Back to GetFilings.com
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, 2004
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, 2004, 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
$2,531,730 (based on the closing price of the Common Stock on June 30, 2004 of
$1.10 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,
2005, 6,001,573 shares of Common Stock were outstanding.
1
ORBIT/FR, INC.
INDEX
PAGE NO.
--------
PART I.
Item 1. Business........................................................................... 3
Item 2 Properties......................................................................... 14
Item 3 Legal Proceedings.................................................................. 14
Item 4 Submission of Matters to a Vote of Security Holders ............................... 15
Item 4.1 Executive Officers and Key Employees............................................... 15
PART II.
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters.......... 17
Item 6 Selected Financial Data............................................................ 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 18
Item 7a Quantitative and Qualitative Disclosure About Market Risk.......................... 26
Item 8 Financial Statements and Supplementary Data........................................ 26
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures........................................................................ 26
Item 9a Controls and Procedures............................................................ 26
PART III
Item 10 Directors and Executive Officers of the Registrant................................. 28
Item 11 Executive Compensation............................................................. 31
Item 12 Security Ownership of Certain Beneficial Owners and Management..................... 35
Item 13 Certain Relationships and Related Transactions..................................... 38
PART IV
Item 14 Principle Accountant Fees and Services............................................. 39
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 39
2
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. Military antennas,
cellular phones, satellites, radio transmitters, and global positioning system
("GPS") receivers all depend upon 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 aerospace/defense systems integrators and product
manufacturers that incorporate microwave technology, such as Lockheed Martin,
Raytheon, Northrop Grumman, BAE, L3 Communications, Alenia, Astrium Lufthansa
and Boeing; manufacturers of wireless systems and products, such as Motorola,
Nokia Ericsson, Samsung and Qualcomm; telecommunications service providers that
rely on microwave technology, such as AT&T, NTT and British Telecom; and
automobile and automotive subassembly manufacturers such as Daimler-Chrysler,
Ford, BMW and Hyundai. 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.
3
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.
4
The Company has 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.
On March 6, 2000, the Company received notification, effective March 1,
2000 from the U.S. Department of State, 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 U.S. Department of Commerce and therefore would not be subject to the
Department of State'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. Department of State'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, including 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,
precision guided weapons, and data links and stealth aircraft, 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 and
base stations, pagers, wireless PDAs, and Bluetooth, Wi-Fi and Wi-Max products,
and RFIDs (RF tags). The Company expects continued growth within the wireless
communications industry in the future due to an increase in available spectrum,
the generation of 3G cellular systems, 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
5
changing markets in which the performance and reliability of their systems and
products are essential to achieve and maintain competitive advantage. 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 of both cellular handsets and wireless base stations for signal quality,
direction, strength and interference.
SATELLITE. Satellite-related markets have grown over the past several
years, driven by the emergence of advanced communication technologies offering
cost-effective global voice, video and data transmission, GPS, internet access
and tracking capabilities. Satellites provide several advantages over
terrestrial communications networks, including rapid installation and
deployment, no incremental cost as distances increase and higher rates of data
transmission.
To ensure that satellite-based communications systems are effective and
reliable, it is essential that both satellites and "earth stations" transmit and
receive microwave signals accurately. The accuracy requirements for these
satellite systems are critical and failure to detect a design error could result
in a satellite's "footprint" not covering its intended geographic area.
Satellite manufacturers cannot afford to make this kind of error since the cost
to manufacture, launch and insure a satellite can exceed approximately $200
million. Accordingly, sophisticated microwave test and measurement systems are
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, GPS-based, navigation and anti-theft
systems, satellite radios (e.g. XM, Sirius), 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 and controllers, as well as
other microwave products, and a full line of RF absorbing materials, 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.
6
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 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 its 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 are 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 reputation and diverse product line, the Company maintains strong
relationships with the U.S. Government and several of the leading defense
contractors. With expected increases in Homeland Security and Department of
Defense budgets, the Company expects to expand this relationship.
PURSUING GROWTH IN INTERNATIONAL MARKETS. Approximately 41% and 52% of the
Company's revenues during 2004 and 2003, respectively, were derived from
international customers. The Company believes that in addition to domestic
growth as a result of increases in Department of Defense 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 has devoted and intends to continue to devote significant
efforts to increasing its share of the international market for microwave test
and measurement systems by strengthening and expanding its sales network through
the establishment of foreign sales and customer service centers and the
appointment of additional international sales representatives. In addition, the
Company believes it has a competitive advantage due to the duty-free status of
its products manufactured in Israel and sold into the European Union. As fully
detailed under "History" on page 5, most of the Company's products fall under
the jurisdiction of the Commerce Department and therefore are not 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
7
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 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. The Company believes that one of its 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. Although 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, cellular handsets and base-stations, field
service/delivery equipment, satellite earth stations and radios, precision
guided missiles, radar and commercial and military aircraft 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. Although
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.
8
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, pagers, and PDAs. 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 a Dielectric Belt Driven
Rotator (DBDR) positioning system, and the Company's software and receiver,
constructed in a small anechoic chamber. The positioning subsystem allows a
probe to trace a sphere around the handset or pager held by a 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 and "smart" antennas. These systems enable
cellular/PCS base station antenna manufacturers to design and build efficient
and reliable products, and allow wireless communications service providers to
monitor more efficiently the performance of their base stations. The existing
system design is based on the Company's cylindrical near-field technology and is
designed for indoor use.
Satellite Systems. The Company develops and sells microwave test and
measurement systems for satellites which test many aspects of satellite
performance, including beam location (to assess the satellite's "footprint"),
channel purity and intermodulation, gain, G/T, pattern, EIRP and TMA/TDMA
microwave timing. These systems also test the transmit and receive
characteristics of the active array antennas used on most modern satellites and
can have the ability to identify and diagnose malfunctions within these complex
antennas. The Company's satellite systems utilize either near-field or compact
range technology. Both technologies are equally effective from a test and
measurement viewpoint, but each offers certain benefits. A near-field system
offers diagnostic capabilities and is generally less expensive than a comparably
equipped compact range system, but a compact range system is faster and easier
to use.
Automotive Systems. ORBIT/FR believes it is a leader in the design and
delivery of high-performance test and measurement systems for automobile
manufacturers and manufacturers of automotive sub-assemblies. The Company's
systems incorporate both near-field and far-field technologies and are thus
capable of microwave sampling over a wide range of frequencies. A typical system
includes a large mechanical arm that sweeps over a large turntable. The car
being tested rests on the turntable, and both the turntable and the mechanical
arm are set in motion based upon instructions received from the Company's
measurement software. The systems' broad capabilities are essential given a
growing trend by automobile manufacturers to integrate advanced microwave
technologies such as cellular/PCS, GPS-based navigation system, satellite
radios, digital TV and collision-avoidance systems into their "smart" cars.
RCS Systems. The Company's Radar Cross Section 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 Department of State
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. Department of State'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
9
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 Department of State's 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 worldwide. The Company's broad microwave and antenna expertise has
enabled it to obtain these contracts, and the Company intends to bid for similar
jobs in the future if the expertise gained in designing such systems is deemed
to be of strategic value to the Company.
MICROWAVE TEST AND MEASUREMENT SOFTWARE PRODUCTS. ORBIT/FR offers
automatic measurement software for microwave test and measurement systems. The
Company's software products are Windows-based programs that provide the customer
with a consistent user-friendly interface with the test and measurement system.
