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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

 
R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2011

OR

 
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from            to

Commission File Number 0-22583

ORBIT/FR, Inc.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE
23-2874370
(State or Other Jurisdiction
(IRS Employer
of Incorporation or Organization)
Identification No.)
   
506 Prudential Road, Horsham, PA
19044
(Address of Principal Executive Offices)
(Zip Code)

(215) 674-5100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

Indicate by check mark in the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes £ No R

Indicate by check mark in the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the act. Yes £ No R

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K £


Indicate by check mark whether the Registrant 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 S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £
Accelerated filer £
Non-accelerated filer £
Smaller reporting company R
    (Do not check if a smaller reporting company)  

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Act) Yes £ No R

As of June 30, 2011, the last business day of the Registrant’s most recently completed second fiscal quarter; the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $5,061,371 (based on the closing price of the Common Stock on June 30, 2011 of $2.20 per share). The information provided shall in no way be construed as an admission that any officer, director, or 10% shareholder in the Company may or may not be deemed an affiliate of the Company or that he/it is the beneficial owner of the shares reported as being held by him/it, and any such inference is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. As of March 30, 2012, 6,001,773 shares of Common Stock were outstanding.



 
 

 
 
ORBIT/FR, Inc.


 
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Forward-Looking Statements

This Annual Report on Form 10-K, and documents incorporated herein, contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including, but not limited to those set forth in Item 1A “Risk Factors” below and elsewhere in this Annual Report on Form 10-K. The following discussion should be read in conjunction with Item 1A “Risk Factors” below and the Consolidated Financial Statements and notes to the Consolidated Financial Statements beginning on page F-1. As used in this Annual Report on Form 10-K, unless the context otherwise requires, “we,” “us,” “our,” “Company,” or “ORBIT/FR” refers to ORBIT/FR, Inc. and its subsidiaries.

ITEM 1. BUSINESS

General

ORBIT/FR, Inc. develops markets and supports sophisticated automated microwave test and measurement systems for the aerospace/defense, wireless communications, satellite and automotive industries and manufactures anechoic foam, a microwave absorbing material that is an external component of microwave test and measurement systems. Military antennas, cellular phones, satellites, radars, radio transmitters, and global positioning system receivers all depend upon the reliable and efficient transmission and reception of microwave signals in order to communicate. By utilizing the Company’s systems to test and measure the critical performance characteristics of antennas, microwave signals, wireless manufacturers and service providers within these industries can improve quality and time-to-market, lower the risk of failure and underperformance and reduce costs.

Since its founding, the Company has expanded from distributing individual microwave test and measurement components to providing a wide range of fully integrated microwave test and measurement solutions. Components of an ORBIT/FR automated microwave test and measurement system include proprietary software and hardware products, which can be combined into standard or customized configurations to meet a customer’s specific needs.

The Company markets and sells its systems to customers in the United States and throughout the world. Within its targeted industries, the Company’s customers include aerospace/defense systems integrators and product manufacturers that incorporate microwave technology, such as Lockheed Martin, Raytheon, Northrop Grumman, BAE, L3 Communications, Alenia, Astrium, Lufthansa and Boeing; manufacturers of wireless systems and products, such as Motorola, Nokia, Ericsson, Samsung, Sony and Qualcomm; telecommunications service providers that rely on microwave technology, such as AT&T, NTT and British Telecom; and automobile and automotive subassembly manufacturers such as Daimler, Ford, BMW and Hyundai. The Company’s customers also include the United States government and several foreign governments.

The Company’s primary objective is to strengthen its position in automated microwave test and measurement systems while developing products and systems for a broader range of microwave applications. The principal elements of the Company’s strategy to reach its objectives are: (i) offering comprehensive high quality solutions to customers; (ii) maintaining its technological leadership; (iii) focusing on standard systems and proprietary off-the-shelf products: (iv) pursuing growth in international markets; and (v) leveraging its technological expertise to expand into complementary markets.

The Company’s principal offices are located at 506 Prudential Road, Horsham, Pennsylvania 19044. Its telephone number is (215) 674-5100, its e-mail address is mail@orbitfr.com and its Internet website is www.orbitfr.com.

 
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History

The Company was incorporated in Delaware in December 1996. The Company is the holding company for Orbit Advanced Technologies, Inc., a Delaware corporation (“Technologies”), and its wholly owned subsidiaries, Flam & Russell, Inc., a Delaware corporation (“Flam & Russell”), Orbit FR Engineering, Ltd., an Israeli corporation (“Engineering”), Orbit FR Europe, GmbH, a German corporation (“GmbH”), and Advanced ElectroMagnetics, Inc. (“AEMI”), a California corporation. The Company’s former majority shareholder was Orbit-Alchut Technologies, Ltd., a publicly traded company in Israel which was founded in 1950 (“Alchut”). On May 13, 2008, Alchut sold all of its 3.7 million shares of common stock of the Company to Satimo, SA (“Satimo”) a publicly traded company on the ALTERNEXT stock exchange. On June 30, 2009, Microwave Vision Group, SA, (“Microwave Vision”), acquired the 3.7 million common shares of the Company through a reorganization involving its wholly owned subsidiary, Satimo.

Technologies was incorporated in 1985 as a wholly-owned subsidiary of Alchut to provide sales and customer support for Alchut’s products in the United States, including positioning subsystems. In 1991, Technologies began to focus on the development and design of its own proprietary microwave test and measurement products and systems. In 1994, Technologies recognized the potential for providing customers with fully integrated microwave test and measurement solutions and began incorporating its software technology with hardware from third-party manufacturers.

Engineering was incorporated in Israel in December 1996 as a wholly-owned subsidiary of Alchut at which time Alchut transferred all of the assets relating to its microwave test and measurement business to Engineering. Engineering is principally responsible for overseeing the development, design and production of ORBIT/FR’s electro-mechanical products. Along with providing electro-mechanical products internally, Engineering is responsible for sales, marketing and customer support to the Asian market.

In October 1997, Orbit FR Europe, GmbH was incorporated in Germany. GmbH develops compact range measurement systems and components, and is responsible for sales, marketing and customer support to the European market.

On June 28, 1996, Technologies purchased all of the issued and outstanding shares of Flam & Russell for approximately $1,043,000. The acquisition of Flam & Russell augmented the Company’s product mix, staff of microwave and software engineers and customer base. Flam & Russell has been active in the microwave test and measurement field since 1981.

On June 17, 1997, contemporaneously with the completion of its initial public offering, the Company purchased all of the issued and outstanding shares of AEMI for approximately $1.2 million. One-half of the purchase price was payable in cash and the other half was payable by issuance of shares of the Company’s Common Stock at the initial offering price of $8.25 per share. AEMI manufactures anechoic foam, a microwave absorbing material that is an integral component of microwave test and measurement systems.

  On May 13, 2008, Alchut sold all of its 3.7 million shares of common stock of the Company to Satimo, SA (“Satimo”) a publicly traded company on the ALTERNEXT stock exchange. On June 30, 2009, Microwave Vision Group, SA, (“Microwave Vision”), acquired the 3.7 million common shares of the Company through a reorganization involving its wholly owned subsidiary, Satimo.

 
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Industry Overview

The need for microwave and antenna test and measurement systems and products expanded rapidly during the 1960’s and 1970’s in conjunction with the growth and increased sophistication of the aerospace/defense industry in the United States and Western Europe. In the last 30 years, this need for test and measurement products and systems has expanded beyond aerospace/defense applications to all aspects of modern telecommunications, including personal wireless communications devices, satellite-based communications systems and “smart” automobiles. This expansion has occurred in conjunction with a growing desire among companies to focus on their core competencies and outsource many non-core functions such as the development and manufacture of microwave test and measurement systems.

Within the wireless communications, satellite, automotive and aerospace/defense industries, test and measurement products and systems are used during all stages of a product’s life cycle, including product development, pre-production qualification, production testing and product maintenance. Given the broad scope of testing procedures, it is not uncommon for a manufacturer or service provider to own and operate more than one microwave test and measurement system.

Aerospace/Defense. The need within the aerospace/defense community for accurate and secure communications and tracking systems led to the emergence of microwave test and measurement companies in the 1960’s. Recent growth in Department of Homeland Security and Department of Defense budgets have provided additional opportunities for the Company.

The industry’s tracking requirements, such as air traffic control, precision guided weapons, and data links and stealth aircraft, led to the development of Radar Cross Section (“RCS”) and the test and measurement of radomes. RCS involves the transmission of microwave signals towards a passive target, such as an aircraft or missile, and then the creation of an “image” of the target by measuring the energy reflected back towards the transmit source. Radome testing evaluates the impact of a radome (the dome-shaped casing that is placed on the leading edge of an aircraft or missile to protect the radar and direction-finding equipment) on the microwave signals that pass through it.

Wireless Communications. The wireless communications industry has grown in recent years as a result of the development of cost-effective digital technologies and the gradual global deregulation of the telecommunications industry. Wireless communications products include cellular/PCS handsets and base stations, pagers, wireless PDAs, and Bluetooth, Wi-Fi and Wi-Max products, and RFIDs (RF tags). The Company expects continued growth within the wireless communications industry in the future due to an increase in available spectrum, new generations of cellular systems, the adoption of efficient new digital technologies and the development of “smart” antennas.

Growing worldwide demand for wireless communications products and services has generated a need among wireless manufacturers and service providers for systems and products that address their specific microwave test and measurement needs. These companies operate in highly-competitive, rapidly changing markets in which the performance and reliability of their systems and products are essential to achieve and maintain competitive advantage. The accurate transmission and reception of microwave signals are fundamental to the performance of wireless systems and products. To ensure the successful transfer of voice or data from one point to another and to minimize poor reception, cross talk and dropped calls, manufacturers and service providers conduct extensive testing of both cellular handsets and wireless base stations for signal quality, direction, strength and interference.

Satellite. Satellite-related markets have grown over the past several years, driven by the emergence of advanced communication technologies offering cost-effective global voice, video and data transmission, GPS, internet access and tracking capabilities. Satellites provide several advantages over terrestrial communications networks, including rapid installation and deployment, no incremental cost as distances increase and higher rates of data transmission.

To ensure that satellite-based communications systems are effective and reliable, it is essential that both satellites and “earth stations” transmit and receive microwave signals accurately. The accuracy requirements for these satellite systems are critical, and failure to detect a design error could result in a satellite’s “footprint” not covering its intended geographic area. Satellite manufacturers cannot afford to make this kind of error since the cost to manufacture, launch and insure a satellite can exceed approximately $200 million. Accordingly, sophisticated microwave test and measurement systems are critical to satellite and earth station manufacturers, as well as their subcontractors and sub-assembly manufacturers, to ensure that their products work properly.

Automotive. The world’s major manufacturers of automobiles and automotive sub-assemblies, driven by competitive pressures, are designing new generations of “smart” cars and trucks. These vehicles incorporate the latest communications and safety devices including cellular, GPS-based, navigation and anti-theft systems, satellite radios (e.g. XM, Sirius), data transfer, digital TV and collision-avoidance systems. Each of these features requires a specialized, highly-accurate microwave transmission and reception system. To ensure the performance of these various systems and to assess how they are impacted by the electromagnetic properties of the car itself, automotive manufacturers must test the car and these devices as a unit using a microwave test and measurement system designed for automotive applications.

 
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The ORBIT/FR Solution

ORBIT/FR provides its customers with flexible and reliable solutions for their complex microwave test and measurement needs. The Company focuses its efforts and resources on developing state-of-the-art microwave test and measurement systems and products that incorporate specialized technologies and expertise. The Company’s customers have a need for microwave test and measurement systems and products but often do not have the in-house capabilities to develop, or the desire to develop, such systems and products themselves. ORBIT/FR’s systems and products provide customers with cost- effective and user-friendly solutions to their microwave test and measurement needs, thus allowing them to remain focused on their core competencies. The Company’s systems and products incorporate technological expertise developed and acquired by the Company over many years.

The Company offers a wide range of standard and custom microwave test and measurement solutions for specialized aerospace/defense-related testing, cellular/PCS handset testing, cellular base station testing, satellite testing and automotive testing. The Company’s products include test and measurement software, microwave receivers, positioner subsystems and controllers, as well as other microwave products, and a full line of RF absorbing materials, all of which are typically incorporated into the Company’s systems. The Company’s proprietary software supports the Company’s own test and measurement products as well as those manufactured by third parties. The Company’s engineers and other technical staff use their broad expertise to assess and understand their customers’ specific microwave test and measurement needs, process orders quickly, keep delivery time to a minimum, provide comprehensive customer support and release new software on a regular basis.

The ORBIT/FR Strategy

The Company’s objective is to strengthen its leadership position in automated microwave test and measurement systems while developing products and systems for a broader range of microwave applications. The principal elements of the Company’s strategy to reach its objective are:

Offering Comprehensive Turnkey Solutions to Customers . Within the microwave test and measurement market, new and existing customers increasingly desire to purchase comprehensive, turnkey test and measurement systems from a single provider. The Company addresses this desire by providing engineering and project management services, by offering an increasingly broad product line and by maintaining close relationships with outside component suppliers. Additionally, the Company may periodically acquire companies with complementary products and services that can be integrated with the Company’s existing or proposed products and systems, as it did with its acquisitions of Flam & Russell and AEMI. By acquiring suppliers of key components of microwave test and measurement systems that the Company does not already provide, the Company believes, but cannot assure, that it will be able to increase gross margins.

Maintaining Technological Leadership. The Company believes that it has sophisticated and diversified technological capabilities and intends to strengthen its technologies by continuously designing and developing new software releases and hardware upgrades which offer greater performance and higher precision.

Focusing on Standard Products and Proprietary Off-the Shelf Products. Given the diversified needs of the Company’s customers, no two microwave test and measurement systems are identical. However, the Company seeks to keep the costs of customization to a minimum by designing and delivering specific types of systems that maximize the use of the Company’s proprietary off-the-shelf products. This approach enables the Company to optimize its margins while offering its customers tailor-made solutions built around proven high-quality and reliable products.

