Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2009
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 No. 0-3936
ORBIT INTERNATIONAL CORP.
(Name of registrant as specified in its charter)
DELAWARE 11-1826363
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
80 CABOT COURT, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 435-8300
Securities registered pursuant to Section 12(b) of the Exchange Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE NASDAQ CAPITAL MARKET
-------------------------------------- ---------------------------------------
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No X
=
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
=
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) been subject to such filing requirements
for the past 90 days.
Yes X No
==
Indicate by check mark whether Registrant has submitted electronically and
posted on its Corporate Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S0t( 232.405 of this
Chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and posted such files).
Yes 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, to the
best of Registrant's 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. X
=
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer Accelerated Filer
Non-accelerated filer Smaller reporting company X
=
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act).Yes No X
=
Aggregate market value of Registrant's voting and non-voting common equity held
by non-affiliates (based on shares held and the closing price quoted on the
Nasdaq Capital Market on June 30, 2009): $9,908,979
Number of shares of common stock outstanding as of March 30, 2010: 4,581,074
Documents incorporated by reference: The Registrant's definitive proxy statement
to be filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 in connection with the Registrant's 2010 Annual Meeting of
Stockholders.
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PART I
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INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K which are not statements
of historical or current fact constitute "forward-looking statements" within the
meaning of such term in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual financial or operating results to be
materially different from the historical results or from any future results
express or implied by such forward-looking statements. Such forward-looking
statements are based on our best estimates of future results, performance or
achievements, based on current conditions and our most recent results. In
addition to statements which explicitly describe any risks and uncertainties
(including factors noted in Item 7 below - "Management's Discussion and Analysis
of Financial Condition and Results of Operations"), readers are urged to
consider statements labeled with the terms "may", "will", "potential",
"opportunity", "believes", "belief", "expects", "intends", "estimates",
"anticipates" or "plans" to be uncertain and forward-looking. The
forward-looking statements contained herein are also subject generally to other
risks and uncertainties that are described from time to time our reports and
registration statements filed with the Securities and Exchange Commission.
While we may elect to update forward-looking statements at some point in the
future, we specifically disclaim any obligation to do so, even if our estimates
change.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Orbit International Corp. (the "Company" or "Orbit") was incorporated under
the laws of the State of New York on April 4, 1957 as Orbit Instrument Corp. In
December 1986, the state of incorporation was changed from New York to Delaware
and in July 1991, the name was changed to Orbit International Corp. We conduct
our operations through our Orbit Instrument Division ("Orbit Instrument") and
our wholly owned subsidiaries, Behlman Electronics, Inc. ("Behlman"), TDL
Development Laboratory, Inc. ("TDL") and Integrated Consulting Services, Inc.,
d/b/a Integrated Combat Systems ("ICS"). Through our Orbit Instrument Division,
which includes our wholly owned subsidiaries, Orbit Instrument of California,
Inc. and TDL, we are engaged in the design, manufacture and sale of customized
electronic components and subsystems. ICS, based in Louisville, Kentucky,
performs systems integration for gun weapons systems and fire control interface,
as well as logistics support and documentation. Behlman is engaged in the design
and manufacture of high quality commercial power units, AC power, frequency
converters, uninterruptible power supplies and commercial-off-the-shelf ("COTS")
power solutions.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We currently operate in two industry segments. Our Electronics Group is
comprised of our Orbit Instrument Division, our TDL subsidiary, and our ICS
subsidiary. Orbit Instrument and TDL are engaged in the design and manufacture
of electronic components and subsystems. ICS performs system integration for gun
weapons systems and fire control interface as well as logistics support and
documentation. Our Power Group is comprised of our Behlman subsidiary and is
engaged in the design and manufacture of commercial power units.
The following sets forth certain selected historical financial information
relating to our business segments:
December 31,
------------
2009 2008
----------- ------------
Net sales (1):
---------
Electronics Group
Domestic $13,595,000 $15,678,000
Foreign 3,116,000 1,851,000
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Total Electronics Group $16,711,000 $17,529,000
Power Group
Domestic $ 9,014,000 $ 8,605,000
Foreign 1,170,000 1,516,000
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Total Power Group $10,184,000 $10,121,000
Operating income (loss) (2):
Electronics Group $(1,569,000) $(6,059,000)
Power Group $ 1,509,000 $ 1,654,000
Assets:
Electronics Group $12,629,000 $12,888,000
Power Group $ 5,916,000 $ 5,834,000
(1) Includes intersegment sales.
(2) Exclusive of corporate overhead expenses, interest expense, and
investment and other income- net, which are not allocated to the business
segments. Includes goodwill and intangible assets impairment charges of
$2,048,000 and $6,889,000 in 2009 and 2008, respectively.
Additional financial information relating to the business segments in which
Orbit conducts its operations is set forth in Note 16 to the Consolidated
Financial Statements appearing elsewhere in this report.
DESCRIPTION OF BUSINESS
GENERAL
Our Electronics Group designs, manufactures and sells customized panels,
components, and subsystems for contract program requirements to prime
contractors, governmental procurement agencies and research and development
("R&D") laboratories, primarily in support of specific military programs. More
recently, we have focused on providing commercial, non-military "ruggedized
hardware" (hardware designed to meet severe environmental conditions) for prime
contractor programs at cost competitive prices. Products include a variety of
custom designed "plasma based telephonic intercommunication panels" for secure
voice airborne and shipboard program requirements, "full-mil keyboards",
trackballs and data entry display devices. Our Electronics Group's products,
which in all cases are designed for customer requirements on a firm, fixed-price
contract basis, have been successfully incorporated into systems deployed on
surveillance aircraft, including E-2C, E-2D, Joint Surveillance Target Attack
Radar Systems (J/STARS), Lookdown Surveillance Aircraft (AWACS) and P-3
(anti-submarine warfare) requirements, and shipboard programs, including AEGIS
(Guided Missile Cruisers and Destroyers), DDG'S (Guided Missile Destroyers),
BFTT (Battle Force Tactical Training), LSD'S (Amphibious Warfare Ships) and
LHA'S (Amphibious Warfare Ships) applications, as well as a variety of land
based guidance control programs, including the TAD (Towed Artillery
Digitization) fire control system. Through ICS, the Electronics Group also
performs (i) analysis and evaluation of medium and major caliber Naval Gun
Weapon Systems performance, including interoperability and compatibility with
combat systems, interface systems, ammunition, subsystems and components, (ii)
engineering requirements, such as the design, integration and production of
medium and major caliber Naval Gun Weapon Systems' components and (iii)
engineering supplies and services in support of medium and major caliber Naval
Gun Weapon Systems initiatives, including the development of test plans, test
equipment, test articles/units, analyses, trouble shooting, repair, maintenance
and reporting.
Our Power Group manufactures and sells power supplies, AC power sources
(equipment that produces power that is the same as what would be received from a
public utility), "frequency converters" (equipment that converts local power to
equivalent foreign power), "uninterruptible power supplies ("UPS")" (devices
that allow a computer to operate while utility power is lost), associated
analytical equipment and other electronic equipment. The military division of
our Behlman subsidiary designs and manufactures power solutions that use COTS
power modules to meet customer specifications.
PRODUCTS
Electronics Group
IFF- Identification Friend or Foe
Our Orbit Instrument Division has designed and developed a remote control
unit ("RCU") that has supported the Common Transponder ("CXP") program for both
the U.S. Navy and U.S. Army. Our RCU has been fully qualified for shipboard,
aircraft and ground based programs, which are now functional and supporting U.S.
forces in air, sea and ground battlefield conditions. Orbit's RCU now has
embedded proprietary software code for Mode S, Enhanced Traffic Alert and
Collision Avoidance Systems ("ETCAS"), and Mode 5 IFF combat applications.
After shipping more than 3,000 units in support of U.S. Army and U.S. Navy
CXP program requirements, our Orbit Instrument division has designed and
qualified a new Integrated Remote Control Unit ("IRCU") which has been qualified
to support U.S. Air Force retrofit program, as well as new program
opportunities.
Intercommunication Panels
Our Orbit Instrument division has designed and developed various types of
shipboard communication terminals. These communication terminals support
existing shipboard secure and non-secure voice communication switches. The
panels contained within the terminals have recently been upgraded with
state-of-the-art color LCD displays, including options for touch screens. In
addition, Orbit Instrument has upgraded the communications terminals with
"telco-based" capability. The upgraded communication terminals have been
successfully embedded within combat information center ("CIC") consoles on a
number of U.S. Naval ship configurations.
Orbit Instrument has designed and developed the next generation color LCD flat
panel technology with a touch screen based computer controlled Action Entry
Panel for the AEGIS class ships. The new Color Entry Panel (CEP) is currently
replacing our existing, functional yet aging Plasma Entry Panel (PEP) that now
exceeded decades of 24/7 critical useful life naval service. The CEP continues
to be deployed as a form fit replacement display for the previously designed
PEP.
Displays
Our Electronics Group, through Orbit Instrument and TDL, has designed,
developed, qualified and successfully supported a number of critical programs
for prime contractors and government procurement agencies. Our Electronics Group
has designed displays using electroluminescent ("EL"), plasma, and LCD
technologies for military and rugged environments.
Displays designed by our Electronics Group allow one or more operators to
monitor and control radar systems for aircraft, helicopter, shipboard,
ground-based, and tracked vehicles systems. Our unique modular design technique
allows our displays to provide "smart technology", in the form of high-speed
graphics to operators in the most severe combat conditions. TDL and Orbit
Instrument displays are readable under both sunlight and night vision conditions
("NVIS"), and continue to operate in nuclear, biological and chemical ("NBC")
environments.
Both our Orbit Instrument division and our TDL subsidiary have penetrated a
niche defense electronics marketplace by providing avionic displays and
keyboards for a number of Air Force jet fighter, bomber, surveillance and tanker
refueling programs. Displays may vary from four (4) inches, up to forty five
(45) inches long, incorporating multiple inputs and outputs for operator program
requirements.
With years of prime contractor and procurement agency support, both TDL and
Orbit Instrument have designed and embedded displays for U.S. Army programs,
providing multiple display systems supporting commander, fire control and GPS
driver requirements for the Abrams, Bradley, and Challenger programs.
Our TDL subsidiary has developed a number of color LCD displays that have
been qualified and currently support a number of helicopter, jet fighter,
bomber, tracked vehicle and armored vehicle programs requirements.
Working together with prime contractors, TDL has designed a number of display
configurations to support retrofit and upgrade programs for B-52 aircraft, V-22
Osprey cockpit and rear displays, as well as the latest fleet upgrade for
domestic and foreign military F-16 aircraft.
TDL has successfully designed and qualified an input device assembly
("IDA"), which includes a fully integrated keyboard, trackball and display
assembly that is worn (via velcro), on the co-pilot's thigh during flight
missions. This unique wearable system provides co-pilots with additional
information that is easy to access, and does not require additional space within
the cockpit environment. This allows the aircraft to actually have four bullnose
systems, the last being the TDL designed IDA thigh pad.
By focusing on the avionics market, TDL has designed, qualified and delivered
displays for mission support in the CH-53 helicopter, providing real time data
to the operator. This program opportunity will support both current and retrofit
program requirements.
Our Orbit Instrument Division has supported programs that include displays,
keyboards and track balls to form complete operator systems on "trays". These
trays are qualified for sub-surface, shipboard, aircraft and tracked vehicle
program opportunities.
Orbit Instrument has successfully designed and qualified a display tablet
in support of an ongoing Chinook Helicopter upgrade program. The initial
quantity of production tablets will enhance and upgrade mission avionics and
control capabilities in the Chinook helicopter. These tablets are currently
scheduled for delivery during the first quarter of 2011.
Orbit Instrument has designed and developed a 6.5" display, as well as a
sunlight readable 20.1" display for the U.S. Navy's Carrier MCS programs. The
qualification phase of these displays will be second quarter 2010. Production of
these displays is presently expected to start during the fourth quarter 2010 for
delivery and installation on the Navy's CVN-78 aircraft carrier.
Orbit Instrument designed, developed and delivered pre-production 12.1" display
units, for the maintenance panel of the Littoral Combat Ships. The
pre-production phase has been completed and the production phase is expected
start in the next couple of years.
Keyboards, Keypads and Pointing Devices
Orbit Instrument and TDL have designed a number of custom backlit keyboards
and keypads to meet military specifications. These keyboards and keypads have
been designed for shipboard, airborne, sub-surface and land-based program
requirements, as well as for the Federal Aviation Administration. The keyboards
include various microprocessor-based serial interfaces, such as RS-232, RS-422,
PS/2, USB and SUN type interfaces. Depending on the requirement, some of the
backlit keyboards are night vision goggle compatible and designed for NVIS Green
A or Green B night vision requirements.
Orbit Instrument designed/developed pointing devices, trackballs and force
sticks. It manufactures various militarized trackballs in various sizes for
airborne, shipboard, Army and FAA requirements. The trackballs and the force
sticks include various microprocessor based serial interfaces such as RS-232,
RS-422, PS/2, USB and SUN type interfaces.
Operator Control Trays
Our Orbit Instrument division designs and manufactures a variety of
"operator control trays" that help organize and process data created by
interactive communications systems, making such data more manageable for
operator consumption. These trays are presently used to support patrol and
surveillance aircraft programs, standard shipboard display console requirements
and land-based defense systems applications. The operator trays are integrated
with Orbit designed/developed keyboards, flat panel technology-based computer
controlled action entry panels, switch panels and pointing devices.
Command Display Units (CDU'S)
Our Orbit Instrument division currently has orders for command display panels
that are being utilized in vehicular, shipboard and sheltered platform
requirements. The display panels are flat panel technology based and include a
Pentium based single board computer. We have designed/developed several models
of the CDU to be used by U.S. Navy, U.S. Army and U.S. Marines, and the South
Korean and Canadian armies.
Mobile Key Panel Receivers
TDL is under contract for the production of mobile key panel receivers that
provide battlefield operators with real-time position, velocity, navigation and
timing (PVNT) information in stand alone, hand-held and lightweight
configurations.
MK 119 Gun Console System Computer (GCSC)
ICS is under a multi-year contract for production of the MK 119 GCSC, an
unmanned environmentally isolated shipboard enclosure that houses a standard
19-inch electronics rack containing processors, electronic devices and cooling
and power conditioning equipment that perform processing, interfacing and data
extraction functions.
MK 437 Gun Mount Control Panel (GMCP)
ICS is also under contract to provide the GMCP, a manned control panel
located shipboard in the gun loader room. The GMCP consists of an interactive
operator control/display terminal that permits the operator to control the Gun
Mount and the GCSC. The operator is able to enter ammunition and environmental
pre-engagement data and to monitor the Gun Mount status and operation. In the
event of a loss of the Gun Console ("GC"), the GMCP can serve as a casualty mode
of system operation.
Selected Products
ICS builds a wide range of system integration-related products, including:
fiber optic cables, specialty enclosures, traditional shipboard cable sets (both
low smoke and non-low smoke) and training devices.
Power Group
Our Behlman subsidiary's Commercial Power Supply Division designs and
manufactures AC power sources. These products are used for clean regulated
power and for frequency and voltage conversion applications. Behlman's AC power
supplies are used on production lines, in engineering labs, for oil and gas
exploration, on aircraft and ships (both manned and unmanned), and on related
ground support systems.
