT/FR, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Israel Adan
Israel Adan
Chief Executive Officer
31
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dave Lubbe, Chief Financial Officer of ORBIT/FR, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of ORBIT/FR, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Dave Lubbe
Dave Lubbe
Chief Financial Officer
32
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Orbit/FR, Inc.
We have audited the consolidated balance sheet of Orbit/FR, Inc. and
Subsidiaries as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the financial
statements of Orbit/FR Engineering, Ltd., a wholly owned subsidiary, which
statements reflect total assets of $4,816,000 as of December 31, 2002, and total
revenues of $6,648,000 for the year then ended. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Orbit/FR Engineering, Ltd., is based
solely on the report of the other auditors. The consolidated financial
statements of Orbit/FR, Inc. and Subsidiaries as of December 31, 2001 and 2000,
were audited by other auditors whose report dated March 14, 2002, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
2002 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Orbit/FR, Inc. and Subsidiaries as
of December 31, 2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 2002, 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/ Hoberman, Miller, Goldstein & Lesser. CPA's, P.C
February 27, 2003
New York, NY
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Orbit/FR, Inc.
We have audited the accompanying consolidated balance sheet of Orbit/FR, Inc. as
of December 31, 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 15. 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 the consolidated results of its
operations and its cash flows for each of the two 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-2
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,030 $ 4,413
Accounts receivable, less allowance of $254 and $427
in 2002 and 2001, respectively 4,160 5,079
Inventory 1,580 1,600
Costs and estimated earnings in excess of billings
on uncompleted contracts 683 477
Deferred income taxes 386 64
Other 302 169
-------- --------
Total current assets 10,141 11,802
Property and equipment, net 1,166 1,329
Deferred income taxes 135 217
Cost in excess of net assets acquired 381 682
Other 52 96
-------- --------
Total assets $ 11,875 $ 14,126
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,017 $ 794
Accounts payable--Parent 607 699
Accrued expenses 1,857 2,048
Customer advances 159 727
Income taxes payable 42 12
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,426 417
Deferred income taxes 284 68
-------- --------
Total liabilities, all current 5,392 4,765
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 shares--6,084,473 61 61
Additional paid-in capital 15,173 15,173
Accumulated deficit (8,508) (5,630)
Treasury stock--82,900 shares (243) (243)
-------- --------
Total stockholders' equity 6,483 9,361
-------- --------
Total liabilities and stockholders' equity $ 11,875 $ 14,126
======== ========
See accompanying notes.
F-3
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
Contract revenues $ 13,053 $ 18,612 $ 16,862
Cost of revenues 9,312 13,589 11,563
---------- ---------- ----------
Gross profit 3,741 5,023 5,299
---------- ---------- ----------
Operating expenses:
General and administrative 2,764 3,197 2,523
Sales and marketing 2,324 2,093 2,471
Research and development 1,144 1,142 984
---------- ---------- ----------
Total operating expenses 6,232 6,432 5,978
---------- ---------- ----------
Operating loss (2,491) (1,409) (679)
Other income, net 59 82 286
---------- ---------- ----------
Loss before income taxes (2,432) (1,327) (393)
Income tax expense 145 669 195
---------- ---------- ----------
Net loss before cumulative effect of
change in accounting principle (2,577) (1,996) (588)
Cumulative effect of change in
accounting principle (301) -- --
---------- ---------- ----------
Net loss $ (2,878) $ (1,996) $ (588)
========== ========== ==========
Basic and diluted loss per share before
cumulative effect of change in
in accounting principle $ (0.43) $ (0.33) $ (0.10)
Cumulative effect of change in
accounting principle (0.05) -- --
---------- ---------- ----------
Basic and diluted loss per share $ (0.48) $ (0.33) $ (0.10)
========== ========== ==========
Weighted average number
common shares - basic and diluted 6,001,573 6,008,311 6,017,145
========= ========= =========
See accompanying notes.
F-4
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Common Stock Additional Treasury Stock Total
----------------- Paid-in Accumulated ---------------- Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
------ ------ ---------- ----------- ------ ------ -------------
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
Net loss -- -- -- (2,878) -- -- (2,878)
----- --- ------- ------- -- ----- --------
Balance, December 31, 2002 6,084 $61 $15,173 $(8,508) 83 $(243) $ 6,483
===== === ======= ======= == ===== ========
See accompanying notes.
