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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, 2003
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 30, 2003, 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
$966,661 (based on the closing price of the Common Stock on June 30, 2003 of
$0.42 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 31,
2004, 6,001,573 shares of Common Stock were outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
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 March 31, 2001 and the Company's Annual Report on Form 10-K
filed on March 31, 2003 are incorporated by reference as Exhibits in Part IV of
this Report.
F-2
ORBIT/FR, INC.
INDEX
PAGE NO.
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PART I.
Item 1. Business.............................................................................. 4
Item 2 Properties............................................................................ 14
Item 3 Legal Proceedings..................................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders .................................. 15
Item 4.1 Executive Officers and Key Employees.................................................. 15
PART II.
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters............. 17
Item 6 Selected Financial Data............................................................... 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 18
Item 7a Quantitative and Qualitative Disclosure About Market Risk............................. 25
Item 8 Financial Statements and Supplementary Data........................................... 25
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures........................................................................... 25
Item 9a Controls and Procedures............................................................... 26
PART III
Item 10 Directors and Executive Officers of the Registrant.................................... 26
Item 11 Executive Compensation................................................................ 29
Item 12 Security Ownership of Certain Beneficial Owners and Management........................ 31
Item 13 Certain Relationships and Related Transactions........................................ 34
PART IV
Item 14 Principle Accountant Fees and Services................................................ 35
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 35
3
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
aerospace/defense, wireless communications, satellite, and automotive 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, BAE, 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 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.
5
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 25 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.
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
Homeland Security and Department of 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.
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.
6
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
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.
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 specialized aerospace/defense-related testing,
cellular/PCS handset testing, cellular base station testing, satellite testing,
and automotive 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 TURNKEY SOLUTIONS TO CUSTOMERS. Within the
microwave test and measurement market, new and existing customers increasingly
desire to purchase comprehensive, turnkey test and measurement systems from a
single provider. The Company addresses this desire by providing engineering and
project management services, by offering an increasingly broad product line
7
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.
CONTINUED FOCUS ON EXPANDING U.S. AEROSPACE/DEFENSE MARKET. As a result
of its strong reputation and extensive product line, the Company maintains a
strong relationship with the U.S. Government. With expected increases in
Homeland Security and Defense Department budgets, the Company expects to expand
this relationship.
PURSUING GROWTH IN INTERNATIONAL MARKETS. Approximately 52% and 62% of
the Company's revenues during 2003 and 2002 respectively were derived from
international customers. The Company believes that in addition to domestic
growth as a result of increases in Defense Department and Homeland Security
budgets, the international microwave test and measurement marketplace will also
grow over the next several years, 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 turnkey
solutions, which can include chamber design, RF absorbing materials, antenna
measurement and/or RCS subsystems, RF test equipment and software suites, and a
wide range of microwave test and measurement solutions. Components of an
ORBIT/FR
8
automated microwave test and measurement system include proprietary software and
hardware products which can be combined into standard or customized
configurations to meet customers' specific needs. One of the Company's principal
strengths is its experienced design team that solves complex technical and
practical problems.
MICROWAVE TEST AND MEASUREMENT SYSTEMS. The Company designs,
manufactures and markets automated microwave test and measurement systems. In
addition to providing most of these systems' component parts, the Company also
integrates the systems and trains its customers in use of the systems. While
most customers purchase fully integrated turnkey microwave test and measurement
systems, the Company also sells its hardware and software products individually
as replacement parts or components of custom-designed systems. The Company
offers seven types of microwave test and measurement systems. The first, antenna
measurement systems, are generic systems that can be adapted for many uses, and
the other types are designed and sold in response to well-defined microwave test
and measurement needs within specific industries. Prices for a typical ORBIT/FR
system range from $50,000 to $500,000, but large systems have been sold for over
$3 million.
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
9
within these complex antennas. The Company's satellite systems utilize either
near-field or compact range technology. Both technologies are equally effective
from a test and measurement viewpoint, but each offers certain benefits. A
near-field system offers diagnostic capabilities and is generally less expensive
than a comparably equipped compact range system, but a compact range system is
faster and easier to use.
Automotive Systems. ORBIT/FR believes it is a leader in the design and
delivery of high-performance test and measurement systems for automobile
manufacturers and manufacturers of automotive sub-assemblies. The Company's
systems incorporate both near-field and far-field technologies and are thus
capable of microwave sampling over a wide range of frequencies. A typical system
includes a large mechanical arm that sweeps over a large turntable. The car
being tested rests on the turntable, and both the turntable and the mechanical
arm are set in motion based upon instructions received from the Company's
measurement software. The systems' broad capabilities are essential given a
growing trend by automobile manufacturers to integrate advanced microwave
technologies such as cellular/PCS, GPS-based direction-finding, data transfer,
digital TV and collision-avoidance systems into their "smart" cars.
RCS Systems. The Company's Radar Cross Section ("RCS") measurement
systems transmit microwave signals towards a passive target and then measure the
energy reflected back towards the transmit source. In an RCS system, the passive
target is typically a model or full scale aircraft or missile that is mounted on
a special "low-RCS" testing pylon capable of rotating the target. Data collected
at various rotation angles and frequencies can be processed to form an
electromagnetic "image" of the target. This type of information enables the
design engineer to assess more accurately the detailed radar signature of the
target. The Company believes that it is a market leader in this field. 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
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Company's software products are designed to be "off-the-shelf" but are versatile
and can be customized by the Company's or the customer's technical personnel to
suit specific needs.
While software can vary between systems, it always consists of three
primary modules: data acquisition, data analysis and report writing. The
software's data acquisition module records actual measurements as it controls
the microwave measurement equipment, the positioning subsystem, and often the
source antenna and/or the antenna being measured. Variables such as frequency,
power level, amplitude, phase, rotary and/or linear motion, polarization,
transmit/receive switching, electrical beam pointing and polarization switching
are all controlled by the Company's measurement software. The multidimensional
results obtained are stored in a computer file for subsequent analysis. The
software's data analysis module processes the acquired data using sophisticated
microwave and signal processing algorithms developed by the Company and the
National Institute of Standards and Technology ("NIST"). The data analysis
module transforms the acquired data into easily-understood numerical information
and graphic representations, thus providing the customer with the data required
to satisfy its internal requirements and those of its own customers. The
software's report writing module can be customized to meet each customer's
needs.
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 mounted 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.
11
Radial Power Combiners. The Company's radial power combiners offer a
highly efficient electromagnetic mechanism to combine several identical
low-energy signals together to make a single high-energy signal. Radial power
combiners have many uses, but their most common application is in high-power
microwave transmitters.
Antennas, Probes and Other Microwave Accessories. The Company designs
and manufactures antennas, probes and other microwave accessories. These
products are used in the Company's microwave test and measurement systems, and
they are also sold to customers as stand-alone items.
SALES 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 (found at WWW.ORBITFR.COM), advertising in trade
publications, participation in conferences and trade shows, and on the World
Wide Web.
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 performed several hundred world wide installations for
customers in the aerospace/defense, wireless communications, satellite, and
automotive industries. Representative customers that have purchased systems from
the Company include:
Aerospace/Defense................... Aerospatiale, Allgon, Ball
Aerospace, Boeing, BAE Systems,
Dassault, Elta, Ericsson Microwave,
General Electric, Israel Aircraft
Industry, ITT Avionics, JPL,
Lockheed Martin/Loral, Mitsubishi
Heavy Industries, NASA,
Northrop-Grumman, Nurad, Pratt &
Whitney, Racal Avionics, Raytheon,
Rockwell International, SAAB
Missiles, SPAR Aerospace, Texas
Instruments, Tracor/AEL and the
United States Air Force, Army and
Navy.