Behlman's frequency converters are used to convert power from one frequency to
another. They are used to test products to be exported to foreign countries
from the point of origin (e.g., in the U.S., 60 Hz. is converted to 50 Hz) and
to test products requiring the supply of 400 Hz for aircraft and ship power.
These frequency converters are also used in rugged applications such as on
airplanes to supply the 60 Hz. required by standard equipment, such as
computers, from the 400 Hz. available on the aircraft. In addition, Behlman's
products are used for railroad signaling. Its frequency converters are
manufactured for most of the passenger railroads in the United States.
Behlman's power sources have power levels from 100 VA to 120,000 VA.
Behlman's Uninterruptible Power Supply ("UPS") products are used for backup
power when local power is lost. Behlman only competes in the "ruggedized",
industrial and military markets. Behlman is now producing its UPS units for
DDG-51 class Aegis destroyers, LHD Wasp class ships and military aircraft.
Behlman's inverters which convert system battery power to AC are being used in
electric, gas and water transmission systems and in utility substations.
Behlman's COTS Division designs and manufactures power supplies that use COTS
power modules to meet its customers' environmental specifications. This
technique requires less engineering resources and produces a more reliable unit
in much less time. Customers include the U.S. and NATO military services and
their prime contractors, and nuclear power plant control systems manufacturers.
Behlman also performs reverse engineering of analog systems for the United
States Government or United States Government contractors to enable them to have
a new supplier when the old manufacturer cannot or will not supply the
equipment.
Behlman is a long time supplier to the Source Development Department of the
Navel Inventory Control Point ("NAVICP") and has been given the opportunity to
compete against prime contractors. Behlman has supplied power supplies used on
a broad array of equipment including submarines, surface ships, aircraft and
ground support equipment.
Behlman also operates as a qualified repair depot for many United States
Air Force and Navy programs.
PROPOSED PRODUCTS
Electronics Group
Our Electronics Group continues to identify new program opportunities,
which require new hardware and software designs to support prime contractors and
defense procurement agency land, sea and air solutions.
TDL continues to be a leading supplier of display and keyboard designs,
supporting defense electronics and industrial program requirements. TDL has
developed a second LCD display configuration, which is supporting transit
authority communication directly with the driver. This device is typically
mounted within a bus and allows the driver to input and receive information
throughout the intended route. TDL continues to support this transportation
display requirement and can provide solutions to each transit authority as new
awards are released.
Our Electronics Group has developed several new color smart displays for
use on helicopters. Given the critical requirements of helicopter missions, each
configuration has been designed as sunlight readable and night vision qualified,
and provides the crew with real time data under extreme environmental and combat
requirements.
Our Electronics Group continues to provide a family of state of the art display
configurations which combine various stand alone switch panels and data input
devices onto a single display. These displays provide an operator with a single
source of easy to access information that supports naval consoles, aircraft
cockpits, armor vehicle suites and helicopter cockpit requirements.
Orbit Instrument has designed and developed a 6.5" display, as well as a
sunlight readable 20.1" display for the U.S. Navy's Carrier MCS programs. Orbit
Instrument also has designed and developed an 8" display for U.S. Navy ships as
part of the NBC detection program.
Orbit Instrument continues to develop new GPS Control Display Unit ("CDU")
panels that support U.S. Army land navigation system requirements. A number of
CDU panels have been designed as a total solution for customer requirements. As
each foreign country procures this Fire Finder system from the prime contractor,
critical country mapping and targeting code is written by the division segment,
and embedded into the CDU as an operational requirement.
Our Electronics Group continues to target ongoing retrofit programs, which
are intended to extend the life cycle of ships, aircraft, and armored vehicles.
To that extent, Orbit Instrument and TDL have designed state-of-the art LED
switch panels, keyboards, and communication panels that are form fit and
replaceable for units that have exceeded their intended operational usage. In
all cases, the new technological designs supporting the switch panels,
keyboards, and communication panels are intended to replace units which have
been operational in combat mode for decades. As the Electronics Group continues
to receive new contract awards for program opportunities, developing new
hardware to replace our previously designed units will continue to be a
significant part of our Electronics Group's business strategy.
Orbit Instrument is developing a voice over IP version of its Secure Audio
System ("SAS") used on LSD-class ships. The new SAS panel will include a color
LCD panel and a VOIP interface. It has provided the plasma display version of
the SAS Panel in the past. The new LCD display based SAS panel will be developed
to work with Common Enterprise Display System ("CEDS") and target retrofit
opportunities.
Orbit Instrument is in the process of design and development of color LCD
display version of the Radio Frequency Transmission Line Test Set ("RFTLTS")
Test set. It has supported the RTFLTS with an Electro Luminescent ("EL") display
in the past, and the new color LCD version will target retrofit opportunities.
We have recognized the timing and availability opportunity to strategically
penetrate the armored vehicle defense electronics market, at the prime vehicle
manufacture level, in conjunction with prime electronics contractors. We have
designed displays that now support the Bradley Vehicle, the Abrams Tank, the
Stryker Vehicle, and displays supporting the M777 towed howitzer.
Given the visibility of displays designed by TDL for these critical program
requirements, we have been contacted by several major prime contractors to
support additional Mine Resistant Ambush Protected ("MRAP") armored vehicle
programs.
TDL has designed, qualified, and delivered a number of Limited Rate Initial
Production displays to support the latest MRAP-ATV vehicle, which is
manufactured by Oshkosh Corporation.
Working under an exclusive Supplier Partner Agreement (SPA), with Synexxus,
TDL has delivered a quantity of displays that have been deployed in various
configurations of MRAP vehicles, which are currently deployed in Iraq and
Afghanistan theaters of operations.
TDL will now try to strategically leverage these prime contract display
configurations that have been qualified and embedded and deployed in support of
a number of critical armored vehicles programs, and provide solutions to
retrofit and full production opportunities.
In response to market-based influences ICS is planning to develop a family
of shock-isolated cabinets to house both custom and COTS components. This
family of cabinets will be qualified to the full spectrum of environmental
criteria mandated by our Department of Defense customer base.
Future modifications of the GCSC will incorporate touch sensitive displays,
detailed built-in-test capabilities and a robust graphic interface.
Littoral Combat Ship (LCS)
With the ability to maneuver in shallow waters inaccessible to other surface
combatants, the Littoral Combat Ship (LCS) is a new class of warship meant to
facilitate U.S. Navy access to, and operations in the littorals, which are
waters close to shore. The Navy plans a major investment in the LCS program,
which is currently projected to cost $28 billion for 55 ships and related,
interchangeable combat capability. The planned 55 ships would comprise about 38
percent of the Navy's surface combatants in a 313-ship Navy. The Navy is using
two contractors, Lockheed Martin Corporation and General Dynamics Corporation to
build differently designed ships, (or seaframes). The USS Freedom (LCS-1) was
designed by Lockheed Martin and was commissioned in 2008, while the USS
Independence (LCS-2) was designed by General Dynamics, commissioned in late
2009. The Navy plans to select one design in fiscal year 2010 and award the
winning contractor 10 seaframes and 15 combat management systems. ICS has been
working diligently to support both prime contractors as they prepare their bid
responses for the LCS procurement.
Serial Data Converter
The MK 119 Gun Computer System designed and built by ICS is being adapted for
use in the DDG-51 and CG-47 Aegis Modernization (AMOD) programs. This redesign,
which is called a Serial Data Converter (SDC), will allow the newly modernized
Combat Management System aboard AMOD hulls to easily interface with legacy Gun
System hardware. The SDC will be installed aboard the DDG-51 through DDG-78 as
well as CG-59 through CG-73. Additionally, ICS is performing a design study to
assess the viability of the SDC design for installation aboard the DDG-113 (and
follow-on) procurement.
Naval Fires Control System
The Naval Fires Control System (NFCS) is becoming the Navy's key system to
manage surface fires in littoral warfare. NFCS, technically the AN/SYQ-27, is
bringing Navy surface combatants into the digital fires arena, enabling the
concepts of the Marine Corps Operational Maneuver From the Sea (OMFS) and
Ship-to-Objective Maneuver (STOM). These concepts are setting the standard for
the naval combatant operations. They also are leading the way for buying
advanced technologies to depict battle-space three dimensionally and develop a
common operational picture (COP).
The NFCS provides this COP while interfacing with the advanced FA tactical
data system (AFATDS), among other systems. NFCS is a variable message format
(VMF) based system that manages naval fires for Arleigh Burke Class destroyers
equipped with the MK 160 Gun Fire Control System (GFCS). ICS is the OEM for the
MK 160 GFCS and is exploring opportunities to add NFCS related products to its
portfolio.
Power Group
In an effort to expand our Power Group's product base, Behlman is
developing new, higher power inverters. These products are designed to expand
our presence in the utility market and to establish a presence in the military
inverter market where the inverter can be used on vehicles such as Hummers.
Behlman is expanding its high power BL series to be used on new aircraft that
utilize "wild frequency" systems.
Behlman is expanding its "P" series of low cost AC power supplies to add power
factor corrected input and CE marking in order to enhance its sales to the
European Community.
Behlman is developing a new line of ruggedized UPS to be used in military and
high end industrial applications.
In response to customer requests, Behlman is developing COTS power supplies to
be used in applications such as satellite, nuclear power plant control, sonar
and fire control optics. Behlman continues to be the company of choice by
certain divisions of military procurement to replace obsolete power equipment
with modern COTS versions.
SALES AND MARKETING
Products of our Electronics Group are marketed by the sales personnel and
management of the respective operating units. The COTS division's products of
our Power Group are marketed by Behlman's sales and program managers and other
management personnel. Commercial products of our Power Group are sold by
regional sales managers, manufacturer's representatives and non-exclusive
distributors.
COMPETITION
Many of our competitors are well established, have reputations for success
in the development and sale of their products and services and have
significantly greater financial, marketing, distribution, personnel and other
resources than us, thereby permitting them to implement extensive advertising
and promotional campaigns, both in general and in response to efforts by
additional competitors to enter into new markets and introduce new products and
services.
The electronics industry is characterized by frequent introduction of new
products and services and is subject to changing consumer preferences and
industry trends, which may adversely affect our ability to plan for future
design, development and marketing of our products and services. The markets for
electronic products, components and related services are also characterized by
rapidly changing technology and evolving industry standards, often resulting in
product obsolescence or short product life cycles. We are constantly required
to expend more funds for research and development of new technologies.
Our Electronics Group's competitive position within the electronics
industry is, in management's view, predicated upon our manufacturing techniques,
our ability to design and manufacture products which will meet the specific
needs of our customers and our long-standing relationship with our major
customers. (See "Major Customers" below). There are numerous companies, many of
which have greater resources than us, which are capable of producing
substantially all of our products.
Competition in the markets for our Power Group's commercial and military
products depends on such factors as price, product reliability and performance,
engineering and production. In particular, due primarily to budgetary
restraints and program cutbacks, competition in Behlman's United States
Government markets has been increasingly severe and price has become the major
overriding factor in contract and subcontract awards. To our knowledge, some of
Behlman's regular competitors include companies with substantially greater
capital resources and larger engineering, administrative, sales and production
staffs than Behlman's.
SOURCES AND AVAILABILITY OF RAW MATERIALS
We use multiple sources for our procurement of raw materials and are not
dependent on any specific suppliers for such procurement. We continuously
update our delivery schedules and evaluate availability of components so that
they are received on a "just-in-time schedule". Occasionally, in the production
of certain military units, we will be faced with procuring certain components
that are either obsolete or difficult to procure. However, we have access to
worldwide brokers using the Internet to assure component availability.
Nevertheless, there can be no assurance that such components will be available
and, even if so, at reasonable prices.
MAJOR CUSTOMERS
Various agencies of the United States Government and BAE Systems accounted
for approximately 25% and 15%, respectively, of our consolidated net sales for
the year ended December 31, 2009. The loss of any of these customers would have
a material adverse effect our net sales and earnings. We do not have any
significant long-term contracts with any of the above-mentioned customers.
The major customers of our Electronics Group are various agencies of the
United States Government and BAE Systems, accounting for approximately 31% and
23%, respectively, of the net sales of such segment for the year ended December
31, 2009. The loss of any of these customers would have a material adverse
effect on the net sales and earnings of our Electronics Group.
The major customers of our Power Group are various agencies of the United States
Government and Telephonics Inc., both accounting for approximately 14%,
respectively, of the net sales of such segment for the year ended December 31,
2009. The loss of these customers would have a material adverse effect on the
net sales and earnings of our Power Group.
Since a significant amount of all of the products which we manufacture are
used in military applications, any substantial reduction in overall military
spending by the United States Government could have a materially adverse effect
on our sales and earnings.
BACKLOG
As of December 31, 2009 and 2008 our backlog was as follows:
2009 2008
---- ----
Electronics Group $ 14,000,000 $9,000,000
Power Group 6,000,000 7,000,000
----------- ----------
Total $20,000,000 $16,000,000
=========== ===========
All but approximately $1,393,000 of the backlog at December 31, 2009,
represents backlog under contracts that are expected to be shipped during 2010.
The backlog at December 31, 2008 did not include approximately $1,100,000
of orders not yet received under a Master Order Agreement received from a
customer whereby we were authorized to procure material to complete such orders.
Those orders were received in 2009.
A significant amount of our contracts are subject to termination at the
convenience of the United States Government. The backlog is not influenced by
seasonality.
SPECIAL FEATURES OF UNITED STATES GOVERNMENT CONTRACTS
Orders under United States Government prime contracts or subcontracts are
customarily subject to termination at the convenience of the U.S. Government, in
which event the contractor is normally entitled to reimbursement for allowable
costs and a reasonable allowance for profits, unless the termination of a
contract was due to a default on the part of the contractor.
During the year ended December 31, 2007, our Power Group was a subcontractor to
a prime contractor on a program that was terminated by the U.S. Government,
under which we recovered all of our costs of approximately $200,000 during the
year ended December 31, 2008. No material terminations of contracts of either
our Electronics Group or the Power Group at the convenience of the U.S.
Government occurred during the years ended December 31, 2009 and 2008.
A significant portion of our revenues are subject to audit under the
Vinson-Trammel Act of 1934 and other federal statutes since they are derived
from sales under United States Government contracts. We believe that
adjustments to such revenues, if any, will not have a material adverse effect on
our financial position or results of operations.
RESEARCH AND DEVELOPMENT
We incurred approximately $1,446,000 and $1,398,000 of research and
development expenses during the years ended December 31, 2009 and 2008,
respectively. During the years ended December 31, 2009 and 2008, we recognized
revenue of approximately $987,000 and $649,000, respectively, for customer
funded research and development.
PATENTS
We do not own any patents which we believe are of material significance to
our operations.
EMPLOYEES
As of March 12, 2010, we employed 144 persons, all on a full-time basis.
Of these, our Electronics Group employed 92 people, consisting of 23 in
engineering and drafting, 6 in sales and marketing, 17 in direct and corporate
administration and the balance in production. Our Power Group employed 52
people, consisting of 14 in engineering and drafting, 7 in sales, 3 in direct
and corporate administration and the balance in production.
