ITEM 1. BUSINESS
GENERAL
ORBIT/FR, Inc. ("ORBIT/FR" or the "Company") develops, markets and supports sophisticated automated microwave test and measurement systems for the aerospace/defense, wireless communications, satellite, and automotive industries and manufactures anechoic foam, a microwave absorbing material that is an external component of microwave test and measurement systems. Products such as cellular phones, satellites, radio transmitters, and global positioning system ("GPS") receivers depend on the reliable and efficient transmission and reception of microwave signals in order to communicate. By utilizing the Company's systems to measure the critical performance characteristics of microwave signals, wireless manufacturers and service providers within these industries can improve quality and time-to-market, lower the risk of failure and underperformance and reduce costs.
Since its founding, the Company has expanded from distributing individual microwave test and measurement components to providing a wide range of fully integrated microwave test and measurement solutions. Components of an ORBIT/FR automated microwave test and measurement system include proprietary software and hardware products, which can be combined into standard or customized configurations to meet a customer's specific needs.
The Company markets and sells its systems to customers in the United States and throughout the world. Within its targeted industries, the Company's customers include manufacturers of wireless systems and products, such as Motorola, Nokia and Ericsson; aerospace/defense systems integrators and product manufacturers that incorporate microwave technology, such as Lockheed Martin, Raytheon, Northrop Grumman, BAE, and Boeing; telecommunications service providers that rely on microwave technology, such as AT&T, NTT and British Telecom; and automobile and automotive subassembly manufacturers. The Company's customers also include the United States government and several foreign governments.
The Company's objective is to strengthen its position in automated microwave test and measurement systems while developing products and systems for a broader range of microwave applications. The principal elements of the Company's strategy to reach its objectives are: (i) offering comprehensive solutions to customers, (ii) maintaining its technological leadership, (iii) focusing on standard systems and proprietary off-the-shelf products, (iv) pursuing growth in international markets and (v) leveraging its technological expertise to expand into complementary markets.
The Company's principal offices are located at 506 Prudential Road, Horsham, Pennsylvania 19044. Its telephone number is (215) 674-5100, its e-mail address is mail@orbitfr.com and its World Wide Web home page is located at www.orbitfr.com.
HISTORY
The Company was incorporated in Delaware in December 1996. The Company is the holding company for Orbit Advanced Technologies, Inc., a Delaware corporation ("Technologies") and its wholly owned subsidiary, Flam & Russell, Inc., a Delaware corporation ("Flam & Russell"), Orbit FR Engineering, Ltd., an Israeli corporation ("Engineering"), Orbit FR Europe, GmbH, a German corporation ("GmbH") and Advanced Electromagnetics, Inc. ("AEMI") a California corporation. The Company's parent, Orbit-Alchut Technologies, Ltd., is a publicly traded company in Israel which was founded in 1950 ("Alchut"). In addition to its ownership interest in the Company (approximately 62%), Alchut has ownership interests in companies operating in the avionics, tracking and telemetry markets.
Technologies was incorporated in 1985 as a wholly-owned subsidiary of Alchut to provide sales and customer support for Alchut's products in the United States, including positioning subsystems. In 1991, Technologies began to focus on the development and design of its own proprietary microwave test and measurement products and systems. In 1994, Technologies recognized the potential for providing customers with fully integrated microwave test and measurement solutions and began incorporating its software technology with hardware from third-party manufacturers, including Alchut. Technologies continues to subcontract certain production services to Alchut through Engineering but retains the right to select any other production subcontractor.
Engineering was incorporated in Israel in December 1996 as a wholly-owned subsidiary of Alchut at which time Alchut transferred all of the assets relating to its microwave test and measurement business to Engineering. Engineering is principally responsible for overseeing the development, design and production of ORBIT/FR's electro-mechanical products. Along with providing electro-mechanical products internally, Engineering is responsible for sales, marketing and customer support to the Asian market.
In October 1997, Orbit FR Europe, GmbH was incorporated in Germany. The GmbH develops compact range measurement systems and components, and is responsible for sales, marketing and customer support to the European market.