12
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.
The Company's customers are located in the Americas (the United States,
Canada, Brazil and Argentina), Europe (the United Kingdom, France, Germany,
Israel, 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, 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 each of the years ended
December 31, 2003, and 2002 one customer accounted for 11% of the Company's
revenues.
PRODUCTION AND SUPPLIERS
The Company's engineers, based in the United States, Germany and
Israel, are responsible for product design and development and for overseeing
the production of the Company's products. While the Company maintains a
production facility in Horsham, PA, most of the production of the Company's
products is performed by subcontractors. Alchut is currently the Company's
principal subcontractor for electro-mechanical production, primarily in
connection with the manufacturing of positioners. The Company believes that
Alchut currently offers the best available combination of quality, reliability
and price. By giving three months notice, the Company has the right to select
any other subcontractor.
While the Company produces most of the component parts for its
microwave test and measurement systems, it purchases certain components from
outside vendors for turnkey microwave test and measurement systems, including
personal computers, shielded enclosures and microwave absorbers.
BACKLOG
At December 31, 2003 and 2002, the Company's backlog was approximately
$12.7 million and $9.0 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
13
development expenses of the Company for fiscal years ended December 31, 2003,
2002 and 2001 were $1,132,000, $1,144,000 and $1,142,000 respectively.
COMPETITION
The Company believes that its current systems and products compete
effectively with the systems and products offered by its competitors on the
basis of product functionality, speed and accuracy, reliability, price, ease of
use and technical support. The market for automated microwave test and
measurement products, systems and services, however, is highly competitive and
is characterized by continuing advances in products and technologies.. 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., ETS
, and March Microwave.
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, 2003, the Company had a total of 82 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 2008.
The current annual base rent is approximately $124,000. 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 $365,000.
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 denial
14
policy under the International Traffic in Arms Regulations (ITAR), effective as
of November 2, 1999, as a result of the Plea Agreement. 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 has submitted a formal request seeking
reinstatement of its export privileges.
The Company is currently seeking to re-establish its International
Traffic in Arms (ITAR) export privileges, denied since November 1999, through a
settlement with the U.S. Department of State. The Company has been informed that
any such settlement will involve the payment of a civil penalty which cannot be
currently estimated.
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 51 Chairman
Israel Adan 53 President, Chief Executive Officer
Dave Lubbe 40 Chief Financial Officer
John Aubin 50 Vice President, Chief Technology Officer
Moshe Pinkasy 53 Managing Director, Engineering
Marcel Boumans 45 Managing Director, GmbH
Gabriel Sanchez 52 President, AEMI
Mark Bates 33 Vice President, Software Development - USA
William Campbell 48 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.
15
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.
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 worked for BAE systems
where he 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
On April 11, 2003, the Company's Common Stock was delisted from the
Nasdaq Stock Market and began trading on the electronic over-the-counter
quotation system of the National Association of Securities Dealers (the "NASD"),
the Over-the-Counter Bulletin Board (the "OTCBB") under the symbol "ORFR." The
OTCBB is a regulated quotation service for subscribing members of the NASD that
displays the real-time quotes, last-sale prices and volume information in
over-the-counter securities. The OTCBB market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
The following table sets forth the high and low bid prices per share
for the Common Stock for the periods indicated below as reported to the NASD by
the NASD's member firms. For the first quarter of 2003 the table includes the
high and low sale prices per share for the Common Stock reported by Nasdaq.
2003 2002
---- ----
YEAR ENDED DECEMBER 31, HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $0.46 $0.20 $0.78 $0.45
Second Quarter $1.00 $0.19 $1.06 $0.49
Third Quarter $0.90 $0.42 $0.79 $0.39
Fourth Quarter $1.63 $0.61 $0.48 $0.25
On March 7, 2004, there were 34 holders of record o f 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,
-----------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ------
Contract revenues $15,966 $13,053 $18,612 $16,862 $12,923
Cost of revenues 10,682 9,312 13,589 11,563 11,242
------- ------- ------- ------- -------
Gross profit 5,284 3,741 5,023 5,299 1,681
------- ------- ------- ------- -------
General and administrative 2,554 2,764 3,197 2,523 2,512
Sales and marketing 2,726 2,324 2,093 2,471 2,073
Research and development 1,132 1,144 1,142 984 750
------- ------- ------- ------- -------
Total operating expenses 6,412 6,232 6,432 5,978 5,335
------- ------- ------- ------- -------
Operating loss (1,128) (2,491) (1,409) (679) (3,654)
Other income (loss), net (73) 59 82 286 427
------- ------- ------- ------- -------
Loss before income taxes (1,201) (2,432) (1,327) (393) (3,227)
Income tax expense 134 145 669 195 183
------- ------- ------- ------- -------
Net loss before cumulative effect of
change in accounting principle (1,335) (2,577) (1,996) (588) (3,410)
Cumulative effect of change in
accounting principle - (301) - - -
------- ------- ------- ------- -------
Net loss $(1,335) 2,878) $(1,996) $ (588) $(3,410)
======= ======= ======= ======= =======
Basic and diluted loss per share before cumulative
effect of change in accounting principle $ (.22) $ (.43) $ (.33) $ (.10) $ (.57
======= ======= ======= ======= =======
Basic and diluted loss per share $ (.22) $ (.48) $ (.33) $ (.10) $ (.57)
======= ======= ======= ======= =======
Consolidated Balance Sheet Data:
(amounts in thousands)
December 31,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Working capital $ 3,221 $ 4,749 $ 7,037 $ 8,626 $ 9,154
Total assets $11,260 $11,875 $14,126 $16,210 $17,768
Stockholders' equity $ 5,148 $ 6,483 $ 9,361 $11,383 $11,937
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial
18
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, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Revenues for the year ended December 31, 2003 were
approximately $16.0 million compared to approximately $13.1 million for the year
ended December 31, 2002, an increase of approximately $2.9 million or 22%.
Revenues from the defense, satellite and automotive markets increased
approximately $4.0 million, $464,000, and $98,000, respectively. Revenues from
the wireless, electromagnetic compatibility (EMC), higher education markets
decreased approximately $949,000, $370,000, and $303,000, respectively.
Geographically, revenues from North America, Asia, and Europe increased $2.7
million, $150,000 and $43,000 respectively. Increased 2003 defense revenues were
a result of the completion of several significant U.S. defense contracts, while
2003 satellite revenues increased in Asia. European and Asian wireless revenues
recognized during 2002 were not completely replaced during 2003.
Cost of revenues. Cost of revenues for the year ended December 31, 2003
were approximately $10.7 million compared to approximately $9.3 million for the
year ended December 31, 2002. Gross margin percentage for the year ended
December 31, 2003 increased to 33.1% from 28.7% for the year ended December 31,
2002. The increased margins are due primarily to greater efficiencies related to
greater beginning backlog and increased productivity recognized on large U.S.
defense and Asian satellite contracts.
General and administrative expenses. General and administrative
expenses for the year ended December 31, 2003 totaled approximately $2.6 million
compared to approximately $2.8 million for the year ended December 31, 2002, a
decrease of approximately $200,000 due primarily to the Company's reallocation
of existing resources to sales and marketing and other operational activities.