ITEM 1A. RISK FACTORS
Not applicable, as we are a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable, as we are a smaller reporting company.
ITEM 2. PROPERTIES
We owned our plant and executive offices located at 80 Cabot Court,
Hauppauge, New York. This facility consists of approximately 60,000 square feet
(of which approximately 50,000 square feet are available for manufacturing
operations) in a two-story, brick building, was completed in October 1982 and
expanded in 1985. We are currently operating this facility at approximately 70%
of capacity. In March 2001, we completed a sale leaseback transaction whereby we
sold our land and building for $3,000,000 and entered into a twelve-year net
lease with the buyer of the property. The lease provides for an annual payment
of $360,000 with 10% increases in the fourth, seventh and tenth years of the
lease. The lease expires in February 2013, but may be extended by us at our
option through 2025. During the extension period, the lease provides for an
annual rent of $527,076 with 10% increases in the fourth, seventh and tenth
years of the extended lease.
In December 2007, our Behlman subsidiary entered into a new lease for a
2,000 square foot facility at 2363 Teller Road, Unit 108, Newbury Park,
California, which is used as a selling office for all of the Company's operating
units. The five year lease provides for monthly payments of approximately $2,100
with annual increases of approximately 3%. The lease provides for an option to
renew for an additional five years at a monthly rent equal to the rent charged
for comparable space in the geographical area.
In April 2009, our TDL subsidiary entered into a five-year lease for 50,000
square feet at 300 Commerce Boulevard, Quakertown, Pennsylvania which is used
for manufacturing, engineering and administration. The facility is currently
operating at 60% of capacity. TDL paid certain operating expenses only, from
April through October 2009, and lease payments commenced November 1, 2009. The
lease provides for monthly lease payments of approximately $15,300 for the first
two years of the lease and approximately $16,600, $17,200 and $17,800 for years
three, four and five, respectively. The lease includes one five-year option
based on the CPI Index (Philadelphia, PA area) and a second five-year option
based on fair market value rent. In connection with the new facility, TDL
incurred approximately $537,000 in leasehold improvements. In August 2009, TDL
entered into a sublease with the landlord on a month-to-month basis for 15,000
square feet which is being utilized for storage. The sublease provides for TDL
to receive $1,250 per month.
On April 5, 2005, TDL entered into a five-year lease for 19,000 square feet
at 1765 Walnut Drive, Quakertown, Pennsylvania which was used for manufacturing,
engineering and administration. The facility had been operating at full
capacity. TDL vacated the facility in October 2009 but continued to make lease
payments through January 2010 at which time the facility was sold by the lessor
to an unrelated third party. The lessor of this facility was a limited
partnership, the ownership of which was controlled by the former shareholders of
TDL.
Our ICS subsidiary operates out of two facilities in Louisville, KY, one of
which is used for engineering, logistics and administration and the other for
manufacturing. In December 2008, ICS entered into a new lease for engineering,
logistics and administration for approximately 14,000 square feet and provides
for monthly payments of approximately $6,800 per month from April 2009 through
March 2014 and includes an option to extend the lease for an additional five
years at approximately $8,400 per month. The facility is currently operating at
approximately 65% of capacity. The lease for manufacturing space is for
approximately 13,000 square feet and provides for monthly payments of
approximately $5,000 pursuant to an option in the lease that was exercised in
April 2009. The facility is currently operating at approximately 70% of
capacity. ICS also entered into a three year lease for a sales office in
Virginia Beach, VA, which consists of approximately 800 square feet and provides
for monthly rent of approximately $1,000. The lease expired in December 2008
and ICS did not renew it.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become a party to litigation or other legal
proceedings that we consider to be a part of the ordinary course of our
business. We are not currently involved in legal proceedings that could
reasonably be expected to have a material adverse effect on our business,
prospects, financial condition or results of operations. We could become
involved in material legal proceedings in the future.
ITEM 4. REMOVED AND RESERVED
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the Nasdaq Capital Market under the symbol
"ORBT".
The following table sets forth the high and low sales prices of our common stock
for each quarter from January 1, 2008 through its fiscal year ended December 31,
2009, as reported on the Nasdaq Capital Market.
HIGH LOW
---- ---
2008:
First Quarter: $9.28 $7.43
Second Quarter: 8.00 6.75
Third Quarter: 7.00 3.75
Fourth Quarter: 4.53 1.12
2009:
First Quarter: $2.60 $1.68
Second Quarter: 3.66 2.27
Third Quarter: 3.78 3.07
Fourth Quarter: 4.10 3.60
HOLDERS
As of March 15, 2010, the Company had 182 stockholders of record.
DIVIDENDS
We have not paid or declared any cash dividends to date and do not
anticipate paying any in the foreseeable future. We intend to retain earnings,
if any, to support the growth of the business.
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on the
Common Stock for the last five fiscal years with the cumulative total return on
the Nasdaq Stock Market-U.S. Index ("Nasdaq Composite"), and the Dow Jones
Wilshire MicroCap over the same period (assuming the investment of $100 in the
Common Stock, the Nasdaq Composite, and Dow Jones Wilshire MicroCap. on December
31, 2004, and the reinvestment of all dividends).
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG ORBIT INTERNATIONAL CORP., THE NASDAQ
STOCK MARKET-US INDEX AND A PEER GROUP
(in dollars)
Orbit
International Dow Jones
Corp. Nasdaq Wilshire MicroCap
------------- --------- --------------------
12/04 100.00 100.00 100.00
12/05 138.20 101.33 101.21
12/06 90.51 114.01 116.28
12/07 95.83 123.71 106.37
12/08 19.63 73.11 58.53
12/09 42.70 105.61 81.44
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth, as of December 31, 2009:
- the number of shares of our common stock issuable upon exercise of
outstanding options, warrants and rights, separately identified by those granted
under equity incentive plans approved by our stockholders and those granted
under plans, including individual compensation contracts, not approved by our
stockholders (column a),
- the weighted average exercise price of such options, warrants and rights,
also as separately identified (column b), and
- the number of shares remaining available for future issuance under such
plans, other than those shares issuable upon exercise of outstanding options,
warrants and rights (column c).
EQUITY COMPENSATION PLAN INFORMATION TABLE
(a) (b) (c)
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in column (a))
-------------- --------------------------- -------------------- -------------------------------------
Equity compensation
plans approved by
security holders 476,000 $ 3.58 52,000
Equity compensation
plans not approved by
security holders -0- N/A -0-
-------- -------- --------
Total 476,000 $ 3.58 52,000
======== ======== ========
ISSUER'S PURCHASE OF EQUITY SECURITIES:
(a) (b) (c) (d)
Period Total Number of Average Price Paid Total Number of Shares (or Units) Maximum Number(or
Shares (or per Share (or Unit) Purchased as part of Publicly Approximate Dollar Value)
Units) Announced Plans or Programs of Shares (or Units) that May
Purchased Yet Be Purchased Under the
Plans or Programs
-------------------- ----------------- -------------------- ---------------------------------- -----------------------------
October 1- 31, 2009 4,300 $ 3.54 4,300 $ 2,087,000
November 1-30, 2009 0 N/A 0 $ 2,087,000
December 1-31, 2009 0 N/A 0 $ 2,087,000
------- -------- ------- ------------
Total 4,300 $ 3.54 4,300 $ 2,087,000
======= ======== ====== ===========
Additional information relating to the Issuer's purchase of equity
securities is provided in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
RECENT SALE OF UNREGISTERED SECURITIES
During 2009 and 2008, we issued, respectively, 83,825 and 40,245 shares of
restricted stock to management, key employees and directors.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable, as we are a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our financial statements and related notes contained elsewhere in this report.
This discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors discussed in this report and those discussed in other documents we
file with the SEC. In light of these risks, uncertainties and assumptions,
readers are cautioned not to place undue reliance on such forward-looking
statements. These forward-looking statements represent beliefs and assumptions
only as of the date of this report. While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any obligation
to do so, even if our estimates change.
Executive Overview
------------------
Although we recorded good operating results in our fourth quarter before
the intangible assets and goodwill impairment charges, our operating results
decreased in 2009 as compared to 2008. After completing our impairment testing
of goodwill and other intangible assets, we concluded an impairment charge of
$1,622,000 and $426,000 should be taken in connection with the recorded
intangible assets and goodwill, respectively, arising from the ICS acquisition
in 2007. In 2008, we recorded an impairment charge of $6,889,000 taken in
connection with the recorded goodwill arising from our TDL and ICS acquisitions
made in 2005 and 2007, respectively.
Our sales decreased for the year ended December 31, 2009 by 3.1%, principally
due to a decrease in sales from our Electronics Group, which was primarily
attributable to a delay by several months in the receipt of the MK 119 order by
ICS. Gross profit margins decreased for the year ended December 31, 2009
compared to the prior year. Our loss before income tax provision was
$1,568,000 for the year ended December 31, 2009 compared to a loss of $5,899,000
for the year ended December 31, 2008. This decrease in loss was principally due
to a decrease in the goodwill and intangible asset impairment charges taken in
the current year, a decrease in selling, general and administrative expenses and
interest expense, an increase in investment and other income, and despite
decreased sales from our Electronics Group and a decrease in gross profit.
Our backlog at December 31, 2009 was approximately $20,500,000 compared to
$15,800,000 at December 31, 2008. There is no seasonality to our business. Our
shipping schedules are generally determined by the shipping schedules outlined
in the purchase orders received from our customers. Both of our operating
segments are pursuing a significant amount of business opportunities and we are
confident that we will receive many of the orders we are pursuing, although
timing is always an uncertainty.
Our success over the past few years has significantly strengthened our balance
sheet, as evidenced by our 4.8 to 1 current ratio at December 31, 2009. As a
result of lower profitability related primarily to customer shipping and
contract delays, we were not in compliance with certain of our financial
covenants at various quarterly reporting periods during 2009 and 2008. These
covenant defaults were waived by our financial lender in consideration for
waiver fees and other consideration. In March 2010, we entered into a new
credit agreement with a new commercial lender pursuant to which we (a)
established a line of credit of up to $3,000,000, and (b) entered into a term
loan in the amount of approximately $4,700,000. These new credit facilities
were used to pay off in full our obligations to our former primary lender
pursuant to a prior credit facility and to provide for us general working
capital needs. The new credit facilities are secured by a first priority lien
and security interest in substantially all of our assets.
In August 2008, our Board of Directors authorized a stock repurchase program
allowing us to purchase up to $3.0 million of our outstanding shares of common
stock in open market or privately negotiated transactions. During the period
from August 2008 through December 31, 2009, we repurchased approximately 368,000
shares at an average price of $2.48 per share. Total consideration for the
repurchased stock was approximately $913,000. From August 2008 through March
29, 2010, we purchased approximately 369,000 shares of our common stock for
total cash consideration of $915,000 representing an average price of $2.48 per
share.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and the results of
operations are based on our financial statements and the data used to prepare
them. Our financial statements have been prepared based on accounting
principles generally accepted in the United States of America. On an on-going
basis, we re-evaluate our judgments and estimates including those related to
inventory valuation, the valuation allowance on our deferred tax asset, goodwill
impairment, valuation of share-based compensation, revenue and cost recognition
on long-term contracts accounted for under the percentage-of-completion method
and other than temporary impairment on marketable securities. These estimates
and judgments are based on historical experience and various other assumptions
that are believed to be reasonable under current business conditions and
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting
policies affect more significant judgments and estimates in the preparation of
the consolidated financial statements.
Inventories
-----------
Inventory is valued at the lower of cost (specific, average and first-in,
first-out basis) or market. Inventory items are reviewed regularly for excess
and obsolete inventory based on an estimated forecast of product demand. Demand
for our products can be forecasted based on current backlog, customer options to
reorder under existing contracts, the need to retrofit older units and parts
needed for general repairs. Although we make every effort to insure the
accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have an
impact on the level of obsolete material in our inventory and operating results
could be affected, accordingly. However, world events have forced our country
into various situations of conflict whereby equipment is used and parts may be
needed for repair. This could lead to increased product demand as well as the
use of some older inventory items that we had previously determined obsolete.
Deferred Tax Asset
--------------------
At December 31, 2009, we had an alternative minimum tax credit of approximately
$573,000 with no limitation on the carry-forward period and Federal and state
net operating loss carry-forwards of approximately $19,000,000 and $6,000,000,
respectively that expire through 2020. Approximately, $16,000,000 of federal net
operating loss carry-forwards expire between 2010-2012. In addition, we receive
a tax deduction when our employees exercise their non-qualified stock options
thereby increasing our deferred tax asset. We record a valuation allowance to
reduce its deferred tax asset when it is more likely than not that a portion of
the amount may not be realized. We estimate our valuation allowance based on an
estimated forecast of our future profitability. Any significant changes in
future profitability resulting from variations in future revenues or expenses
could affect the valuation allowance on its deferred tax asset and operating
results could be affected, accordingly.
Impairment of Goodwill
------------------------
We have a significant amount of goodwill and acquired intangible assets.
In determining the recoverability of goodwill and intangible assets, assumptions
are made regarding estimated future cash flows and other factors to determine
the fair value of the assets. After completing the impairment testing of
goodwill and intangible assets, we concluded an impairment charge should be
taken at December 31, 2009 in connection with the recorded goodwill and
intangible assets arising from the acquisition of ICS in 2007. In addition, we
concluded an impairment charge should be taken at December 31, 2008 in
connection with the recorded goodwill arising from our TDL and ICS acquisitions
made between 2005 and 2007.
Our analysis employed the use of both a market and income approach.
Significant assumptions used in the income approach include growth and discount
rates, margins and our weighted average cost of capital. We used historical
performance and management estimates of future performance to determine margins
and growth rates. Discount rates selected for each reporting unit varied. Our
weighted average cost of capital included a review and assessment of market and
capital structure assumptions. The balance of our goodwill for each of our
operating units as of December 31, 2009 is as follows: TDL $820,000, ICS
$795,000 and Behlman $868,000. After the impairment charges taken on the
goodwill and intangible assets of ICS at December 31, 2009, of the three
reporting units with goodwill, TDL, ICS and Behlman has a fair value that is in
excess of its carrying value by approximately 45%, 67% and 33%, respectively.
Considerable management judgment is necessary to evaluate the impact of
operating changes and to estimate future cash flows. Changes in our actual
results and/or estimates or any of our other assumptions used in our analysis
could result in a different conclusion.
Share-Based Compensation
-------------------------
We account for share-based compensation awards by recording compensation
based on the fair value of the awards on the date of grant and expensing such
compensation over the vesting periods of the awards, which is generally one to
ten years. Total share-based compensation expense was $310,000 for the year
ended December 31, 2009. The estimated fair values of stock options granted in
2009 were calculated using the Black-Scholes model. This model requires the use
of input assumptions. These assumptions include expected volatility, expected
life, expected dividend rate, and expected risk-free rate of return.