The software products have a robust and modular structure that enables the
Company to easily add features for current and future customers. The software
uses far-field and/or near-field algorithms to generate accurate results, and
the computational methodologies used have gained acceptance throughout the
microwave test and measurement community. The software supports the Company's
own measurement equipment as well as equipment manufactured by third parties.
The Company's software products are designed to be "off-the-shelf," but are
versatile and can be customized by the Company's or the customer's technical
personnel to suit specific needs.
Although 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. 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.
10
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 measurement 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. During 2004 the
Company introduced a newly developed version of its positioner controller.
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 by 3
feet to over 100 feet by 100 feet.
Pylons and Model Towers. Pylons and model towers are used in many
microwave test and measurement applications and range in size from very large to
very small. Large pylons can carry substantial loads in indoor or outdoor
environments, and certain models can even support a full-sized aircraft. Pylons
are almost always used in RCS systems.
OTHER MICROWAVE PRODUCTS. The Company has developed several microwave
products used in the larger microwave industry.
Radial Power Combiners. The Company's radial power combiners offer a
highly efficient electromagnetic mechanism to combine several identical
low-energy signals together to make a single high-energy signal. Radial power
combiners have many uses, but their most common application is in high-power
microwave transmitters.
Antennas, Probes and Other Microwave Accessories. The Company designs and
manufactures antennas, probes and other microwave accessories. These products
are used in the Company's microwave test and measurement systems, and they are
also sold to customers as stand-alone items.
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.
11
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 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 direct phone support the
Company believes it is positioned to provide rapid solutions upon request.
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, L3 Communications,
Lockheed Martin/Loral, Lufthansa, Mitsubishi
Heavy Industries, NASA, Northrop-Grumman,
Nurad, Pratt & Whitney, Racal Avionics,
Raphael, Raytheon, Rockwell International, SAAB
Missiles, SPAR Aerospace, Texas Instruments,
and the United States Air Force, Army and Navy.
Wireless Communications... Alcatel, Andrew, AT&T, Bell Atlantic, BAE,
Bosch, Celwave, Chelton, Daewoo, Ericsson, GTE,
IBM, Intel, ITT, Korea Mobile Telecom, Lucent
Technologies, Motorola, NEC, Nokia, Northern
Telecom, NTT, Qualcomm, RCA, Samsung,
SiemensPlessey, Thales Antennas, Telebras and
Tenovis.
Satellite................. Astrium, DASA, Elenia Spazio, Harris, Lockheed
Martin, Space Systems/Loral, Raytheon and TRW.
Automotive................ Blaupunkt, BMW, Daimler-Chrysler, Ford, Fuba,
Hyundai, Mitsubishi, SAAB, and Toyota.
University................ Georgia Tech, University of Hawaii, University
of Hong Kong, University of Utah, UCLA,
University of Illinois, Texas A&M University,
and Villanova University.
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, China, and South
Africa). See Note 7 of the Notes to Consolidated Financial Statements for a
discussion of the geographic concentration of the Company's revenues. For the
year ended December 31, 2004, Northrop Grumman
12
accounted for 16% of the Company's revenues, while Nurad accounted for 11% of
the Company's 2003 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. Although 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. Through its subsidiary Advanced ElectroMagnetics, Inc.,
(AEMI) the Company manufactures anechoic foam absorbing material, an integral
component of the microwave test and measurement system environment.
Although 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, 2004 and 2003, the Company's backlog was approximately
$13.1 million and $12.7 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 18 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. Using its internal research and development
staff, augmented by external consultants, the Company develops all of its
products in-house. A significant portion of the Company's research and
development efforts has been conducted in direct response to the specific
requirements of customers' orders, and, accordingly, such amounts are included
in the cost of sales when incurred and the related funding is included in net
revenues at such time. Research and development expenses of the Company for
fiscal years ended December 31, 2004, 2003 and 2002 were $1,008,000, $1,132,000
and $1,144,000 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. Some of
the Company's competitors 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
13
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, 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, 2004, the Company had a total of 88 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 $129,000. 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 $355,000.
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.
In September 1999, the U.S. District Court accepted the Company's guilty plea
pursuant to a plea agreement (the "Plea Agreement") with the U.S. Attorney's
Office to two counts of violating the Arms Control Act arising from its export
to China of a defense article and defense services without the required export
licenses, in or about November 1997 and January 1998. In March 2000, 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.
In November 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 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. Department of State's approval of the
Company's Commodity Jurisdiction, 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.
14
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 52 Chairman
Israel Adan 54 President, Chief Executive Officer
Dave Lubbe 41 Chief Financial Officer
John Aubin 51 Vice President, Chief Technology Officer
Moshe Pinkasy 54 Managing Director, Engineering
Marcel Boumans 46 Managing Director, GmbH
Gabriel Sanchez 53 President, AEMI
Mark Bates 34 Vice President, Software Development - USA
William Campbell 49 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 Vice President Business Development and Chief
Technology Officer in 2002, and served as Vice President of Measurement Systems
since 1996 to 2001. From 1991 to 1996, Mr. Aubin was Vice President in charge of
the Antenna Measurement Business Area for Flam & Russell.
Moshe Pinkasy has served as the Managing Director of Engineering since
January 1997. From February 1996 to December 1996, Mr. Pinkasy was Alchut's
Manager of the Microwave Test and Measurement Business in Israel. From 1992 to
1996, Mr. Pinkasy served, in various capacities, as the Mechanical Engineering
Department Manager for Alchut.
Marcel Boumans has served as the Managing Director of GmbH since March
1997. Since January 1, 2000, Mr. Boumans has been responsible for sales and
customer support for Europe. From
15
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 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 2002. 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.
2004 2003
---- ----
YEAR ENDED DECEMBER 31, HIGH LOW HIGH LOW
- ----------------------- ---- --- ---- ---
First Quarter $1.77 $1.00 $0.46 $0.20
Second Quarter $1.60 $1.06 $1.00 $0.19
Third Quarter $1.50 $0.68 $0.90 $0.42
Fourth Quarter $4.00 $1.20 $1.63 $0.61
On February 23, 2005, there were 34 holders of record of the Company's
Common Stock. Based on information received by the Company from its stock
transfer agent, the Company believes that there are approximately 2,000
beneficial owners of its Common Stock.
The Company has never paid any cash dividends on its Common Stock and does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
The Company currently intends to reinvest its earnings, if any, in the
development and expansion of the Company's business. Any future declaration of
cash dividends will be at the discretion of the Company's Board of Directors and
will depend upon the earnings, capital requirements and financial position of
the Company, general economic conditions and other pertinent factors.