As a percentage of revenues, general and administrative expenses decreased to
16.0% for the year ended December 31, 2003, down from 21.2% for the year ended
December 31, 2002.
19
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 2003 were $2.7 million compared to $2.3 million for the year
ended December 31, 2002. The current year increase is a result of the Company's
investment in senior marketing personnel and increases in advertising, trade
show, and publication costs. As a percentage of revenues, sales and marketing
expenses decreased to 17.1% for the year ended December 31, 2003, from 17.8% for
the year ended December 31, 2002.
Research and development expenses. Research and development expenses
for the years ended December 31, 2003 and 2002 were $1.1 million. These costs
represent the Company's continuing efforts in the development of its 959Spectrum
software suite and improve its existing compact range technology.
Other income (loss). Other income (loss), net, for the year ended
December 31, 2003 was a loss of approximately $73,000 compared to an income of
$59,000 for the year ended December 31, 2002, a difference of approximately
$132,000. This decrease is primarily a result of the reduction in the Company's
cash balances available for investment, declining interest rates, and foreign
currency losses recognized during 2003.
Income taxes. Income tax expense for the year ended December 31, 2003
was $134,000 compared to $145,000 of income tax expense for the year ended
December 31, 2002, a decrease in expense of $11,000. The Company records income
tax expense on profitable operations and income tax benefits on losses recorded
by its foreign subsidiaries where applicable.
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 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.
20
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.
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, 2003 was $35,000, compared to $1.2 million for the year ended December 31,
2002. The most significant use of cash in operating activities during the year
ended December 31, 2003 came from the Company's $1.3 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 $134,000, and increases in accounts payable and accrued expenses,
customer advances, and billings in excess of costs and estimated earnings on
uncompleted contracts of $584,000, $297,000, and $431,000, respectively.
Significant uses of cash in operating activities included the increase in other
assets and decrease in accounts payable-Parent of $163,000 and $410,000,
respectively.
Net cash used in investing activities during the year ended December
31, 2003 was $634,000. Approximately $262,000 of this amount was invested in
anechoic foam manufacturing equipment at the Company's new Santee CA facility.
Net cash used in investing activities during the year ended December 31, 2002
was $270,000, and related to purchases of property and equipment.
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, 2003, approximately 74% 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
21
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 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 does not expect the
adoption of SFAS No. 143 to have a material impact on its financial position,
results of operations, or cash flows.
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 a material impact
on its financial position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150 "Accounting for Certain Instruments with Characteristics of Both Liabilities
and Equity" which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This new standard did
not impact the Company in 2003.
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.
22
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 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 2003 and 2002,
international sales comprised approximately 52% and 62% 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
23
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 74% of the Company's sales
in 2003 were denominated in U.S. dollars. Accordingly, the Company believes that
it does not have significant exposure to fluctuations in currency. However,
fluctuations in currency could adversely affect the Company's customers.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's operating
results have varied from quarter to quarter in the past and may vary
significantly in the future depending on factors such as the size and timing of
significant contracts, the mix of third party products and the Company's
proprietary products included in a particular contract, customers' budgetary
constraints, increased competition, the timing of new product announcements and
changes in pricing policies by the Company or its competitors, market acceptance
of new and enhanced versions of the Company's products, changes in operating
expenses and changes in general economic factors and export license delays and
denials. The Company's expense levels are based, in part, on its expectations as
to future revenue levels. If the Company's revenue levels were to be below
expectations, the Company's operating results would likely be materially
adversely affected.
DEPENDENCE ON QUALIFIED TECHNICAL PERSONNEL. The Company's operating
results depend in large part upon the efforts of its microwave, software and
systems engineers. The success of the 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
24
potential customers, who may design and develop parts of their own microwave
test and measurement systems. The Company's business, operating results and
financial condition could be materially adversely affected by such competition.
FLUCTUATIONS IN CAPITAL SPENDING. The Company is dependent upon the
wireless communications, satellite, automotive and aerospace/defense industries.
Because these industries are characterized by technological change, pricing and
gross margin pressure and, particularly in the aerospace/defense industry,
government budget constraints, they have from time to time experienced sudden
economic downturns. During these periods, capital spending is frequently
curtailed and the number of design projects often decreases. Since the Company's
revenues are dependent upon capital spending trends and new design projects,
negative factors affecting these industries could have a material adverse effect
on the Company's business, operating results and financial condition.
NO DIVIDENDS. The Company has never paid cash dividends on its Common
Stock and does not anticipate that any cash dividends will be declared or paid
in the foreseeable future.
ISSUANCE OF PREFERRED STOCK AND COMMON STOCK; ANTI-TAKEOVER PROVISIONS.
Pursuant to its Amended and Restated Certificate of Incorporation, the Company
has an authorized class of 2,000,000 shares of Preferred Stock which may be
issued by the Board of Directors with such terms and such rights, preferences
and designations as the Board may determine and without any vote of the
stockholders, unless otherwise required by law. Issuance of such Preferred
Stock, depending upon the rights, preferences and designations thereof, may have
the effect of delaying, deterring or preventing a change in control of the
Company. Issuance of additional shares 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.
MARKET FOR COMMON STOCK. The Company's Common Stock is traded on the
OTCBB, which limits exposure to market analysts and, in turn, may limit volume
of trading. Investors may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's common stock than
would otherwise be the case were the Company's Common Stock listed on a more
recognized stock exchange or quotation service. In addition, trading in the
Company's common stock is currently subject to certain rules under the Exchange
Act, which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a "penny stock." Penny stocks are
generally non-Nasdaq equity securities with a market price less than $5.00 per
share. The penny stock rules require broker-dealers selling penny stocks to make
certain disclosures about such stocks to purchasers thereof, and impose sales
practice restrictions on broker-dealers in certain penny stock transactions. The
additional burdens imposed upon broker-dealers by these rules may discourage
them from effecting transactions in the Company's common stock, which could
limit the liquidity of the common stock and the ability of the Company's
stockholders to sell their stock in the secondary market.
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.
25
ITEM 9A. 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and principal occupation of
each director.
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION
---- --- ----- --------------------
Ze'ev Stein 50 1996 Chairman of the Board of Directors of the Company
Uri Jenach 50 1999 General Manager of SophistiPak Ltd., Netanya, Israel
Doron Ginat 35 2001 General Manager of Netivey Gemel Ltd., Israel
Gurion Meltzer 73 2002 Vice Chairman of the Board of Directors of the Company
Dan Goffer 52 2002 Managing partner of Goffer, Guilman & Co., CPAs
Ze'ev Stein has served as a director of the Company and its predecessor
since March 1996 and began serving as Chairman of the Board of Directors in
October 1998. 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.
Uri Jenach was named a director in November 1999, and has served as the
General Manager of SophistiPak LTD, an engineering and packaging consulting
company since 1993. Mr. Jenach has served as a Director of ORBIT/FR,
Engineering, Ltd., a subsidiary of the Company since 1996. Mr. Jenach also
serves as a Director of Orbit Avionics, Ltd.
Doron Ginat has served as the General Manager of Netivey Gemel Ltd.
since December 2000. From 1997 to December 2000 Mr. Ginat was the General
Manager of the Pension & Insurance Fund of the Construction Workers. Prior to
1997 Mr. Ginat was an Economic Advisor of the General Manager of the Israeli
Ministry of Infrastructure, along with serving in the Israeli Military.