On June 28, 1996, Technologies purchased all of the issued and outstanding shares of Flam & Russell for approximately $1,043,000. The acquisition of Flam & Russell augmented the Company's product mix, staff of microwave and software engineers and customer base. Flam & Russell has been active in the microwave test and measurement field since 1981.
On June 17, 1997, the Company purchased all of the issued and outstanding shares of AEMI, contemporaneously with the completion of its initial public offering, for approximately $1.2 million. One-half of the purchase price was payable in cash and the other half was payable by issuance of shares of the Company's Common Stock at the initial offering price of $8.25 per share. AEMI manufactures anechoic foam, a microwave absorbing material that is an integral component of microwave test and measurement systems.
On May 4, 1998, the Company purchased the principal assets of Quantum Change/EMC Systems, Inc. The acquisition formed a new division responsible for Electromagnetic Compatibility ("EMC") Testing Systems. Quantum Change/EMC Systems provided hardware-independent software solutions to the EMC marketplace. On December 31, 2000, the assets of EMC division were sold under a license agreement.
On September 13, 1999, the Company announced that it had reached a Plea Agreement with the U.S. Attorney's Office to settle an investigation of the Company's export practices. As a result of the plea, the Company's export license applications for munitions list products became subject to a denial policy under the International Traffic in Arms Regulations (ITAR) effective as of November 2, 1999. The Company applied for reinstatement of its ITAR export privileges and hopes to qualify for such reinstatement based upon its present internal policies, procedures, and compliance with all applicable export law.
On March 6, 2000, the Company received notification, effective March 1, 2000 from the U.S. State Department that a Commodity Jurisdiction request submitted by the Company in 1998 had been approved, and the vast majority of the Company's basic Antenna Measurement Software products and systems were removed from the U.S. Munitions List. These products now fall under the jurisdiction of the Commerce Department and therefore would not be subject to the State Department's non-discretionary policy of denying the Company's license applications. The Company's Radar Cross Section ("RCS") and Radome systems remain on the U.S. State Department's Munitions list.
INDUSTRY OVERVIEW
The need for microwave test and measurement systems and products expanded rapidly during the 1960's and 1970's in conjunction with the growth and increased sophistication of the aerospace/defense industry in the United States and Western Europe. In the last 25 years, this need for test and measurement products and systems has expanded beyond aerospace/defense applications to all aspects of modern telecommunications, including personal wireless communications devices, satellite-based communications systems and "smart" automobiles. This expansion has occurred in conjunction with a growing desire among companies to focus on their core competencies and outsource many non-core functions such as the development and manufacture of microwave test and measurement systems.
Within the wireless communications, satellite, automotive and aerospace/defense industries, test and measurement products and systems are used during all stages of a product's life cycle: product development, pre-production qualification, production testing and product maintenance. Given the broad scope of testing procedures, it is not uncommon for a manufacturer or service provider to own and operate more than one microwave test and measurement system.
AEROSPACE/DEFENSE. The need within the aerospace/defense community for accurate and secure communications and tracking systems led to the emergence of microwave test and measurement companies in the 1960's. Recent growth in Homeland Security and Department of Defense budgets are expected to provide additional opportunities for the Company.
The industry's tracking requirements, such as air traffic control and missile guidance, led to the development of Radar Cross Section ("RCS") and the test and measurement of radomes. RCS involves the transmission of microwave signals towards a passive target, such as an aircraft or missile, and then the creation of an "image" of the target by measuring the energy reflected back towards the transmit source. Radome testing evaluates the impact of a radome (the dome-shaped casing that is placed on the leading edge of an aircraft or missile to protect the radar and direction-finding equipment) on the microwave signals that pass through it.
WIRELESS COMMUNICATIONS. The wireless communications industry has grown in recent years as a result of the development of cost-effective digital technologies and the gradual global deregulation of the telecommunications industry. Wireless communications products include cellular/PCS handsets, pagers, field service/delivery equipment and cellular/PCS base stations. The Company expects continued growth within the wireless communications industry in the future due to an increase in available spectrum, the adoption of efficient new digital technologies and the development of "smart" antennas.