17
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Operations Data:
(amounts in thousands, except per share data) Year Ended December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Contract revenues $ 21,185 $ 15,966 $ 13,053 $ 18,612 $ 16,862
Cost of revenues 13,567 10,682 9,312 13,589 11,563
-------- -------- -------- -------- --------
Gross profit 7,618 5,284 3,741 5,023 5,299
-------- -------- -------- -------- --------
General and administrative 2,618 2,554 2,764 3,197 2,523
Sales and marketing 2,901 2,726 2,324 2,093 2,471
Research and development 1,008 1,132 1,144 1,142 984
-------- -------- -------- -------- --------
Total operating expenses 6,527 6,412 6,232 6,432 5,978
-------- -------- -------- -------- --------
Operating income (loss), net 1,091 (1,128) (2,491) (1,409) (679)
Other income (loss), net (108) (73) 59 82 286
-------- -------- -------- -------- --------
Income (loss) before income taxes 983 (1,201) (2,432) (1,327) (393)
Income tax expense 31 134 145 669 195
-------- -------- -------- -------- --------
Net income (loss) before cumulative effect of
change in accounting principle 952 (1,335) (2,577) (1,996) (588)
Cumulative effect of change in
accounting principle -- -- (301) -- --
-------- -------- -------- -------- --------
Net income (loss) $ 952 $ (1,335) $ (2,878) $ (1,996) $ (588)
======== ======== ======== ======== ========
Basic and diluted income (loss) per share before
cumulative effect of change in accounting principle $ 0.16 $ (0.22) $ (0.43) $ (0.33) $ (0.10)
======== ======== ======== ======== ========
Basic and diluted income (loss) per share $ 0.16 $ (0.22) $ (0.48) $ (0.33) $ (0.10)
======== ======== ======== ======== ========
Consolidated Balance Sheet Data:
(amounts in thousands) December 31,
-------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Working capital $ 4,185 $ 3,221 $ 4,749 $ 7,037 $ 8,626
Total assets $13,116 $11,260 $11,875 $14,126 $16,210
Stockholders' equity $ 6,100 $ 5,148 $ 6,483 $ 9,361 $11,383
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates that affect the amounts reported in the financial statements
and accompanying notes. On an on-going basis, management evaluates its estimates
and judgments, including those related to bad debts, intangible assets, income
taxes, financing operations, warranty obligations, contingencies and litigation.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of 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 valuation allowance
due to uncertainty with regard to the Company's ability to generate sufficient
taxable income in the future to realize the deferred tax asset.
Recent Events. During 2004, the Israeli Ministry of Defense implemented a
policy temporarily suspending the export of all Israeli military products to the
far east, affecting our Israeli subsidiary's ability to deliver products
manufactured totaling approximately $1.8 million. Although this delay could lead
to a cancellation of the contract to purchase the products, the Company
anticipates the suspension will be lifted during 2005 and believes that the
customers will accept delivery of the products at that time.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues. Revenues for the year ended December 31, 2004 were approximately
$21.2 million compared to approximately $16.0 million for the year ended
December 31, 2003, an increase of approximately $5.2 million or 33%. Revenues
from the defense, satellite, automotive, Electromagnetic Compatibility (EMC),
and University markets increased approximately $4.3 million, $918,000, $332,000,
$180,000 and $110,000, respectively. Revenues from the wireless market decreased
approximately $591,000. Geographically, revenues from North America and Europe
increased $4.8 million and $1.4 million, respectively. Revenues from the Asian
market decreased approximately $994,000. Increased 2004 defense revenues were a
largely a result of significant completion of large U.S. defense contracts.
Cost of revenues. Cost of revenues for the year ended December 31, 2004
were approximately $13.6 million compared to approximately $10.7 million for the
year ended December 31, 2003. Gross margin percentage for the year ended
December 31, 2004 increased to 36.0% from 33.1% for the year ended December 31,
2003. The increased margins are due primarily to increased volume, increased
sales of
19
high margin software, and improvements in the Company's contract bid and program
management functions..
General and administrative expenses. General and administrative expenses
for each of the years ended December 31, 2004 and 2003 totaled approximately
$2.6 million. As a percentage of revenues, general and administrative expenses
decreased to 12.2% for the year ended December 31, 2004, from 16.0% for the year
ended December 31, 2003.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 2004 were approximately $2.9 million compared to
approximately $2.7 million for the year ended December 31, 2003. The current
year increase is primarily the result of the Company's increased worldwide
marketing efforts, and increased sales commissions. As a percentage of revenues,
sales and marketing expenses decreased to 13.7% for the year ended December 31,
2004, from 17.1% for the year ended December 31, 2003.
Research and development expenses. Research and development expenses for
the year ended December 31, 2004 were approximately $1.0 million, compared to
approximately $1.1 million for the year ended December 31, 2003. These costs
represent the Company's continuing efforts in the development of its 959Spectrum
software suite and improvement of its existing compact range technology. As a
percentage of revenues, research and development expenses decreased to 4.8% for
the year ended December 31, 2004, from 7.1% for the year ended December 31,
2003.
Other income (loss) net. Other income (loss), net, for the year ended
December 31, 2004 was a loss of approximately $108,000 compared to a loss of
approximately $73,000 for the year ended December 31, 2003, an increase of
approximately $35,000. The additional loss is primarily due to the settlement of
the Company's relocation claim as a result of it's 2003 relocation of its
manufacturing facility in Santee, CA.
Income taxes. Income tax expense for the year ended December 31, 2004 was
approximately $31,000 compared to approximately $134,000 of income tax expense
for the year ended December 31, 2003, a decrease in expense of $103,000. The
Company records income tax expense on profitable operations and income tax
benefits on losses recorded by its foreign subsidiaries where applicable. Income
tax expense was not recorded during the year ended December 31, 2004 on the
Company's profitable domestic operations as previously recorded deferred income
tax benefits on losses were reserved for.
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), university 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.
20
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.
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 increase in 2003 was primarily a result of the
Company's investment in senior marketing personnel and increases in advertising,
trade show, and publication costs during the year. 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), net. 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.
LIQUIDITY AND CAPITAL RESOURCES
During recent years the Company has satisfied its working capital
requirements through cash flows from equity financing.
Net cash provided by operating activities during the year ended December
31, 2004 was approximately $783,000, compared to approximately $35,000 used in
operating activities during the year ended December 31, 2003. The most
significant contribution of cash provided by operating activities during the
year ended December 31, 2004 came from the Company's $981,000 net income. Other
significant contributions to cash provided by operating activities resulted from
increases in accounts payable, accounts payable - Parent, and customer advances
of $372,000, $324,000, and $308,000, respectively. Significant uses of cash in
operating activities included the increase in accounts receivable, inventory,
and decreases in billings in excess of costs and estimated earnings on
uncompleted contracts of $744,000, $716,000, and $112,000, respectively.
Net cash used in investing activities for the purchase of property and
equipment during the year ended December 31, 2004 was $382,000. Net cash used in
investing activities for the purchase of property, plant and equipment during
the year ended December 31, 2003 amounted to $634,000, of which approximately
$262,000 was invested in anechoic foam manufacturing equipment at the Company's
Santee, CA facility.
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, 2004, approximately 81% of the Company's revenues
were billed in U.S. dollars. Most of the costs of the Company's contracts,
including costs subcontracted to the
21
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 December 2004, the Financial Accounting Standards Board ("FASB") issued
a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
This statements supersedes APB Opinion No. 25, Accounting for Stock Issused to
Employees", and its related implementation guidance. This statement establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods and services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods and services that are
based on the fair value of the entity's equity investments or that may be
settled by the issuance of those equity instruments. This statement focuses
primarily on accounting transactions in which an entity obtains employee
services in share-based payment transactions. This statement requires all share
based payments to employees, including grants of employee stock options, to be
recognized in the financial statements. The proforma disclosures previously
permitted will no longer be an alternative to financial statement recognition.
This statement is effective for public entities that do not file as small
business issuers, as of the beginning of the first interim or annual period,
that begins after June 15, 2005.
In December 2004, the FASB issued Statement No. 153 "Exchange of
Nonmonetary Assets - an amendment to APB Opinion No. 29". The guidance in APB
No. 29, Accounting for Nonmonetary Transactions, is based on the principle that
exchange of nonmonetary assets should be measured on the fair value of the
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This statement amends APB Opinion No. 29 to
eliminate the exception for the nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has the
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
statement are effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is permitted for nonmonetary
asset exchanges occurring in fiscal periods beginning after December, 2004.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4". This statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges." This statement requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. This statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application
is permitted for inventory costs incurred during fiscal years beginning after
November 24, 2004.