Gurion Meltzer has served as the Vice Chairman of the Board of
directors since July of 2001. In addition, he currently sits on the boards of
directors of Orbit Advanced Technologies, LTD., the Company's parent company,
along with Clal Industries, Neviot, and Zur Sha Mir. Mr. Meltzer was Chairman of
the Board of Bezek from 1995 to 1997. Mr. Meltzer resigned as a Director of the
Company effective as of March 24, 2004.
Dan Goffer is the managing partner of Goffer, Guilman & Co., CPAs of
Tel Aviv, Israel. Mr. Goffer specializes in analytical auditing and computer
consulting implementations.
BOARD OF DIRECTORS
26
The Board of Directors met seven times during the last fiscal year.
There were no directors who, during the last full fiscal year, attended in
person or by phone fewer than 75% of the meetings of the Board of Directors.
The Company's Amended and Restated Certificate of Incorporation provides
that the Board of Directors shall consist of not less than three nor more than
thirteen members, the exact number to be fixed and determined from time to time
by the Board. The Company's whole Board of Directors consists of five (5)
directors.
COMMITTEES OF THE BOARD
The Board of Directors has maintained a Compensation Committee and an Audit
Committee since 1997, and an Executive Committee since June 6, 2002. The current
members of the Executive Committee, Compensation Committee and Audit Committee
were appointed by the Company's Board of Directors in June 2002.
The Compensation Committee of the Board of Directors, subject to the
approval of the Board of Directors, determines the compensation of the Company's
executive officers and oversees the administration of executive compensation
programs. The Compensation Committee did not meet during 2003. Mr. Ginat, Mr.
Jenach and Mr. Goffer were independent, nonemployee directors.
The Audit Committee recommends outside accountants, reviews the results and
scope of the annual audit, the services provided by the Company's independent
auditors and the recommendations of the auditors with respect to the Company's
accounting systems and controls. During 2003, the Audit Committee met three
times and was composed of Mr. Ginat, Mr. Jenach and Mr. Goffer, all of whom are
independent, nonemployee directors, with Mr. Goffer considered an audit
committee financial expert within the meaning of the rules of the Securities and
Exchange Commission. Representatives of the Company's independent auditing firm,
Hoberman, Miller, Goldstein, and Lesser, P.C., "Hoberman, Miller," participated
in these meetings and discussed their reviews of the Company's financial
statements. No members of the Audit Committee, attended in person or by phone,
fewer than 75% of the meetings of the Audit Committee.
The Executive Committee has, and may exercise, all the powers and authority
of the Board of Directors in the Management of the business and affairs of the
Corporation to the fullest extent permitted by Delaware General Corporation Law.
The Executive Committee did not meet during 2003. Mr. Meltzer and Mr. Jenach are
independent, nonemployee directors.
COMPENSATION OF DIRECTORS
Directors not receiving compensation as an officer or employee of the
Company, or under a specific agreement receive $5,000 per year plus stock
options upon being named a director. These Directors are entitled to receive up
to $750 per meeting. All Director's options will vest in five cumulative annual
increments commencing 12 months after the date of grant. Mr. Ginat, Mr. Jenach
and Mr. Goffer earned fees totaling $8,000, $9,750 and $8,000, respectively, for
serving on the Company's Board of Directors.
COMPENSATION PHILOSOPHY AND POLICY
Our compensation program generally is designed to motivate and reward
our executive officers and other personnel responsible for attaining financial
objectives that will contribute to the overall goal of enhancing stockholder
value. In administering the program, the Compensation Committee assesses the
performance of our business and our employees relative to those objectives. Our
compensation program generally provides incentives to achieve annual and longer
term objectives. The principal elements of the compensation plan include base
salary, cash bonus awards and stock awards in the form of grants of stock
options. These elements generally are blended in order to provide compensation
packages which provide competitive pay, reward the achievement of financial
objectives and align the interests of our executive officers and other high
level personnel with those of our stockholders.
27
Base Salary. In setting base salaries for officers and employees, we
consider the experience of the individual, the scope and complexity of the
position, our size and growth rate, profitability, and the compensation paid by
our competitors.
Bonuses. An incentive plan for all executives was established by the
Compensation Committee of the Board of Directors for the year 2001. It is meant
to incent executives for attaining predetermined profit levels for both
individual business units and for the Company overall. The plan is calculated
annually after year end results are audited and executives must be employed by
the Company on December 31st.
Stock Awards. To promote our long-term objectives, stock awards are
made to directors, officers and employees who are in a position to make a
significant contribution to our long-term success. The stock awards are made to
directors, employees and consultants pursuant to our 1997 Stock Option Plan, in
the form of qualified and nonqualified stock options.
The Compensation Committee has discretion to determine which employees
and consultants will be granted stock options, the number of shares to be
optioned and the terms and conditions of such options. The full Board of
Directors conducts the administration of the option plan with respect to options
granted to directors or to officers subject to section 16 of the Exchange Act.
The compensation committee, or the Board of Directors, as applicable, also has
discretion to make adjustments to options in the event of a change in control or
other corporate event including, without limitation, the discretion to
accelerate the vesting of options or waive our repurchase right. Options
currently outstanding generally vest over a five year period.
In selecting recipients and the size of grants, the Compensation
Committee considers various factors such as the potential of the recipient, the
salary of the recipient and competitive factors affecting our ability to attract
and retain employees, prior grants, a comparison of awards made to officers in
comparable positions at similar companies and the performance of our business.
During 2003, Mr. Stein was paid a base salary of $60,000 for serving as
the Chairman of the Board of Directors of Orbit/FR, Engineering Ltd. In addition
Ze'ev Stein Properties, Ltd, an Israeli corporation wholly-owned by Mr. Stein,
was paid $133,000 under a managements services agreement.
No option awards were made to named executive officers during 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2003, the Company had a Compensation Committee comprised of Mr.
Ginat, Mr. Jenach and Mr. Goffer, previously described under "Committees of the
Board." Mr. Ginat, Mr. Jenach and Mr. Goffer were independent, non employee
directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who own more than ten percent (10%)
of the Company's Common Stock to file initial reports of ownership and reports
of change of ownership with the SEC. The reporting persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on a review of the copies of such forms furnished to it, the
Company believes that, during the year ended December 31, 2003, the executive
officers and directors and persons who own more than ten percent (10%) of the
Company's Common Stock then subject to Section 16(a) complied with all Section
16(a) filing requirements.
28
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Information concerning Certain Executive Officers and Key Employees is set
forth in Item 4.1 of this Annual Report on Form 10-K.
The Company has adopted an ethics policy for all employees, including
members of management, which has been filed as an exhibit to this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table summarizes the compensation of the
Chief Executive Officer and the other Named Executive Officers of the Company
for fiscal years 2003, 2002 and 2001 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
------------
Securities All other
Name and Principal Underlying Compen-
Position Year Salary Bonus Options(#) sation
-------- ---- ------ ----- ---------- ------
Israel Adan 2003 160,010 -- -- 3,774 (1)
President, Chief Executive 2002 160,010 -- 60,000 4,381 (2)
Officer 2001 30,771 $ 6,667 -- 117 (3)
John Aubin 2003 119,995 3,700 -- 2,993 (4)
Vice President - Chief 2002 89,996 5,000 20,000 2,227 (5)
Technology Officer 2001 88,905 -- -- 3,918 (6)
William Campbell 2003 109,990 5,000 1,134 (7)
Vice President, 2002 4,653 -- 15,000 --
Engineering and Program
Management
Gabriel Sanchez 2003 121,813 -- -- 3,247 (8)
General Manager, Advanced 2002 123,698 -- -- 4,609 (9)
ElectroMagnetics, Inc. 2001 120,000 -- 2,800 456 (10)
Moshe Pinkasy 2003 105,000 20,000 -- 5,197 (11)
Managing Director, 2002 86,000 15,000 -- 4,790 (11)
ORBIT/FR Engineering, Ltd. 2001 91,000 31,000 -- 5,100 (11)
(1) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $3,366 under the
Company's 401(k) savings plan.