Continued focus on Expanding U.S. Aerospace/Defense Market. As a result of its reputation and diverse product line, the Company maintains relationships with the U.S. government and several of the leading defense contractors. With expected increases in Department of Homeland Security and Department of Defense budgets, the Company expects to expand this relationship.

Pursuing Growth in International Markets. Approximately 65% and 53% of the Company’s revenues during 2011 and 2010, respectively, were derived from international customers (i.e. customers outside of North America). The Company believes that the international microwave test and measurement marketplace will  grow over the next several years, due in large part to worldwide economic development, governmental policies aimed at improving the communications infrastructure in developing countries and the increasing globalization of commerce. The Company has devoted and intends to continue to devote significant efforts to increasing its share of the international market for microwave test and measurement systems by strengthening and expanding its sales network through the establishment of foreign sales and customer service centers and the appointment of additional international sales representatives. In addition, the Company believes it has a competitive advantage due to the duty-free status of its products manufactured in Israel and sold into the European Union.

 
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Leveraging Technological Expertise to Expand into Complimentary Markets. The Company intends to leverage its technological expertise in microwave test and measurement systems to expand into complementary markets that the Company believes offer high growth potential and where the Company’s technology provides competitive advantages.

Microwave Products. The Company believes that opportunities exist to apply the Company’s core technologies to the design, manufacture and marketing of products that incorporate microwave technology. The Company intends to continue marketing its radial power combiners, amplifiers, antennas and mixers, and plans to develop and sell additional microwave-based products in the future. The Company believes its large customer base will give it a competitive advantage in marketing these products.

Systems and Products

Since its founding, the Company has expanded from distributing individual microwave test and measurement components to providing turnkey solutions, which can include chamber design, RF absorbing materials, antenna measurement and/or RCS subsystems, RF test equipment and software suites, and a wide range of microwave test and measurement solutions. Components of an ORBIT/FR automated microwave test and measurement system include proprietary software and hardware products which can be combined into standard or customized configurations to meet customers’ specific needs.

The Company believes that one of its principal strengths is its experienced design team that solves complex technical and practical problems.

Microwave Test and Measurement Systems. The Company designs, manufactures and markets automated microwave test and measurement systems. In addition to providing most of these systems’ component parts, the Company also integrates the systems and trains its customers in use of the systems. Although most customers purchase fully integrated turnkey microwave test and measurement systems, the Company also sells its hardware and software products individually as replacement parts or components of custom-designed systems. The Company offers seven types of microwave test and measurement systems. The first, antenna measurement systems, are generic systems that can be adapted for many uses, and the other types are designed and sold in response to well-defined microwave test and measurement needs within specific industries. Prices for a typical ORBIT/FR system range from $50,000 to $1,000,000, but large systems have been sold for over $3 million.

Antenna Measurement Systems. All products and systems that receive or transmit microwave signals rely on antennas. Accordingly, items such as microwave radios, GPS receivers, cellular handsets and base-stations, field service/delivery equipment, satellite earth stations and radios, precision guided missiles, radar and commercial and military aircraft need to have their antennas tested to ensure satisfactory performance characteristics. The Company’s antenna measurement systems offer both manufacturers and service providers user-friendly and cost-effective solutions for their antenna measurement needs. The systems test for signal quality, direction, strength and interference and can be adapted to perform testing in each of the stages of a product’s life: development; qualification; production; and maintenance. Although antenna measurement systems differ significantly from one application to another, all of the Company’s systems incorporate a personal computer running specialized proprietary software, a microwave receiver, a positioning subsystem and at least one additional antenna or probe. The systems can be designed for use in a wide variety of different test environments, ranging from a small anechoic chamber to an outdoor range covering several acres. The Company offers three types of antenna measurement methods:

Far-field :
Traditional method generally used outdoors
Near-field:
Cost-effective indoor method using mathematical conversion tools
Compact Range :
High-end indoor method using a microwave reflector

The Company also has developed advanced systems that combine these measurement methods, such as far-field and near-field, in a single chamber.

 
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Cellular/PCS Base Station Systems. The Company develops and sells test and measurement systems used to assess the microwave performance characteristics of cellular/PCS base stations and “smart” antennas. These systems enable cellular/PCS base station antenna manufacturers to design and build efficient and reliable products, and allow wireless communications service providers to monitor more efficiently the performance of their base stations. The existing system design is based on the Company’s cylindrical near-field technology and is designed for indoor use.

Satellite Systems. The Company develops and sells microwave test and measurement systems for satellite communication and broadcast systems which test the satellite performance of the satellite’s antennas. These systems also test the transmit and receive characteristics of the active array antennas used on most modern satellites and can have the ability to identify and diagnose malfunctions within these complex antennas. The Company’s satellite test systems utilize either near-field or compact range technology. Both technologies are equally effective from a test and measurement viewpoint, but each offers certain benefits. A near-field system offers diagnostic capabilities and is generally less expensive than a comparably equipped compact range system, but a compact range system is faster and easier to use.

Automotive Systems. ORBIT/FR believes it is a leader in the design and delivery of high-performance test and measurement systems for automobile manufacturers and manufacturers of automotive sub-assemblies. The Company’s systems incorporate both near-field and far-field technologies and are thus capable of microwave sampling over a wide range of frequencies. A typical system includes a large mechanical arm that sweeps over a large turntable. The car being tested rests on the turntable, and both the turntable and the mechanical arm are set in motion based upon instructions received from the Company’s measurement software. The systems’ broad capabilities are essential given a growing trend by automobile manufacturers to integrate advanced microwave technologies such as cellular/PCS, GPS-based navigation system, satellite radios, digital TV and collision-avoidance systems into their advanced next generation cars.

RCS Systems. The Company’s Radar Cross Section measurement systems transmit microwave signals towards a passive target and then measure the energy reflected back towards the transmit source. In an RCS system, the passive target is typically a model or full scale aircraft or missile that is mounted on a special “low-RCS” testing pylon capable of rotating the target. Data collected at various rotation angles and frequencies can be processed to form an electromagnetic “image” of the target. This type of information enables the design engineer to assess more accurately the detailed radar signature of the target. The Company believes that it is a market leader in this field.

Radome Systems. A radome is a dome-shaped casing that is placed on the leading edge of a commercial aircraft, military aircraft or missile to protect the radar and direction-finding equipment. A radome is typically manufactured using fiberglass or other materials that are designed to be “transparent” to microwave signals. Testing is performed periodically to ensure that microwave signals are not degraded or deflected as they pass through the radome. The Company’s systems are designed to measure radome performance by analyzing the path of microwave signals as they pass through the radome and then comparing it to the propagation path when the radome is not present. Radome systems use far-field measurement methods but rely on high positioning accuracy normally required by near-field systems.

Custom Systems. From time to time, the Company designs and manufactures custom microwave test and measurement systems for a wide variety of uses and applications worldwide. The Company’s broad microwave and antenna expertise has enabled it to obtain these contracts, and the Company intends to bid for similar jobs in the future if the expertise gained in designing such systems is deemed to be of strategic value to the Company.

Multi-probe Measurement Systems. Through Microwave Vision, the Company has access to a new multi-probe measurement technology. This technology allows for a substantial increase in measurement speed. We believe that the combination of this technology with the Company’s systems provides the Company with a competitive advantage.

Microwave Test and Measurement Software Products. Through its 959Spectrum and MiDAS software packages, ORBIT/FR offers automatic measurement software for microwave test and measurement systems. The Company’s software products are Windows-based programs that provide the customer with a consistent user-friendly interface with the test and measurement system. The software products have a robust and modular structure that enables the Company to easily add features for current and future customers. The software uses far-field and/or near-field algorithms to generate accurate results, and the computational methodologies used have gained acceptance throughout the microwave test and measurement community. The software supports the Company’s own measurement equipment as well as equipment manufactured by third parties. The Company’s software products are designed to be “off-the-shelf,” but are versatile and can be customized by the Company’s or the customer’s technical personnel to suit specific needs.

 
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Although software can vary between systems, it always consists of three primary modules: data acquisition, data analysis and report writing. The software’s data acquisition module records actual measurements as it controls the microwave measurement equipment, the positioning subsystem, and often the source antenna and/or the antenna being measured. Variables such as frequency, power level, amplitude, phase, rotary and/or linear motion, polarization, transmit/receive switching, electrical beam pointing and polarization switching are all controlled by the Company’s measurement software. The multidimensional results obtained are stored in a computer file for subsequent analysis. The software’s data analysis module processes the acquired data using sophisticated microwave and signal processing algorithms developed by the Company and the National Institute of Standards and Technology. The data analysis module transforms the acquired data into easily-understood numerical information and graphic representations, thus providing the customer with the data required to satisfy its internal requirements and those of its own customers. The software’s report writing module can be customized to meet each customer’s needs.

Positioner Subsystems. The positioner subsystem is the collection of equipment that holds the device under test and causes it to be moved according to the needs of the test. A typical positioner subsystem may include the following components:

Positioners. A positioner is the item upon which the device under test is placed while it is being tested. The Company’s positioners are rugged, yet highly precise, devices that adjust themselves in accordance with the positioning instructions received from the measurement software. Special circuitry and mechanical design features built into the positioner enable the data acquired from the antenna under test to travel efficiently through the positioner to the computer to be analyzed. The Company’s simple positioners rotate around a single axis, while the Company’s more elaborate positioners incorporate up to three axes. An automated microwave test and measurement system requires one or more positioners. The Company offers over 200 different positioner models and believes that its positioners are among the most accurate.

Positioner Controllers and Power Control Units. The Company manufactures positioner controllers and power control units (PCUs) as well as models that combine these two products into one component. Working together, the positioner controller and the PCU act as the “translators” between the measurement software and the positioner. The positioner controller receives digital instructions from the microwave software and translates them into analog signals understood by the PCU. These analog signals are then amplified by the PCU to provide precisely calibrated DC power to the positioner’s electric motors, which then operate at a user-defined speed to move the antenna or device under test through the desired positions. The Company offers four positioner controller models, two PCU models and four models that combine both positioner controller and PCU.

Planar Scanners. A planar scanner is a rectangular device that enables a probe antenna to be moved along an x- and y-axis so that its position at any time is known and can be exactly replicated. Planar scanners are mounted to enable the probe to be moved throughout the height and width dimensions of the scanner. Scanners enable test engineers to accurately and reliably analyze many aspects of the microwave signals radiating from the antenna or device under test. The Company offers 24 standard scanners ranging in size from 3 feet by 3 feet to over 100 feet by 100 feet.

Pylons and Model Towers. Pylons and model towers are used in many microwave test and measurement applications and range in size from very large to very small. Large pylons can carry substantial loads in indoor or outdoor environments, and certain models can even support a full-sized aircraft. Pylons designed to minimize measurement interference are almost always used in RCS systems.

Other Microwave Products . The Company has developed several microwave products used in the larger microwave industry.

Radial Power Combiners. The Company’s radial power combiners offer a highly efficient electromagnetic mechanism to combine several identical low-energy signals together to make a single high-energy signal. Radial power combiners have many uses, but their most common application is in high-power microwave transmitters.

Antennas, Probes and Other Microwave Accessories. The Company designs and manufactures antennas, probes and other microwave accessories. These products are used in the Company’s microwave test and measurement systems, and they are also sold to customers as stand-alone items.

Sales and Marketing

The Company markets and sells its products in the United States through direct regional sales managers including Microwave Vision’s world-wide direct sales force and through independent sales representatives that target specific geographic and strategic markets. Internationally, the Company has established sales and customer service centers in Israel and Germany and has a network of distributors, agents and representatives for sales, marketing and customer support throughout Europe and Asia.

 
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The Company’s engineers and other technical staff support the efforts of the sales force. Since a customer’s engineers typically play an important role in the procurement decision, the Company’s engineers work closely with them to help them understand the advantages of the Company’s products and systems. Additional business from existing customers is pursued through the joint efforts of both the sales force and the engineers and other technical staff who has worked closely with the customer’s engineers and who understand the customer’s needs. If a customer has already purchased a microwave test and measurement system from ORBIT/FR, the Company believes it has an advantage over competitors in obtaining orders for system upgrades as well as any additional systems that the customer may wish to purchase at a later date. Typically, a substantial portion of the Company’s revenues in a given year is generated by customers for whom the Company has previously provided products or systems.

The Company generates sales leads for new customers through referrals from existing customers and other industry suppliers, its reputation in the industry, its on-line catalog (found at www.orbitfr.com ), in coordination with Microwave Vision advertising in trade publications, in conferences and trade shows, and on the World Wide Web.

Customer Support

The Company is committed to providing customer satisfaction through the service and support of its products. Through its Customer Service Response Center, the Company handles warranty support, field service, technical support, training, service contracts, spare parts and user documentation issues. Through a trained customer service representative and direct phone support, the Company believes it is positioned to provide rapid solutions upon request. ORBIT/FR’s customer service capabilities are achieved by providing comprehensive training through offices located in the U.S., Europe and Israel.

Customers

The Company has performed several hundred world-wide installations for customers in the aerospace/defense, wireless communications, satellite and automotive industries. Representative customers that have purchased systems from the Company include:

Aerospace/Defense
Aerospatiale, Alenia Aeronautica, Allgon, Ball Aerospace, Boeing, Chelton, BAE Systems, Dassault, Elta, Ericsson Microwave, General Electric, Israel Aircraft Industry, ITT Avionics, JPL, L3 Communications, Lockheed Martin/Loral, Lufthansa, Mitsubishi Heavy Industries, NASA, Northrop-Grumman, Nurad, Pratt & Whitney, Racal Avionics, Raphael, Raytheon, Rockwell International, SAAB Missiles, SPAR Aerospace, Texas Instruments, and the United States Air Force, Army and Navy.
   