F-5
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net loss $(2,878) $(1,996) $ (588)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 433 437 411
Amortization -- 351 182
Cumulative effect of change in accounting principle 301 -- --
Deferred income tax provision (24) 369 (62)
Changes in operating assets and liabilities:
Accounts receivable 919 (507) (1,346)
Inventory 20 376 25
Costs and estimated earnings in excess of billings on
uncompleted contracts (206) 106 557
Income tax refunds receivable -- -- 744
Other (133) 218 142
Accounts payable and accrued expenses 31 344 (1,908)
Accounts payable--Parent (91) 331 4
Income taxes payable 30 (36) 48
Customer advances (568) 223 504
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,009 (884) 371
------- ------- -------
Net cash used in operating activities (1,157) (668) (916)
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment (270) (669) (421)
Capitalization of software development costs -- (92) (182)
------- ------- -------
Net cash used in investing activities (270) (761) (603)
------- ------- -------
Cash flows from financing activities
Proceeds from issuance of common stock -- -- 34
Purchase of treasury stock -- (26) --
Net repayments of note receivable 44 -- --
------- ------- -------
Net cash provided by (used in) financing activities 44 (26) 34
------- ------- -------
Net decrease in cash and cash equivalents (1,383) (1,455) (1,485)
Cash and cash equivalents at beginning of year 4,413 5,868 7,353
------- ------- -------
Cash and cash equivalents at end of year $ 3,030 $ 4,413 $ 5,868
======= ======= =======
Supplemental disclosures of cash flow information:
Net cash paid (received) during the year for income taxes $ 84 $ 103 $ (596)
======= ======= =======
Sale of net assets in exchange for note receivable $ -- $ -- $ 169
======= ======= =======
See accompanying notes.
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
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-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)
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 was 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. Through
December 31, 2001, such amounts were amortized on a straight-line basis over
twenty years. Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142") was issued in July 2001 and became
effective for the Company on January 1, 2002. SFAS No. 142 addresses how
goodwill and other intangible assets should be accounted for upon their
acquisition and afterwards. The primary impact of SFAS No. 142 on the Company is
that beginning in 2002, existing goodwill ("cost in excess of net assets
acquired") is no longer amortized. Instead of amortization, goodwill is subject
to an assessment for impairment on a reporting unit basis by applying a
fair-value-based test annually, and more frequently if circumstances indicate a
possible impairment. If a reporting unit's net book value is more than its fair
value and the reporting unit's net book value of its goodwill exceeds the fair
value of that goodwill, an impairment loss is recognized in an amount equal to
the excess goodwill over the book value.
Based upon the December 31, 2001 cost in excess of net assets acquired
balance, the Company reported lower amortization of $43 for the year ended
December 31, 2002 compared to 2001, representing $0.01 per share. The Company
tested the goodwill of AEMI for impairment during the first quarter of 2002
using the present value of future cash flows valuation method. This process
resulted in an impairment of $301 which is accounted for as a cumulative effect
of change in accounting principle during the year ended December 31, 2002.
The Company further tested the goodwill of AEMI for impairment at December
31, 2002 using the present value of future cash flow valuation method and found
that no additional adjustment for the value of goodwill was necessary.
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)
Revenue and Cost Recognition
The Company's principal sources of contract revenues are from engineering
and design services and the production of electro-mechanical equipment. Revenues
from long-term fixed-price development contracts performed principally under the
Company's control are recognized on the percentage-of- completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract when such costs can be reasonably estimated. Contract costs
include all direct material, labor and subcontractor costs and those indirect
costs related to contract performance such as indirect labor, supplies and tool
costs. General and administrative costs are charged to expense as incurred.
Changes in job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions and final contract
settlements, may result in revisions to costs and revenue and are recognized in
the period in which the revisions are determined. Revenues from
electro-mechanical equipment sold to customers which are not part of a larger
contract are recognized when the contract is substantially completed. Revenues
recognized in excess of amounts billed are classified under current assets as
costs and estimated earnings in excess of billings on uncompleted contracts.
Amounts received from clients in excess of revenues recognized to date are
classified under current liabilities as billings in excess of costs and
estimated earnings on uncompleted contracts.
Research and Development
Internally funded research and development costs are charged to operations
as incurred. Included in cost of revenues is customer-funded research and
development costs of approximately $90, $135, and $212 for the years ended
December 31, 2002, 2001, and 2000, 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, 2002, there were no irrevocable letters of
credit posted for the Company's foreign customers. For the year ended December
31, 2002, one customer accounted for 11% of the Company's revenues, while two
customers accounted for 22% of the Company's revenues for the year ended
December 31, 2001.
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
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)
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 2002, 2001, and 2000. Foreign currency transaction
gains and losses, are recognized currently in the consolidated statements of
operations and are not material to operations.