(2) Represents premiums of $504 paid by the Company for group term life
insurance, and a matching contribution by the Company of $3,877 under the
Company's 401(k) savings plan.
(3) Represents premiums of $117 paid by the Company for group term life
insurance.
(4) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $2,585 under our
401(k) savings plan.
(5) Represents premiums of $381 paid by the Company for group term life
insurance, and a matching contribution by the Company of $1,846 under our
401(k) savings plan.
29
(6) Represents premiums of $362 paid by the Company for group term life
insurance, and a matching contribution by the Company of $3,556 under our
401(k) savings plan.
(7) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $1,134 under our
401(k) savings plan.
(8) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $3,247 under our
401(k) savings plan.
(9) Represents premiums of $504 paid by the Company for group term life
insurance, and a matching contribution by the Company of $4,105 under our
401(k) savings plan.
(10) Represents premiums of $456 paid by the Company for group term life
insurance.
(11) Represents contributions by the Company of under the retirement plan of
ORBIT/FR Engineering Ltd.
STOCK OPTION GRANTS
No stock options were granted to the Named Executive Officers of the Company
during 2003.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The table below shows 2003 year-end amounts and value of shares of Common
Stock underlying outstanding options. The Named Executive Officers did not
exercise any stock options in 2003.
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Options at
December 31, 2003 December 31, 2002(1)
----------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Israel Adan 40,000 20,000 -- --
John Aubin -- 20,000 -- --
Bill Campbell -- 15,000 -- --
Gabriel Sanchez 22,800 1,400 -- --
Moshe Pinkasy 51,000 -- -- --
(1) Based on the closing price of $1.55 on the OTCBB on December 31, 2003.
EMPLOYMENT AGREEMENTS
Ze'ev Stein. Effective January 1, 2003, the Company entered into a
management services agreement with an Israeli corporation wholly owned by Mr.
Stein. In consideration for services provided by Mr. Stein as Chairman of the
Board of Directors of the Company, the agreement calls for the management
company to receive annual fees of $133,000, payable in monthly installments of
$11,083 (plus VAT if applicable). The management services agreement replaces Mr.
Stein's employment agreement with the Company and may be terminated by either
party upon appropriate written notice. Pursuant to an existing employment
agreement, Mr. Stein continues to act as Chairman of the Board of the Company's
wholly owned subsidiary, ORBIT/FR, Engineering, Ltd. whereby Mr. Stein is paid a
base salary of $60,000 annually. Under both agreements, Mr. Stein is subject to
certain non-disclosure, non-solicitation and non-competitive covenants.
Israel Adan. Effective October 15, 2001, the Company entered into an
employment agreement with Israel Adan. Mr. Adan was named President and Chief
Executive Officer of the Company. The agreement calls for Mr. Adan to receive a
base salary of $150,000 and provides that Mr. Adan may be entitled to an annual
bonus based upon achievement of certain annual objectives established by the
Company's Board of Directors. Mr. Adan was also granted an option to purchase
60,000 shares of common stock at an exercise prices of $3.00 per share. Mr.
Adan's employment agreement may be terminated by the Company for cause, which is
defined as the material breach of the employment agreement by Mr. Adan or if Mr.
Adan commits a material act of dishonesty or a material breach of trust or a
fiduciary obligation with respect to the Company. Under the employment
agreement, Mr. Adan is subject to certain non-disclosure, non-solicitation and
non-
30
competitive covenants. Effective June 20, 2003 Mr. Adan's employment agreement
was amended and restated to provide Mr. Adan with the right to receive a bonus
payment in certain circumstances in the event of a change in control of the
Company, as defined in the agreement, or the Sale of one or more of the
Company's business units.
Gurion Meltzer. Effective July 24, 2001, the Company and Mr. Meltzer
entered into a consulting agreement whereby Mr. Meltzer was elected as a
director and Chair of the director's executive committee. In consideration for
his services Mr. Meltzer will be paid an annual fee of $50,000, payable in six
bi-monthly installments, and was granted an option to purchase 30,000 shares of
common stock at an exercise price of $3.00 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 30, 2004 certain
information with regard to beneficial ownership (as determined in accordance
with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended) of outstanding shares of the Company's Common Stock by (i) each person
known by the Company to beneficially own five percent (5%) or more of the
outstanding shares of the Company's Common Stock, (ii) each director and Named
Executive Officer (as defined below) individually, and (iii) all executive
officers and directors of the Company as a group:
TOTAL NUMBER OF SHARES PERCENTAGE OF CLASS OF
NAME AND ADDRESS OF OF COMMON STOCK COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1)
- ---------------- --------------------- ---------------------
Orbit-Alchut Technologies, Ltd. (2) 3,700,000 61.7%
P.O. Box 3171
Industrial Zone
Netanya 42131 Israel
Ze'ev Stein (3) 3,730,000 61.8%
P.O. Box 3171
Industrial Zone
Netanya 42131
Israel
Uri Jenach (4) 30,000 *
c/o Orbit/FR, Inc.
506 Prudential Road
Horsham, PA 19044
Doron Ginat (5) 18,000 *
c/o Orbit/FR, Inc.
506 Prudential Road
Horsham, PA 19044
Gurion Meltzer (6) 12,000 *
c/o Orbit/FR, Inc.
506 Prudential Road
Horsham, PA 19044
Dan Goffer (7) 6,000 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
31
Israel Adan (8) 40,000 *
c/o Orbit/FR, Inc.
506 Prudential Road
Horsham, PA 19044
Mark Bates (9) 23,700 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
Dave Lubbe (10) 17,250 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
Moshe Pinkasy (11) 51,000 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
Gabriel Sanchez (12) 90,373 1.5%
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
All executive officers and directors 4,107,623 68.4%
as a group (11 persons) (13)
* Less than 1% of the outstanding Common Stock.
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission (the "SEC").
Accordingly, they may include securities owned by or for, among others, the
spouse and/or minor children of the individual and any other relative who
has the same home as such individual, as well as other securities as to
which the individual has or shares voting or investment power or has the
right to acquire under outstanding stock options within 60 days after the
date of this report. Beneficial ownership may be disclaimed as to certain
of the securities.
(2) Represents shares beneficially owned after the Company's initial public
offering effective June 17, 1997.
(3) Represents 3,700,000 shares held by Alchut. Mr. Stein is a director and 57%
beneficial stockholder of Alchut. Also includes 30,000 shares of Common
Stock issuable upon the exercise of options granted to Mr. Stein, which
options became exercisable prior to the date of this Report on Form 10K.
(4) Represents 30,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Jenach, which options became exercisable prior to
the date of this Report on Form 10K.
(5) Represents 18,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Ginat, which options became exercisable prior to the
date of this Report on Form 10K. Does not include 12,000 shares of Common
Stock issuable upon the exercise of options granted to Mr. Ginat, which
options become exercisable in five cumulative installments commencing 12
months after the dates of the original grants, which options are not
exercisable within 60 days of the date of this report.