In December 2003, the FASB issued Statement No. 132[R], "Employers'
Disclosures about Pensions and Other Post Retirement Benefits - an amendment of
FASB Statements No. 87, 88, and 106". This statement revises employers'
disclosures about pension plans and other post retirement benefit plans. It does
not change the measurement or recognition of those plans required by the FASB.
22
All new disclosure requirements for the domestic plans of publicly traded
entities are effective for years ending after December 31, 2003. This new
standard did not impact the Company in 2004.
CONTRACTUAL OBLIGATIONS:
Payments Due by Period
-------------------------------------------------
Less One Three After
---------- ---------- ---------- ----------
Than One to Three to Five Five
---------- ---------- ---------- ----------
Description Total Year Years Years Years
----------- ---------- ---------- ---------- ---------- ----------
Long-term debt obligations..................................
Capital lease obligations................................... $ 101,610 $ 23,895 $ 47,749 $ 29,966
Operating lease obligations................................. 2,311,788 429,804 871,195 486,583 $ 445,021
---------- ---------- ---------- ---------- ----------
Purchase obligations........................................
Other Long-Term Liabilities Reflected on the Registrant's
Balance Sheet under GAAP
---------- ---------- ---------- ---------- ----------
Total....................................................... $2,413,398 $ 453,699 $ 918,944 $ 516,549 $ 445,021
========== ========== ========== ========== ==========
CERTAIN FACTORS
Certain information contained in this Form 10-K contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors are discussed in Item 1 - "Business", Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and those set forth below.
RAPID TECHNOLOGICAL CHANGE. The microwave test and measurement industry is
characterized by rapid technological change. The Company's future success will
depend upon its ability continually to enhance its current products and to
develop and introduce new products that keep pace with the increasingly
sophisticated needs of its customers and the technological advancements of its
competitors. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that will
adequately meet the requirements of the marketplace.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily
dependent upon its proprietary technology. The Company does not currently have
any material patents and relies principally on trade secret and copyright laws
to protect its technology. However, there can be no assurance that these steps
will prevent misappropriation of its technology. Moreover, third parties could
independently develop technologies that compete with the Company's technologies.
Although the Company believes that its products and proprietary rights do not
infringe patents and proprietary rights of third parties, there can be no
assurance that infringement claims, regardless of merit, will not be asserted
against the Company. In addition, effective copyright and trade secret
protection of the Company's proprietary technology may be unavailable or limited
in certain foreign countries.
DEPENDENCE ON ALCHUT; OPERATIONS IN ISRAEL. The Company maintains and will
continue to maintain a number of relationships with Alchut, the major
stockholder of the Company. Alchut is the Company's principal subcontractor for
electro-mechanical production, primarily in connection with the
23
production of positioners. In addition, Alchut provides general and
administrative services for the Company's operations in Israel. Effective
January 1, 2004, 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 2004 and 2003, international
sales comprised approximately 41% and 52% of the Company's total sales, and the
Company expects its international business to continue to account for a material
part of its revenues. International sales are subject to numerous risks,
including political and economic instability in foreign markets, restrictive
trade policies of foreign governments, inconsistent product regulation by
foreign agencies or governments, imposition of product tariffs and burdens and
costs of complying with a wide variety of international and U.S. export laws and
regulatory requirements. The non-discretionary three year denial policy for
Munitions List items stemming from the U.S. Customs Plea agreement, further
restricts future exports. This action was materially limited, when on March 5,
2000, the Department of State notified the Company that it's Commodities
Jurisdiction request submitted in 1998 was approved. The approval removes the
vast majority of the Company's antenna measurement software products and systems
from the US Munitions List. These products now fall under the jurisdiction of
the Department of Commerce and therefore would not be subject to the Department
of State'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 81% of the Company's sales
in 2004 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.
24
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 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
25
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.
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 December 31,
2004 (the "Evaluation Date"), have concluded that as of the Evaluation
26
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 during the
three month period ending on the Evaluation Date, nor any significant
deficiencies or material weaknesses in such internal controls and procedures
requiring corrective actions.
ITEM 9B. OTHER INFORMATION
On March 8, 2005, the Company issued a press release regarding its earnings for
the three months and year ended December 31, 2004, which it inadvertently failed
to file in a current report on Form 8-K. A copy of the press release is attached
as Exhibit 99.1 to this Form 10-K.
27
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 52 1996 Chairman of the Board of Directors of the Company
Uri Jenach 51 1999 General Manager of SophistiPak Ltd., Netanya, Israel
Doron Ginat 36 2002 General Manager of Netivey Gemel Ltd., Israel
Dan Goffer 53 2003 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.
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
The Board of Directors met four 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 four (4)
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
28
administration of executive compensation programs. The Compensation Committee
did not meet during 2004. Mr. Ginat, Mr. Jenach and Mr. Goffer were independent,
non-employee 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 2004, the Audit Committee met
three times and was composed of Mr. Ginat, Mr. Jenach and Mr. Goffer, all of
whom are independent, non-employee directors, with Mr. Goffer considered an
audit committee financial expert by the Board of Directors 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, which consists of Mr. Jenach 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 2004. Mr. Jenach is an independent, non-employee director.
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. Jenach, Mr. Goffer,
and Mr. Ginat earned fees totaling $11,000, $9,500 and $9,250, respectively, for
serving on the Company's Board of Directors during 2004. Under a separate
consulting agreement, former Director Gurion Meltzer was paid $12,500 for
services rendered prior to his March 31, 2004 resignation.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
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.
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 2004. 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
29
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 2004, Mr. Stein was paid a base salary of $91,000 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 management services agreement. The Board of Directors
of the Company approved a bonus payment to Mr. Ze'ev Stein, in his position as
Chairman of the Board of the Company, in the amount of $52,500 in recognition of
the financial results of the Company's operations in 2004.
The preceding report has been furnished by the following members of the
compensations committee: Uri Jenach, Doron Ginat, and Dan Goffer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2004, 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,
2004, 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.
30
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Information concerning 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 2004, 2003 and 2002 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Securities
Name and Principal Annual Compensation Underlying All other
Position Year Salary Bonus Options(#) Compensation
- -------- ---- -------- -------- ------------ ---------------
Israel Adan 2004 $162,618 $ 33,620 60,000 $ 1,554 (1)
President, Chief Executive 2003 160,010 -- -- 3,774 (2)
Officer 2002 160,010 -- 60,000 4,381 (3)
John Aubin 2004 121,992 21,608 -- 1,393 (4)
Vice President - Chief 2003 119,995 3,700 -- 2,993 (5)
Technology Officer 2002 89,996 5,000 20,000 2,227 (6)
William Campbell 2004 113,984 20,000 -- 671 (7)
Vice President, 2003 109,990 5,000 -- 1,542 (8)
Engineering and Program
Management
Mark Bates 2004 103,668 15,500 -- 1,206 (9)
Vice President Software 2003 102,649 -- -- 4,037 (10)
Development, USA 2002 101,192 3.000 -- 4,502 (11)
Moshe Pinkasy 2004 96,000 19,000 -- 5,000 (12)
Managing Director, 2003 105,000 20,000 -- 5,197 (12)
ORBIT/FR Engineering, Ltd. 2002 86,000 15,000 -- 4,790 (12)
(1) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $1,146 under the
Company's 401(k) savings plan.
(2) 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.