For the years ended December 31, 2002, and 2001, approximately 15% and
34%, 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 2002, 2001, and 2000 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 13 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.
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 uses a fair-value based approach, whereby if the implied fair
value of a reporting unit's goodwill is less than its carrying amount, goodwill
is considered to be 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
F-10
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires that a benchmark assessment be performed for all existing reporting
units within six months of the date of adoption. SFAS 142 applies not only to
goodwill arising from acquisitions completed after the effective date, but also
to goodwill previously recorded. The Company adopted FASB 142 in the first
quarter of 2002 and determined there was an impairment of $301,000 which was
reflected as a cumulative effect of a change in accounting principle on the
statement of operations for the year ended December 31, 2002.
In August 2001, the FASB issued SFAS No.143 "Accounting For Asset
Retirement Obligations." This statement addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period incurred. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company has not yet determined
the impact, if any, of adopting this standard.
In August 2001, the FASB issued SFAS No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes both SFAS No. 121
, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," related to the disposal of a segment of a business (as previously
defined in that Opinion). SFAS No. 144 retains the fundamental provisions in
SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS No. 121. The
Company does not expect the adoption of SFAS No. 144 to have material impact on
its financial position, results of operations or cash flows.
2. INVENTORY
Inventory consists of the following:
DECEMBER 31,
2002 2001
------ ------
Work-in-process $ 973 $ 763
Parts and components 607 837
------ ------
$1,580 $1,600
====== ======
F-11
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
2002 2001
------ ------
Lab and computer equipment $1,972 $1,856
Office equipment 1,158 1,042
Transportation equipment 336 314
Furniture and fixtures 44 45
Leasehold improvements 320 317
------ ------
3,830 3,574
Less accumulated depreciation 2,664 2,245
------ ------
Property and equipment, net $1,166 $1,329
====== ======
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
2002 2001
------ ------
Accrued contract costs $ 381 $ 537
Accrued compensation 758 740
Accrued commissions 99 116
Accrued royalties 114 119
Accrued warranty 293 281
Other accruals 212 255
------ ------
$1,857 $2,048
====== ======
F-12
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 $61 per year. These agreements are to be evaluated on an annual basis,
and are intended to be at market value.
The Company paid $202, $302 and $242 in 2002, 2001 and 2000, respectively,
to the Parent for administrative services.
Included in cost of revenues for the years ended December 31, 2002, 2001,
and 2000 are approximately $1,021, $1,359, and $1,117, 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, 2002, 2001, and 2000 was
approximately $550, $537, and $546, respectively. Future minimum lease payments
under noncancelable operating leases with initial terms of one year or more are
as follows at December 31, 2003: $488 in 2004; $288 in 2005; $277 in 2006; $274
in 2007; $259, and $651 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-13
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, 2002, 2001, and 2000:
2002 North America Europe Asia Total
- ---- ------------- ------ ---- -----
Sales to unaffiliated customers $ 4,910 $2,552 $5,591 $13,053
Cost of Sales to unaffiliated customers 3,271 2,122 3,919 9,312
------- ------ ------ -------
Gross profit unaffiliated customers $ 1,639 $ 430 $1,672 $ 3,741
======= ====== ====== =======
Net property and equipment $ 381 $ 785 $ -- $ 1,166
======= ====== ====== =======
Total assets $ 6,166 $5,709 $ -- $11,875
======= ====== ====== =======
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
======= ====== ====== =======
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:
2002 2001 2000
-------- -------- --------
Domestic $(1,644) $(1,679) $(947)
Foreign (788) 352 554
-------- -------- --------
$(2,432) $(1,327) $(393)
======== ======== ========
F-14
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,
---------------------
2002 2001
------- -------
Deferred tax assets:
Net operating loss and credit carryforwards $ 2,379 $ 2,176
Long-term contracts 12 102
Accrued compensation 43 50
Foreign and reserves 986 --
Goodwill 93 569
------- -------
Total deferred tax assets 3,513 2,897
===== =====
Deferred tax liabilities:
Prepaid -- (2)
Purchase accounting basis differences (124) (124)
------- -------
Total deferred tax liabilities (124) (126)
------- -------
Net deferred tax asset 3,389 2,771
Valuation allowance (3,152) (2,558)
------- -------
Net deferred tax asset $ 237 $ 213
======= =======
As of December 31, 2002, the Company has net operating loss carryforwards
of approximately $6,517 for federal income tax purposes which begin to expire in
2022. The Company also has a German net operating loss carryforward of
approximately $2,158 which will be available indefinitely.