32
(6) Represents 12,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Meltzer, which options became exercisable prior to
the date of this Report on Form 10K. Does not include 18,000 shares of
Common Stock issuable upon the exercise of options granted to Mr. Meltzer,
which options become exercisable in five cumulative annual installments
commencing 12 months after the date of original grant which options are not
exercisable within 60 days of the date of this report.
(7) Represents 6,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Goffer, which options became exercisable prior to
the date of this Report on Form 10K. Does not include 24,000 shares of
Common Stock issuable upon the exercise of options granted to Mr. Goffer,
which options become exercisable in five cumulative annual installments
commencing 12 months after the date of original grant which options are not
exercisable within 60 days of the date of this report.
(8) Represents 40,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Adan, which options became exercisable prior to the
date of this Report on Form 10K Statement. Does not include 20,000 shares
of Common Stock issuable upon the exercise of options granted to Mr. Adan,
which options become exercisable in three cumulative annual installments
commencing 12 months after the date of original grant which options are not
exercisable within 60 days of the date of this report.
(9) Includes 21,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Bates, which options became exercisable prior to the
date of this Report on Form 10K. Also includes 2,750 shares of Common Stock
exercisable within 60 days of the date of this Report on Form 10K. Does not
include 5,250 shares of Common Stock issuable upon the exercise of options
granted to Mr. Bates, which options become exercisable in four cumulative
installments commencing 24 months after the dates of the original grants,
which options are not exercisable within 60 days of the date of this
report.
(10) Includes 17,250 shares of Common Stock issuable upon the exercise of
options granted to Mr. Lubbe, which options became exercisable prior to the
date of this Report on Form 10K. Does not include 7,750 shares of Common
Stock issuable upon the exercise of options granted to Mr. Lubbe, which
options become exercisable in four cumulative installments commencing 24
months after the dates of the original grants, which options are not
exercisable within 60 days of the date of this report.
(11) Includes 51,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Pinkasy, which options became exercisable prior to
the date of this report.
(12) Includes 68,973 shares owned by Mr. Sanchez. Also includes 21,400 shares of
Common Stock issuable upon the exercise of options granted to Mr. Sanchez,
which options became exercisable prior to the date of this Report on Form
10K. Does not include 1,400 shares of Common Stock issuable upon the
exercise of options granted to Mr. Sanchez, which options become
exercisable in four cumulative installments commencing 24 months after the
dates of the original grants, which options are not exercisable within 60
days of the date of this report.
(13) Includes the information contained in the notes above, as applicable.
33
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information, as of the end of the fiscal
year ended December 31, 2003, with respect to compensation plans under which the
Company is authorized to issue shares of Common Stock.
Number of Shares Remaining
Number of Shares to be Available for Future Issuance
Issued Upon Exercise Weighted-Average Exercise under Equity Compensation Plans
of Outstanding Options, Price of Outstanding Options, (excluding securities reflected
Plan Category Warrants and Rights Warrants and Rights in 1st column)
- ------------- ------------------- ---------------------------- --------------------------------
Equity compensation
plan(s) approved by
security holders (1) 717,350 $3.23 82,650
Equity compensation
plan(s) not approved
by security holders -- -- --
Total 717,350 $3.23 82,650
- -------------------
(1) This plan consists of the Orbit/FR, Inc. 1997 Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Orbit/FR Engineering, Ltd. ("Engineering"), the Company's wholly-owned
Israeli subsidiary, and Alchut have an agreement, whereby Engineering purchases
from Alchut electrical and mechanical production services. Engineering pays
Alchut for these services based upon a rate of cost plus 5%, totaling
approximately $1,212,000 for the year ended December 31, 2003. In addition,
Alchut provided other administrative services to Engineering, including but not
limited to, bookkeeping, computer, legal, accounting, cost management,
information systems, and production support, which amounted to $245,000 in 2003.
These agreements are evaluated on an annual basis.
34
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ACCOUNTANT FEES
The following table presents fees for professional services rendered by
Hoberman, Miller for the audit of the Company's annual financial statements,
review of the Company's interim financial statements and fees for other services
rendered in 2003 and 2002.
2003 2002
---- ----
Audit Fees $75,539 $23,284
Audit-Related Fees -0- -0-
Tax Fees 12,500 12,500
All Other Fees -0- -0-
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Company's Audit Committee has policies and procedures that require
the pre-approval by the Audit Committee of all fees paid to, and all services
performed by, the Company's independent accounting firm. The Audit Committee
approves the proposed services, including the nature, type, and scope of
services contemplated and the related fees, to be rendered by the Company's
independent accounting firm during the year. In addition, Audit Committee
pre-approval is also required for those engagements that may arise during the
course of the year that are outside the scope of the initial services and fees
pre-approved by the Audit Committee.
Pursuant to the Sarbanes-Oxley Act of 2002, the fees and services
provided as noted in the table above were authorized and approved by the Audit
Committee in compliance with the pre-approval policies and procedures described
herein.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
Independent Auditors' Report
Auditors' Report to the Shareholders of ORBIT/FR
Engineering, LTD.
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2003 and
2002
Consolidated Statements of Operations for the years
ended December 31, 2003, 2002, and 2001
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
35
(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.
(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 Amended and restated Employment agreement dated June
20, 2003_ 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.
14.0 Employee Ethics Policy
21.1 Subsidiaries of the Registrant. (3)
36
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Auditors.
24.1 Power of Attorney (included on signature page). 31.1
Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, of Israel Adan, President and Chief Executive
Officer.
31.2 Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, of Dave Lubbe, Chief Financial Officer.
32.1 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
32.2 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) Incorporate by reference to Company's Annual report on
Form 10-K filed on March 31, 2003
37
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 30, 2004 /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 30th day of March 2004.
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/ Doron Ginat Director
- -----------------------
Doron Ginat
/s/ Dan Goffer Director
- -----------------------
Dan Goffer
38
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 30, 2004
/s/ Ze'ev Stein
Ze'ev Stein
Attorney-in-fact
39
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Orbit/FR, Inc.
We have audited the consolidated balance sheets of Orbit/FR, Inc. and
Subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audit also included the 2003 and 2002 Financial Statement
Schedules listed in the index at item 15(a). These consolidated financial
statements and Schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and Schedules based on our audits. We did not audit the financial
statements of Orbit/FR Engineering, Ltd., a wholly owned subsidiary, which
statements reflect total assets of $3,920,000 and $4,816,000 as of December 31,
2003 and 2002, respectively, and total revenues of $7,505,000 and $6,648,000,
for the years 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 for the year ended December 31, 2001, were audited by other
auditors whose report dated March 14, 2002, expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
2003 and 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, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedules for the years ended
December 31, 2003 and 2002, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the accompanying consolidated financial statements, as
of January 1, 2002, the Company changed its method of accounting for goodwill
and other intangible assets to conform with the provisions of Statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets."
(HOBERMAN, HILLER, GOLDSTEIN, LESSER, CPA's P.C)
February 19, 2004
New York, NY
F-1
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
ORBIT/FR ENGINEERING, LTD.