Wireless Communications
Alcatel, Andrew, AT&T, Bell Atlantic, BAE, Bosch, Celwave, Chelton, Daewoo, Ericsson, GTE, IBM, Intel, ITT, Korea Mobile Telecom, Lucent Technologies, Motorola, NEC, Nokia, Northern Telecom, NTT, Probrand, Qualcomm, RCA, Samsung, SiemensPlessey, Thales Antennas, Telebras and Tenovis.
   
Satellite
Astrium, DASA, EADS, Elenia Spazio, Harris, Lockheed Martin, Space Systems/Loral, Raytheon and TRW.
   
Automotive
Blaupunkt, Honda, BMW, Daimler-Chrysler, Ford, Fuba, Hyundai, Mitsubishi, SAAB and Toyota.
   
University
Georgia Tech, University of Hawaii, University of Hong Kong, University of Utah, UCLA, University of Illinois, Texas A&M University and Villanova University.

The Company’s customers are located in the Americas (the United States, Canada, Brazil and Argentina), Europe (the United Kingdom, France, Germany, Israel, Italy, Holland, Spain, Austria, Denmark, Belgium, Poland, Russia, Finland, Norway, Sweden, Switzerland, Turkey and Portugal) and throughout the rest of the world (India, Japan, Korea, Thailand, Taiwan, Singapore, Indonesia, Australia, China, and South Africa). See Note 8 of the Notes to Consolidated Financial Statements for a discussion of the geographic concentration of the Company’s revenues.
 
 
10


Production and Suppliers

The Company’s engineers, based in the United States, Germany and Israel, are responsible for product design and development and for overseeing the production of the Company’s products. Although the Company maintains a production facility in Horsham, PA, most of the production of the Company’s products is performed by subcontractors. Through its wholly owned subsidiary, Advanced ElectroMagnetics, Inc., the Company manufactures anechoic foam absorbing material, an integral component of the microwave test and measurement system environment.

Although the Company produces many of the component parts for its microwave test and measurement systems, it purchases certain components from outside vendors for turnkey microwave test and measurement systems, including personal computers, shielded enclosures and microwave absorbers.

Backlog

At December 31, 2011 and 2010, the Company’s backlog was approximately $21.6 million and $21.4 million, respectively. The Company includes in backlog only those orders for which it has received and accepted a completed purchase order. Such orders are generally subject to cancellation by the customer with payment of a specified charge. The delivery lead time on the Company’s products and systems is generally three to six months, but can be as short as a few days and as long as 18 months or more. Because of the possibility of customer changes in delivery schedules, cancellation of orders and potential shipment delays, the Company’s backlog as of any particular date may not be representative of actual sales for any succeeding period.

Research and Development

The Company believes that its future success depends on its ability to adapt to rapidly changing technological circumstances within the industries it serves and to continue to meet the needs of its customers. Accordingly, the timely development and introduction of new products is essential to maintain the Company’s competitive position. Using its internal research and development staff, augmented by external consultants, the Company develops most of its products in-house. On occasion, the Company’s research and development efforts have been conducted in direct response to the specific requirements of customers’ orders, and, accordingly, such amounts are included in cost of revenues when incurred and the related funding is included in net revenues at such time. Included in cost of revenues are customer-funded research and development costs of approximately $0 and $0.007 million for the years ended December 31, 2011 and 2010, respectively.

Other research and development expenses of the Company for fiscal years ended December 31, 2011 and 2010 were approximately $1.2 million and $1.3 million respectively.

Competition

The Company believes that its current systems and products compete effectively with the systems and products offered by its competitors on the basis of product functionality, speed and accuracy, reliability, price, ease of use and technical support. The market for automated microwave test and measurement products, systems and services, however, is highly competitive and is characterized by continuing advances in products and technologies. Some of the Company’s competitors have established relationships with current and potential customers of the Company. The Company also competes, on a limited basis, with the internal development groups of its existing and potential customers, many of whom design and develop parts of their own microwave test and measurement systems. The Company’s business, operating results and financial condition could be materially adversely affected by such competition. The Company’s primary competitors in the microwave test and measurement market are MI Technology, Nearfield Systems, Inc., EMC Test Systems, March Microwave.

Proprietary Rights

The Company is heavily dependent on its proprietary technology. The Company relies on a combination of confidentiality agreements with its employees, license agreements, copyrights, trademarks and trade secret laws to establish and protect rights to its proprietary technology. The Company does not hold any material patents. All of the Company’s software is shipped with a security lock which limits software access to authorized users. Generally, the Company does not license or release its source code. Effective copyright and trade secret protection of the Company’s proprietary technology may be unavailable or limited in certain foreign countries.

 
11


Employees

As of December 31, 2011, the Company had a total of 141 employees,  68 of which are in North America and 73 of which are in Europe. The Company considers its relations with its employees to be good.

ITEM 1A. RISK FACTORS

Rapid Technological Change. The microwave test and measurement industry is characterized by rapid technological change. The Company’s future success will depend upon its ability to continually enhance its current products and to develop and introduce new products that keep pace with the increasingly sophisticated needs of its customers and the technological advancements of its competitors. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that will adequately meet the requirements of the marketplace.

Dependence on Proprietary Technology. The Company’s success is heavily dependent upon its proprietary technology. The Company does not currently have any material patents and relies principally on trade secret and copyright laws to protect its technology. However, there can be no assurance that these steps will prevent misappropriation of its technology. Moreover, third parties could independently develop technologies that compete with the Company’s technologies. Although the Company believes that its products and proprietary rights do not infringe patents and proprietary rights of third parties, there can be no assurance that infringement claims, regardless of merit, will not be asserted against the Company. In addition, effective copyright and trade secret protection of the Company’s proprietary technology may be unavailable or limited in certain foreign countries.

Operations in Israel. The Company maintains part of its operations in Israel. As a result, our business may be directly and adversely impacted by the political, economic and military conditions affecting Israel.
 
Risks of Fixed-Price Contracts. Virtually all of the Company’s contracts for its systems and products are on a fixed-price basis. The profitability of such contracts is subject to inherent uncertainties as to the cost of completion. In addition to possible errors or omissions in making initial estimates, cost overruns may be incurred as a result of unforeseen obstacles, including both physical conditions and unexpected problems in engineering, design or testing. Since the Company’s business may at certain times be concentrated in a limited number of large contracts, a significant cost overrun on any one contract could have a material adverse effect on the Company’s business, operating results and financial condition.

Risks Associated with Entering New Markets. The Company has identified and is evaluating whether to enter into certain complementary markets. The Company’s success in these markets will depend on, among other factors, the Company’s ability to identify markets and develop technologies for such markets on a timely basis, hire and retain skilled management, financial, marketing and engineering personnel, successfully manage growth and obtain capital sufficient to finance such expansion. There can be no assurance that the Company will successfully enter these markets.

Management of Growth. The Company believes that growth will be required to maintain the Company’s competitive position. Future growth, coupled with the rapid evolution of the Company’s markets, has placed, and is likely to continue to place, significant strains on its management, administrative, operating and financial resources, as well as increased demands on its internal systems, procedures and controls. The Company’s ability to manage future growth will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis, to implement new systems as necessary and to expand, train, motivate and manage its sales, technical personnel and administrative personnel. There can be no assurance that the Company will be able to manage its growth successfully. Failure to do so could have a material adverse effect on the Company’s business, operating results and financial condition.

 
12


Risks Associated with International Sales. In 2011 and 2010, international sales (sales to customers outside of North America) comprised approximately 65% and 53%, respectively, of the Company’s total sales, and the Company expects its international business to continue to account for a material part of its revenues. International sales are subject to numerous risks, including political and economic instability in foreign markets, restrictive trade and export policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and burdens and costs of complying with a wide variety of international and U.S. export laws and regulatory requirements. Approximately 74% of the Company’s sales in 2011 were denominated in U.S. dollars. Accordingly, the Company believes that it does not have significant exposure to fluctuations in currency. However, fluctuations in currency could adversely affect the Company’s foreign customers.

Potential Fluctuations in Quarterly Results. The Company’s operating results have varied from quarter to quarter in the past and may vary significantly in the future depending on factors such as the size and timing of significant contracts, the mix of third party products and the Company’s proprietary products included in a particular contract, customers’ budgetary constraints, increased competition, the timing of new product announcements and changes in pricing policies by the Company or its competitors, market acceptance of new and enhanced versions of the Company’s products, changes in operating expenses and changes in general economic factors and export license delays and denials. The Company’s expense levels are based, in part, on its expectations as to future revenue levels. If the Company’s revenue levels were to be below expectations, the Company’s operating results would likely be materially adversely affected.

Dependence on Qualified Technical Personnel. The Company’s operating results depend in large part upon the efforts of its microwave, software and systems engineers. The success of the Company’s business therefore depends on its ability to attract and retain engineers and other technical personnel. There are a limited number of microwave engineers, and such individuals are sought both by microwave test and measurement companies such as the Company and by manufacturers of wireless products and telecommunications service providers. Competition for such personnel is intense. The Company has at times experienced difficulty in recruiting and retaining technical personnel, and there can be no assurance that the Company will not experience difficulties in the future in attracting and in retaining technical personnel.

Dependence on Key Personnel. The success of the Company depends to a significant degree upon the contribution of its executive officers and other key personnel. There can be no assurance that the Company will be able to retain its managerial and other key personnel or to attract additional managerial and other key personnel if required.

Product Liability; Risk of Product Defects. The sale of products and systems by the Company may entail the risk of product liability and related claims. A product liability claim brought against the Company could have a material adverse effect upon the Company’s business, operating results and financial condition. Complex software and system products, such as those offered by the Company, may contain defects or failures when introduced or when new versions are released. There can be no assurance that, despite testing by the Company, errors will not be found in new products after commencement of commercial shipments, resulting in loss of market share or failure to achieve market acceptance. The Company maintains product liability insurance in the amount of $2.0 million and errors and omissions insurance in the amount of $7.0 million, although there can be no assurance that such coverage will be applicable to a particular claim or that the amounts of such insurance will be adequate if the Company experiences a significant claim. Although the Company has not experienced any significant claims to date related to its systems or products, the occurrence of such a claim could have a material adverse effect upon the Company’s business, operating results and financial condition.

Competition . The market for automated microwave test and measurement products, systems and services is highly competitive and is characterized by continuing advances in products and technologies.

In general, competition in this market comes from major microwave test and measurement vendors, some of which have a longer operating history, significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. These companies also have established relationships with current and potential customers of the Company. The Company also competes, on a limited basis, with the internal development groups of its existing and potential customers, who may design and develop parts of their own microwave test and measurement systems. The Company’s business, operating results and financial condition could be materially adversely affected by such competition.

Fluctuations in Capital Spending. The Company is dependent upon the wireless communications, satellite, automotive and aerospace/defense industries. Because these industries are characterized by technological change, pricing and gross margin pressure and, particularly in the aerospace/defense industry, government budget constraints, they have from time to time experienced sudden economic downturns. During these periods, capital spending is frequently curtailed and the number of design projects often decreases. Since the Company’s revenues are dependent upon capital spending trends and new design projects, negative factors affecting these industries could have a material adverse effect on the Company’s business, operating results and financial condition.

 
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No Dividends. The Company has never paid cash dividends on its Common Stock and does not anticipate that any cash dividends will be declared or paid in the foreseeable future.

Issuance of Preferred Stock and Common Stock; Anti-Takeover Provisions. Pursuant to its Amended and Restated Certificate of Incorporation, the Company has an authorized class of 2,000,000 shares of Preferred Stock which may be issued by the Board of Directors with such terms and such rights, preferences and designations as the Board may determine and without any vote of the stockholders, unless otherwise required by law. Issuance of such Preferred Stock, depending upon the rights, preferences and designations thereof, may have the effect of delaying, deterring or preventing a change in control of the Company. Issuance of additional shares of Common Stock could result in dilution of the voting power of the Common Stock. In addition, certain “anti-takeover” provisions of the Delaware General Corporation Law among other things, may restrict the ability of the stockholders to approve a merger or business combination or obtain control of the Company.

Market for Common Stock. The Company’s Common Stock is traded on the OTCBB, which limits exposure to market analysts and, in turn, may limit volume of trading. Investors may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company’s common stock than would otherwise be the case were the Company’s Common Stock listed on a more recognized stock exchange or quotation service. In addition, trading in the Company’s Common Stock is currently subject to certain rules under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a “penny stock.” Penny stocks are generally non-Nasdaq equity securities with a market price less than $5.00 per share. The penny stock rules require broker-dealers selling penny stocks to make certain disclosures about such stocks to purchasers thereof, and impose sales practice restrictions on broker-dealers in certain penny stock transactions. The additional burdens imposed upon broker-dealers by these rules may discourage them from effecting transactions in the Company’s Common Stock, which could limit the liquidity of the common stock and the ability of the Company’s stockholders to sell their stock in the secondary market.

ITEM 1B.      UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

The Company occupies approximately 18,000 square feet of space at its headquarters in Horsham, Pennsylvania under a lease expiring in October 2015. The current annual base rent is approximately $164,000. The Company also maintains sales, engineering, technical support and program management facilities in Israel and Germany, and at its manufacturing facilities in Santee, California. The Company’s current aggregate annual rental expenses for these additional facilities are approximately $460,000.

ITEM 3.      LEGAL PROCEEDINGS

None.

ITEM 4.      MINE SAFETY DISCLOSURES

Not applicable

 
14



MARKET FOR THE REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

On April 11, 2003, the Company’s Common Stock was delisted from the Nasdaq Stock Market and began trading on the electronic over-the-counter quotation system of the Financial Industry Regulatory Authority (“FINRA”), the Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol “ORFR.” The OTCBB is a regulated quotation service for subscribing members of FINRA that displays the real-time quotes, last-sale prices and volume information in over-the-counter securities. The OTCBB’s market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

The following table sets forth the high and low bid prices per share for the Common Stock for the periods indicated below as reported to the OTCBB by the FINRA’s member firms.