Revenue and Cost Recognition
-------------------------------
Revenue and costs under larger, long-term contracts are reported on the
percentage-of-completion method. For projects where materials have been
purchased, but have not been placed in production, the costs of such materials
are excluded from costs incurred for the purpose of measuring the extent of
progress toward completion. The amount of earnings recognized at the financial
statement date is based on an efforts-expended method, which measures the degree
of completion on a contract based on the amount of labor dollars incurred
compared to the total labor dollars expected to complete the contract. When an
ultimate loss is indicated on a contract, the entire estimated loss is recorded
in the period. Assets related to these contracts are included in current assets
as they will be liquidated in the normal course of contract completion, although
this may require more than one year.
Marketable Securities
----------------------
We currently have approximately $900,000 invested in government and
corporate bonds. We treat our investments as available-for-sale which requires
us to assess our portfolio each reporting period to determine whether declines
in fair value below book value are considered to be other than temporary. We
must first determine that we have both the intent and ability to hold a security
for a period of time sufficient to allow for an anticipated recovery in its fair
value to its amortized cost. In assessing whether the entire amortized cost
basis of the security will be recovered, we compare the present value of future
cash flows expected to be collected from the security (determination of fair
value) with the amortized cost basis of the security. If the impairment is
determined to be other than temporary, the investment is written down to its
fair value and the write-down is included in earnings as a realized loss, and a
new cost is established for the security. Any further impairment of the
security related to all other factors is recognized in other comprehensive
income. Any subsequent recovery in fair value is not recognized until the
security either is sold or matures.
We use several factors in our determination of the cash flows expected to be
collected including i) the length of time and extent to which market value has
been less than cost; ii) the financial condition and near term prospects of the
issuer; iii) whether a decline in fair value is attributable to adverse
conditions specifically related to the security or specific conditions in an
industry; iv) whether interest payments continue to be made and v) any changes
to the rating of the security by a rating agency. Although we received all our
interest payments during the current year, we recorded an other than temporary
impairment write-down of $39,000 for the three months ended March 31, 2009
consisting of bonds held in two separate issuers in which we determined the
decline in fair value was due to adverse conditions specifically related to the
security or specific conditions in an industry. We did not take any additional
other than temporary impairment charges for the remainder of 2009.
RESULTS OF OPERATIONS:
Year Ended December 31, 2009 vs. Year Ended December 31, 2008
-----------------------------------------------------------------------
We currently operate in two industry segments. Our Orbit Instrument
Division and our TDL subsidiary are engaged in the design and manufacture of
electronic components and subsystems and our ICS subsidiary performs system
integration for Gun Weapons Systems and Fire Control Interface as well as
logistics support and documentation (the "Electronics Group"). Our Behlman
subsidiary is engaged in the design and manufacture of commercial power units
and COTS power solutions (the "Power Group").
Consolidated net sales for the year ended December 31, 2009 decreased by
3.1% to $26,518,000 from $27,364,000 for the year ended December 31, 2008 due to
a decrease in sales from our Electronics Group which was partially offset by a
slight increase in sales from our Power Group. Sales from our Electronics Group
decreased by 4.7% due to primarily to a delay in the receipt of the MK 119
order by ICS until the end of the third quarter of 2009. This order was
expected early in the second quarter of 2009 which approximated the time of
receipt in the prior year. The MK 119 is recorded under the percentage of
completion method. Sales from our Orbit Instrument Division increased for the
year and sales from our TDL subsidiary decreased due to certain scheduled
deliveries that were delayed at the request of our customer in order for them to
complete testing of their completed unit. Sales from our Power Group slightly
increased by 0.1% for the current year as the segment recorded its second
consecutive year of record sales.
Gross profit, as a percentage of net sales, for the year ended December 31, 2009
decreased to 40.5% from 42.2% for the prior year. This decrease resulted from a
lower gross profit from our Electronics Group (36.4% v. 38.7%) due to a lower
gross profit from ICS due to a decrease in sales, which was partially offset by
a higher gross profit from TDL despite lower sales and a higher gross profit
from our Orbit Instrument Division. The slight decrease in gross profit (46.4%
v. 47.2%) from our Power Group was principally due to product mix and despite
the slight increase in sales.
Selling, general and administrative expenses decreased by 1.3% to $10,248,000
for the year ended December 31, 2009 from $10,381,000 for the year ended
December 31, 2008 principally due to a decrease in selling, general and
administrative expenses from our Electronics Group that was partially offset by
higher selling, general and administrative costs from our Power Group and higher
corporate costs. Selling, general and administrative expenses, as a percentage
of sales, for the year ended December 31, 2009 increased to 38.7% from 37.9% for
the year ended December 31, 2008 principally due to the aforementioned decrease
in sales that was not commensurate with the decrease in expenses.
During the fourth quarter, in addition to the significant delay in the
receipt of the MK 119 order, we were notified by our customer that a replacement
was under consideration for a portion of future MK119 requirements for which ICS
was being considered but not guaranteed of future awards. Consequently, we
determined that future cash flows for ICS, particularly with respect to MK 119
orders, could potentially decrease. As a result, we determined the undiscounted
future cash flows for certain of our intangible assets were less than their
carrying value. Therefore, we recorded an impairment charge relating to our
intangible assets in the amount of $1,622,000 in the year ended December 31,
2009 representing the excess carrying values over their fair values. Also during
the fourth quarter 2009, after completing the annual impairment testing of
goodwill pursuant to ASC 350, we concluded an impairment charge of $426,000
should be take in connection with the goodwill arising from the acquisition of
ICS in 2007 In the prior year, after completing our impairment testing, we
concluded an impairment charge of $6,889,000 should be taken in connection with
the recorded goodwill arising from our TDL and ICS acquisitions made in 2005 and
2007, respectively.
Interest expense for the year ended December 31, 2009 decreased to $208,000 from
$342,000 for the year ended December 31, 2008 due to a decrease in the amounts
owed to lenders in the current year due to the pay down of our term debt and to
a decrease in interest rates.
Investment and other income for the year ended December 31, 2009 increased to
$208,000 from $154,000 for the prior year principally due to a $130,000 other
than temporary impairment loss taken in the prior year related to certain
corporate bonds held by us and despite a decrease in the amounts invested and a
decrease in interest rates.
Loss before income tax provision was $1,568,000 for the year ended December 31,
2009 compared to a loss of $5,899,000 for the year ended December 31, 2008.
This decrease in loss was principally due to a decrease in the goodwill and
intangible asset impairment charges taken in the current year, a decrease in
selling, general and administrative expenses and interest expense, an increase
in investment and other income and despite decreased sales from our Electronics
Group and a decrease in gross profit.
Income taxes for the year ended December 31, 2009 and December 31, 2008 consist
of $39,000 and $108,000, respectively, in state income and Federal minimum taxes
that cannot be offset by any state or Federal net operating loss carry-forwards.
As a result of the foregoing, net loss for the year ended December 31, 2009 was
$1,607,000 compared to a loss of $6,007,000 for the year ended December 31,
2008.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for
the year ended December 31, 2009 decreased to $1,427,000 from $2,158,000 for the
year ended December 31, 2008. Listed below is the EBITDA reconciliation to net
income:
Year ended
December 31,
-------------
2009 2008
---- ----
Net loss $(1,607,000) $(6,007,000)
Interest expense 208,000 342,000
Income tax expense 39,000 108,000
Goodwill and intangible asset impairment 2,048,000 6,889,000
Depreciation and amortization 739,000 826,000
---------- -----------
EBITDA $ 1,427,000 $ 2,158,000
============ ============
EBITDA is a non-GAAP financial measure and should not be construed as an
alternative to net income. An element of our growth strategy has been through
strategic acquisitions which have been substantially funded through the issuance
of debt. This has resulted in significant interest expense and amortization
expense. EBITDA is presented as additional information because we believe it is
useful to our investors and management as a measure of cash generated by our
business operations that will be used to service our debt and fund future
acquisitions as well as provide an additional element of operating performance.
Liquidity, Capital Resources and Inflation
----------------------------------------------
Working capital decreased to $16,558,000 at December 31, 2009 as compared
to $17,136,000 at December 31, 2008. Despite the decrease in working capital,
the ratio of current assets to current liabilities was 4.8 to 1 at December 31,
2009 compared to 4.4 to 1 at December 31, 2008. The reduction in working capital
was principally due to the repayment of long-term debt and the purchase of
treasury stock.
Net cash provided by operating activities for the year ended December 31, 2009
was $2,174,000, primarily attributable to the non-cash intangible asset and
goodwill impairment charges, amortization of intangible assets, depreciation and
stock based compensation and the decrease in accounts receivable that was
partially offset by the net loss for the year, an increase in cost and estimated
earnings in excess of billings and a decrease in accounts payable. Net cash
used in operating activities for the year ended December 31, 2008 was
$1,210,000, primarily attributable to the net loss for the year, the non cash
deferred income, increase in accounts receivable and inventory and decrease in
accrued expenses, taxes payable and customer advances that was partially offset
by the non-cash goodwill impairment charge, amortization of intangible assets,
depreciation and stock based compensation, the decrease in cost and estimated
earnings in excess of billings and amounts due from ICS sellers, and an increase
in accounts payable
Cash flows used in investing activities for the year ended December 31, 2009 was
$445,000, attributable to the purchase of fixed assets ($537,000 incurred by TDL
in connection with its new operating facility) that was partially offset by the
sale of marketable securities and fixed assets. Cash flows provided by
investing activities for the year ended December 31, 2008 was $2,257,000,
attributable to the sale of marketable securities that was partially offset by
the purchase of marketable securities and fixed assets, and costs associated
with our ICS acquisition.
Cash flows used in financing activities for the year ended December 31, 2009 was
$1,488,000, primarily attributable to the repayments of long term debt and
purchase of treasury stock that was partially offset from loan proceeds from our
line of credit and stock option exercises. Cash flows used in financing
activities for the year ended December 31, 2008 was $2,543,000, primarily
attributable to the repayments of long term debt and purchase of treasury stock
that was partially offset from loan proceeds from our line of credit.
In April 2005, we entered into a five-year $5,000,000 term loan agreement to
finance the acquisition of TDL and its manufacturing affiliate ("TDL Term
Loan"). In December 2007, we entered into a five-year $4,500,000 term loan
agreement to finance the acquisition of ICS ("ICS Term Loan"). Principal
payments under the two term loan facilities were approximately $113,000 per
month. In December 2007, we also amended an existing $3,000,000 line of credit
facility with a commercial lender secured by accounts receivable, inventory and
property and equipment. In connection with the ICS Term Loan entered into in
December 2007, the interest rates on both term loan facilities and the line of
credit facility were amended to equal a certain percentage plus the one month
LIBOR (0.23% at December 31, 2009) depending on a matrix related to a certain
financial covenant. The line of credit facility was to continue from year to
year unless sooner terminated for an event of default including non-compliance
with certain financial covenants.
In April 2005, we entered into a five year $2,000,000 promissory note with
the selling shareholders of TDL ("TDL Shareholder Note") at an interest rate of
prime plus 2.00% (3.25% at December 31, 2009). Principal payments of $100,000
were made on a quarterly basis along with accrued interest. In June 2007, we
refinanced the $1,050,000 balance due on the TDL Shareholder Note with our
primary commercial lender. Under the terms of the new term loan entered into
with our primary commercial lender ("TDL Refinanced Shareholder Loan"), monthly
payments of $35,000 were made over a thirty-month period (through January 2010)
along with accrued interest pursuant to the interest terms described below. The
TDL Refinanced Shareholder Loan was paid off in January 2010.
As a result of lower profitability related to customer shipping delays in
the first and second quarter of 2008, we were not in compliance with two of our
financial covenants at September 30, 2008. In November 2008, our primary lender
waived the covenant default of two of our financial ratios at September 30, 2008
and we renegotiated the financial covenant ratios for the quarterly reporting
periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009, the
covenants were to revert back to their original ratios with a modification to a
certain financial ratio covenant definition. The lender instituted an unused
line fee of .25% per annum, as a cost to us for the waiver and amendment to the
loan agreements. In connection therewith, the interest rate on the TDL Term
Loan and TDL Refinanced Shareholder Loan, increased to the sum of 2.50% plus the
one month LIBOR and the interest rate on the ICS Term Loan and line of credit
was increased to the sum of 2.25% plus the one month LIBOR. We were in
compliance with all financial covenants at March 31, 2009.
As a result of decreased revenue and profitability due to the customer contract
delay for the MK 119 that is recorded under the percentage of completion method,
we were not in compliance with two of our financial covenant ratios as of June
30, 2009. In August 2009, our primary lender agreed to waive these covenant
defaults. The lender, in consideration of such waiver, assessed a waiver fee of
$10,000 and increased the interest rate on all term debt, including the TDL Term
Loan, TDL Refinanced Shareholder Loan and ICS Term Loan, and the line of credit
equal to the sum of 3.50% plus the one month LIBOR. In addition, we agreed to
reduce our line of credit from $3,000,000 to $2,500,000 until October 31, 2009,
at which time it was further reduced to $2,000,000.
As a result of the customer contract delay for the MK 119 and capital
expenditures made for our new TDL operating facility, we were not in compliance
with two of our financial covenant ratios at September 30, 2009. In November
2009, our primary lender agreed to waive the covenant defaults as of September
30, 2009 and to amend the requirement for two of the financial ratios at
December 31, 2009 and for one of the financial ratios at March 31, 2010. Our
lender, in consideration of such waiver, assessed a waiver fee of $15,000 and
increased the interest rate on all term debt, including the TDL Term Loan, TDL
Refinanced Shareholder Loan and ICS Term Loan, and the Line of Credit to the sum
of 4.00% plus the one month LIBOR. In addition, we agreed to reduce our Line of
Credit from $2,000,000 to $1,500,000 at December 31, 2009. We were in compliance
with all financial covenants at December 31, 2009.
On March 10, 2010, we entered into a new credit agreement (the "Credit
Agreement") with a new commercial lender pursuant to which we (a) established a
new line of credit of up to $3,000,000, and (b) entered into a term loan in the
amount of approximately $4,655,000. These new credit facilities were used to pay
off all of our obligations to our former primary lender and to provide for our
general working capital needs. The new credit facilities are secured by a first
priority security interest in substantially all of our assets.
The term loan is payable in 60 consecutive monthly installments of principal and
interest and matures on March 1, 2015. The line of credit matures on June 1,
2011. Payment of interest on all loans is due at a rate per annum (at our
option) as follows: (1) for a prime rate loan under the line of credit at a rate
equal to the Prime Rate established by the Bank plus 0%, (2) for a prime rate
loan under the term loan at a rate equal to the Prime Rate established by the
Bank plus 0.5%, (3) for a LIBOR loan under the line of credit at a rate equal to
LIBOR plus 2% and (4) for a LIBOR loan under the term loan at a rate equal to
LIBOR plus 3%.
The Credit Agreement contains customary affirmative and negative covenants and
certain financial covenants. Available borrowings under the line of credit are
subject to a borrowing base of eligible accounts receivable, inventory and, for
the term loan facility only, cash and marketable securities. The Credit
Agreement also contains customary events of default such as non-payment,
bankruptcy and material adverse change.
Pursuant to the terms of our new lending arrangement entered into with a new
commercial lender in March 2010 and in accordance with ASC 470, we (i)
reclassified the TDL Term Loan, with a maturity date in 2010, to long term and
(ii) reclassified the short term portion of our term loans at December 31, 2009.