We have audited the accompanying balance sheets of Orbit/Fr Engineering,
Ltd. ("the Company") as of December 31, 2003 and 2002, and the related
statements of income, changes in shareholders' equity and cash flows for each
of the years ended on those dates. These financial statements are the
responsibility of the Company's board of directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States and in Israel, including those prescribed by the
Israeli Auditors' Regulations (Auditor's Mode of Performance), 1973. 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2003 and 2002, and the results of its operations, the changes in its
shareholders' equity and its cash flows for each of the years ended on those
dates, in conformity with generally accepted accounting principles in Israel,
which do not differ in any significant respects from those followed in the
United States.
As explained in Note 2b, the financial statements referred to above are
presented in U.S. dollars in accordance with pronouncements of the Institute
of Certified Public Accountants in Israel.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 21, 2004 A Member of Ernst & Young Global
F-2
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Orbit/FR, Inc.
We have audited the accompanying financial statements of operations,
stockholders' equity, and cash flows of Orbit/FR, Inc. for the year ended
December 31, 2001. Our audit also included the 2001 financial statement schedule
listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Orbit/FR, Inc. for the year 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-3
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,413 $ 3,030
Accounts receivable, less allowance of $187 and $254
in 2003 and 2002, respectively 4,026 4,160
Inventory 1,549 1,580
Costs and estimated earnings in excess of billings
on uncompleted contracts 605 683
Deferred income taxes 275 386
Other 465 302
-------- -------
Total current assets 9,333 10,141
Property and equipment, net 1,401 1,166
Deferred income taxes 145 135
Cost in excess of net assets acquired 381 381
Other -- 52
-------- -------
Total assets $ 11,260 $11,875
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,578 $ 1,017
Accounts payable--Parent 197 607
Accrued expenses 1,880 1,857
Customer advances 456 159
Income taxes payable 19 42
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,857 1,426
Deferred income taxes 125 284
-------- -------
Total liabilities, all current 6,112 5,392
-------- -------
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 (9,843) (8,508)
Treasury stock--82,900 shares (243) (243)
-------- -------
Total stockholders' equity 5,148 6,483
-------- -------
Total liabilities and stockholders' equity $ 11,260 $11,875
======== =======
See accompanying notes.
F-4
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
---------- ----------- ----------
Contract revenues $ 15,966 $ 13,053 $ 18,612
Cost of revenues 10,682 9,312 13,589
---------- ----------- ----------
Gross profit 5,284 3,741 5,023
---------- ----------- ----------
Operating expenses:
General and administrative 2,554 2,764 3,197
Sales and marketing 2,726 2,324 2,093
Research and development 1,132 1,144 1,142
---------- ----------- ----------
Total operating expenses 6,412 6,232 6,432
---------- ----------- ----------
Operating loss (1,128) (2,491) (1,409)
Other income (loss), net (73) 59 82
---------- ----------- ----------
Loss before income taxes (1,201) (2,432) (1,327)
Income tax expense 134 145 669
---------- ----------- ----------
Net loss before cumulative effect of
change in accounting principle (1,335) (2,577) (1,996)
Cumulative effect of change in
accounting principle -- (301) --
---------- ----------- ----------
Net loss $ (1,335) $ (2,878) $ (1,996)
========== =========== ==========
Basic and diluted loss per share before
cumulative effect of change in
in accounting principle $ (0.22) $ (0.43) $ (0.33)
Cumulative effect of change in
accounting principle -- (0.05) --
---------- ----------- ----------
Basic and diluted loss per share $ (0.22) $ (0.48) $ ( 0.33)
========== =========== ==========
Weighted average number
common shares - basic and diluted 6,001,573 6,001,573 6,008,311
========== =========== ==========
See accompanying notes.
F-5
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Additional
Common Stock Paid-in Treasury Stock Total
------------ ------- Accumulated -------------- Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
------- ------ -------- ----------- ------ ------ ----------
Balance, January 1, 2001 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
Net loss -- -- -- (1,335) -- -- (1,335)
----- ------ -------- ----------- ---- ------ ----------
Balance, December 31, 2003 6,084 $ 61 $ 15,173 $ (9,843) 83 $ (243) $ 5,148
===== ====== ======== =========== ==== ====== ==========
See accompanying notes.
F-6
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net loss $ (1,335) $ (2,878) $ (1,996)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 400 433 437
Amortization -- -- 351
Cumulative effect of change in accounting principle -- 301 --
Deferred income tax provision (58) (24) 369
Changes in operating assets and liabilities:
Accounts receivable 134 919 (507)
Inventory 31 20 376
Costs and estimated earnings in excess of billings on
uncompleted contracts 78 (206) 106
Other (163) (133) 218
Accounts payable and accrued expenses 584 31 344
Accounts payable--Parent (410) (91) 331
Income taxes payable (24) 30 (36)
Customer advances 297 (568) 223
Billings in excess of costs and estimated earnings on
uncompleted contracts 431 1,009 (884)
-------- -------- --------
Net cash used in operating activities (35) (1,157) (668)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (634) (270) (669)
Capitalization of software development costs -- -- (92)
-------- -------- --------
Net cash used in investing activities (634) (270) (761)
-------- -------- --------
Cash flows from financing activities
Purchase of treasury stock -- -- (26)
Net repayments of note receivable 52 44 --
-------- -------- --------
Net cash provided by (used in) financing activities 52 44 (26)
-------- -------- --------
Net decrease in cash and cash equivalents (617) (1,383) (1,455)
Cash and cash equivalents at beginning of year 3,030 4,413 5,868
-------- -------- --------
Cash and cash equivalents at end of year $ 2,413 $ 3,030 $ 4,413
======== ======== ========
Supplemental disclosures of cash flow information:
Net cash paid during the year for income taxes $ 299 $ 84 $ 103
======== ======== ========
See accompanying notes.
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
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).
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-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)
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 year ended December 31, 2001 the Company capitalized $92 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, 2003 and 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-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)
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 $280, $90, and $135 for the years ended
December 31, 2003, 2002, and 2001, 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, 2003, there were 13 bank guarantees in place for
the Company's foreign customers. For the year ended December 31, 2003 and 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-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)
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. 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, 2003, and 2002, approximately 26% and
15%, 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 2003, 2002, and 2001 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-11
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 does not expect the
adoption of SFAS No. 143 to have a material impact on its financial position,
results of operations, or cash flows.
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 a material impact
on its financial position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150 "Accounting for Certain Instruments with Characteristics of Both Liabilities
and Equity" which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This new standard did
not impact the Company in 2003.
2. INVENTORY
Inventory consists of the following:
DECEMBER 31,
2003 2002
-------- --------
Work-in-process $ 991 $ 973
Parts and components 558 607
-------- --------
$ 1,549 $ 1,580
======== =========
F-12
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,
2003 2002
------- ------
Lab and computer equipment $ 2,536 $1,972
Office equipment 908 1,158
Transportation equipment 376 336
Furniture and fixtures 38 44
Leasehold improvements 288 320
------- ------
4,146 3,830
Less accumulated depreciation 2,745 2,664
------- ------
Property and equipment, net $ 1,401 $1,166
======= ======
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
2003 2002
------- ------
Accrued contract costs $ 338 $ 381
Accrued compensation 797 758
Accrued commissions 65 99
Accrued royalties 117 114
Accrued warranty 411 293
Other accruals 152 212
------- ------
$ 1,880 $1,857
======= ======
F-13
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 20%.
Engineering is leasing office space from the Parent on an annual basis, for a
rental of $63 per year. These agreements are to be evaluated on an annual basis,
and are intended to be at market value.
The Company paid $245, $202 and $302 in 2003, 2002 and 2001,
respectively, to the Parent for administrative services.