 
 
Year ended December 31,
 
 
 
2011
   
2010
 
 
 
High
   
Low
   
High
   
Low
 
First Quarter
  $ 3.50     $ 2.65     $ 2.50     $ 1.05  
Second Quarter
  $ 2.90     $ 1.30     $ 3.50     $ 1.93  
Third Quarter
  $ 2.20     $ 0.97     $ 3.10     $ 1.80  
Fourth Quarter
  $ 1.20     $ 0.56     $ 3.70     $ 2.66  

On March 5, 2012, there were 31 holders of record of the Company’s Common Stock based on information received by the Company from its stock transfer agent.

The Company has never paid any cash dividends on its Common Stock and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to reinvest its earnings, if any, in the development and expansion of the Company’s business. Any future declaration of cash dividends will be at the discretion of the Company’s Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors.

 
15


ITEM 6.      SELECTED FINANCIAL DATA
 
Consolidated Statement of Operations Data:
 
Year Ended December 31,
 
(amounts in thousands, except per share data)
 
2011
   
2010
   
2009
   
2008
   
2007
 
Contract revenues
  $ 33,603     $ 36,245     $ 31,246     $ 23,118     $ 29,292  
Cost of revenues
    25,424       25,514       20,483       17,103       20,044  
Gross profit
    8,179       10,731       10,763       6,015       9,248  
General and administrative
    3,158       3,113       3,005       2,768       3,119  
Sales and marketing
    2,638       2,920       3,565       3,655       3,569  
Sales, marketing, general and administrative-MVG
    1,208       1,681       1,539              
Research and development
    1,242       1,253       1,308       2,080       1,607  
(Gain) loss on disposal of assets
    —­       (109 )     167              
Insurance Proceeds
    (132 )                        
Total operating expenses
    8,114       8,858       9,584       8,503       8,295  
Operating income (loss), net
    65       1,873       1,179       (2,488 )     953  
Impairment of goodwill
                   
__
      (80 )
Compensation charge coincident to change in control
                      (969 )      
Other (loss), net
    (122 )     (73 )     (217 )     (5 )     223  
(Loss) income before income tax expense (benefit)
    (57 )     1,800       962       (3,462 )     1,096  
Income tax expense (benefit)
    495       (497 )     (508 )     12       4  
Net (loss) income
  $ (552 )   $ 2,297     $ 1,470     $ (3,474 )   $ 1,092  
Other comprehensive (loss) foreign currency translation adjustment net of $26 and $32, tax benefit
  $ (76 )   $ (57 )   $     $     $  
Total comprehensive (loss) income
  $ (628 )   $ 2,240     $ 1,470     $ (3,474 )   $ 1,092  
Basic and diluted (loss) income per share
  $ (0.09 )   $ 0.38     $ 0.24     $ (0.58 )   $ 0.18  
 
Consolidated Balance Sheet Data:
 
December 31,
 
(amounts in thousands)
 
2011
   
2010
   
2009
   
2008
   
2007
 
Working capital
  $ 5,833     $ 7,249     $ 4,973     $ 4,760     $ 6,444  
Total assets
  $ 24,250     $ 21,932     $ 20,113     $ 16,552     $ 17,370  
Stockholders’ equity
  $ 9,935     $ 10,534     $ 8,254     $ 6,707     $ 9,073  
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, intangible assets, income taxes, financing operations, warranty obligations, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following accounting policies are the most critical and could impact our results of operations.

Revenue Recognition. The Company recognizes revenue and profit as work progresses on long-term, fixed price contracts using the percentage-of-completion method, which measures the percentage of costs incurred to date to the estimated total costs for each contract when such costs can be reasonably estimated. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a contract can be made. Recognized revenues and profit are subject to revisions as work under a  contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.

Bad Debts. The Company maintains an allowance for estimated losses resulting from the non-payment of accounts receivable. If the estimate is not sufficient to cover actual losses, the Company is required to take additional charges to its earnings.

Deferred Income Taxes. At December 31, 2011, the Company has recorded a deferred tax asset valuation allowance due to uncertainty with regard to the Company’s ability to generate sufficient taxable income in the near future to realize a portion of its net deferred tax assets in the U.S. As a result of the current year U.S. tax loss, the valuation allowance at December 31, 2011 was increased to 62% of the net deferred tax assets.  However, during 2010, the Company reduced its deferred tax valuation allowance as a result of the positive financial results of 2010 and 2009 and based upon the Company’s then projected ability to generate taxable income in the future.

 
16


Results of Operations

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenues.  Revenues for the year ended December 31, 2011 were approximately $33.6 million, a 7.2% decline from revenues of approximately $36.2 million for the year ended December 31, 2010. Geographically, as a percentage of 2010 revenues, a 7.7% increase in the European and Asia markets of $1.9 million and 0.9 million, respectively, has enabled the Company to partially off-set the 14.8% revenue reduction or approximately $5.4 million in the North American market. The increases in revenues in the European and Asian markets reflect increased business and business opportunities aided by the Microwave Vision sales and support network in those markets. The US defense market, which has shown weakness in the first three quarters of 2011, had an increase in revenues in the fourth quarter. To date in 2012, the Company has seen an increase in business opportunities in the U.S. defense market as compared to the same period in 2011.

Cost of revenues. Cost of revenues for the year ended December 31, 2011 were approximately $25.4 million compared to approximately $25.5 million for the year ended December 31, 2010. Included in the cost of revenues for the year ended December 31, 2011 were unexpected costs on two large domestic contracts of approximately $1.3 million. This increase in costs was primarily responsible for the reduction of gross margin to 24.4% as of December 31, 2011 from 29.6% as of December 31, 2010.  One of the contracts was completed as of December 31, 2011 and the final payment was received in the first quarter of 2012. The other large domestic contract was completed by March 31, 2012. The Company believes that all costs have been recognized as of December 31, 2011. In addition, the Company anticipates filing a claim for damages against a vendor on this contract whose late delivery resulted in the Company incurring additional costs on this contract. Gross margin percentage for the year ended December 31, 2011 was also negatively affected by the overall reduction in revenues.
 
General and administrative expense-others. General and administrative expenses for the year ended December 31, 2011 were approximately $3.2 million, compared to approximately $3.1 million for the year ended December 31, 2010. As a percentage of revenues, general and administrative expenses for the year ended December 31, 2011 increased to 9.4% from 8.6% for the year ended December 31, 2010, primarily reflecting reduced sales volume.

Sales and marketing expenses. Sales and marketing expenses for the year ended December 31, 2011 were approximately $2.6 million compared to approximately $2.9 million for the year ended December 31, 2010, a decrease of approximately $0.3 million. This decrease reflects reduced sales rep fees, reduced labor costs and reduced travel.

Sales, marketing, general and administrative expenses-Microwave Vision Group. The Company has recorded approximately $1.2 million in sales, marketing, general and administrative expenses for the year ended December 31, 2011 under the Service Agreement with MVG. The Company recorded approximately $1.7 million in sales, marketing, general and administrative expenses for the year ended December 31, 2010.

Research and development expenses. Research and development expenses for the years ended December 31, 2011 were approximately $1.2 million compared to approximately $1.3 million for the year ended December 31, 2010. In 2011 the Company initiated significant new research and development programs which resulted in a U.S. R&D tax credit of $0.027M, a reduction to future U.S. tax liabilities.
 
Gain on Disposal of Assets. A fire on November 3, 2010 at the Company’s wholly owned subsidiary, AEMI, destroyed the oven used to dry the anechoic foam produced there. Through December 31, 2010, the Company received insurance proceeds of $0.13 million representing the replacement cost of certain machinery with a depreciated book basis of $0.03 million resulting in a gain of $0.1 million.

Other Insurance Proceeds. In the quarter ended June 30, 2011, the Company’s AEMI subsidiary had increased cost of revenues in 2010 due to the impact of the oven fire in the fourth quarter of 2010. The Company received approximately $0.13 million as full reimbursement from its insurance company for these costs.

Other (loss),net. Other (loss), net, for the year ended December 31, 2011 was approximately $0.2 million, as compared to $0.1 for the year ended December 31, 2010, an increase of approximately $0.1million. This increase is primarily due to increased foreign exchange losses due to the strength of the Euro during part of the year and increased bank guarantee fees.

 
17


Income taxes. For the year ended December 31, 2011 the Company recorded income tax expense of approximately $0.5 million resulting from income taxes applicable to the net income of our Israeli subsidiary and the reduction in value of the Israeli subsidiary’s deferred tax assets due to a tax rate reduction. The U.S. tax benefit relating to the 2011 operating losses of the Company in the U.S. was not recorded based on management’s current estimate that the benefit will not be utilized in the near future. As a result, the Company increased the valuation allowance to 62% of its net deferred tax assets in the U.S. As a result of its operation through December 31, 2010 and its then estimate of its future operating results, the Company recorded an income tax benefit of $0.5 million for the year ended December 31, 2010 by reducing its valuation allowance to 50% of the net deferred tax assets in the U.S. The Company decreased its valuation allowance by approximately $0.7 million or 37% of the net deferred tax asset at December 31, 2010. In addition, the Company recorded a $0.2 million benefit attributable to the reversal of accrued taxes for prior years by the Israeli subsidiary that were no longer required as those years were settled with the Israeli taxing authorities. The foregoing were offset by approximately $0.4 million of net tax charges primarily resulting from taxes currently payable and foreign tax rate changes.

Other comprehensive (loss)-foreign currency translation adjustment. The Company recorded other comprehensive (loss)-foreign translation adjustment relating to the translation of its  German subsidiary’s financial statements into U.S. dollars of $0.1 million for each of the years ended December 31, 2011 and December 31, 2010. This comprehensive loss is the result of the Euro exchange rate to the dollar declining from December 31, 2010 and December 31, 2009 levels, respectively. Prior to January 1, 2010 the Company did not reflect foreign translation gains or losses separately as they were not material.
 
Liquidity and Capital Resources
 
The Company has satisfied its working capital requirements through cash flows from operations, and  short term bank financing.

Net cash generated by operating activities during the year ended December 31, 2011 was approximately $1.5 million versus net cash generated by operating activities of $1.7 million for the year ended December 31, 2010. The most significant source of cash for the year ended December 31, 2011 was the increase in billings in excess of costs and estimated earnings on uncompleted contracts of $3.2 million. The most significant uses of cash for the year ended December 31, 2011 were the increase in accounts receivable of $1.0 million and the reduction of accounts payable and accrued expenses of $0.8 million.

Net cash used in investing activities for the purchase of property and equipment for the year ended December 31, 2011 was $1.3 million, attributable primarily to the purchase of assets for use in manufacturing by AEMI and the Israeli subsidiary. In addition, the Company has invested as of December 31, 2011, $0.3 million in a new software product that is expected to be released in the quarter ending June 30, 2012.

During the year ended December 31, 2011, the Company used proceeds of $0.5 million under its $2.25 million Revolving Demand Note bank facility to help meet its working capital cash requirements. In addition, the Company borrowed approximately $0.14 million of the $0.25 million available under its Term Note-Non Revolving Line of Credit to purchase a Computer Numerical Control (CNC) machine for its subsidiary, AEMI. On September 23, 2011, The Term Note-Non Revolving Line of Credit was extended to August 31, 2017. The Bank also extended the date that the Company can draw on the Term Note-Non Revolving Line of Credit to August 31, 2012. The revolving line of credit agreement requires an annual “clean-up” period of 30 days where no loans under the line may be outstanding.

Orbit/FR Engineering, LTD has established lines of credit with two Israeli banks and one Indian Bank (Israeli Branch). The line of credit from one Israeli bank has limits of NIS 378,000 (approximately $0.1 million) and $1.9 million for the issuance of bank guarantees of letters of credit in favor of customers, while the other  Israeli bank has  limits of $250,000 and $2.4 million for the issuance of bank guarantees of letters of credit in favor of customers. The Indian bank line of credit is $3.1 million for the issuance of bank guarantees of letters of credit in favor of customers. The interest rate charged by all the banks is LIBOR plus 2.25%. The bank agreements with all three banks do not have expiration dates but are subject to termination on a quarterly basis. As of December 31, 2011 there were no amounts outstanding under these lines of credit.
 
The Company’s functional currency for the operations of its subsidiary in Israel is the U.S. dollar. The Company’s functional currency for the operations of its German subsidiary is the Euro. The translation of foreign subsidiaries’ financial statements denominated in a functional currency other than the U.S. dollar into U.S. dollars is performed at each balance sheet date as follows: The foreign currency statement of operations is translated at the average exchange rate in effect for the period. The balance sheet asset and liability accounts are translated at the period-end exchange rate. The Company has exposure to currency fluctuations as a result of billing certain of its customers in foreign currency.  The Company primarily bills its customers in U.S. dollars with the exception of GmbH which bills its customers in Euros. For the year ended December 31, 2011, approximately 74% of the Company’s revenues were billed in U.S. dollars. Most of the costs of the Company’s contracts have been, and are expected to continue to be, primarily U.S. dollar-denominated except for wages for employees of the Company’s Israeli and German subsidiaries, which are denominated in local currency. Other than GmbH, the Company intends to continue to enter primarily into U.S. dollar-denominated contracts.

 
18


Inflation and Seasonality

The Company does not believe that inflation or seasonality has had a significant effect on the Company’s operations to date.

Impact of Recent Accounting Pronouncements

Public companies in the United States are subject to the accounting and reporting requirements of various authorities, including the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). These authorities issue numerous pronouncements, most of which are not applicable to the Company’s current or reasonably foreseeable operating structure. Below are the new authoritative pronouncements that management believes are relevant to the Company’s current operations.

In April 2009, the FASB issued FSP No. FAS-107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This amends previous guidance, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This guidance was effective for interim reporting periods ending after June 15, 2009. This guidance did not have any impact on our consolidated financial statements.

In October 2009, the FASB issued revised guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all deliverables based on relative-selling-price. This update eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. This guidance was effective for fiscal years beginning on or after September 15, 2010. Companies may use either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The revised guidance did not have a material impact on ours consolidated financial statements.