Our existing capital resources, including our bank credit facilities and our
cash flow from operations, is expected to be adequate to cover our cash
requirements for the foreseeable future.
In August 2008, our Board of Directors authorized a stock repurchase
program allowing us to purchase up to $3.0 million of our outstanding shares of
common stock in open market or privately negotiated transactions. During the
period from August 2008 through December 31, 2009, we repurchased approximately
368,000 shares at an average price of $2.48 per share. Total consideration for
the repurchased stock was approximately $913,000. From August 2008 through
March 29, 2010, we purchased approximately 369,000 shares of our common stock
for total cash consideration of $915,000 representing an average price of $2.48
per share.
Inflation has not materially impacted the operations of our Company.
Certain Material Trends
-------------------------
During the second quarter of 2008, our Orbit Instrument Division was
verbally advised by one of its larger customers to provide support for the
immediate development of certain modifications to a critical product for the
division. This "out of scope" support caused a delay in a significant amount of
shipments scheduled throughout 2008 which resulted in a decrease in revenue and
profitability for 2008. We worked closely with this customer and shipment of
the units resumed in the third quarter. However, a significant number of units
scheduled for shipment by December 31, 2008 were shipped in 2009. In addition,
that same customer approached us and requested a modification to the existing
Memorandum of Agreement so that additional units could be procured before the
end of the year. However, this modification was delayed and not received by us
until August 2009. Consequently, certain shipments planned for 2009 will be
delayed until 2010. In addition, the modification also contained an option for
our customer to procure additional units provided such option was exercised by
the 2009 year end. Our customer requested and we agreed to additional units
being added to the option quantity and such option was exercised by year end.
These units are also scheduled for delivery in 2010 for our Orbit Instrument
Division.
ICS experienced a delay in the award for its MK 119 Gun Console System which
affected its first and second quarter shipments in 2009. This award was finally
received by ICS at the end of September 2009. ICS had commenced the procurement
process of material and labor resources were allocated to the job beginning in
the second quarter. As a result, certain cabinets were delivered by year end
2009 but due to the delay in the receipt of the award, other cabinets will not
be delivered until the second quarter of 2010. Shipment delays related to
contracting, funding and engineering issues are commonplace in our industry and
could, in the future, have an adverse effect on our financial performance.
During the fourth quarter of 2009, in addition to the significant delay in the
receipt of the MK 119 order, we were notified by our customer that a replacement
was under consideration for a portion of future MK119 requirements for which ICS
was being considered but not guaranteed of future awards. Consequently, we
believe that cash flows for ICS in the immediate future, particularly with
respect to MK 119 orders, could potentially decrease. After completing the
impairment testing of goodwill and intangible assets pursuant to ASC 350 and ASC
360, we concluded an impairment charge of $1,622,000 and $426,000 should be
taken in connection with the recorded intangible assets and goodwill arising
from the acquisition of ICS in 2007. However, ICS, in addition to its bid on
two of the replacement programs, is currently being considered as a
subcontractor for one of the prime contractors currently bidding for the
Littoral Combat Ship which is a significant program being considered by the U.S.
Navy. In the event that MK 119 awards are even less than expected for 2010 and
the prospects for additional MK 119 awards or replacement opportunities
diminish, the fair market value of the goodwill for ICS of $795,000 could be
further impaired.
Our Power Group had a record year of bookings and revenue in 2008 and another
record year of revenue in 2009. The commercial division of our Power Group has
historically been vulnerable to a weak economy. Bookings in the commercial
division were weak during most of 2009 but bookings from the COTS division
remained fairly strong. However, despite current economic conditions and its
effect on capital spending, our Power Group's commercial division recorded its
strongest bookings of the year in the fourth quarter of 2009. However, due to
continued weakness in the economy, it is uncertain whether the commercial
division can sustain the improvement from the fourth quarter. The strength of
our COTS division will position our Power Group for a strong year of revenue and
profitability for 2010 but improvement in the commercial division will be needed
to continue its trend of record revenues.
In April 2005, our Company completed the acquisition of TDL and its operations
became part of our Electronics Group. In December 2007, we completed the
acquisition of ICS which also became part of our Electronics Group. Our
Electronics Group and the COTS Division of our Power Group are heavily dependent
on military spending. The events of September 11, 2001, have put a tremendous
emphasis on defense and homeland security spending and we have benefited from an
increasing defense budget. Although our Electronics Group and our COTS
Division of our Power Group are pursuing several opportunities for reorders, as
well as new contract awards, we have normally found it difficult to predict the
timing of such awards. In addition, we have an unprecedented amount of new
opportunities that are in the prototype or pre-production stage. These
opportunities generally move to a production stage at a later date but the
timing of such is also uncertain.
There is no seasonality to our business. Our revenues are generally
determined by the shipping schedules outlined in the purchase orders received
from its customers. We stratify all the opportunities we are pursuing by
various confidence levels. We generally realize a very high success rate with
those opportunities to which we apply a high confidence level. We currently
have a significant amount of potential contract awards to which we have applied
a high confidence level. However, because it is difficult to predict the timing
of awards for most of the opportunities we are pursuing, it is also difficult to
predict when we will commence shipping under these contracts. A delay in the
receipt of any contract from our customer ultimately causes a corresponding
delay in shipments under that contract. During 2007 through 2009, due to
shipping schedules resulting from contract delays, our second half of the year
was stronger than the first half. We again expect ICS's new orders for 2010 to
be received at a similar time as was received in 2009 so we once again expect
the second half of 2010 to be stronger than the first half.
Despite the increase in military spending, we still face a challenging
environment. The government is emphasizing the engineering of new and improved
weaponry and it continues to be our challenge to work with each of our prime
contractors so that we can participate on these new programs. In addition,
these new contracts require incurring up-front design, engineering, prototype
and pre-production costs. While we attempt to negotiate contract awards for
reimbursement of product development, there is no assurance that sufficient
monies will be set aside by our customers, including the United States
Government, for such effort. In addition, even if the United States Government
agrees to reimburse development costs, there is still a significant risk of cost
overrun that may not be reimbursable. Furthermore, once we have completed the
design and pre-production stage, there is no assurance that funding will be
provided for future production. In such event, even if we are reimbursed our
development costs it will not generate any significant profits.
We are heavily dependent upon military spending as a source of revenues and
income. However, even increased military spending does not necessarily
guarantee us increased revenues, particularly, when the allocation of budget
dollars may vary depending on what may be needed for specific military conflicts
Any future reductions in the level of military spending by the United States
Government due to budget constraints or for any other reason, could have a
negative impact on our future revenues and earnings. We believe that defense
budget dollars that are allocated to modernization and refurbishment of military
equipment will generally benefit us. In addition, due to major consolidations
in the defense industry, it has become more difficult to avoid dependence on
certain customers for revenue and income. Behlman's line of commercial products
gives us some diversity and the additions of TDL and ICS gives our Electronics
Segment a more diversified customer base.
Our business strategy had been to expand our operations through strategic,
accretive acquisitions. Through the past several years, we reviewed various
potential acquisitions and believe there are numerous opportunities presently
available, particularly to integrate into our current operating facilities. In
April 2005, we completed the acquisition of TDL and in December 2007, we
completed the acquisition of ICS. However, due to current economic
conditions and tightening of credit markets, there can be no assurance that we
will obtain the necessary financing to complete additional acquisitions and even
if we do, there can be no assurance that we will have sufficient income from
operations of such acquired companies to satisfy the interest payments, in which
case, we will be required to pay them out of our operations which may be
adversely affected.
During the second quarter of 2007, we expanded the activities of our investment
banker to include the pursuit of alternative strategies, including the potential
sale of the Company as a means of enhancing shareholder value. In June 2008, we
terminated such activities with the investment banker. In May 2009, we hired a
new investment banker and continue to pursue strategic alternatives to enhance
shareholder value. However, there is no assurance that a sale or any of the
other strategic alternatives will be accomplished.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable, as we are a smaller reporting company.
ITEM 8 . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this Item appears in Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A (T). CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our filings under the Exchange Act
is recorded, processed, summarized and reported within the periods specified in
the rules and forms of the SEC. Our management, including our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the design
of our disclosure controls and procedures, as defined in Rules 13a-15(e) or
15d-15(e) under the Exchange Act as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a - 15(f) of the
Exchange Act.
Our management conducted an evaluation of the effectiveness of its internal
control over financial reporting, as of December 31, 2009, based on the
framework and criteria established in Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
This evaluation included review of the documentation of controls, evaluation of
the design effectiveness of controls, testing of the operating effectiveness of
controls and a conclusion on this evaluation. Based on this evaluation,
management concluded that the Company's internal control over financial
reporting was effective as of December 31, 2009.
There have been no changes in our internal control over financial reporting
during the three months ended December 31, 2009, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management's
report in this annual report.
We believe that a controls system, no matter how well designed and
operated, can not provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
ITEM 9B. OTHER INFORMATION
There have not been any other material changes in our affairs which have
not been described in a report on Form 8-K during the fourth quarter ended
December 31, 2009.
PART III
---------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Incorporated by reference to our definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Exchange Act in connection with
our 2010 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to our definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Exchange Act in connection with
our 2010 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference to our definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Exchange Act in connection with
our 2010 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS, AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
Incorporated by reference to our definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Exchange Act in connection with
our 2010 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to our definitive proxy statement to be
filed pursuant to Regulation 14A promulgated under the Exchange Act in
connection with our 2010 Annual Meeting of Shareholders.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form
10-K for the fiscal year ended December 31, 2009.
1. Financial Statements
2. Schedules-
None.
3. Exhibits:
Exhibit No. Description of Exhibit
------------ ------------------------
2.1 Stock Purchase Agreement, dated December 13, 2004, by and among
Orbit International Corp., TDL Development Laboratory, TDL Manufacturing, Inc.
and the respective Shareholders of TDL Development Laboratory, Inc. and TDL
Manufacturing, Inc. Incorporated by reference to Exhibit 2.1 to Registrant's
Current Report on Form 8-K for December 13, 2004.
2.2 Stock Purchase Agreement, dated December 19, 2007, by and among Orbit
International Corp., Integrated Consulting Services, Inc. and the respective
shareholders of Integrated Consulting Services, Inc. Incorporated by reference
to Exhibit 2.1 to Registrant's Current Report on Form 8-K for December 19, 2007.
3.1 Certification of Incorporation, as amended. Incorporated by reference
to Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1991.
3.2 By-Laws, as amended. Incorporated by reference to Exhibit 3(b) to
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988.
4.1 Orbit International Corp. 2003 Stock Incentive Plan. Incorporated by
reference to Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002.
10.1 Employment Agreement, dated as of December 14, 2007, between Registrant
and Mitchell Binder. Incorporated by reference to Registrant's Current Report
on Form 8-K for December 11, 2007.
10.2 Amendment to Employment Agreement dated December 22, 2009 between
Registrant and Mitchell Binder. Incorporated by reference to Registrant's
Current Report on form 8-K for December 23, 2009.
10.3 Employment Agreement, dated as of December 14, 2007, between Registrant
and Bruce Reissman. Incorporated by reference to Registrant's Current Report on
Form 8-K for December 11, 2007.
10.4 Employment Agreement, dated as of December 14, 2007, between Registrant
and Dennis Sunshine. Incorporated by reference to Registrant's Current Report
on Form 8-K for December 11, 2007.
10.5 Form of Indemnification Agreement between the Company and each of its
Directors dated as of September 10, 2001. Incorporated by reference to Exhibit
10(d) to Registrant's Annual Report on Form 10-KSB for the year ended December
31, 2001.
10.6 Purchase and Sale Agreement between the Company and 80 Cabot Realty LLC
dated February 26, 2001. Incorporated by reference to Exhibit 4(b) to
Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2000.
10.7 Lease Agreement between the Company and 80 Cabot Realty LLC dated
February 26, 2001. Incorporated by reference to Exhibit 4(b) to Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000.
Capital One Bank. N.A. Incorporate by referral to 8-K.
10.8 Credit Agreement dated as of March 10, 2010 between Registrant and its
subsidiaries Behlman Electronics, Inc, Tulip Development Laboratory Inc and
Integrated Consulting Services, and Capital One, N.A. Incorporated by reference
to Exhibit 10.1 to Registrant's current report on form 8-K for March 16, 2010.
10.9 Term Loan and Security Agreement dated as of December 19, 2007, between
Orbit International Corp. and Merrill Lynch Business Financial Services Inc.
("MLBFS"). Incorporated by reference to Exhibit 10.6 to Registrant's Current
Report on Form 8-K for December 19, 2007.
10.10 Net lease dated as of April 4, 2005 by and between Rudy's
Thermo-Nuclear Devices, as Landlord, and TDL Manufacturing, Inc. and TDL
Development Laboratory, Inc. Incorporated by reference to Registrant's Current
Report on Form 8-K for April 4, 2005.
10.11 Term Loan and Security Agreement dated as of April 4, 2005 between the
Company and Merrill Lynch Financial Business Services Inc. Incorporated by
reference to Registrant's Current Report on Form 8-K for April 4, 2005.
10.12 Collateral Installment Note to Merrill Lynch Financial Business
Services Inc. dated as of April 4, 2005, from the Company. Incorporated by
reference to Registrant's Current Report on Form 8-K for April 4, 2005.
10.13 Employment Agreement, dated December 19, 2007, between Integrated
Consulting Services, Inc. and Kenneth J. Ice. Incorporated by reference to
Registrant's Current Report on Form 8-K for December 19, 2007.
10.14 Employment Agreement, dated December 19, 2007, between Integrated
Consulting Services, Inc. and Michael R. Rhudy. Incorporated by reference to
Registrant's Current Report on Form 8-K for December 19, 2007.
10.15 Employment Agreement, dated December 19, 2007, between Integrated
Consulting Services, Inc. and Julie A. McDearman. Incorporated by reference to
Registrant's Current Report on Form 8-K for December 19, 2007.
10.16 Custody, Pledge and Security Agreement, dated as of December 19, 2007,
by and among Orbit International Corp. ("Pledgor"), Kenneth J. Ice, Michael R.
Rhudy and Julie A. McDearman ("Pledgees"), and Phillips Nizer LLP ("Custodian").
Incorporated by reference to Registrant's Current Report on Form 8-K for
December 19, 2007.
10.17 Form of Contingent Promissory Note (three substantially similar notes
were issued) from Orbit International Corp. to Kenneth J. Ice. Incorporated by
reference to Registrant's Current Report on Form 8-K for December 19, 2007.
10.18 Form of Code of Ethics between the Company and its Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer. Incorporated by
reference to Registrant's Annual Report on Form 10K-SB for the fiscal year ended
December 31, 2003.
21.1* Subsidiaries of Registrant.
23.1* Consent of Amper, Politziner & Mattia, LLP.
23.2* Consent of McGladrey & Pullen, LLP.
31.1* Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a) and 18 U.S.C. 1350.
31.2* Certification of the Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a) and 18 U.S.C. 1350.