Included in cost of revenues for the years ended December 31, 2003,
2002 and 2001 are approximately $1,212, $1,021, and $1,359, 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, 2003, 2002 and 2001 was
approximately $609, $550, and $537, respectively. Future minimum lease payments
under noncancelable operating leases with initial terms of one year or more are
as follows at December 31, 2003: $507 in 2004; $439 in 2005; $450 in 2006; $439
in 2007; $303 in 2008, and $500 thereafter.
In connection with the Company's efforts to re-establish its
International Traffic in Arms (ITAR) export privileges, denied since November
1999, the Company is seeking a settlement with the U.S. Department of State. The
Company has been informed that any such settlement will involve the payment of a
civil penalty which cannot be currently estimated.
F-14
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, 2003, 2002, and 2001:
2003 North America Europe Asia Total
- ---- ------------- ------ ---- -----
Sales to unaffiliated customers $ 7,630 $ 2,595 $5,741 $15,966
Cost of Sales to unaffiliated customers 5,226 2,067 3,389 10,682
-------- -------- ------ -------
Gross profit unaffiliated customers $ 2,404 $ 528 $2,352 $ 5,284
======== ======== ====== =======
Net property and equipment 548 $ 853 $ -- $ 1,401
======== ======== ====== =======
Total assets $ 5,730 $ 5,530 $ -- $11,260
======== ======== ====== =======
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
======== ======== ====== =======
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:
2003 2002 2001
------- ------- -------
Domestic $ (831) $(1,644) $(1,679)
Foreign (370) (788) 352
-------- ------- -------
$ (1,201) $(2,432) $(1,327)
======== ======= =======
F-15
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,
--------------------------
2003 2002
--------- ----------
Deferred tax assets:
Net operating loss and credit carryforwards $ 2,705 $ 2,379
Long-term contracts 182 12
Accrued compensation 43 43
Foreign and reserves 987 986
Goodwill 78 93
--------- ---------
Total deferred tax assets 3,995 3,513
Deferred tax liabilities:
Purchase accounting basis differences (124) (124)
------ ------
Net deferred tax asset 3,871 3,389
Valuation allowance (3,576) (3,152)
--------- ---------
Net deferred tax asset $ 295 $ 237
========= =========
As of December 31, 2003, the Company has net operating loss
carryforwards of approximately $7,477 for federal income tax purposes which
begin to expire in 2023. The Company also has a German net operating loss
carryforward of approximately $1,476 which will be available indefinitely.
As of December 31, 2003, 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 2003 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-16
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,
-----------------------------------------
2003 2002 2001
------- ------- --------
Current:
Federal $ 26 $ 31 $ --
Foreign 166 131 300
------- ------- --------
192 162 300
------- ------- --------
Deferred:
Federal 4 317
State -- 18
Foreign (58) (21) 34
------- ------- --------
(58) (17) 369
------- ------- --------
Total income tax expense $ 134 $ 145 $ 669
======= ======= ========
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,
-----------------------------------------
2003 2002 2001
------- ------- --------
Statutory U.S. Federal rate $ (408) $ (827) $ (451)
State taxes, net -- -- 1
Book/tax differences 97 293 33
Increase in valuation allowance 424 594 1,061
Foreign rate difference 60 90 73
Other, net (39) (5) (48)
------- ------- --------
$ 134 $ 145 $ 669
======= ======= ========
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 year ended December 31, 2001
royalties under this program were approximately $7. At December 31, 2003 and
2002 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, 2003,
2002, and 2001, royalties under this program were approximately $60, $59 and
$57, respectively. At December 31, 2003 the Company had an outstanding
contingent obligations to the Chief Scientist of $571. Such contingent
obligation is payable in future periods based upon annual sales of products
developed under the grants.
F-17
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, 2003, 2002 and 2001, the Company's
contributions to the plans were $71, $79 and $67, respectively.
11. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the
percentage-of-completion method are as follows:
DECEMBER 31,
2003 2002
-------- --------
Accumulated expenditures on uncompleted contracts $ 7,856 $ 9,796
Estimated earnings thereon 560 (136)
-------- --------
8,416 9,660
Less: applicable progress billings 9,668 10,403
-------- --------
Total $ (1,252) $ (743)
======== ========
The long-term contracts are shown in the accompanying balance sheets as follows:
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 605 $ 683
Billings on uncompleted contracts in excess of
costs and estimated earnings (1,857) (1,426)
-------- --------
$ (1,252) $ (743)
======== ========
F-18
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. 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:
2003 2002 2001
------------------- --------------------- -------------------
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 743,850 $3.30 613,850 $3.33 600,500 $3.40
Options granted -- -- 171,000 3.00 122,500 3.00
Options forfeited (26,500) 4.10 (41,000) 3.16 (109,150) 3.33
------- ------ ------- ----- -------- -----
Options outstanding, end of year 717,350 $3.23 743,850 $3.25 613,850 $3.33
======= ===== ======= ===== ======== =====
Options exercisable, end of year 491,588 $3.26 393,375 $3.30 275,000 $3.27
======= ===== ======= ===== ======== =====
F-19
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. STOCK OPTION PLAN (CONTINUED)
2003 2002 2001
---- ----- -----
Weighted average remaining
contractual life (years) 6.07 7.04 7.03
===== ===== =====
Weighted average fair
value of options granted
at market value $ -- $0.46 $1.28
===== ===== =====
Range of exercise prices per share,
options outstanding $3.00 $3.00 $3.00
===== ===== =====
The Company has elected to follow APB 25 and the related
interpretations in accounting for stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, requires the use
of option valuation models that were not developed for use in valuing stock
options. Under APB 25, because the exercise price of the Company's stock options
equals or exceeds the market price of the underlying common stock on the date of
grant, no compensation expense is recognized.
Pro-forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for stock options under the fair value method of
SFAS 123. The fair value for the Company's stock options granted is estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2002 and 2001; 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% and 108.1%;
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-20
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. 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,
-----------------------------------
2003 2002 2001
------- ------- --------
Net loss as reported under APB 25 $(1,335) $(2,878) $ (1,996)
Stock option expense per FASB 123 (167) (73) (124)
------- ------- --------
Pro-forma net loss $(1,502) $(2,951) $ (2,120)
======= ======= ========
Pro-forma basic and diluted loss per share $ (0.25) $ (0.49) $ (0.35)
======= ======= ========
13. 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, 2003. The treasury shares have been recorded at cost.
F-21
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows:
Quarter Ended
------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
2003 2003 2003 2003
-------- ------- -------- -------
Contract revenues $ 4,584 $ 3,281 $ 4,236 $ 3,865
Gross profit 1,453 864 1,584 1,383
Net loss (173) (683) (200) (279)
Loss per share - basic and diluted (0.03) (0.11) (0.03) (0.05)
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 (0.14) (0.12) (0.12) (0.10)
F-22
Schedule II - Valuation and Qualifying Accounts
ORBIT/FR, Inc. and Subsidiaries
December 31, 2003
Balance at Charged to Balance at
Beginning Costs and End of
of period Expenses Deductions period
--------- -------- ---------- ------
Year ended December 31, 2003
Allowance for doubtful accounts $254,047 $72,828 $139,449 $187,426
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
EXHIBIT INDEX
Number Description
- ------ -----------
10.8 Amended and Restated Employment agreement dated June 20, 2003 by and
between the Company and Israel Adan.
14.0 Employee Ethics Policy
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Israel Adan
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Dave Lubbe