In October 2009, the FASB issued amended guidance that affects how entities account for revenue arrangements that contain both hardware and software elements. Products that rely on software will be accounted for under the revised multiple-element arrangement revenue recognition guidance mentioned above rather than software revenue recognition guidance. The revised guidance must be adopted no later than fiscal years beginning on or after September 15, 2010. The transition method and period for the adoption of this guidance and the revisions to the multiple-elements arrangements guidance noted above must be the same.  This guidance did not have a material impact on our consolidated financial statements.

Beginning in 2012 under FASB accounting standards update 2011-8, the test for impairment of goodwill allows an entity the option to eliminate the second portion of the annual impairment test if on its assessment of qualitative factors it is determined that the fair value of the reporting unit is not less than its carrying amount as of the valuation date.
 
Management does not believe that any other recently issued, but not yet effected, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.

 
19


QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a smaller reporting company, we have elected not to provide the information required by this item.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The reports of independent registered public accounting firms and consolidated financial statements are set forth in this report beginning on page F-1.
 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A(T).   CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. The Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by us in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure. The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, these controls and procedures were effective.

(b) Management’s Annual Report on Internal Control Over Financial Reporting. The management of Orbit/FR, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on that assessment, management concludes that, as of December 31, 2011, the Company’s internal control over financial reporting is effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

(c) Changes in Internal Control Over Financial Reporting. There have been no changes in internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the Company’s fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.      OTHER INFORMATION

None.

 
20



Item 10.      Directors, Executive Officers and Corporate Governance.

Board of Directors

The following table sets forth the name, age and principal occupation of each director.

 
NAME 
 
 
AGE 
 
DIRECTOR
SINCE 
 
 
PRINCIPAL OCCUPATION                                                                              
Dr. Philippe Garreau
 
50
 
2008
 
Chairman of the Board of the Company, President and CEO of Microwave Vision, S.A.
Per Iversen
 
48
 
2008
 
President and CEO of Orbit/FR, Inc.
Raymond Boch
 
47
 
2008
 
Global Account Director for ORACLE Corporation
Douglas Merrill
 
44
 
2008
 
President of Manufacturing and Supply Chain Strategies
Eric Anderson
 
52
 
2008
 
President of SEAKR Engineering, Inc.

Dr. Philippe Garreau has served as Chairman of the Board of the Company since May 2008. Dr. Garreau has held the position of President and CEO of Microwave Vision, S.A. (formerly Satimo, S.A.) since 1996. Prior to joining Microwave Vision, Dr. Garreau worked for the European Space Agency’s technology center in the Netherlands. Dr. Garreau provides the board of directors with significant knowledge of our industry.

Per Iversen was named a director of the Company and President and its CEO in May 2008. Prior to joining the Company, Mr. Iversen had been employed by Satimo, S.A. since 1998.now an affiliate of the Company. Most recently, Mr. Iversen was Chief Technology Officer and Director of U.S. Operations of Satimo, S.A. Prior to joining Satimo, Mr. Iversen spent seven years with the European Space Agency where he managed antenna development programs for both terrestrial and space- borne applications. Mr. Iversen has significant experience in our industry and, additionally, his position as the Company’s president and chief executive officer provides the board of directors with unique insight into the operations of the Company.

Raymond Boch was named a director of the Company in May 2008 and is a Global Account Director for ORACLE Corporation where he has been since 2004. Prior to ORACLE, Mr. Boch spent several years dealing with international development and account management for French Telecom at Hewlett Packard. Mr. Boch provides the board of directors with significant experience in international business matters. Mr. Boch also is an independent director who is unaffiliated with Microwave Vision, the Company’s majority stockholder.

Douglas Merrill was named a director of the Company in June 2008 and is the President of Manufacturing and Supply Chain Strategies, an operations management consulting firm. Prior to Manufacturing and Supply Chain Strategies, Mr. Merrill served as Operations Manager for Husky Injection Molding from May 2005 to June 2008. Between 1991 and 2005 Mr. Merrill held various positions with General Electric Corporation, most recently serving as its Manufacturing Integration Leader for its GE Energy Global Supply Chain Management division. Mr. Merrill provides the board of directors with significant management experience in global supply chain and has expertise in accounting and financial matters. Mr. Merrill also is an independent director who is unaffiliated with Microwave Vision, the Company’s majority stockholder.

Eric Anderson was named a director of the Company in June 2008 and is the President of SEAKR Engineering, Inc. where he has been employed since 1985 and currently is responsible for operations and software development. Mr. Anderson provides the board of directors with significant experience in technical and engineering matters. Mr. Anderson also is an independent director who is unaffiliated with Microwave Vision, the Company’s majority stockholder.

 
21


Executive Officers and Key Employees of the Company

The following table sets forth certain information regarding the Company’s executive officers and certain key employees.

The biographical information for Mr. Iversen is set forth above under “Board of Directors”.

NAME
 
AGE
 
POSITION
Per Iversen
 
48
 
President and Chief Executive Officer
Relland Winand
 
57
 
Chief Financial Officer
John Aubin
 
58
 
Vice President, Business Development and CTO
Moshe Pinkasy
 
61
 
Managing Director, Engineering
Marcel Boumans
 
53
 
Managing Director, GmbH
William Campbell
 
56
 
Vice President, Engineering and Program Management

Relland Winand was named Chief Financial Officer in March 2008. From 2003 to June 2007, Mr. Winand served in several capacities at Traffic.com, Inc. including Controller, Vice President Finance and Vice President Administration.

John Aubin was named Vice President Business Development and Chief Technology Officer in 2002, and served as Vice President of Measurement Systems since 1996 to 2001. From 1991 to 1996, Mr. Aubin was Vice President in charge of the Antenna Measurement Business Area for Flam & Russell.

Moshe Pinkasy has served as the Managing Director of Engineering since January 1997. From February 1996 to December 1996, Mr. Pinkasy was Alchut’s Manager of the Microwave Test and Measurement Business in Israel. From 1992 to 1996, Mr. Pinkasy served, in various capacities, as the Mechanical Engineering Department Manager for Alchut.

Marcel Boumans has served as the Managing Director of GmbH since March 1997. Since January 1, 2000, Mr. Boumans has been responsible for sales and customer support for Europe. From June 1995 to March 1997, Mr. Boumans was a Systems Design Engineer for Dornier Satelliten Systeme GmbH, the satellite systems subsidiary of Daimler-Benz Aerospace. From 1990 to 1995, Mr. Boumans was a Systems Design Engineer for Dornier GmbH, the communications and defense subsidiary of Daimler-Benz Aerospace.

William Campbell joined the Company as Vice President, Engineering and Program Management in December 2002. Mr. Campbell managed Optical Transponder development and production activities at JDS Uniphase Transmission Systems Division from 2000 to 2002. Prior to that, Mr. Campbell worked for BAE systems where he served as Business Area Director of High Power Transmission Systems, and other various program management activities during his 13 years at the company.
 
Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file with the United States Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during fiscal year ended December 31, 2011, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent stockholders were complied with.

 
22


Code of Ethics

The Company has adopted the ORBIT/FR, Inc. Employee Ethics Policy that applies to all of its officers and employees. If the Company makes any amendment to a provision of the Employee Ethics Policy that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, or grants any waiver from a provision of the Employee Ethics Policy that applies to any such persons, any such amendment or waiver will be publicly disclosed as required by applicable law.

A copy of the ORBIT/FR, Inc. Employee Ethics Policy was filed with the Securities and Exchange Commission on March 30, 2004 as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and a copy of the Employee Ethics Policy will be provided to any person without charge, upon request, by contacting the Company by mail at ORBIT/FR, Inc., 506 Prudential Road, Horsham, Pennsylvania 19044, or by phone at (215) 674-5100.

Director Independence

Our Board of Directors affirmatively determines the independence of each director and nominee for election as a director using the standards set forth in rules promulgated by The NASDAQ Stock Market LLC(“NASDAQ”) for determining the independence of a director, including the consideration of any relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the director’s responsibilities as a member of the Board. During the Board’s annual review of director independence, the Board determined that each of Mr. Boch, Mr. Merrill and Mr. Anderson is an “independent” director.

Information Regarding Corporate Governance

Committees of the Board of Directors

The Board of Directors maintains a standing Compensation Committee and Audit Committee. The Board of Directors does not maintain a standing committee regarding the nomination of individuals to serve on the Board of Directors; rather the full Board of Directors fulfills this function.  Applying the NASDAQ committee independence standards with respect to all of the directors of the Company, Dr. Garreau and Mr. Iversen are not independent directors .

The Compensation Committee of the Board of Directors, subject to the approval of the Board of Directors, determines the compensation of the Company’s executive officers and oversees the administration of executive compensation programs. The Compensation Committee is comprised of Mr. Garreau, Mr. Merrill, Mr. Boch and Mr. Anderson. Mr. Merrill, Mr. Boch and Mr. Anderson each of whom the Board of Directors has determined to be independent.

The Audit Committee recommends outside accountants, reviews the results and scope of the annual audit, the services provided by the Company’s independent auditors and the recommendations of the auditors with respect to the Company’s accounting systems and controls. During 2011, the Audit Committee conducted six meetings. The Audit Committee is comprised of Mr. Merrill, Mr. Boch and Mr. Anderson, each of whom the Board of Directors has determined to be independent.

Audit Committee Financial Expert

The Board of Directors has determined that Mr. Merrill is an “audit committee financial expert” within the meaning of the rules of the Securities and Exchange Commission.

Stockholder Nominations

The Company has not adopted any procedures by which the holders of the Company’s securities may recommend nominees to the Company’s Board of Directors.

 
23


Item 11.      Executive Compensation.

Overview

Compensation Philosophy

The Company’s compensation program generally is designed to motivate and reward our executive officers and other personnel responsible for attaining financial objectives that will contribute to the overall goal of enhancing stockholder value. In administering the program, the Compensation Committee assesses the performance of our business and our employees relative to those objectives. The Company’s compensation program generally provides incentives to achieve annual and longer term objectives. The principal elements of the compensation plan include base salary, cash bonus awards and stock awards in the form of grants of stock options. These elements generally are blended in order to provide compensation packages which provide competitive pay, reward the achievement of financial objectives and align the interests of our executive officers and other high level personnel with those of our stockholders.

Compensation Program

Base Salary. Base salary levels for executive officers are determined annually. In setting base salaries for officers and employees, the Compensation Committee considers the experience of the individual, the scope and complexity of the position, our size and growth rate, profitability, and the compensation paid by our competitors. The Compensation Committee generally approves, based upon in appropriate circumstances the recommendations of the Company’s Chief Executive Officer, the base salaries that are paid to the Company’s executive officers other than its Chief Executive Officer whose base salary is approved by the Compensation Committee. Overall, the Compensation Committee believes that the base salaries of its executive officers are approximately competitive with median base salary levels for similar positions with our peer companies. The Compensation Committee approved no salary adjustments for Messrs. Iversen, Aubin and Campbell.

Bonuses. The Company’s executive officers are eligible to receive bonus awards designed to motivate them to attain short-term and longer-term corporate and individual management goals. Bonuses are based on the attainment of specific Company performance measures established by the Compensation Committee early in the fiscal year, and by the achievement of specified individual performance objectives and the degree to which each executive officer contributes to the overall success of the Company and the management team. The annual bonus is paid in cash in an amount reviewed and approved, in appropriate circumstances on the recommendation of Mr. Iversen, by the Compensation Committee and is ordinarily paid in the first quarter following the completion of each fiscal year. For the year ended December 31, 2011, no bonuses were awarded to Messrs. Iversen, Aubin and Campbell.

Stock Awards. To promote the Company’s long-term objectives, stock awards are made to officers and employees who are in a position to make a significant contribution to our long-term success. The stock awards are made to employees and consultants pursuant to our 1997 Stock Option Plan, in the form of qualified and nonqualified stock options with an exercise price of the market price of the Company’s common stock on the date of grant. The Compensation Committee has discretion to determine which employees and consultants will be granted stock options, the number of shares to be optioned and the terms and conditions of such options. The full Board of Directors conducts the administration of the option plan with respect to options granted to directors or to executive officers. Options currently outstanding generally vest over a five year period. In selecting recipients and the size of grants, the Compensation Committee considers various factors such as the potential of the recipient, the salary of the recipient and competitive factors affecting our ability to attract and retain employees, prior grants, a comparison of awards made to officers in comparable positions at similar companies and the performance of our business. The Company did not grant stock options to the named executive officers during the year ended December 31, 2011.

 
24


Director Compensation

The following table shows certain information with respect to the compensation of all directors of the Company for the year ended December 31, 2011.

2011 DIRECTOR COMPENSATION TABLE

 
 
Name
 
Fees Earned or
Paid in Cash
($)
   
Option
Awards
($)
   
Total
($)
 
Current Directors
                 
Dr. Philippe Garreau
                 
Per Iversen
                 
Raymond Boch
    1,250             1,250  
Douglas Merrill
    3,250             3,250  
Eric Andersen
    2,750             2,750  

Directors not receiving compensation as an officer or employee of the Company receive $500 per meeting attended and $250 per meeting attended telephonically.

Compensation Tables and Related Information

The following tables and footnotes set forth information, for the years ended December 31, 2011 and December 31, 2010, concerning compensation awarded to, earned by or paid to (i) the Company’s Chief Executive Officer, and (ii) each of the Company’s two (2) other most highly compensated executive officers for the years ended December 31, 2011 and December 31, 2009 (the “Named Executive Officers”).