32.1* Certification of the Chief Executive Officer required by Rule
13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2* Certification of the Chief Financial Officer required by Rule
13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
_________
* Filed herewith.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Report of Independent Registered Public Accounting Firm - F-1
Amper, Politziner & Mattia, LLP
Report of Independent Registered Public Accounting Firm - F-2
McGladrey & Pullen, LLP
Consolidated Financial Statements:
Balance Sheets as of December 31, 2009 and 2008 F-3
Statements of Operations for the Years Ended December 31, 2009 and 2008 F-4
Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended
December 31, 2009 and 2008 F-5
Statements of Cash Flows for the Years Ended December 31, 2009 and 2008 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Orbit International Corp.
We have audited the accompanying consolidated balance sheet of Orbit
International Corp. and Subsidiaries as of December 31, 2009, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Orbit International
Corp. and Subsidiaries as of December 31, 2009, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/S/ AMPER, POLITZINER & MATTIA, LLP
March 31, 2010
New York, New York
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Orbit International Corp.
We have audited the accompanying consolidated balance sheet of Orbit
International Corp. and Subsidiaries as of December 31, 2008, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Orbit International
Corp. and Subsidiaries as of December 31, 2008 and the results of their
operations and their cash flows for the year then ended in conformity with U.S.
generally accepted accounting principles.
/S/ MCGLADREY & PULLEN, LLP
New York, New York
March 31, 2009
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 2008
------------ ------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,321,000 $ 2,080,000
Investments in marketable securities 1,019,000 1,127,000
Accounts receivable, less allowance for doubtful accounts of $145,000 3,857,000 6,333,000
Inventories 11,624,000 11,536,000
Costs and estimated earnings
in excess of billings on uncompleted contracts 1,079,000 -
Deferred tax assets 714,000 850,000
Other current assets 287,000 198,000
----------- -----------
TOTAL CURRENT ASSETS 20,901,000 22,124,000
Property and equipment, net 1,246,000 655,000
Intangible assets, net 227,000 2,346,000
Goodwill 2,483,000 2,909,000
Deferred tax assets 1,403,000 1,322,000
Other assets 661,000 644,000
---------- -----------
TOTAL ASSETS $26,921,000 $30,000,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 995,000 $ 1,777,000
Notes payable - bank 988,000 399,000
Accounts payable 1,084,000 1,499,000
Income taxes payable 57,000 69,000
Accrued expenses 1,102,000 1,122,000
Customer advances 32,000 37,000
Deferred income 85,000 85,000
----------- -----------
TOTAL CURRENT LIABILITIES 4,343,000 4,988,000
Deferred income 171,000 257,000
Long-term debt, net of current maturities 4,034,000 5,029,000
----------- -----------
TOTAL LIABILITIES 8,548,000 10,274,000
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value, 10,000,000 shares authorized,
4,931,000 and 4,772,000 shares issued at 2009 and 2008, respectively,
and 4,563,000 and 4,535,000 shares outstanding at 2009 and 2008,
respectively 493,000 477,000
Additional paid-in capital 21,464,000 21,032,000
Treasury stock, at cost (913,000) (529,000)
Accumulated other comprehensive income (loss), net of income tax 65,000 (125,000)
Accumulated deficit (2,736,000) (1,129,000)
----------- ------------
STOCKHOLDERS' EQUITY 18,373,000 19,726,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,921,000 $30,000,000
=========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009 2008
----------------------- ----------- -------------
Net sales $26,518,000 $27,364,000
Cost of sales 15,790,000 15,805,000
----------- ------------
Gross profit 10,728,000 11,559,000
---------- -----------
Selling, general and administrative expenses 10,248,000 10,381,000
Impairment of intangible assets 1,622,000 -
Goodwill impairment 426,000 6,889,000
Interest expense 208,000 342,000
Investment and other income, net (208,000) (154,000)
---------- -----------
Total expenses, net 12,296,000 17,458,000
---------- -----------
Loss before income tax provision (1,568,000) (5,899,000)
Income tax provision 39,000 108,000
---------- -----------
Net loss $(1,607,000) $(6,007,000)
============ ===========
Net loss per common share:
Basic $ (.37) $ (1.33)
============ ============
Diluted $ (.37) $ (1.33)
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2009 AND 2008
--------------------------------------
ACCUMULATED
COMMON STOCK OTHER
10,000,000 SHARES COMPREHENSIVE
AUTHORIZED ADDITIONAL RETAINED EARNINGS INCOME (LOSS),
SHARES PAID-IN (ACCUMULATED TREASURY STOCK NET OF
ISSUED AMOUNT CAPITAL DEFICIT) SHARES AMOUNT INCOME TAX TOTAL
------- ------- ------- ----------- ------ ----- ------------- ---------
Balance at January 1, 2008 4,724,000 $472,000 $20,766,000 $4,878,000 - - $(33,000) $26,083,000
Share-based compensation expense - - 250,000 - - - - 250,000
Issuance of restricted stock 40,000 4,000 (4,000) - - - - -
Exercise of options 8,000 1,000 9,000 - - - - 10,000
Tax benefit of stock option exercise - - 11,000 - - - - 11,000
Purchase of treasury stock - - - - 237,000 $(529,000) - (529,000)
Unrealized gain (loss) on marketable
securities, net of income tax - - - - - - (92,000) (92,000)
Net loss - - - (6,007,000) - - - (6,007,000)
----------
Comprehensive loss- 2008 (6,099,000)
--------- ------- ----------- ------------ -------- -------- --------- -----------
Balance at December 31, 2008 4,772,000 477,000 21,032,000 (1,129,000) 237,000 (529,000) (125,000) 19,726,000
Share-based compensation expense - - 310,000 - - - - 310,000
Issuance of restricted stock 84,000 8,000 (8,000) - - - - -
Exercise of options 75,000 8,000 76,000 - - - - 84,000
Tax benefit of stock option exercise - - 54,000 - - - - 54,000
Purchase of treasury stock - - - - 131,000 (384,000) - (384,000)
Unrealized gain (loss) on marketable
securities, net of income tax - - - - - - 190,000 190,000
Net loss - - - (1,607,000) - - - (1,607,000)
----------
Comprehensive loss-2009 (1,417,000)
--------- -------- ----------- ----------- ------- --------- -------- -----------
Balance at December 31, 2009 4,931,000 $493,000 $21,464,000 $(2,736,000) 368,000 $(913,000) $65,000 $18,373,000
========== ======== =========== =========== ======== ========== ======== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 2008
------------------------ --------- ----------
Cash flows from operating activities:
Net loss $ (1,607,000) $(6,007,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Impairment of intangible assets 1,622,000 -
Goodwill impairment 426,000 6,889,000
Share-based compensation expense 310,000 250,000
Amortization of intangible assets 497,000 623,000
Depreciation and amortization 242,000 203,000
Bond premium amortization 6,000 15,000
Loss on disposal of fixed assets - 23,000
Bad debts 10,000 -
Unrealized impairment loss on write down of marketable securities 39,000 130,000
(Gain) loss on sale of marketable securities (26,000) 11,000
Deferred income (86,000) (332,000)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,466,000 (1,772,000)
Increase in inventories (88,000) (1,083,000)
(Increase) decrease in costs and earnings in excess of billings (1,079,000) 136,000
(Increase) decrease in other current assets (89,000) 91,000
Increase in other assets (17,000) (10,000)
(Decrease) increase in accounts payable (415,000) 115,000
Decrease in customer advances (5,000) (126,000)
Decrease in taxes payable (12,000) (93,000)
Decrease in accrued expenses (20,000) (273,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,174,000 (1,210,000)
Cash flows from investing activities:
Purchase of marketable securities - (1,029,000)
Sale of marketable securities 388,000 3,598,000
Purchase of property and equipment (842,000) (190,000)
Sale of fixed asset 9,000 -
Cash paid for acquisition of ICS - (122,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (445,000) 2,257,000
Cash flows from financing activities:
Purchase of treasury stock (384,000) (529,000)
Repayments of long-term debt and note payable-bank (2,884,000) (3,943,000)
Proceeds from issuance of note payable-bank 1,696,000 1,919,000
Proceeds from exercise of stock options 84,000 10,000
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (1,488,000) (2,543,000)
(continued)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
(CONTINUED)
Net increase (decrease) in cash and cash equivalents 241,000 (1,496,000)
Cash and cash equivalents at beginning of year 2,080,000 3,576,000
------------- ------------
Cash and cash equivalents at end of year $ 2,321,000 $ 2,080,000
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
--------------------------------------------------
Cash paid during the year for interest $ 207,000 $ 349,000
============== ==========
Cash paid during the year for income taxes $ 61,000 $ 256,000
============== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
The consolidated financial statements include the accounts of Orbit
International Corp. and its wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions have been eliminated in
consolidation.
The Company currently operates in two reporting segments, the Electronics Group
and the Power Group. The Electronics Group is comprised of the Company's Orbit
Instrument Division ("Orbit"), its TDL subsidiary, and Integrated Consulting
Services, Inc. d/b/a Integrated Combat Systems ("ICS"). Orbit and TDL are
engaged in the design and manufacture of electronic components and subsystems.
ICS performs system integration for gun weapons systems and fire control
interface as well as logistics support and documentation. The Power Group is
comprised of the Company's Behlman subsidiary and is engaged in the design and
manufacture of commercial and custom power units. The Electronics Group and the
Power Group both conduct their operations in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates. On an on-going basis, we re-evaluate our judgments
and estimates including those related to inventory valuation, the valuation
allowance on our deferred tax asset, goodwill impairment, valuation of
share-based compensation, revenue and cost recognition on long-term contracts
accounted for under the percentage-of-completion method and other than temporary
impairment on marketable securities.
RECLASSIFICATION
For comparability, certain 2008 amounts have been reclassified, where
appropriate, to conform to the financial presentation in 2009.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains cash in bank deposit accounts, which, at times, exceed federally
insured limits. The Company has not experienced any losses on these accounts.
MARKETABLE SECURITIES
The Company's investments are classified as available-for-sale securities
and are stated at fair value, based on quoted market prices, with the unrealized
gains and losses, net of income tax, reported in other comprehensive income
(loss). Realized gains and losses are included in investment income. Prior to
adoption of an amendment to Accounting Standards Codification ("ASC") 320,
Investments - Debt and Equity Securities, any decline in value judged to be
other-than-temporary on available-for-sale securities was included in investment
income. After adoption of an amendment to ASC 320 at the beginning of the second
quarter of 2009, any decline in value judged to be other-than-temporary on
available-for-sale securities are included in earnings to the extent they relate
to a credit loss. A credit loss is the difference between the present value of
cash flows expected to be collected from the security and the amortized cost
basis. The amount of any impairment related to other factors will be recognized
in comprehensive income. The cost of securities is based on the
specific-identification method. Interest and dividends on such securities are
included in investment income.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are reported at their outstanding unpaid principal
balances reduced by an allowance for doubtful accounts. The Company estimates
doubtful accounts based on historical bad debts, factors related to specific
customers' ability to pay and current economic trends. The Company writes off
accounts receivable against the allowance when a balance is determined to be
uncollectible.
INVENTORIES
Inventories, which consist of raw materials, work-in-process, and finished
goods, are recorded at the lower of cost (specific, average and first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization
of the respective assets are computed using the straight-line method over their
estimated useful lives ranging from 3 to 10 years. Leasehold improvements are
amortized using the straight-line method over the remaining term of the lease or
the estimated useful life of the improvement, whichever is less.
LONG-LIVED ASSETS
When impairment indicators are present, the Company reviews the carrying
value of its long-lived assets in determining the ultimate recoverability of
their unamortized values using future undiscounted cash flow analyses. In the
event the future undiscounted cash flows of the long-lived asset is less than
the carrying value, the Company will record an impairment charge for the
difference between the carrying value and the fair value of the long-lived
asset.
GOODWILL
The Company records goodwill as the excess of purchase price over the fair
value of identifiable net assets acquired. In accordance with ASC 350, goodwill
is not amortized but instead tested for impairment on at least an annual basis.
The Company's annual goodwill impairment test is performed in the fourth quarter
each year. If the goodwill is deemed to be impaired, the difference between the
carrying amount reflected in the financial statements and the estimated fair
value is recognized as an expense in the period in which the impairment occurs.
In determining the recoverability of goodwill, assumptions are made regarding
estimated future cash flows and other factors to determine the fair value of the
assets.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances have been established to reduce deferred tax assets to the amount
expected to be realized.
REVENUE AND COST RECOGNITION
The Company recognizes a substantial portion of its revenue upon delivery
of product, however for certain products, revenue and costs under larger,
long-term contracts are reported on the percentage-of-completion method. For
projects where materials have been purchased but have not been placed into
production, the costs of such materials are excluded from costs incurred for the
purpose of measuring the extent of progress toward completion. The amount of
earnings recognized at the financial statement date is based on an
efforts-expended method, which measures the degree of completion on a contract
based on the amount of labor dollars incurred compared to the total labor
dollars expected to complete the contract. When an ultimate loss is indicated on
a contract, the entire estimated loss is recorded in the period the loss is
identified. Assets related to these contracts are included in costs and
estimated earnings in excess of billings on uncompleted contracts as they will
be liquidated in the normal course of contract completion, although this may
require more than one year. The components of cost and estimated earnings in
excess of billings on uncompleted contracts are the sum of the related
contract's direct material, direct labor, manufacturing overhead and estimated
earnings less accounts receivable billings.
All contracts are for products made to specific customer specifications
with no right of return. All units are shipped with a one-year warranty.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and unrealized
gains and losses on marketable securities, net of tax.
STOCK BASED COMPENSATION
The Company accounts for share-based compensation awards based on the fair
value of the awards on the date of grant and expensing such compensation over
the vesting periods of the awards.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed by dividing net earnings by the sum of the weighted
average number of shares of common stock and the effect of unexercised stock
options and the unearned portion of restricted stock awards.
FREIGHT AND DELIVERY COSTS
The Company's freight and delivery costs were $116,000 and $106,000 for the
years ended December 31, 2009 and 2008, respectively. These costs are included
in selling, general and administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed when incurred. The Company
expensed approximately $1,446,000 and $1,398,000 for research and development
during the years ended December 31, 2009 and 2008, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued FASB Accounting
Standards Codification effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The ASC is an aggregation of
previously issued authoritative U.S. generally accepted accounting principles
("GAAP") in one comprehensive set of guidance organized by subject area. In
accordance with the ASC, references to previously issued accounting standards
have been replaced by ASC references. Subsequent revisions to GAAP will be
incorporated into the ASC through Accounting Standards Updates (ASU). The ASC
did not have an effect on the Company's consolidated results of operations or
financial condition.
In April 2009, the FASB issued amended accounting principles related to
recognition and presentation of other-than-temporary impairments (ASC 320).