(3) 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.
31
(4) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $985 under our
401(k) savings plan.
(5) 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.
(6) 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.
(7) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $263 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 $1,134 under our
401(k) savings plan.
(9) Represents premiums of $408 paid by the Company for group term life
insurance, and a matching contribution by the Company of $798 under our
401(k) savings plan.
(10) Represents premiums of $456 paid by the Company for group term life
insurance and a matching contribution by the Company of $3,581 under our
401(k) savings plan.
(11) Represents premiums of $456 paid by the Company for group term life
insurance, and a matching contribution by the Company of $4,046 under our
401(k) savings plan.
(12) Represents contributions by the Company under the retirement plan of
ORBIT/FR Engineering Ltd.
STOCK OPTION GRANTS
Pursuant to the Incentive Plan, stock options for 60,000 shares of Common Stock
were granted to the Named Executive Officers of the Company. The table below
shows option grants in 2004 to the Named Executive Officers of the Company.
Potential Realized Value
At Assumed Annual
Rates of Stock Price
Appreciation For
Individual Grants Option Term(1)
--------------------------------------------------------- ------------------------
% of total Exercise
Number Options Granted Price Expiration
of Securities to Employees ($ per share) Date 5% ($) 10%($)
------------- --------------- ------------- ---------- -------- --------
Israel Adan 60,000 100% $1.35 10/01/2014 $161,261 $256,781
(1) Shows the difference between the market value of the Common Stock for
which the option may be exercised, assuming that the market value of the
Common Stock appreciates in value from the date of the grant to the end of
the ten-year option term at annualized rates of 5% and 10% respectively,
less the exercise price of the option. The rates of appreciation used in
this table are prescribed by regulations of the Securities and Exchange
Commission and are not intended to forecast future appreciation of the
market value of the Common Stock.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The table below shows 2004 year-end amounts and value of shares of Common
Stock underlying outstanding options. None of the Named Executive Officers
exercised any stock options in 2004.
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Options at
December 31, 2004 December 31, 2003(1)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------- ----------- -------------
32
Israel Adan (2) 60,000 60,000 -- $99,000
John Aubin 5,000 15,000 -- --
Bill Campbell -- 15,000 -- --
Mark Bates 24,750 5,250 -- --
Moshe Pinkasy 51,000 -- -- --
(1) Based on the closing price of $3.00 on the OTCBB on December 31, 2004.
(2) In connection with the grant of these options in June 2002, the Company
agreed to pay to Mr. Adan, upon and with respect to each share of the
Company's stock for which these options are exercise, a bonus equal to the
difference between $3.00 and $0.72, the per share exercise price for the
options.
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, pursuant to which 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 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-competitive covenants. Effective June 20, 2004 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 as defined in the agreement, or the sale of one or more of the
Company's business units.
33
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on the
Company's Common Stock for the period from December 31, 1999 to December 31,
2004, with the cumulative total return of the NASDAQ Composite Index. Since
historical peer group and industry or line-of-business data is not available,
the graph below compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total return of Schmitt Industries,
Inc., a publicly traded manufacturer of electronic and mechanical components for
machine tool products and laser-measurement systems that has a market
capitalization similar to that of the Company. The comparison assumes $100 was
invested on June 17, 1997 in the Company's Common Stock and in the foregoing
index and assumes reinvestment of dividends.
Comparison of Cumulative Total Returns
[LINE GHAPH]
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 2005 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 61.8%
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) 24,000 *
c/o Orbit/FR, Inc.
506 Prudential Road
Horsham, PA 19044
Dan Goffer (6) 12,000 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
Israel Adan (7) 60,000 *
c/o Orbit/FR, Inc.
506 Prudential Road
Horsham, PA 19044
Mark Bates (8) 28,750 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
Moshe Pinkasy (9) 51,000 *
Orbit/FR, Inc.
506 Prudential Road
35
Horsham, Pennsylvania 19044
John Aubin (10) 10,000 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
William Campbell (11) 7,500 *
Orbit/FR, Inc.
506 Prudential Road
Horsham, Pennsylvania 19044
All executive officers and directors 4,101,073 68.3%
as a group (12 persons) (12)
* 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 24,000 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.
(6) 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.
(7) Represents 60,000 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.
(8) Includes 26,000 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.
(9) 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.
36
(10) Includes 10,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Aubin, which options became exercisable prior to
the date of this Report on Form 10K.
(11) Includes 7,500 shares of Common Stock issuable upon the exercise of
options granted to Mr. Campbell, which options became exercisable prior to
the date of this Report on Form 10K.
(12) Includes the information contained in the notes above, as applicable.
37
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information, as of the end of the fiscal
year ended December 31, 2004, with respect to compensation plans under which the
Company is authorized to issue shares of Common Stock.
Number of Shares to be Number of Shares Remaining Available
Issued Upon Exercise of Weighted-Average Exercise for Future Issuance under Equity
Outstanding Options, Price of Outstanding Compensation Plans (excluding
Plan Category Warrants and Rights Options, Warrants and Rights securities reflected in 1st column)
- ---------------------------- ----------------------- ---------------------------- ------------------------------------
Equity compensation plan(s)
approved by security holders 587,200 $2.93 212,800
(1)
Equity compensation plan(s)
not approved by security -- -- --
holders
Total 587,200 $2.93 212,800
- -------------------
(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 $1,414,000 for the year ended December 31, 2004. 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 approximately
$266,000 in 2004. These agreements are evaluated on an annual basis.
38
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 for 2004 and 2003.
2004 2003
------- -------
Audit Fees $42,191 $75,539
Audit-Related Fees -0- -0-
Tax Fees 20,000 12,500
All Other Fees -0- -0-
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Company's Audit Committee policies and procedures 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 2003, 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 SCHEDULE
(a)(1) Consolidated Financial Statements
Independent Auditors' Report
Auditors' Report to the Shareholders of ORBIT/FR Engineering,
LTD.
Consolidated Balance Sheets at December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002
39
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule filed as part of this report.
II Valuation and Qualifying Accounts
The financial statement schedule should be read in conjunction
with the consolidated financial statements. Financial
statement schedules not included have been omitted because
they are not applicable as the required information is shown
in the consolidated financial statements. (electronic filing
only.)
(a)(3) Exhibits
The exhibits filed as part of this report are listed under
exhibits as subsection (c) of this Item 15.
(b) 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
(4)
10.6 Consulting agreement dated July 24, 2002 by and between the
Company and Gurion Meltzer. (5)
10.7 Employment Agreement dated September 5, 2002 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. (6)
14.1 Employee Ethics Policy (6)
21.1 Subsidiaries of the Registrant. (3)
23.1 Consent of Independent Auditors.
40
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 2003, 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 2003, 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 2003, 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 2003, of
Dave Lubbe, Chief Financial Officer.
99.1 Earnings release, March 8, 2005.
(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
(6) Incorporated by reference to Company's Annual report on Form
10-K filed on March 30, 2004
41
ORBIT/FR, INC.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ORBIT/FR, INC
Date: March 31, 2005 /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 2005.
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
42
ACKNOWLEDGMENT BY AGENT
I, Ze'ev Stein, have read the above power of attorney and am the person
identified as the attorney-in-fact and agent for the principals whose signatures
appear above. I hereby acknowledge that in the absence of a specific provision
to the contrary in the power of attorney or in the Pennsylvania Probate, Estates
and Fiduciaries Code (20 Pa. C.S.) when I act as an attorney-in-fact and agent:
I shall exercise the power for the benefit of the principals.