Summary Compensation Table

                                 
Name and
               
Option
   
All Other
       
Principal
   
Salary
   
Bonus
   
Awards
   
Compensation
   
Total
 
Position
Year
 
($)
   
($)
   
($)(1)
   
($)(2)
   
($)
 
Per Iversen
2011
    201,594                   12,442       214,036  
Chief Executive Officer (Principal Executive Officer)
2010
    155,798       24,536             7,707       188,041  
John Aubin
2011
    150,727             3,267       3,264       157,258  
Vice President Chief Technology Officer
2010
    149,541       23,067       5,600       2,956       181,164  
William Campbell
2011
    139,261             3,267       756       143,284  
Vice President, Engineering and Program Management
2010
    135,212       21,469       5,600       676       162,957  
____________

(1)
Represents the grant date fair value of the option awards calculated in accordance with the Financial Accounting Standards Board standard on “Stock Compensation”. The valuation assumptions used for the calculation are as follows: expected life of 7 years; volatility of 7.74%; dividends of zero; and a risk free interest rate of 5.5%.

(2)
Represents contributions under the Company’s 401(k) Plan. In addition, Mr. Iversen received $9,750 in compensation for the personal use of a Company car.

Outstanding Equity Awards at Fiscal Year-End

 
 
Option Awards
             
 
 
 
 
 
 
Name
 
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
   
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
   
 
 
Option
Exercise
Price
($)
   
 
 
 
Option
Expiration
Date
 
Per Iversen
                       
John Aubin
    20,000             3.00    
3/5/12
 
      15,000             1.95    
7/9/17
 
William Campbell
    15,000             3.00    
11/25/12
 
      15,000             1.95    
7/9/17
 
 
 
25


Employment Agreements

Effective June 2, 2008 and executed on December 16, 2008, the Company entered into an employment agreement with Per Iversen, pursuant to which Mr. Iversen was named President and Chief Executive Officer of the Company. The agreement calls for Mr. Iversen to receive an initial base salary of $150,000, and provides that Mr. Iversen may be entitled to an annual bonus as determined by the Compensation Committee of the Company’s Board of Directors. In addition, the Board of Directors approved Mr. Iversen’s use of the company vehicle previously driven by the Company’s former CEO. Mr. Iversen’s employment agreement may be terminated by the Company for cause, which is defined as the material breach of the employment agreement by Mr. Iversen or if Mr. Iversen commits a material act of dishonesty or a material breach of trust or a fiduciary obligation with respect to the Company. Under the employment agreement, Mr. Iversen is subject to certain non-disclosure, non-solicitation and non-competitive covenants.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth, as of March 30, 2012, certain information with regard to beneficial ownership (as determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of outstanding shares of the Company’s Common Stock by (i) each person known by the Company to beneficially own five percent (5%) or more of the outstanding shares of the Company’s Common Stock, (ii) each director and Named Executive Officer (as defined below) individually, and (iii) all executive officers and directors of the Company as a group. Unless otherwise indicated, the address of each of the persons named in the following table is c/o Orbit/FR, Inc., 506 Prudential Road, Horsham, Pennsylvania 19044.

 
 
 
 
 
Name and Address of Beneficial Owner
 
 
Total Number of
Shares of
Common
Stock Beneficial
Owned (1)
   
Percentage of
Class of
Common
Stock
Beneficially
Owned (1)
 
Five Percent (5%) or more Beneficial Owners
Microwave Vision, SA
17, Avenue de Norvege
91 953 Coutaboeuf-France
    3,700,000       61.8 %
Wellington Trust Company (2)
c/o Wellington Management Company, LLP
280 Congress Street
Boston, MA 02210
    346,988       5.8 %
Directors
Dr. Philippe Garreau (3)
17, Avenue de Norvege
91 953 Coutaboeuf-France
    3,700,000       61.8 %
Raymond Boch
Douglas Merrill
           
Eric Anderson
           
Named Executive Officers
           
Per Iversen
           
John Aubin (4)
    35,000       *  
William Campbell (5)
    30,000       *  
All executive officers and directors as a group (11 persons)
    3,830,750       62.2 %
____________
*     Less than 1% of the outstanding Common Stock.

(1)
The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options within 60 days of March 30, 2012. Beneficial ownership may be disclaimed as to certain of the securities.

(2)
Based on information set forth in the Schedule 13G filed by Wellington Trust Company with the Securities and Exchange Commission on February 14, 2012.

(3)
Represents 3,700,000 shares held by Microwave Vision, Dr. Garreau serves as the President and CEO of Microwave Vision.

(4)
Represents 35,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Aubin.

(5)
Represents 30,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Campbell.

 
26

 
EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information, as of the end of the fiscal year ended December 31, 2011, with respect to compensation plans under which the Company is authorized to issue shares of Common Stock.

 
 
 
 
 
 
 
 
 
Plan Category
 
 
 
 
Number of Shares to
be Issued Upon
Exercise of
Outstanding
Options,
Warrants and Rights
   
 
 
 
 
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
   
Number of Shares
Remaining
Available for Future
Issuance
under Equity
Compensation
Plans (excluding
securities
reflected in 1st
column)
 
Equity compensation plan(s) approved by security holders (1)
    204,600     $ 2.27       995,400  
Equity compensation plan(s) not approved by security holders
                 
Total
    204,600     $ 2.27       995,400  
____________
 
(1)
This plan consists of the Orbit/FR, Inc. 1997 Stock Option Plan.
 
Item 13. Certain Relationships and Related Transactions, and Director Independence.

Review, Approval or Ratification of Transactions with Related Persons

The Board of Directors has adopted a policy regarding the review and approval of transactions with related persons, which provides that certain transactions in which the Company is a party must be approved by (i) the Audit Committee, and (ii) to the extent such transaction involves compensation, also by the Compensation Committee. Those transactions that require review and approval include transactions to which any executive officer, or board member or board member nominee, or any immediate family member or affiliate of any of the foregoing, is a party with the Company. Types of transactions excluded by the policy include transactions generally available to all of our employees and transactions involving solely matters of executive compensation, which transactions need only to be approved by our compensation committee.

Transactions subject to review under this policy may proceed if the Audit Committee finds that the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party, and, to the extent they involve compensation, if they are also approved by the Compensation Committee.

As of December 31, 2011 Microwave Vision owned 3.7 million shares, representing approximately 61.8% of the outstanding shares, of the Company’s common stock.

Transactions with Related Persons during Fiscal Year 2011

Orbit-Alchut Technologies, Ltd., an Israeli publicly traded corporation controlled approximately 61.8% of the Company’s stock until the sale of that stock to Satimo, S.A. on May 13, 2008 (“Satimo”). On June 30, 2009, Microwave Vision acquired the 3.7 million common shares of the Company through a reorganization involving its wholly owned subsidiary, Satimo. Included in sales and cost of revenues for the year ended December 31, 2011 are approximately $2.4 million and $0.9 million, respectively, relating to sales to and purchases from Microwave Vision. Included in sales and cost of revenues for the year ended December 31, 2010 are approximately $2.3 million and $0.4 million, respectively, relating to sales to and purchases from Microwave Vision.

On August 14, 2009, the Company entered into an Assistance and Provision of Services Agreement (the “Services Agreement”) with Microwave Vision and several subsidiaries of Microwave Vision, including Satimo. Pursuant to the Services Agreement, Microwave Vision agreed to provide management, operational, sales and marketing, legal, technical and other services to the Company, Satimo and Microwave Vision’s other direct and indirect Subsidiaries (collectively, the “Subsidiaries”). In consideration thereof, the Company, Satimo and each of the other Subsidiaries agreed to pay Microwave Vision a fee to be determined as of the start of each calendar year, commencing on January 1, 2009, based on the projected gross margins of each Subsidiary for that year subject to adjustment at year end based on actual results of operations for that year.. In addition, the Company agreed to pay Microwave Vision an additional fee of 1% of its gross sales in consideration of the right to use the name “Microwave Vision” in the Company’s sales and marketing activities.   The Company recorded approximately $1.2 million and $1.7 million respectively in expenses related to the Services Agreement for the years ended December 31, 2011 and 2010.

 
27


Item 14. Principal Accountant Fees and Services.

Accountant Fees

The following table presents fees for professional services rendered in the United States by Cornick, Garber & Sandler, LLP and in Israel, by BDO Ziv Haft for the audit of the Company’s annual financial statements, the review of the interim financial statements the preparation of its income tax returns, and fees for consulting and other professional services.

 
 
2011
   
2010
 
Audit Fees
  $ 182,000     $ 166,000  
Audit-Related Fees
    19,000       47,000  
Tax Fees
    19,000       27,000  
All Other Fees
 
      4,000  

All other fees relate to work performed under Sarbanes-Oxley Section 404 compliance

Audit Committee Pre-Approval Policies and Procedures

The Company’s Audit Committee policies and procedures require the pre-approval by the Audit Committee of all fees paid to, and all services performed by, the Company’s independent accounting firms. The Audit Committee approves the proposed services, including the nature, type, and scope of services contemplated and the related fees, to be rendered by the Company’s independent accounting firms during the year. In addition, Audit Committee pre-approval is also required for those engagements that may arise during the course of the year that are outside the scope of the initial services and fees pre-approved by the Audit Committee.

Pursuant to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in the table above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.


ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE

(a)(1) Consolidated Financial Statements

Independent Auditors’ Report

Auditors’ Report to the Shareholders of ORBIT/FR Engineering, LTD.

Consolidated Balance Sheets at December 31, 2011 and 2010

Consolidated Statements of Operations for the years ended December 31, 2011 and 2010

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011 and 2010

Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010

Notes to Consolidated Financial Statements

(a)(3)      Exhibits

The exhibits filed as part of this report are listed under exhibits as subsection (c) of this Item 15.

 
28

 
(b)    Exhibits

3.1  
Amended and Restated Certificate of Incorporation of the Company. (2)
     
3.2  
Bylaws of the Company. (7)
     
4.1  
Specimen Common Stock Certificate of the Company. (2)
     
4.2  
Citizens Bank Term Note, dated December 13, 2010 in the aggregate principal amount of $250,000.
     
4.3  
Citizens Bank Revolving Demand Note, dated December 13, 2010 in the aggregate principal amount of $2,250,000.
     
10.1 *
Employment Agreement dated January 1, 1997 by and between the Company and Moshe Pinkasy. (1)
     
10.2  
1997 Equity Incentive Plan. (1)
     
10.3  
ORBIT/FR Inc. non-debarment agreement dated February 15, 2000 (4)
     
10.4  
Consent Agreement. (8)
     
10.5 *
Employment Agreement dated December 16, 2008 by and between the Company and Per Iversen. (9)
     
10.6  
Services Agreement dated August 14, 2009 among the Company, Microwave Vision Group, S.A. and the other parties thereto. (10)
     
10.7  
Loan Agreement Dated December 13, 2010 by and between the Company and Citizens Bank of Pennsylvania (Equipment Line of Credit).
     
10.8  
Security Agreement Dated December 13, 2010 by and between the Company and Citizens Bank of Pennsylvania (Equipment Line of Credit).
     
10.9  
Loan Agreement Dated December 13, 2010 by and between the Company and Citizens Bank of Pennsylvania (Revolving Credit Facility).
     
10.10  
Security Agreement Dated December 13, 2010 by and between the Company and Citizens Bank of Pennsylvania (Revolving Credit Facility).
     
14.1  
Employee Ethics Policy. (6)
     
21.1  
Subsidiaries of the Registrant. (3)
     
23.1  
Consent of Cornick, Garber & Sandler, LLP.
     
23.2  
Consent of Ziv Haft Certified Public Accountants (Isr.).
     
24.1  
Power of Attorney (included on signature page).
     
31.1  
Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003, of Per Iversen, President and Chief Executive Officer.
     
31.2  
Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003, of Relland Winand, Chief Financial Officer.
     
32.1  
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, of Per Iversen, President and Chief Executive Officer
     
32.2  
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, of Relland Winand, Chief Financial Officer.
     
101.INS
 
Instance Document
     
101.SCH
 
XBRL Taxonomy Extension Schema Document
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF
  XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
29

____________

*
Management contract, compensatory plan or arrangement

(1)
Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-25015), filed with the Commission on April 11, 1997

(2)
Incorporated by reference to Amendment 1 of the Company’s Registration Statement on Form S-1 (File No. 333-25015), filed with the Commission on May 19, 1997

(3)
Incorporated by reference to Amendment 2 of the Company’s Registration Statement on Form S-1 (File No. 333-25015), filed with the Commission on June 5, 1997

(4)
Incorporated by reference to Company’s Annual Report on Form 10-K filed on March 30, 2001

(5)
Incorporated by reference to Company’s Annual Report on Form 10-K filed on March 31, 2003

(6)
Incorporated by reference to Company’s Annual Report on Form 10-K filed on March 30, 2004

(7)
Incorporated by reference to Company’s Quarterly Report on Form 8-K filed on March 26, 2007

(8)
Incorporated by reference to Company’s Annual Report on Form 10-K filed on March 29, 2006

(9)
Incorporated by reference to Company’s Annual Report on Form 10-K filed on April 15, 2009

(10)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 19, 2009

 
30


  ORBIT/FR, Inc.

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  ORBIT/FR, Inc
 
     
Date: April 9, 2012
/s/ Philippe Garreau
 
 
Philippe Garreau
 
 
Chairman of the Board
 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Philippe Garreau and each of them, his true and lawful attorney-in-fact and agent with full power of substitution or resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documentation in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the 6th day of April 2012.

 
Name
 
Title
     
/s/ Philippe Garreau
 
Chairman of the Board
Philippe Garreau    
     
/s/ Per Iversen
 
Director, President and Chief Executive Officer
Per Iversen   (principal executive officer)
     
/s/ Relland Winand
 
Chief Financial Officer
Relland Winand   (principal accounting and financial officer)
     
/s/ Raymond Boch
 
Director
Raymond Boch    
     
/s/ Douglas Merrill
 
Director
Douglas Merrill    
     
/s/ Eric Anderson
 
Director
Eric Anderson    

 
31


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and

Board of Directors

Orbit/FR, Inc.