As of December 31, 2002, 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 2002 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-15
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,
---------------------------------
2002 2001 2000
----- ----- -----
Current:
Federal $ 31 $ -- $ --
State -- -- --
Foreign 131 300 257
----- ----- -----
162 300 257
Deferred:
Federal 4 317 --
State -- 18 --
Foreign (21) 34 (62)
----- ----- -----
(17) 369 (62)
----- ----- -----
Total income tax expense $ 145 $ 669 $ 195
===== ===== =====
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,
---------------------------------
2002 2001 2000
----- ------- -----
Statutory U.S. Federal rate $(827) $ (451) $(132)
State taxes, net -- 1 3
Book/tax differences 293 33 20
Increase in valuation allowance 594 1,061 299
Foreign rate difference 90 73 5
Other, net (5) (48) --
----- ------- -----
$ 145 $ 669 $ 195
===== ======= =====
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, and
2000 royalties under this program were approximately $7, and $9, respectively.
At December 31, 2002 and 2001 the Company had outstanding contingent obligations
to BIRD of $46. 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, 2002, 2001, and 2000, royalties under this program were approximately $59,
$57 and $81, respectively. At December 31, 2002, and 2001, the Company had an
outstanding contingent obligations to the Chief Scientist of $631 and $690
respectively. Such contingent obligations are payable in future periods based
upon annual sales of products developed under the grants.
F-16
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, 2002, 2001 and 2000, the Company's contributions to the plans were
$79, $67 and $98, respectively.
11. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the
percentage-of-completion method are as follows:
DECEMBER 31,
2002 2001
------- -----
Accumulated expenditures on uncompleted contracts $ 9,796 $12,687
Estimated earnings thereon (136) 1,087
-------- -------
9,660 13,774
Less: applicable progress billings 10,403 13,714
-------- -------
Total $ (743) $ 60
======== =======
The long-term contracts are shown in the accompanying balance sheets as follows:
DECEMBER 31,
2002 2001
------- -----
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 683 $ 477
Billings on uncompleted contracts in excess of
costs and estimated earnings (1,426) (417)
------- -----
$ (743) $ 60
======= =====
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-17
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:
2002 2001 2000
-------------------- ---------------------- --------------------
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 613,850 $3.33 600,500 $3.40 715,200 $3.00
Options granted 171,000 3.00 122,500 3.00 168,000 4.80
Options exercised -- -- -- -- (11,500) 3.00
Options forfeited (41,000) 3.16 (109,150) 3.33 (271,200) 3.03
------- ----- ------- ----- ------- -----
Options outstanding, end of year 743,850 $3.25 613,850 $3.33 600,500 $3.40
------- ----- ------- ----- ------- -----
Options exercisable, end of year 393,375 $3.30 275,000 $3.27 188,500 $3.46
======= ===== ======= ===== ======= =====
F-18
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLAN (CONTINUED)
2002 2001 2000
---- ---- ----
Weighted average remaining
contractual life (years) 7.04 7.03 7.35
===== ===== =====
Weighted average fair
value of options granted
at market value $0.46 $1.28 $5.45
===== ===== =====
Weighted average fair
value of options granted
above market value $ -- $ -- $1.92
===== ===== =====
Range of exercise prices per share,
options outstanding $3.00 $3.00 $3.00 - $6.63
===== ===== =============
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 2002, 2001 and 2000; 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 101.0%, 108.1%
and 115.8%; 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-19
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. 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,
--------------------------------
2002 2001 2000
------- ------- ------
Net loss as reported under APB 25 $(2,878) $(1,996) $ (588)
Stock option expense per FASB 123 (73) (124) (299)
------- ------- ------
Pro-forma net loss $(2,951) $(2,120) $ (887)
======= ======= ======
Pro-forma basic and diluted loss per share $ (0.49) $ (0.35) $(0.15)
======= ======= ======
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 stockholders. 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, 2002. The treasury shares have been recorded at cost.
F-20
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
2002 2002 2002 2002
---- ---- ---- ----
Contract revenues $ 3,833 $ 2,972 $ 2,521 $ 3,727
Gross profit 998 861 681 1,201
Net loss (847) (692) (737) (602)
Loss per share - basic and diluted (.14) (.12) (.12) (.10)
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)
F-21
Schedule II - Valuation and Qualifying Accounts
ORBIT/FR, Inc. and Subsidiaries
December 31, 2002
Balance at Charged to Balance at
Beginning Costs and End of
of period Expenses Deductions period
--------- -------- ---------- ------
Year ended December 31, 2002
Allowance for doubtful accounts $427,473 $149,455 $322,881 $254,047
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