These amended principles changed existing guidance for determining whether an
impairment of debt securities is other than temporary. It also required other
than temporary impairments to be separated into the amount representing the
decrease in cash flows expected to be collected from a security (referred to as
credit losses) which is recognized in earnings and the amount related to other
factors which is recognized in other comprehensive income (loss). This noncredit
loss component of the impairment may only be classified in other comprehensive
income (loss) if the holder of the security concludes that it does not intend to
sell and it will not more likely than not be required to sell the security
before it recovers its value. If these conditions are not met, the noncredit
loss must be recognized in earnings. When adopting this amendment, an entity is
required to record a cumulative effect adjustment as of the beginning of the
period of adoption to reclassify the noncredit component of a previously
recognized other than temporary impairment from retained earnings to accumulated
other comprehensive income. This amendment was effective for interim and annual
periods ending after June 15, 2009. The adoption of this amendment did not
materially impact the Company's consolidated financial statements.
In April 2009, the FASB issued amended accounting principles related to
determining fair value when the volume and level of activity for the asset or
liability have significantly decreased and identifying transactions that are not
orderly. (ASC 820). This amendment provides additional guidance on estimating
fair value when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity for the asset or
liability. The amendment also provides additional guidance on circumstances that
may indicate that a transaction is not orderly. This amendment was effective for
interim and annual periods ending after June 15, 2009. The adoption of this
amendment did not materially impact the Company's consolidated financial
statements.
In April 2009, the FASB issued amended principles related to interim
disclosures about fair value of financial instruments (ASC 825). This amendment
relates to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet of companies at fair value. Prior to
issuance, fair values for these assets and liabilities were only required to be
disclosed once a year. This amendment now requires these disclosures on a
quarterly basis effective June 30 2009, providing qualitative and quantitative
information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value.
3. INVENTORIES:
Inventories consist of the following:
December 31, 2009 2008
------- -------
Raw materials $ 7,569,000 $ 7,108,000
Work-in-process 3,328,000 3,853,000
Finished goods 727,000 575,000
------------ -------------
$ 11,624,000 $ 11,536,000
============ =============
4. MARKETABLE SECURITIES:
The following is a summary of the Company's available-for-sale marketable
securities at December 31, 2009 and 2008:
Unrealized
Adjusted Fair Holding
December 31, 2009 Cost Value Gain (loss)
----------------- ------- ----- ------------
Corporate Bonds $ 915,000 $1,018,000 $ 103,000
U.S. Government
Agency Bonds 1,000 1,000 -
----------- ---------- ----------
Total $ 916,000 $1,019,000 $ 103,000
=========== ========== ==========
December 31, 2008
-----------------
Corporate Bonds $ 974,000 $ 779,000 (195,000)
U.S. Government
Agency Bonds 350,000 348,000 (2,000)
---------- ----------- ----------
Total $1,324,000 $ 1,127,000 $(197,000)
========== =========== ==========
Maturities of marketable securities classified as available-for-sale at December
31, 2009 are as follows:
Due after one year through five years $830,000
Due after five years through ten years 86,000
--------
$916,000
========
During 2009 and 2008, the Company charged $39,000 and $130,000, respectively,
against investment and other income-net to record the impairment in market value
of certain available-for-sale securities deemed to be other than temporary.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Effective January 1, 2008, the Company adopted ASC 820, Fair Value Measurements
and Disclosures, which applies to all financial assets and liabilities that are
being measured and reported on a fair value basis. ASC 820 requires new
disclosure that establishes a framework for measuring fair value in GAAP and
expands disclosure about fair value measurements. This statement enables the
reader of the financial statements to assess the inputs used to develop those
measurements by establishing a hierarchy for ranking the quality and reliability
of the information used to determine fair values. The statement requires that
assets and liabilities carried at fair value will be classified and disclosed in
one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or
liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
In determining the appropriate levels, the Company performs a detailed analysis
of the assets and liabilities that are subject to ASC 820. All of the Company's
cash and cash equivalents are considered Level 1 investments.
The tables below present the balances, as of December 31, 2009 and 2008, of
assets and liabilities measured at fair value on a recurring basis by level
within the hierarchy.
2009 Total Level 1 Level 2 Level 3
---- ----- -------- -------- --------
Corporate Bonds $1,018,000 $1,018,000 $ - $ -
U.S. Government
Agency Bonds 1,000 1,000 - -
----------- ----------- --------- ------
Total Assets $1,019,000 $1,019,000 $ - $ -
========== ========== ======== =======
2008 Total Level 1 Level 2 Level 3
---- ----- -------- -------- --------
Corporate Bonds $ 779,000 $ 779,000 $ - $ -
U.S. Government
Agency Bonds 348,000 348,000 - -
------- ------- ------ -------
Total Assets $1,127,000 $1,127,000 $ - $ -
========== ========== ====== =======
The Company's only asset or liability that is measured at fair value on a
recurring basis is marketable securities, based on quoted market prices in
active markets and therefore classified as level 1 within the fair value
hierarchy. The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and short-term debt reasonably approximate their fair value due
to their relatively short maturities. Long-term debt carrying value is
approximate to its fair value at the balance sheet date. The fair value
estimates presented herein were based on market or other information available
to management. The use of different assumptions and/or estimation methodologies
could have a significant effect on the estimated fair value amounts.
6. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS:
At December 31, 2009, costs and estimated earnings in excess of billings on
uncompleted contracts consist of:
Costs incurred on uncompleted contracts $2,211,000
Estimated earnings 980,000
----------
3,191,000
Less: billings to date (2,112,000)
-----------
Cost and estimated earnings in excess of
billings on uncompleted contracts $1,079,000
===========
7. INTANGIBLE ASSETS AND GOODWILL:
The Company applies ASC 350, Intangibles-Goodwill and Other. ASC 350 requires
that an intangible asset with a finite life be amortized over its useful life
and that goodwill and other intangible assets with indefinite lives not be
amortized but evaluated for impairment. The Company performs its annual
impairment test of goodwill at the end of its fiscal year and tests its other
intangible assets when impairment indicators are present.
At December 31, 2009, the Company's goodwill and intangible assets consist of
the following:
Estimated Gross Net
Useful Carrying Accumulated Accumulated Carrying
Life Value Amortization Impairment Value
------------ ------------ ------------- ---------- -----------
Goodwill $9,798,000 - $(7,315,000) $2,483,000
=========== ============== ============ ===========
Intangible Assets:
Contract relationships 15 Years 2,000,000 (267,000) (1,593,000) 140,000
Contract backlog 1-5 Years 1,750,000 (1,668,000) - 82,000
Non-compete
agreements 3 Years 415,000 (381,000) (29,000) 5,000
---------- ----------- ----------- ------------
$4,165,000 $(2,316,000) $(1,622,000) $ 227,000
========== ============ ============ ============
At December 31, 2008, the Company's goodwill and intangible assets consist of
the following:
Estimated Gross Net
Useful Carrying Accumulated Accumulated Carrying
Life Value Amortization Impairment Value
------------ ------------ ------------- ---------- ----------
Goodwill $9,798,000 - $(6,889,000) $2,909,000
=========== ============== ============ ============
Intangible Assets:
Contract relationships 15 Years 2,000,000 (133,000) - 1,867,000
Contract backlog 1-5 Years 1,750,000 (1,338,000) - 412,000
Non-compete
agreements 3 Years 415,000 (348,000) - 67,000
---------- ----------- ----------- ------------
$4,165,000 $(1,819,000) - $ 2,346,000
========== ============ ============ ============
Amortization expense for the next five years is expected to be as follows:
Year ending December 31,
2010 98,000
2011 11,000
2012 11,000
2013 11,000
2014 11,000
The Company recognized amortization expense of $497,000 and $623,000 for the
years ended December 31, 2009 and 2008, respectively.
During the fourth quarter of 2009, the Company's ICS subsidiary was notified by
one of its major customers that a replacement was under consideration for a
portion of significant future contract requirements for which ICS was being
considered but not guaranteed a future award. Consequently, the Company
determined that future cash flows for ICS could potentially decrease. As a
result, the Company determined the undiscounted future cash flows for certain of
the Company's intangible assets are less than their carrying value. Therefore,
the Company has recorded an impairment charge relating to its intangible assets
in the amount of $1,622,000 in the year ended December 31, 2009, representing
the excess carrying values over their fair values. Also during the fourth
quarter 2009, after completing the annual impairment testing of goodwill
pursuant to ASC 350, the Company concluded an impairment charge of $426,000
should be taken in connection with the goodwill arising from the acquisition of
ICS in 2007. In the prior year, after completing our impairment testing, the
Company concluded an impairment charge of $6,889,000 should be taken in
connection with the recorded goodwill arising from our TDL and ICS acquisitions
made in 2005 and 2007, respectively. The methods used to determine the fair
value of the Company's reporting units were an income approach (discounted cash
flow analysis based on financial and operating projections) and a market
approach (comparison of financial data for publicly traded companies engage in
similar lines of business).
8. PROPERTY AND EQUIPMENT:
Property and equipment at cost, consists of the following:
December 31, 2009 2008
------ ------
Leasehold improvements $ 851,000 $ 274,000
Computer equipment 572,000 487,000
Machinery and equipment 1,479,000 1,421,000
Autos 87,000 101,000
Furniture and fixtures 778,000 677,000
------------- -------------
3,767,000 2,960,000
Accumulated depreciation and amortization (2,521,000) (2,305,000)
------------- ------------
$ 1,246,000 $ 655,000
============= ============
The Company recognized, on a straight-line basis, depreciation and amortization
expense of $242,000 and $203,000 for the years ended December 31, 2009 and 2008,
respectively.
9. DEBT:
During March 2010, the Company entered into a new $3,000,000 line of credit
with a new commercial lender secured by all assets of the Company. In addition,
the Company refinanced its existing term loans with the same aforementioned
commercial lender with a new five-year $4,655,000 term loan facility that
matures April 2015. The interest rate on the line of credit is equal to; at the
Company's option, either 2% plus the one-month LIBOR or the prime rate of
interest plus 0%. The interest rate on the term loan is equal to; at the
Company's option, either 3% plus the one-month LIBOR or the prime rate of
interest plus 0.5%. The aggregate amount of principal outstanding under the
line of credit cannot exceed a borrowing base of eligible accounts receivable
and inventory, as defined. The line of credit will expire on June 1, 2011 unless
sooner terminated for an event of default including adherence to certain
financial covenants.
The Company previously had a credit agreement and three term loan agreements
with a different commercial lender. As a result of lower profitability related
to customer contract and shipping delays during 2008 and 2009, the Company was
not in compliance with certain of its financial covenants during certain
reporting periods during 2008 and 2009. In all instances, such defaults were
waived by the Company's lender in consideration for waiver fees. The Company was
in compliance with all of the financial covenants of its new lender at December
31, 2009.
In March 2010, the Company fully paid the outstanding principal on its term
loans and line of credit with its previous commercial lender. Outstanding
borrowings under the previous line of credit were $988,000 at December 31, 2009.
The Company's long-term debt obligations are as follows:
December 31, 2009 2008
-------------------------------------------------------------- ---------- ---------
Term loan agreement, collateralized by all business assets of
the Company, used to finance the acquisition of TDL ("TDL
Shareholder Note"). Payable in thirty (30) monthly payments
of approximately $35,000. The loan bears interest equal to
the one-month LIBOR rate (0.23% at December 31, 2009)
plus 4.00%. The loan was fully paid in January 2010. $ 35,000 $ 455,000
Term loan agreement, collateralized by all business assets of
the Company, used to finance the acquisition of TDL ("TDL
Term Loan"). Payable in fifty-nine (59) monthly principal
payments of approximately $60,000 and a sixtieth payment
of approximately $1,190,000 in 2010. The loan bears interest
equal to the one-month LIBOR rate (0.23% at December 31,
2009) plus 4.00%. The loan was fully paid in March 2010. 1,726,000 2,440,000
Term loan agreement, collateralized by all business assets of
the Company, used to finance the acquisition of ICS ("The
ICS Term Loan"). Payable in fifty-nine (59) monthly
payments of approximately $54,000 and a sixtieth (60th)
payment of approximately $1,339,000 in 2013. The loan
bears interest equal to the one-month LIBOR rate (0.23%
at December 31, 2009) plus 4.00%. The loan was fully paid in
March 2010. 3,268,000 3,911,000
---------- -----------
5,029,000 6,806,000
Less: current portion 995,000 1,777,000
---------- -----------
$4,034,000 $5,029,000
========== ==========
Pursuant to the terms of its new lending arrangement entered into with a
new commercial lender in March 2010 and in accordance with ASC 470, the Company
(i) reclassified the TDL Term Loan, with a maturity date in 2010, to long term
and (ii) reclassified the short term portion of its term loans at December 31,
2009.
Principal payments due on the Company's long-term debt are as follows:
Year ending December 31,
2010 $995,000
2011 931,000
2012 931,000
2013 931,000
2014 and thereafter 1,241,000
----------
$ 5,029,000
===========
10. STOCK-BASED COMPENSATION PLANS:
The Company has various stock-based compensation plans, which provide for
the granting of nonqualified and incentive stock options, as well as restricted
stock awards to officers, key employees and nonemployee directors. The plans
authorize the granting to officers and key employees, stock options and
restricted stock awards, to acquire up to 1,891,000 common shares. Each plan
grants options at the market value of the Company's stock on the date of such
grant and all options expire ten years after granted. The terms and vesting
schedules for share-based awards vary by type of grant and the employment status
of the grantee with vesting ranging from one to ten years. Generally the awards
vest based upon time-based conditions. Stock option exercises are funded through
the issuance of the Company's common stock. Stock compensation expense for the
years ended December 31, 2009 and 2008 was $310,000 and $250,000, respectively.
The following table summarizes activity in stock options:
December 31, 2009 2008
------------- ------- --------
Average
Weighted- Remaining Weighted-
Average Contractual Average
Exercise Term Exercise
Options Price (in years) Options Price
-------- ---------- ----------- -------- ----------
Outstanding at
beginning of year 591,000 $3.19 4 599,000 $3.15
Granted 85,000 2.00 6 9,000 7.51
Forfeited (125,000) 2.15 - (9,000) 5.94
Exercised (75,000) 1.13 - (8,000) 1.26
--------- ------- ------- --------- --------
Outstanding at end of
Year 476,000 $3.58 3 591,000 $3.19
======= ===== ===== ======= =====
Outstanding
exercisable at end
of year 405,000 $3.85 3 582,000 $3.13
======= ===== ===== ======= ======
Weighted-average fair
value of options granted
during the year $2.00 $3.06
===== =====
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2009:
Options Outstanding Options Exercisable
-------------------- ---------------------
Weighted-
average Weighted- Weighted-
Remaining average average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life/Years Price Exercisable Price
---------------- ------------ ----------- --------- ----------- -----------
$ .60 - $1.07 99,000 1 $1.06 99,000 $1.06
$1.26 - $1.62 11,000 - $1.26 11,000 $1.26
$1.92 - $2.04 111,000 4 $1.98 40,000 $1.96
$2.40 - $3.70 4,000 3 $3.61 4,000 $3.61
$4.51 - $9.07 251,000 4 $5.38 251,000 $5.38
---------------- ---------- --------- ---------- ---------- --------
$ .60 - $9.07 476,000 3 $3.58 405,000 $3.85
================ ========== ========= ========== ========== ========
At December 31, 2009, 125,000 shares of common stock were reserved for future
issuance of stock options, restricted stock and stock appreciation rights.
At December 31, 2009, the aggregate intrinsic value of options outstanding was
$514,000 and the aggregate intrinsic value of options exercisable was $383,000.