We have audited the consolidated balance sheets of Orbit/FR, Inc. and Subsidiaries as of December 31, 2011 and December 31, 2010 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years 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 audits. We did not audit the financial statements of Orbit/FR Engineering, LTD., a wholly owned subsidiary, which statements include assets of $12,401,000 as of December 31, 2011 and $9,576,000 at December 31, 2010 and revenues of $14,814,000 and $12,842,000 net of intercompany eliminations for the respective years then ended. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Orbit/FR Engineering, LTD., is based solely on the reports of the other auditors.

We conducted our audits 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbit/FR, Inc. and Subsidiaries as of December 31, 2011 and December 31, 2010 and the consolidated results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 
/s/ CORNICK, GARBER & SANDLER, LLP
 

April 9, 2012

New York, NY

 
32


(LOGO)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

ORBIT/FR ENGINEERING, LTD.

We have audited the accompanying balance sheet of Orbit/Fr Engineering, Ltd. (“the Company”) as of December 31, 2011 and 2010 and the related statements of income, changes in shareholders’ equity and cash flows for the years 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. The Company is not required to have, nor were we engaged to perform, an audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Orbit/FR Engineering, LTD. as of December 31, 2011 and 2010, and the results of its operations, changes in equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 
/s/ Ziv Haft.
 
 
Certified Public Accountants (Isr.)
 
 
BDO Member Firm
 

Tel-Aviv, Israel
April 9, 2012

(LOGO)

 
33


ORBIT/FR, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)

   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 3,266     $ 2,400  
Accounts receivable, less allowance of $76 in 2011 and $90 in 2010
    6,709       5,693  
Inventory
    2,923       2,776  
Costs and estimated earnings in excess of billings on uncompleted contracts
    5,256       4,941  
Income tax refunds receivable
    694       655  
Deferred income taxes
    917       1,437  
Other
    277       745  
Total current assets
    20,042       18,647  
Property and equipment, net
    2,974       2,296  
Deferred income taxes
    933       688  
Goodwill
    301       301  
Total assets
  $ 24,250     $ 21,932  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 3,313     $ 3,781  
Accounts payable— ultimate parent
    1,519       1,697  
Accrued expenses
    3,364       3,728  
Short-term bank financing
    500        
Current portion of long-term debt
    27        
Customer advances
    228       75  
Billings in excess of costs and estimated earnings on uncompleted contracts
    5,258       2,117  
Total current liabilities
    14,209       11,398  
                 
Long term debt (less current portion above)
    106        
                 
Stockholders’ equity:
               
Preferred stock: $.01 par value:
               
Authorized shares—2,000,000
               
Issued and outstanding shares—none
           
Common stock: $.01 par value:
               
Authorized  shares—10,000,000
               
Issued shares—6,084,473
    61       61  
Additional paid-in capital
    16,529       16,500  
Accumulated deficit
    (6,279 )     (5,727 )
Accumulated other comprehensive (loss)-
Foreign currency translation adjustment net of  $42 in 2011 and $32 in 2010, income tax benefit
    (133 )     (57 )
Treasury stock—82,700 shares in 2011 and  2010, at cost
    (243 )     (243 )
Total stockholders’ equity
    9,935       10,534  
Total liabilities and stockholders’ equity
  $ 24,250     $ 21,932  

See accompanying notes.

 
34


ORBIT/FR, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)

 
 
Years Ended December 31,
 
 
 
2011
   
2010
 
Contract revenues
  $ 33,603     $ 36,245  
Cost of revenues
    25,424       25,514  
Gross profit
    8,179       10,731  
Operating expenses:
               
General and administrative
    3,158       3,113  
Sales and marketing
    2,638       2,920  
Sales, marketing, general and administrative-MVG
    1,208       1,681  
Research and development
    1,242       1,253  
Gain on disposal of assets
          (109 )
Insurance proceeds
    (132 )      
Total operating expenses-net
    8,114       8,858  
Operating income
    65       1,873  
Other (loss), net
    (122 )     (73 )
(Loss) income before income tax
    (57 )     1,800  
Income tax expense (benefit)
    495       (497 )
Net (loss) income
  $ (552 )   $ 2,297  
Other comprehensive (loss)
               
Foreign currency translation adjustment net of $42 and $32 income tax benefit
  $ (76 )   $ (57 )
Total comprehensive (loss) income
  $ (628 )   $ 2,240  
Basic and diluted (loss) income per share
  $ (0.09 )   $ 0.38  
Weighted average number common shares — basic
    6,001,773       6,001,773  
Weighted average number common shares — diluted
    6,001,773       6,029,701  

See accompanying notes.

 
35


ORBIT/FR, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Shares and amounts in thousands)

 
 
 
Common Stock
   
Additional
Paid-in
   
Accumulated
   
Accumulated
Comprehensive
   
Treasury Stock
   
Total
Stockholders’
 
 
 
Shares
   
Amount
   
Capital
   
Deficit
   
(Loss)
   
Shares
   
Amount
   
Equity
 
Balance, January 1, 2010
    6,084       61       16,460       (8,024 )           83       (243 )     8,254  
Net income
                      2,297                         2,297  
Stock-based compensation
                40                                 40  
Accumulated  other comprehensive (loss) – foreign currency translation adjustment net of $32 income tax benefit
                                                               
                                      (57 )                     (57 )
Balance, December 31, 2010
    6,084     $ 61     $ 16,500     $ (5,727 )     (57 )     83     $ (243 )   $ 10,534  
Net (loss)
                            (552 )                             (552 )
Stock-based compensation
                29                                 29  
Accumulated  other comprehensive (loss) – foreign currency translation adjustment net of $42 income tax benefit
                                     (76 )                     (76 )
Balance, December 31, 2011
    6,084     $ 61     $ 16,529     $ (6,279 )   $ (133 )     83     $ (243 )   $ 9,935  

See accompanying notes.

 
36


ORBIT/FR, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

   
Year Ended December 31,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net (loss) income
  $ (552 )   $ 2,297  
Adjustments to reconcile results of operations to net cash (used in) provided by operating activities:
               
Depreciation
    602       525  
Gain  on disposal of fixed assets
          (109 )
Stock-based compensation
    28       41  
Deferred income tax provision
    274       (402 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,024 )     3,437  
Inventory
    (149 )     (103 )
Costs and estimated earnings in excess of billings on uncompleted contracts
    (332 )     (3,282 )
Income tax refunds receivable
    (40 )     (112 )
Other current assets
    435       (440 )
Accounts payable and accrued expenses
    (812 )     89  
Accounts payable— ultimate parent
    (276 )     313  
Customer advances
    155       65  
Billings in excess of costs and estimated earnings on uncompleted contracts
    3,151       (603 )
Net cash provided by operating activities
    1,460       1,716  
Cash flows from investing activities:
               
Proceeds from sale of property and equipment
          134  
Purchase of property and equipment
    (1,284 )     (764 )
Net cash (used in) investing activities
    (1,284 )     (630 )
Cash flows from financing activities
               
Proceeds from short-term bank financing
    1,400        
Repayments of short-term bank financing
    (900 )     (250 )
Proceeds from long-term debt
    143        
Repayment of long-term debt
    (10 )      
Net cash provided by (used in)  financing activities
    633       (250 )
Effect of exchange rate changes on cash and cash equivalents
    57       (58 )
Net increase in cash and cash equivalents
    866       778  
Cash and cash equivalents at beginning of year
    2,400       1,622  
Cash and cash equivalents at end of year
  $ 3,266     $ 2,400  
Supplemental disclosures of cash flow information:
               
Net cash paid during the year for income taxes
  $ 515     $ 291  
Net cash paid during the year for interest
  $ 21     $ 7  

See accompanying notes.

 
37


ORBIT / FR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)

1. Summary of Significant Accounting Policies

Ownership and Basis of Presentation

ORBIT/FR, Inc. (the “Company”) was incorporated in Delaware on December 9, 1996, as a wholly-owned subsidiary of Orbit-Alchut Technologies, Ltd., an Israeli publicly traded corporation (hereinafter referred to as “Alchut”). On May 13, 2008, Alchut sold all of its 3.7 million shares of common stock of the Company to Satimo Industries, SA (Satimo) and on June 30, 2009, as a result of a corporate reorganization, Satimo became a wholly owned subsidiary of Microwave Vision, SA (“Microwave Vision”) a newly created holding company which is publicly traded on the ALTERNEXT stock exchange. The Company develops, markets, and supports sophisticated automated microwave test and measurement systems for the wireless communications, satellite, automotive, and aerospace/defense industries and manufactures anechoic foam, a microwave absorbing material that is an integral component of microwave test and measurement systems. ORBIT/FR, Inc., a holding company, supports its worldwide customers through its subsidiaries ORBIT/FR Engineering, LTD (Israel), (hereinafter referred to as “Engineering”), ORBIT/FR Europe (Germany), Advanced ElectroMagnetics, Inc. (“AEMI”, San Diego, CA), and Orbit Advanced Technologies, Inc. and Flam and Russell, Inc. (Horsham, PA). The Company sells its products to customers throughout Asia, Europe and North and South America.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions of the Company and its wholly-owned subsidiaries have been eliminated in consolidation. The Company’s functional currency for the operations of its subsidiary in Israel is the U.S. dollar. The Company’s functional currency for the operation of its German subsidiary is the Euro. The translation of foreign subsidiaries’ financial statements denominated in a functional currency other than the U.S. dollar into U.S. dollars is performed at each balance sheet date as follows: The foreign currency statement of operations is translated at the average exchange rate in effect for the period. The balance sheet asset and liability accounts are translated at the period-end exchange rate. The resulting translation gain or loss is recorded as a separate component of stockholders’ equity. The change in the cumulative translation gains or losses from the preceding period is separately reported net of income tax effect, on the statement of operations under the caption “Other comprehensive income (loss) – foreign currency translation adjustment”, unless such change is considered immaterial (in which case it is included in foreign exchange transaction gains or losses).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company classifies as cash equivalents all highly liquid instruments with original maturities of three months or less at the time of purchase.

Accounts Receivable

The Company accounts for potential losses in accounts receivable utilizing the allowance method. In reviewing aged receivables, management considers its knowledge of customers, historical losses and current economic conditions in establishing the allowance for doubtful accounts.

 
38


Inventory

Inventory is stated at the lower of cost, determined on the first-in first out method, or market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed on accelerated methods for both financial reporting and income tax reporting purposes over the estimated useful lives as follows: office equipment — 5-7 years; lab equipment — 5 years; furniture and fixtures — 7 years; transportation equipment — 5 years; leasehold improvements — life of lease.

Goodwill

Goodwill represents the excess of costs over the fair value of the net assets acquired in connection with the Company’s acquisition of Advanced ElectroMagnetics, Inc. (AEMI) in 1997.

The Company has tested the goodwill of AEMI for impairment at December 31, 2011 and 2010 using the present value of future cash flow valuation method. No adjustment for the value of goodwill was necessary.

Revenue and Cost Recognition

The Company’s principal sources of contract revenues are from engineering and design services and the production of electro-mechanical equipment. Revenues from long-term fixed-price development contracts performed principally under the Company’s control are recognized on the percentage-of- completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract when such costs can be reasonably estimated. Contract costs include all direct material, labor and subcontractor costs and those indirect costs related to contract performance such as indirect labor, supplies and tool costs. Selling, general and administrative costs are charged to expense as incurred. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenue and are recognized in the period in which the revisions are determined. Revenues recognized in excess of amounts billed are classified under current assets as costs and estimated earnings in excess of billings on uncompleted contracts. Amounts billed to customers in excess of revenues recognized to date are classified under current liabilities as billings in excess of costs and estimated earnings on uncompleted contracts.

Revenues from electro-mechanical equipment sold to customers which are not part of a larger contract are recognized when the contract is completed and the equipment is delivered.

Research and Development

Internally funded research and development costs are charged to operations as incurred. Included in cost of revenues are customer-funded research and development costs of approximately $0 and $7 for the years ended December 31, 2011 and 2010, respectively. Other research and development costs are separately reflected in the Consolidated Statement of Operations.

Concentrations of Credit Risk and Significant Customers

Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of cash and accounts receivable.

The Company maintains cash and cash equivalents with various major commercial institutions in the U.S. and overseas. At December 31, 2010, cash balances that are either uninsured under the Federal Deposit Insurance Corporation coverage limit per  financial institution, or are located overseas without such type of insurance coverage, totaled approximately $2.9 million. The Company does not anticipate credit risk in connection with its concentration of cash.

To reduce credit risk relating to the Company’s sales in the U.S. and overseas, the Company performs ongoing credit evaluations of its commercial customers’ financial condition, but generally does not require collateral for government and domestic commercial customers. For certain foreign commercial customers, the Company generally requires irrevocable letters of credit in the amount of the total contract. At December 31, 2011, there were twenty eight bank guarantees in place for foreign customers with an aggregate value of approximately $5,465.

 
39


Warranty Expense

The Company provides for warranty costs on its products. Product warranty periods generally extend for one to two years from the date of sale. The warranty expense to date has not been material.

Income Taxes

The Company records income tax expense on profitable operations and generally records income tax benefits on losses where applicable except where it is not considered more likely than not that the future benefit of such losses will be realized for income tax purposes in which case a valuation allowance is recorded equal to such tax benefit. The Company uses the liability method to account for income taxes. Accordingly, deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reportable for income tax purposes. The Company files a consolidated federal income tax return with its domestic subsidiaries and separate income tax returns in Israel and Germany for its foreign subsidiaries.
 
Foreign Currency Translation

For the years ended December 31, 2011 and 2010, approximately 26% and 21%, respectively, of the Company’s revenue was billed in currencies other than the U.S. dollar.  The majority of the costs of the Company’s contracts have been from U.S. dollar denominated transactions. Transactions with the Company’s parent are predominantly in Euros. The majority of the costs incurred in performing the Company’s contracts have been denominated in U.S. dollars.