I shall keep the assets of the principals separate from my assets.
I shall exercise reasonable caution and prudence.
I shall keep a full and accurate record of all actions, receipts and
disbursements on behalf of the principals.
March 31, 2005
/s/ Ze'ev Stein
- --------------------
Ze'ev Stein
Attorney-in-fact
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004. Our audit also included the
financial statement schedule listed in the index at 15(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule 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 $4,455,000 and $3,920,000 as of
December 31, 2004 and 2003, respectively, and total revenues of $8,567,000,
$7,505,000 and $6,648,000 for each of the three years in the period ended
December 31, 2004. 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United Sates). 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
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Orbit/FR, Inc. and
Subsidiaries as of December 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. 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.
As discussed in Note 1 to the accompanying consolidated financial statements, as
of January 1, 2003, 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".
/s/ Hoberman, Miller, Goldstein & Lesser, CPA's, P.C.
February 11, 2005
New York, NY
F-1
[Letterhead of Ernst & Young]
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, 2004 and 2003, and the
related statements of income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2004. 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 generally accepted auditing
standards in the United States and in Israel, including those prescribed by the
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 the board of
directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2004 and 2003, and the results of its operations, the changes in its
shareholders' equity and its cash flows for each of the years then ended, in
conformity with generally accepted accounting principles in Israel, which
differ in certain respects from those followed in the United States (see Note
15 to the financial statements).
As described in Note 2a, 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 &
March 31, 2005 KASIERER
A Member of Ernst & Young Global
F-2
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 2,814 $ 2,413
Accounts receivable, less allowance of $164 and $187
in 2004 and 2003, respectively 4,482 3,738
Inventory 2,265 1,549
Costs and estimated earnings in excess of billings
on uncompleted contracts 659 605
Income tax refunds receivable 241 220
Deferred income taxes 293 275
Other 447 533
-------- --------
Total current assets 11,201 9,333
Property and equipment, net 1,376 1,401
Deferred income taxes 158 145
Cost in excess of net assets acquired 381 381
-------- --------
Total assets $ 13,116 $ 11,260
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,167 $ 1,578
Accounts payable--Parent 521 197
Accrued expenses 2,674 1,880
Customer advances 764 456
Income taxes payable 20 19
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,745 1,857
Deferred income taxes 125 125
-------- --------
Total liabilities, all current 7,016 6,112
-------- --------
Stockholders' equity:
Preferred stock: $.01 par value:
Authorized shares--2,000,000
Issued and outstanding shares--none -- --
Common stock: $.01 par value:
Authorized shares--10,000,000
Issued shares--6,084,473 61 61
Additional paid-in capital 15,173 15,173
Accumulated deficit (8,891) (9,843)
Treasury stock -- 82,900 shares (243) (243)
-------- --------
Total stockholders' equity 6,100 5,148
-------- --------
Total liabilities and stockholders' equity $ 13,116 $ 11,260
======== ========
See accompanying notes.
F-3
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Contract revenues $ 21,185 $ 15,966 $ 13,053
Cost of revenues 13,567 10,682 9,312
----------- ----------- -----------
Gross profit 7,618 5,284 3,741
----------- ----------- -----------
Operating expenses:
General and administrative 2,618 2,554 2,764
Sales and marketing 2,901 2,726 2,324
Research and development 1,008 1,132 1,144
----------- ----------- -----------
Total operating expenses 6,527 6,412 6,232
----------- ----------- -----------
Operating income (loss) 1,091 (1,128) (2,491)
Other income (loss), net (108) (73) 59
----------- ----------- -----------
Income (loss) before income taxes 983 (1,201) (2,432)
Income tax expense 31 134 145
----------- ----------- -----------
Net income (loss) before cumulative effect of
change in accounting principle 952 (1,335) (2,577)
Cumulative effect of change in
accounting principle -- -- (301)
----------- ----------- -----------
Net income (loss) $ 952 $ (1,335) $ (2,878)
=========== =========== ===========
Basic and diluted income (loss) per share
before cumulative effect of change in
in accounting principle $ 0.16 $ (0.22) $ (0.43)
Cumulative effect of change in
accounting principle -- -- (0.05)
----------- ----------- -----------
Basic and diluted income (loss) per share $ 0.16 $ (0.22) $ (0.48)
=========== =========== ===========
Weighted average number
common shares - basic and diluted 6,001,573 6,001,573 6,001,573
=========== =========== ===========
See accompanying notes.
F-4
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, 2002 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
Net income -- -- -- 952 -- -- 952
------- ------- ------- ------- ------- ------- -------
Balance, December 31, 2004 6,084 $ 61 $15,173 $(8,891) 83 $ (243) $ 6,100
======= ======= ======= ======= ======= ======= =======
See accompanying notes.
F-5
ORBIT/FR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 952 $(1,335) $(2,878)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 407 400 433
Cumulative effect of change in accounting principle -- -- 301
Deferred income tax provision (31) (58) (24)
Changes in operating assets and liabilities:
Accounts receivable (744) 422 919
Inventory (716) 31 20
Costs and estimated earnings in excess of billings on
uncompleted contracts (54) 78 (206)
Income tax refunds receivable (21) (220) --
Other 86 (231) (133)
Accounts payable and accrued expenses 383 584 31
Accounts payable--Parent 324 (410) (91)
Income taxes payable 1 (24) 30
Customer advances 308 297 (568)
Billings in excess of costs and estimated earnings on
uncompleted contracts (112) 431 1,009
------- ------- -------
Net cash provided by (used in) operating activities 783 (35) (1,157)
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment (382) (634) (270)
------- ------- -------
Net cash used in investing activities (382) (634) (270)
------- ------- -------
Cash flows from financing activities
Net repayments of note receivable -- 52 44
------- ------- -------
Net cash provided by (used in) financing activities -- 52 44
------- ------- -------
Net increase (decrease) in cash and cash equivalents 401 (617) (1,383)
Cash and cash equivalents at beginning of year 2,413 3,030 4,413
------- ------- -------
Cash and cash equivalents at end of year $ 2,814 $ 2,413 $ 3,030
======= ======= =======
Supplemental disclosures of cash flow information:
Net cash paid during the year for income taxes $ 227 $ 299 $ 84
======= ======= =======
See accompanying notes.
F-6
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership and Basis of Presentation
ORBIT/FR, Inc. (the "Company"), was incorporated in Delaware on December
9, 1996, as a wholly-owned subsidiary of Orbit-Alchut Technologies, Ltd., an
Israeli publicly traded corporation (hereinafter referred to as the "Parent").
The Company develops, markets, and supports sophisticated automated microwave
test and measurement systems for wireless communications, satellite, automotive,
and aerospace/defense industries and manufactures anechoic foam, a microwave
absorbing material that is an integral component of microwave test and
measurement systems. ORBIT/FR, Inc., a holding company, supports its world wide
customers through its subsidiaries ORBIT/FR Engineering, LTD (hereinafter
referred to as "Engineering", Israel), ORBIT/FR Europe, (Germany), Advanced
ElectroMagnetics, Inc. ("AEMI", San Diego, CA), and Orbit Advanced Technologies,
Inc. and Flam and Russell, Inc, (Horsham, PA).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions of the Company and its wholly-owned subsidiaries have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company classifies as cash equivalents all highly liquid instruments
with original maturities of three months or less at the time of purchase.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
F-7
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on
accelerated methods for both financial reporting and income tax reporting
purposes over the estimated useful lives as follows: office equipment -- 5-7
years; lab equipment -- 5 years; furniture and fixtures -- 7 years;
transportation equipment -- 5 years; leasehold improvements -- 5 years.