At December 31, 2008, the aggregate intrinsic value of options outstanding and
exercisable was $127,000. The intrinsic value of options exercised during the
years ended December 31, 2009 and 2008 was approximately $147,000 and $30,000,
respectively.
The Company estimated the fair value of its stock option awards on the date of
grant using the Black-Scholes valuation model. The assumptions used for stock
option grants issued during the following periods were as follows:
December 31, 2009 2008
------------- -------- ----------
Expected Volatility 61.86% 49.16% to 49.62%
Risk-free interest rate 1.88% 3.70% to 4.16%
Expected term of options (in years) 4.5 3.6
Dividend Yield - -
Expected volatility assumptions utilized for 2009 and 2008 were based on the
volatility of the Company's stock price for 4.5 and 3.6 years, respectively,
prior to grant date. The risk-free rate for 2009 and 2008 is derived from the 5
and 10 year U.S. treasury yield on grant date, respectively. Expected life for
2009 was estimated using the "simplified" method, as allowed under the
provisions of the Securities and Exchange Commission Staff Bulletin No. 107,
since there was no prior history of similar stock option grants. Expected life
for 2008 was based on prior history of similar option activity. Dividend yield
is based on prior history of cash dividends declared.
The following table summarizes the Company's nonvested stock option activity for
the year ended December 31, 2009:
Number of Weighted-Average
Shares Grant-Date Fair Value
------ -----------------------
Nonvested stock options
at January 1, 2009 9,000 $3.06
Granted 85,000 1.02
Vested (22,000) 1.74
Forfeited (1,000) 2.91
------ ----
Nonvested stock options
at December 31, 2009 71,000 $1.02
====== ======
At December 31, 2009, there was approximately $13,000 of unearned compensation
cost related to the above non-vested stock options. The cost is expected to be
recognized over approximately the next four years.
The following table summarizes the Company's nonvested stock option activity for
the year ended December 31, 2008:
Number of Weighted-Average
Shares Grant-Date Fair Value
------ -----------------------
Nonvested stock options
at January 1, 2008 9,000 $3.82
Granted 9,000 3.06
Vested (8,000) 3.81
Forfeited (1,000) 3.92
------- -----
Nonvested stock options
at December 31, 2008 9,000 $3.06
===== =====
The Company's stock based employee compensation plans allow for the issuance of
restricted stock awards that may not be sold or otherwise transferred until
certain restrictions have lapsed. The unearned stock-based compensation related
to restricted stock granted is being amortized to compensation expense over the
vesting period, which ranges from two to ten years. The share based expense for
these awards was determined based on the market price of the Company's stock at
the date of grant applied to the total number of shares that were anticipated to
vest. During the year ended December 31, 2009, approximately 84,000 shares of
restricted stock were awarded to senior management and independent directors.
During the year ended December 31, 2008, approximately 40,000 shares of
restricted stock were awarded to senior management. As of December 31, 2009, the
Company had unearned compensation of $930,000 associated with all of the
Company's restricted stock awards.
11. EMPLOYEE BENEFIT PLAN:
A profit sharing and incentive-savings plan provides benefits to certain
employees who meet specified minimum service and age requirements. The plan
provides for contributions by the Company equal to 1/2 of employee contributions
(but not more than 2% of eligible compensation) and the Company may make
additional contributions out of current or accumulated net earnings at the sole
discretion of the Company's board of directors.
The Company contributed approximately $229,000 and $235,000 to the plan during
the years ended December 31, 2009 and 2008, respectively.
12. INCOME TAXES:
For the year ended December 31, 2009, the Company utilized net operating
loss carry-forwards to offset income taxes except for $39,000 of state income
and federal minimum tax expense. For the comparable period in 2008, the Company
utilized net operating loss carry-forwards to offset income taxes except for
$108,000 of state income and federal minimum tax expense.
At December 31, 2009 and 2008, the Company has an alternative minimum tax
credit of approximately $573,000 with no limitation on the carryforward period.
The Company also has federal and state net operating loss carryforwards of
approximately $19,000,000 and $6,000,000, respectively, at December 31, 2009.
The net operating loss carry-forwards expire through 2020. Approximately,
$16,000,000 of federal net operating loss carry-forwards expire between
2010-2012.
The Company recognized a $595,000 deferred tax benefit for the year ended
December 31, 2008 due to the reversal of the Company's deferred tax liability
relating to its goodwill. The Company's goodwill impairment charge for the year
ended December 31, 2008 resulted in a deferred tax asset for the timing
difference of its goodwill. The Company also recorded a net deferred tax expense
of $595,000 due to the reversal of timing differences, utilization of net
operating losses and an increase to its valuation allowance on its deferred tax
asset. The increase in its valuation allowance was due to the Company's decrease
in confidence in attaining projected future profitability.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
December 31, 2009 2008
------- -------
Tax at U.S. statutory rates (34.0%) (34.0%)
State income and federal minimum taxes 2.0% 2.0%
Change in valuation allowance 33.0% 33.0%
Other items, net 1.0% 1.0%
-------- -------
2.0% 2.0%
======== ========
Deferred tax assets (liabilities) are comprised of the following:
December 31, 2009 2008
------------ ------ -------
Alternative minimum tax credit carry-forward $ 573,000 $ 573,000
Net operating loss and capital loss
carryfowards (including pre-acquisition
net operating losscarry-forwards) 6,655,000 6,972,000
Temporary differences in bases of assets and
liabilities:
Accounts receivable and inventory 435,000 203,000
Marketable securities 53,000 -
Accrued expenses 222,000 212,000
Stock-based compensation 76,000 49,000
Goodwill 1,591,000 1,677,000
Intangible assets 1,103,000 432,000
Deferred revenue 94,000 125,000
Property and equipment (197,000) (101,000)
----------- ----------
3,377,000 2,597,000
----------- ----------
Total deferred tax assets, net 10,605,000 10,142,000
Valuation allowance (8,488,000) (7,970,000)
----------- ------------
Net deferred tax assets $2,117,000 $2,172,000
=========== ============
Deferred income taxes are included in the accompanying balance sheet as follows:
2009 2008
---- ----
Current asset $ 714,000 $ 850,000
Long-term asset 1,403,000 1,322,000
----------- ---------
$2,117,000 $2,172,000
========== ==========
On January 1, 2007, the Company adopted amended accounting principles related to
the accounting for uncertainty in income taxes (ASC 740). This amendment
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is "more likely that not" that the position is sustainable
based on its technical merits. Additionally, this amendment provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company has evaluated its tax positions
and has concluded that the tax positions meet the "more likely-than-not"
recognition threshold. As such, there are no liabilities recorded for uncertain
tax positions at December 31, 2009 and 2008. The Company's tax returns for
December 31, 2003 and 2004 have been examined by the Internal Revenue Service
which resulted in no material adjustments. The Company's tax returns from
December 31, 2005 through December 31, 2009 remain open to examination. The
Company's policy is to recognize interest and penalties relating to uncertain
tax positions in income tax expense.
13. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
Sales to significant customers accounted for approximately 40% (25% and
15%) and 38% (27% and 11%) of the Company's consolidated net sales for the years
ended December 31, 2009 and 2008, respectively.
Significant customers of the Company's Electronics Group accounted for
approximately 54% (31% and 23%) and 63% (36%, 17%, and 10%) of the Electronics
Group's net sales for the years ended December 31, 2009 and 2008, respectively.
Significant customers of the Company's Power Group accounted for approximately
28% (14% and 14%) and 22% (12% and 10%) of the Power Group's net sales for the
years ended December 31, 2009 and 2008, respectively.
A substantial portion of the net sales is subject to audit by agencies of
the U.S. government. In the opinion of management, adjustments to such sales, if
any, will not have a material effect on the Company's consolidated financial
position or results of operations.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables from its
customers.
The Company performs credit evaluations on its customers and collateral is
generally not required. Credit losses are provided for in the consolidated
financial statements during the period in which an impairment has been
determined.
14. LEASING ARRANGEMENTS:
In April 2009, the Company's TDL subsidiary entered into a five year lease
for a new operating facility commencing November 1, 2009. Monthly rent payments
will be approximately $15,300 for the first two years of the lease and
approximately $16,600, $17,200 and $17,800 for years three, four and five of the
lease, respectively. The lease includes two five year renewable options. In
August 2009, TDL entered into a sublease with the landlord on a month-to-month
basis for $1,250 per month.
The Company entered into a sale-leaseback of its operating facility in
2001. The initial term of the operating lease expires in 2013 and may be
extended by the Company at its option through February 2025. The Company
recorded a deferred gain on the sale which is being recognized over the initial
term of the lease. Additional operating leases are for the ICS facility, a sales
office, vehicles and office equipment.
Future minimum lease payments as of December 31, 2009 under all operating
lease agreements that have initial or remaining noncancelable lease terms in
excess of one year are as follows:
Year ending December 31,
2010 903,000
2011 892,000
2012 883,000
2013 448,000
2014 214,000
----------
Total future minimum lease payments $3,340,000
==========
Rent expense for operating leases was approximately $740,000 and $711,000 for
the years ended December 31, 2009 and 2008, respectively.
15. COMMITMENTS:
The Company has employment agreements, all for a term of three years, with
its three executive officers and six other principal officers. At December 31,
2009, the total contractual obligations under these agreements over the next
three years is approximately $3,436,000. In addition, the three executive
officers will be entitled to bonuses based on certain performance criteria, as
defined, and the other six officers are entitled to bonuses based on a
percentage of earnings before taxes, as defined. Total bonus compensation
expense was approximately $324,000 and $315,000 for the years ended December 31,
2009 and 2008, respectively.
From time to time, the Company may become a party to litigation or other
legal proceedings that it considers to be a part of the ordinary course of
business. The Company is not currently involved in any legal proceedings that
could reasonably be expected to have a material adverse effect on its business,
prospects, financial condition or results of operations.
16. BUSINESS SEGMENTS:
The Company operates through two reporting segments. The Electronics Group
is comprised of the Orbit Instrument Division and TDL and ICS subsidiaries. The
Company's Power Group is comprised of its Behlman Electronics, Inc. subsidiary.
The Company's reportable segments are business units that offer different
products. The Company's reportable segments are each managed separately as they
manufacture and distribute distinct products with different production
processes.
The following is the Company's reporting segment information as of and for the
years ended December 31, 2009 and 2008:
Year ended December 31, 2009 2008
-------- --------
Net sales:
Electronics Group:
Domestic $13,595,000 $15,678,000
Foreign 3,116,000 1,851,000
------------ ------------
Total Electronics Group 16,711,000 17,529,000
Power Group:
Domestic 9,014,000 8,605,000
Foreign 1,170,000 1,516,000
------------ -----------
Total Power Group 10,184,000 10,121,000
Intersegment Sales (377,000) (286,000)
------------- ------------
Total net sales $26,518,000 $27,364,000
=========== ===========
Income (loss) from operations:
Electronics Group (1) $(1,569,000) $(6,059,000)
Power Group 1,509,000 1,654,000
Intersegment profit (82,000) -
General corporate expenses not allocated (1,426,000) (1,306,000)
Interest expense (208,000) (342,000)
Investment and other income, net 208,000 154,000
----------- ------------
Loss before income tax provision $(1,568,000) $(5,899,000)
============ ============
December 31, 2009 2008
----- -------
Assets:
Electronics Group $12,629,000 $12,888,000
Power Group 5,916,000 5,834,000
General corporate assets not allocated 8,828,000 11,278,000
Elimination of intersegment receivables (370,000) -
Elimination of intersegment gross profit in
ending inventory (82,000) -
----------- ------------
TOTAL ASSETS $26,921,000 $30,000,000
=========== ===========
Depreciation and amortization:
Electronics Group $ 710,000 $ 796,000
Power Group 29,000 30,000
Corporate 6,000 15,000
----------- ------------
TOTAL DEPRECIATION AND AMORTIZATION $ 745,000 $ 841,000
=========== =============
(1) Includes goodwill and intangible assets impairment charges of $2,048,000
and $6,889,000 in 2009 and 2008, respectively.
17. NET LOSS PER COMMON SHARE:
The following table sets forth the computation of basic and diluted net loss per
common share:
Year Ended December 31, 2009 2008
------- --------
Denominator:
Denominator for basic net loss per
share - weighted-average common shares 4,365,000 4,509,000
Effect of dilutive securities:
Unearned portion of restricted stock awards - -
Employee and director stock options - -
Dilutive potential common shares - -
----------- ------------
Denominator for diluted net loss
per share - weighted-average common
shares and assumed conversions 4,365,000 4,509,000
========= ===========
The numerator for basic and diluted net loss per share for the years ended
December 31, 2009 and 2008 is the net loss for each year.
During the years ended December 31, 2009 and 2008, the Company had net losses
and therefore did not include, respectively, 248,000 and 196,000 incremental
common shares and options in its calculation of diluted net loss per common
share an inclusion of such securities would be anti-dilutive.
18. RELATED PARTY TRANSACTION:
TDL leased a facility from a limited partnership, the ownership of which is
controlled by the former shareholders of TDL. The lease commenced April 2005 and
ended January 2010 and provided for monthly payments of $9,100 and increases of
2% each year for the first two renewal periods and 3% for the final two renewal
periods. For the years ended December 31, 2009 and 2008, the total amount paid
under this lease was approximately $120,000 and $116,000, respectively.
19. EQUITY:
In August 2008, the Company's Board of Directors authorized a stock repurchase
program allowing the Company to purchase up to $3.0 million of its outstanding
shares of common stock in open market or privately negotiated transactions in
compliance with applicable laws and regulations including the SEC's Rules 10b5-1
and 10b-18. The timing and amount of repurchases under the program will depend
on market conditions and publicly available information and, therefore,
repurchase activity may be suspended or discontinued at any time. During year
ended December 31, 2009, the Company repurchased approximately 131,000 shares of
its common stock at an average purchase price of $2.92 per share. Total cash
consideration for the repurchased stock was approximately $384,000. From August
2008 through March 29, 2010, the Company purchased approximately 369,000 shares
of its common stock for total cash consideration of $915,000 representing an
average purchase price of $2.48 per share.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
ORBIT INTERNATIONAL CORP.
Dated: March 31, 2010 By: /s/ Dennis Sunshine
---------------------
Dennis Sunshine, President
and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------- ----- ----
/s/ Dennis Sunshine President, Chief Executive March 31, 2010
------------------- Officer and Director
Dennis Sunshine (Principal Executive Officer)
/s/ Mitchell Binder Executive Vice President,and March 31, 2010
------------------- Chief Financial Officer,
Mitchell Binder and Director
(Principal Financial and
Accounting Officer)
/s/ Bruce Reissman Executive Vice President, and March 31, 2010
------------------- Chief Operating Officer
Bruce Reissman Director
/s/ Fredric Gruder Director March 31, 2010
-------------------
Fredric Gruder
/s/ Bernard Karcinell Director March 31, 2010
----------------------
Bernard Karcinell
/s/ Lee Feinberg Director March 31, 2010
-----------------
Lee Feinberg
/s/ Sohail Malad Director March 31, 2010
-----------------
Sohail Malad