The Company records transaction in connection with the foreign currency invoices received, collected, issued or paid at the exchange rate in effect at the date of the transaction. Receivables and payables denominated in foreign currency are re-measured at each balance sheet date. The differences resulting from unrealized changes in foreign exchange rates are recorded as foreign gain or loss, which is included as a component of “Other income (loss), net” on the consolidated statement of operations. When a transaction is collected or paid within an accounting period, a realized foreign exchange gain or loss is recorded based on the rate at the date of settlement and the previous carrying amount of the receivable or payable. The Company occasionally enters into forward exchange currency contracts and their carrying amount is measured at each balance sheet date. The change in carrying amount is recoded as a foreign exchange gain or loss. The aggregate foreign exchange transaction gain was $15 for the year ended December 31, 2011 and $22 for the year ended December 31, 2010.

As of December 31, 2011, the Company had net liabilities of 4.5 million shekels, (approximately $1.2 million), and 0.5 million Euros, (approximately $0.6 million), subject to foreign exchange fluctuation
 
Income Per Share Amounts

Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average common shares outstanding for the period. Diluted income per share is calculated by dividing net income by the weighted average common shares outstanding for the period plus the effect of outstanding stock options when they are considered dilutive. Outstanding stock options were anti- dilutive in 2011 and had no effect on earnings per share in 2010.

Stock-Based Compensation

The Company has stock-based employee compensation plans, which are described more fully in Note 12. Prior to January 1, 2006, the Company accounted for stock options issued pursuant to its stock option plans (the “Plans”) under recognition and measurement provisions of APB Opinion No. 25, as permitted by subsequent standards issued by the Financial Standards Accounting Board. Effective January 1, 2006, the Company adopted the fair value provisions for share-based awards, and compensation costs. All share based awards granted subsequent to January 1, 2006, are based on the grant-date fair value estimated in accordance with the provisions of  the Financial Standards Accounting Board and recognized on a straight line basis over the shorter of the vesting or requisite service periods.

 
40


Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and bank financing reported in the consolidated balance sheets equal or approximate fair value due to their short maturities or recent incurrence.

Impact of Recent Accounting Pronouncements

Public companies in the United States are subject to the accounting and reporting requirements of various authorities, including the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). These authorities issue numerous pronouncements, most of which are not applicable to the Company’s current or reasonably foreseeable operating structure. Below are the new authoritative pronouncements that management believes are relevant to the Company’s current operations.
 
In April 2009, the FASB issued FSP No. FAS-107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This amends previous guidance, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This guidance was effective for interim reporting periods ending after June 15, 2009. This guidance did not have any impact on our consolidated financial statements.
 
In October 2009, the FASB issued revised guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all deliverables based on relative-selling-price. This update eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. This guidance was effective for fiscal years beginning on or after September 15, 2010. Companies may use either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. The revised guidance did not have a material impact on its consolidated financial statements.

In October 2009, the FASB issued amended guidance that affects how entities account for revenue arrangements that contain both hardware and software elements. Products that rely on software will be accounted for under the revised multiple-element arrangement revenue recognition guidance mentioned above rather than software revenue recognition guidance. The revised guidance must be adopted no later than fiscal years beginning on or after September 15, 2010. The transition method and period for the adoption of this guidance and the revisions to the multiple-elements arrangements guidance noted above must be the same. This guidance did not have a material impact on ours consolidated financial statements.

Beginning in 2012 under FASB accounting standards update 2011-8, the test for impairment of goodwill allows an entity the option to eliminate the second portion of the annual impairment test if on its assessment of qualitative factors it is determined that the fair value of the reporting unit is not less than its carrying amount as of the valuation date.
 
Management does not believe that any other recently issued, but not yet effected, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.

2. Inventory

Inventory consists of the following:

   
December 31,
 
   
2011
   
2010
 
Work-in-process
  $ 243     $ 140  
Parts and components
    2,680       2,636  
Total
  $ 2,923     $ 2,776  

 
41


3. Property and Equipment

Property and equipment consists of the following:

   
December 31,
 
   
2011
   
2010
 
Lab and computer equipment
  $ 3,635     $ 2,864  
Office equipment
    1,030       884  
Transportation equipment
    61       61  
Furniture and fixtures
    68       65  
Project- in-process
    400       72  
Leasehold improvements
    680       651  
Total
    5,874       4,597  
Less accumulated depreciation
    2,900       2,301  
Property and equipment, net
  $ 2,974     $ 2,296  

4. Accrued Expenses

Accrued expenses consists of the following:

   
December 31,
 
   
2011
   
2010
 
Contract costs
  $ 211     $ 72  
Compensation
    1,436       1,673  
Commissions
    620       628  
Royalties
    25       71  
Warranty
    437       574  
Customer advances and deferred revenue
    219       240  
Other
    416       470  
Total
  $ 3,364     $ 3,728  

5. Debt

     The components of debt shown in the accompanying balance sheet are as follows:

   
December 31,
 
   
2011
   
2010
 
             
             
Short term bank financing
  $ 500     $ --  
                 
                 
Total long term debt
  $ 133     $ --  
Less: current portion
    (27 )     --  
Total long-term debt, net of current portion
  $ 106     $ --  

On December 13, 2010 the Company signed a one year $2.25 million domestic demand line of credit facility agreement with Citizens Bank.  The revolving line can also be used to support the issuance of letters of credit. The interest rate on loans under the line is at LIBOR rate plus 2.25%. This facility does not contain any financial covenants and is collateralized by the assets of Orbit Advanced Technologies, Inc. and Advanced Electromagnetics, Inc. subsidiaries of Orbit/FR, Inc. The agreement prohibits the payment of dividends on or any distribution on account of any class of capital stock in cash or property without prior written consent of the Bank. The revolving line of credit agreement requires an annual “clean-up” period of 30 days where no loans under the line may be outstanding. In addition, the Company also signed a $0.25 million asset term note non-revolving line of credit of credit with Citizens Bank. This facility has an interest rate of prime plus two and one-half percent and allows up to a five year amortization of any advances under the facility starting at the time of each advance.

 
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The Company borrowed $0.14 million of the $0.25 million available under its Term Note-Non Revolving Line of Credit to purchase a Computer Numerical Control (CNC) machine for its subsidiary Advanced Electromagnetics, Inc. The current portion of this long term debt is $0.027 million and is included in current liabilities. The long term debt portion is $0.106 million. The note is payable in 60 equal installments and has an interest rate of 4.28%. The principal payments at December 31, 2011 are $0.03 million per annum through 2015 and $0.1 million in 2016. On September 23, 2011 the Term Note-Non Revolving Line of Credit was extended to August 31, 2017. The Bank also extended the date that the Company can draw on the Term Note-Non Revolving Line of Credit to August 31, 2012.

Orbit/FR Engineering, LTD has established lines of credit with the two Israeli banks and one Indian Bank (Israeli Branch). The line of credit from one Israeli bank has a  limit of NIS 0.378 million (approximately $0.1 million) and $1.9 million, for the issuances of bank guarantees of letters of credit in favor of customers and one Israeli bank has a  limit of $0.25 million and $2.4 million for the issuances of bank guarantees of letters of credit in favor of customers. The Indian bank line of credit is $3.0 million for the issuances of bank guarantees of letters of credit in favor of customers. The interest rates charged by all the banks are at LIBOR plus 2.25%. There was no outstanding balance due at December 31, 2011 and 2010 under the lines of credit. The bank agreements with all three banks do not have expiration dates but are subject to termination on a quarterly basis based upon the Company’s financial performance for the quarter. These lines of credit are collateralized by the assets of Orbit/FR Engineering, LTD., a subsidiary of Orbit/FR, Inc.

6. Related Party Transactions

Included in sales and cost of revenues for the year ended December 31, 2011 are approximately $2.5 million and $0.9 million respectively relating to sales to and purchases from Microwave Vision. Included in sales and cost of revenues for the year ended December 31, 2010, are approximately $2.3 million and $0.4 million, respectively, relating to sales to and purchases from Microwave Vision.

On August 14, 2009, the Company entered into an Assistance and Provision of Services Agreement (the “Services Agreement”) with Microwave Vision and several subsidiaries of Microwave Vision, including Satimo. Microwave Vision owns 3.7 million shares of common stock of the Company, which it acquired through a reorganization involving its wholly owned subsidiary, Satimo. Satimo originally acquired its shares of common stock of the Company from Orbit-Alchut Technologies, Ltd. on May 13, 2008. Pursuant to the Services Agreement, Microwave Vision agreed to provide management, operational, sales and marketing, legal, technical and other services to the Company, Satimo, and Microwave Vision’s other direct and indirect Subsidiaries (collectively, the “Subsidiaries”). In consideration thereof, the Company, Satimo and each of the other Subsidiaries agreed to pay Microwave Vision a fee to be determined as of the start of each calendar year, effective on January 1, 2009, based on the projected gross margins of each Subsidiary for that year, subject to adjustment at year-end based on each entities’ gross margin (as defined) for the year. In addition, the Company agreed to pay Microwave Vision an additional fee of 1% of its gross sales in consideration of the right to use the name “Microwave Vision” in the Company’s sales and marketing activities.  The Company has recorded approximately $1.2 million and $1.7 million respectively in expenses related to the Services Agreement for the years ended December 31, 2011 and 2010.

7. Commitments and Contingencies

The Company leases its operating facilities and certain equipment under non-cancelable operating lease agreements which expire in various years through 2016. Rent expense for the years ended December 31, 2011 and 2010 was approximately $1.1 million and $0.9 million, respectively. Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more are as follows:

Year ending December 31:
 
2012
  $ 860  
2013
    669  
2014
    409  
2015
    326  
2016
    129  
Total
  $ 2,393  
 
 
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Under the terms of a Chief Scientist grant in Israel, Engineering is obligated to pay royalties at a rate of 2% of revenues generated from the sale of certain products up to the amount of the grant. For the years ended December 31, 2011 and 2010, royalties under this program were approximately $25 and $34, respectively. At December 31, 2011, the Company had an outstanding contingent obligation to the Chief Scientist of $22. Such contingent obligation is payable in future periods based upon annual sales of products developed under the grants.

At December 31, 2011, the Company has outstanding letters of credit in the favor of customers and a landlord totaling $5,465
 
8. Segment and Geographic Information

The Company operates exclusively in one industry segment, the business of developing, marketing and supporting sophisticated automated microwave test and measurement systems. In addition to its principal operations and markets in the United States, the Company conducts sales, customer support and service operations to other geographic locations in Europe, Asia, and North America. The following table represents financial information by geographic region for the years ended December 31, 2011 and 2010.




   
North
America
   
Europe
   
Asia
   
Total
 
2011
                       
Sales to unaffiliated customers
  $ 11,724     $ 12,719     $ 9,160     $ 33,603  
Cost of revenues to unaffiliated customers
    10,050       8,751       6,623       25,424  
Gross profit unaffiliated customers
  $ 1,674     $ 3,968     $ 2,537     $ 8,179  
Net property and equipment
  $ 1,449     $ 1,525     $     $ 2,974  
Total assets
  $ 10,137     $ 14,113     $     $ 24,250  
2010
                               
Sales to unaffiliated customers
  $ 17,102     $ 11,869     $ 7,274     $ 36,245  
Cost of revenues to unaffiliated customers
    12,079       8,409       5,026       25,514  
Gross profit unaffiliated customers
  $ 5,023     $ 3,460     $ 2,248     $ 10,731  
Net property and equipment
  $ 1,059     $ 1,237     $     $ 2,296  
Total assets
  $ 12,087     $ 9,845     $     $ 21,932  

In the table above “North America” includes the property and assets of all domestic operations, and “Europe” includes the property and assets of the subsidiaries in Germany and Israel.

 One customer located in Asia accounted for approximately 13.0% and 10.6% of the Company’s consolidated revenues for the years ended 2011 and 2010, respectively. One customer located in Europe accounted for approximately 13.4% of the Company’s consolidated revenues for the year ended 2011. No other customer accounted for more than 10% of consolidated revenue in either year.
 
9. Income Taxes

Pretax (loss) income was applicable to the following jurisdictions:

   
Year ended December 31
 
 
 
2011
   
2010
 
United States
  $ (1,924 )   $ 57  
Foreign
    1,867       1,743  
Total
  $ (57 )   $ 1,800  

 
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The components of income tax expense (benefit) are as follows:

   
Year ended December 31,
 
   
2011
   
2010
 
Currently Payable (Refundable):
           
Federal state and local taxes within the U.S.
  $ 33     $ 95  
Foreign
    188       (190 )
Total
    221       (95 )
Deferred:
               
Federal
          (382 )
Foreign
    274       (20 )
Total
    274       (402 )
Total income tax expense (benefit)
  $ 495     $ (497 )

A reconciliation of income tax expense (benefit) at the U.S. Federal statutory tax rate and the actual income tax expense (benefit) is as follows:

 
 
Year ended December 31,
 
 
 
2011
   
2010
 
Tax (benefit) expense at statutory U.S. Federal rate
  $ (19 )   $ 612  
State and local taxes within the U.S.
    33       35  
Reversal of previous tax accruals in Israel
          (218 )
Decrease in deferred tax asset valuation allowance
          (668 )
U.S. loss for which no benefit was recognized
    650        
Change in future tax rate on foreign deferred tax assets
    198       (152 )
Foreign tax rate differences compared to U.S. tax rate
    (346 )     (125 )
Foreign subsidiary NOL used which was fully valued
    (15 )      
Other, net
    (6 )     19  
Total income tax expense (benefit)
  $ 495     $ (497 )

The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and liabilities consist of the following:

   
December 31,
 
   
2011
   
2010
 
Deferred tax assets:
           
U.S. net operating loss and tax credit carryforwards
  $ 3,733     $ 2,688  
MVG expense not currently deductible
    417       287  
Allowance for doubtful accounts
    27       31  
Accrued warranty reserves
    39       100  
Inventory valuation reserve
    15       15  
Accrued compensation
    85       161  
Stock-based compensation
    81       71  
Unearned service revenue
    78       86  
Foreign, including German and Israel net operating loss carryforwards
    282       569  
Total deferred tax assets
    4,757       4,008