Software Development Costs
Costs incurred in the research and development of new software products
and enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional development costs are capitalized in accordance
with SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed. Capitalization ceases when the product is available for
general release to customers and amortization over a three year period will
commence. During the year ended December 31, 2002 the Company capitalized $92 of
software development costs in connection with the development of its 959+
Nearfield software package. During the fourth quarter of 2002, 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, 2002
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 2002 and became
effective for the Company on January 1, 2003. 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 2003, 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, 2004, 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-8
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue and Cost Recognition
The Company's principal sources of contract revenues are from engineering
and design services and the production of electro-mechanical equipment. Revenues
from long-term fixed-price development contracts performed principally under the
Company's control are recognized on the percentage-of- completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract when such costs can be reasonably estimated. Contract costs
include all direct material, labor and subcontractor costs and those indirect
costs related to contract performance such as indirect labor, supplies and tool
costs. General and administrative costs are charged to expense as incurred.
Changes in job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions and final contract
settlements, may result in revisions to costs and revenue and are recognized in
the period in which the revisions are determined. Revenues from
electro-mechanical equipment sold to customers which are not part of a larger
contract are recognized when the contract is substantially completed. Revenues
recognized in excess of amounts billed are classified under current assets as
costs and estimated earnings in excess of billings on uncompleted contracts.
Amounts received from clients in excess of revenues recognized to date are
classified under current liabilities as billings in excess of costs and
estimated earnings on uncompleted contracts.
Research and Development
Internally funded research and development costs are charged to operations
as incurred. Included in cost of revenues is customer-funded research and
development costs of approximately $80, $280, and $90 for the years ended
December 31, 2004, 2003, and 2002, respectively.
Concentrations of Credit Risk and Significant Customers
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist principally of cash and 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, 2004, there were 13 bank
guarantees in place for the Company's foreign customers. For the years ended
December 31, 2004 and 2003 one customer accounted for 16% and 11% of the
Company's revenues, while two customers accounted for 22% of the Company's
revenues for the year ended December 31, 2002. The Company does not anticipate
credit risk in connection with its concentration of cash.
Warranty Expense
The Company provides for warranty costs on sales of its own product.
Product warranty periods generally extend for one year from the date of sale.
Income Taxes
The Company uses the liability method to account for income taxes.
Accordingly, deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities
F-9
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for financial reporting purposes and the amounts reportable for income tax
purposes. The Company files a consolidated federal income tax return with its
domestic subsidiaries.
Foreign Currency Translation
The Company's functional currency for operations in Israel is the U.S.
dollar. The Company's functional currency for operations of its German
subsidiary is the local currency. 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, 2004, and 2003, approximately 19% and
26%, 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.
Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the net income
(loss) by the weighted average common shares outstanding for the period. Diluted
income (loss) per share is calculated by dividing net income (loss) by the
weighted average common shares outstanding for the period plus the dilutive
effect of stock options. The dilutive effect of stock options is not included in
2004, 2003, and 2002 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 12 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 December 2004, the Financial Accounting Standards Board ("FASB") issued
a revision of ASB Statement No. 123, "Accounting for Stock-Based Compensation".
This statements supersedes APB Opinion No. 25, Accounting for Stock Issused to
Employees", and its related implementation guidance. This statement establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods and services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods and services that are
based on the fair value of the entity's equity
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)
investments or that may be settled by the issuance of those equity instruments.
This statement focuses primarily on accounting transactions in which an entity
obtains employee services in share-based payment transactions. This statement
requires all share based payments to employees including grants of employee
stock options, to be recognized in the financial statements. The proforma
disclosures previously permitted will no longer be an alternative to financial
statement recognition. This statement is effective for public entities that do
not file as small business issuers, as of the beginning of the first interim or
annual period that begins after June 15, 2005.
In December, 2004, the FASB issued Statement No. 153 "Exchange of
Nonmonetary Assets - an amendment to APB Opinion No. 29". The guidance in APB
No. 29, Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured on the fair value of the
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for the nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of this statement are effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after December, 2004.
In November, 2004, the FASB issued Statement No. 151, "Inventory Costs -
an amendment of ARB No. 43, Chapter 4". This statement amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that
"under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges." This statement requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 24, 2004.
In December, 2003, the FASB issued Statement No. 132[R], "Employers' Disclosures
about Pensions and Other Post Retirement Benefits - an amendment of FASB
Statements No. 87, 88, and 106". This statement revises employers' disclosures
about pension plans and other post retirement benefit plans. It does not change
the measurement or recognition of those plans required by the FASB. All new
disclosure requirements for the domestic plans of publicly traded entities are
effective for years ending after December 31, 2003. This new standard did not
impact the Company in 2004.
Reclassification
Certain 2003 account balances have been reclassified to conform to the
2004 presentation.
F-11
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. INVENTORY
Inventory consists of the following:
DECEMBER 31,
2004 2003
------ ------
Work-in-process $1,460 $ 991
Parts and components 805 558
------ ------
$2,265 $1,549
====== ======
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
2004 2003
------ ------
Lab and computer equipment $2,292 $2,536
Office equipment 963 908
Transportation equipment 396 376
Furniture and fixtures 15 38
Leasehold improvements 290 288
------ ------
3,956 4,146
Less accumulated depreciation 2,580 2,745
------ ------
Property and equipment, net $1,376 $1,401
====== ======
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
---------------
2004 2003
------ ------
Accrued contract costs $ 602 $ 338
Accrued compensation 1,038 797
Accrued commissions 206 65
Accrued royalties 87 117
Accrued warranty 413 411
Accrued DTC settlement costs 100 --
Other accruals 228 152
------ ------
$2,674 $1,880
====== ======
F-12
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. RELATED PARTY TRANSACTIONS
Engineering and the Parent have an agreement, whereby Engineering
purchases from the Parent electrical and mechanical production services. In
addition, the Parent provides other administrative services, including but not
limited to, bookkeeping, computer, legal, accounting, cost management,
information systems, and production support. Engineering pays the Parent for
these services based upon a rate of cost of production services plus 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 $266, $245 and $202 in 2004, 2003 and 2002, respectively,
to the Parent for administrative services. During 2004, Ze'ev Stein Properties,
Ltd, an Israeli corporation wholly-owned by the Company's Chairman of the Board,
was paid $133 under a management services agreement in 2004.
Included in cost of revenues for the years ended December 31, 2004, 2003
and 2002 are approximately $1,414, $1,212, and $1,021, 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, 2004, 2003 and 2002 was
approximately $567, $609, and $550, respectively. Future minimum lease payments
under noncancelable operating leases with initial terms of one year or more are
as follows at December 31, 2004: $429 in 2005; $441 in 2006; $430 in 2007; $303
in 2008; $184 in 2009 and $445 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.
At December 31, 2004, the Company has outstanding letters of credit
totaling $428.
F-13
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates exclusively in one industry segment, the business
of developing, marketing and supporting sophisticated automated microwave test
and measurement systems. In addition to its principal operations and markets in
the United States, the Company conducts sales, customer support and service
operations out of other geographic locations in Europe, Asia, and North America.
The following table represents financial information by geographic region for
the years ended December 31, 2004, 2003, and 2002:
2004 North America Europe Asia Total
- ---- ------------- ------ ---- -------
Sales to unaffiliated customers $12,428 $ 4,010 $ 4,747 $21,185
Cost of Sales to unaffiliated customers 8,317 2,370 2,880 13,567
------- ------- ------- -------
Gross profit unaffiliated customers $ 4,111 $ 1,640 $ 1,867 $ 7,618
======= ======= ======= =======
Net property and equipment $ 603 $ 773 $ -- $ 1,376
======= ======= ======= =======
Total assets $ 6,973 $ 6,143 $ -- $13,116
======= ======= ======= =======
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
======= ======= ======= =======
In table above "North America" includes all domestic operations, and
"Europe" includes subsidiaries in Germany and Israel.
8. INCOME TAXES
Pretax income (loss) for the years ended December 31 was taxed in the
following jurisdictions:
2004 2003 2002
------- ------- -------
Domestic $ 778 $ (831) $(1,644)
Foreign 205 (370) (788)
------- ------- -------
$ 983 $(1,201) $(2,432)
======= ======= =======
F-14
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of deferred tax assets and liabilities consist of the following:
DECEMBER 31,
------------------
2004 2003
------- -------
Deferred tax assets:
Net operating loss and credit carryforwards $ 2,566 $ 2,705
Long-term contracts 189 182
Accrued compensation 55 43
Foreign and reserves 1,033 987
Goodwill 62 78
------- -------
Total deferred tax assets 3,905 3,995
Deferred tax liabilities:
Purchase accounting basis differences (124) (124)
------- -------
Net deferred tax asset 3,781 3,871
Valuation allowance (3,455) (3,576)
------- -------
Net deferred tax asset $ 326 $ 295
======= =======
As of December 31, 2004, the Company has net operating loss carryforwards
of approximately $7,140 for federal income tax purposes which expire through
2023. The Company also has a German net operating loss carryforward of
approximately $1,471 which will be available indefinitely.
As of December 31, 2004, 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 decreased its valuation allowance on its deferred tax asset
during 2004 as a result of the Company reporting operating income. A valuation
allowance has been recorded due to the uncertainty with regard to the Company's
ability to continue to generate sufficient taxable income in the future to
realize the entire deferred tax asset. A valuation allowance has also been
recorded due to the uncertainty with respect to the ultimate realization of the
deferred tax asset recorded in connection with the Company's German subsidiary.
F-15
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES (continued)
The components of income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
----- ----- ------
Current:
Federal $ -- $ 26 $ 31
Foreign 61 166 131
----- ----- -----
61 192 162
----- ----- -----
Deferred:
Federal 4
State -- --
Foreign (30) (58) (21)
----- ----- -----
(30) (58) (17)
----- ----- -----
Total income tax expense $ 31 $ 134 $ 145
===== ===== =====
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,
-----------------------
2004 2003 2002
----- ----- -----
Statutory U.S. Federal rate $ 334 $(408) $(827)
Utilization of loss carryforwards (115) -- --
Book/tax differences (150) 97 293
Increase (decrease) in valuation allowance (41) 424 594
Foreign rate difference 2 60 90
Other, net 1 (39) (5)
----- ----- -----
$ 31 $ 134 $ 145
===== ===== =====
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. At December 31, 2004 and 2003 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, 2004, 2003, and 2002, royalties under
this program were approximately $56, $60 and $59, respectively. At December 31,
2004 the Company had an outstanding contingent obligations to the Chief
Scientist of $515. Such contingent obligation is payable in future periods based
upon annual sales of products developed under the grants.
F-16
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. RETIREMENT PLANS
The Company has retirement plans which cover substantially all employees
who have attained the age of 21 and have completed 3 months of service. Eligible
employees make voluntary contributions to the plans up to specified percentages
of their annual compensation as defined in the plans. Under the plans, the
Company makes discretionary matching contributions determinable each plan year
and additional contributions based on annual eligible compensation for each
participant. The plans are funded on a current basis. For the years ended
December 31, 2004, 2003 and 2002, the Company's contributions to the plans were
$72, $71 and $79, respectively.
11. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the
percentage-of-completion method are as follows:
DECEMBER 31,
--------------------
2004 2003
-------- --------
Accumulated expenditures on uncompleted contracts $ 9,578 $ 7,856
Estimated earnings thereon 2,477 560
-------- --------
12,055 8,416
Less: applicable progress billings 13,141 9,668
-------- --------
Total $ (1,086) $ (1,252)
======== ========
The long-term contracts are shown in the accompanying balance sheets as follows:
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 659 $ 605
Billings on uncompleted contracts in excess of
costs and estimated earnings (1,745) (1,857)
-------- --------
$ (1,086) $ (1,252)
======== ========
F-17
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:
2004 2003 2002
---------------------- ---------------------- ----------------------
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 717,350 $ 3.26 743,850 $ 3.30 613,850 $ 3.33
Options granted 60,000 1.35 -- 171,000 3.00
Options forfeited (130,150) 3.78 (26,500) 4.10 (41,000) 3.16
-------- ----------- -------- ----------- -------- -----------
Options outstanding, end of year 647,200 $ 2.93 717,350 $ 3.23 743,850 $ 3.25
======== =========== ======== =========== ======== ===========
Options exercisable, end of year 480,975 $ 3.10 491,588 $ 3.26 393,375 $ 3.30
======== =========== ======== =========== ======== ===========
F-18
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. STOCK OPTION PLAN (CONTINUED)
2004 2003 2002
------------ ------------ -----------
Weighted average remaining
contractual life (years) 5.43 6.07 7.04
============ ============ ===========
Weighted average fair
value of options granted
at market value $ -- $ -- $ 0.46
============ ============ ===========
Range of exercise prices per share,
options outstanding $ 1.35-$6.63 $ 3.00-6.63 $ 3.00-6.63
============ ============ ===========
The Company has elected to follow APB 25 and the related interpretations
in accounting for stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS 123, requires the use of option
valuation models that were not developed for use in valuing stock options. Under
APB 25, because the exercise price of the Company's stock options equals or
exceeds the market price of the underlying common stock on the date of grant, no
compensation expense is recognized.
Pro-forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for stock options under the fair value method of
SFAS 123. The fair value for the Company's stock options granted is estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2004, 2003 and 2002; 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 a
weighted-average expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. As noted above, the Company's stock options are
vested over an extended period. In addition, option models require the input of
highly subjective assumptions including future stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value the Company's stock options.
F-19
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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,
-----------------------------
2004 2003 2002
------- ------- -------
Net income (loss) as reported under APB 25 $ 952 $(1,335) $(2,878)
Stock option expense per FASB 123 (59) (167) (73)
------- ------- -------
Pro-forma net income (loss) $ 893 $(1,502) $(2,951)
======= ======= =======
Pro-forma basic and diluted income (loss) per share $ 0.15 $ (0.25) $ (0.49)
======= ======= =======
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, 2004. The treasury shares have been recorded at cost.
F-20
ORBIT / FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows:
Quarter Ended
------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
2004 2004 2004 2004
-------- ------- -------- -------
Contract revenues $4,624 $5,468 $4,977 $6,116
Gross profit 1,564 2,039 1,864 2,151
Net income 13 407 427 105
Income per share - basic and diluted 0.00 0.07 0.07 0.02
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)
F-21
Schedule II - Valuation and Qualifying Accounts
ORBIT/FR, Inc. and Subsidiaries
December 31, 2004
Balance at Charged to Balance at
Beginning Costs and End of
of period Expenses Deductions period
---------- ---------- ---------- ----------
Year ended December 31, 2004
Allowance for doubtful accounts $187,426 $180,988 $202,038 $166,376
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