Growing worldwide demand for wireless communications products and services has generated a need among wireless manufacturers and service providers for systems and products that address their specific microwave test and measurement needs. These companies operate in highly-competitive, rapidly changing markets in which the performance and reliability of their systems and products are essential to achieve and maintain competitive advantages. The accurate transmission and reception of microwave signals are fundamental to the performance of wireless systems and products. To ensure the successful transfer of voice or data from one point to another and to minimize poor reception, cross talk and dropped calls, manufacturers and service providers conduct extensive testing for signal quality, direction, strength and interference.
SATELLITE. Satellite-related markets have grown over the past several years, driven by the emergence of advanced communication technologies offering cost-effective global voice, video and data transmission, GPS, internet access and tracking capabilities. Satellites provide several advantages over terrestrial communications networks, including rapid installation and deployment, no incremental cost as distances increase and higher rates of data transmission.
To ensure that satellite-based communications systems are effective and reliable, it is essential that both satellites and "earth stations" transmit and receive microwave signals accurately. The accuracy requirements for these satellite systems are critical and failure to detect a design error could result in a satellite's "footprint" not covering its intended geographic area. Satellite manufacturers cannot afford to make this kind of error since the cost to manufacture, launch and insure a satellite can exceed approximately $200 million. Accordingly, sophisticated microwave test and measurement systems are critical to satellite and earth station manufacturers, as well as their subcontractors and sub-assembly manufacturers, to ensure that their products work properly.
AUTOMOTIVE. The world's major manufacturers of automobiles and automotive sub-assemblies, driven by competitive pressures, are designing new generations of "smart" cars and trucks. These vehicles incorporate the latest communications and safety devices including cellular/PCS, GPS-based direction-finding, data transfer, digital TV and collision-avoidance systems. Each of these features requires a specialized, highly-accurate microwave transmission and reception system. To ensure the performance of these various systems and to assess how they are impacted by the electromagnetic properties of the car itself, automotive manufacturers must test the car and these devices as a unit using a microwave test and measurement system designed for automotive applications.
THE ORBIT/FR SOLUTION
ORBIT/FR provides its customers with flexible and reliable solutions for their complex microwave test and measurement needs. The Company focuses its efforts and resources on developing state-of-the-art microwave test and measurement systems and products that incorporate specialized technologies and expertise. The Company's customers have a need for microwave test and measurement systems and products but often do not have the in-house capabilities to develop, or the desire to develop, such systems and products themselves. ORBIT/FR's systems and products provide customers with cost- effective and user-friendly solutions to their microwave test and measurement needs, thus allowing them to remain focused on their core competencies. The Company's systems and products incorporate technological expertise developed and acquired by the Company over many years.
The Company offers a wide range of standard and custom microwave test and measurement solutions for specialized aerospace/defense-related testing, cellular/PCS handset testing, cellular base station testing, satellite testing, and automotive testing. The Company's products include test and measurement software, microwave receivers, positioner subsystems, as well as other microwave products, all of which are typically incorporated into the Company's systems. The Company's proprietary software supports the Company's own test and measurement products as well as those manufactured by third parties. The Company's engineers and other technical staff use their broad expertise to assess and understand their customers' specific microwave test and measurement needs, process orders quickly, keep delivery time to a minimum, provide comprehensive customer support and release new software on a regular basis.
THE ORBIT/FR STRATEGY
The Company's objective is to strengthen its leadership position in automated microwave test and measurement systems while developing products and systems for a broader range of microwave applications. The principal elements of the Company's strategy to reach its objective are:
OFFERING COMPREHENSIVE TURNKEY SOLUTIONS TO CUSTOMERS. Within the microwave test and measurement market, new and existing customers increasingly desire to purchase comprehensive, turnkey test and measurement systems from a single provider. The Company addresses this desire by providing engineering and project management services, by offering an increasingly broad product line
and by maintaining close relationships with outside component suppliers. Additionally, the Company may periodically acquire companies with complementary products and services that can be integrated with the Company's existing or proposed products and systems, as it has with acquisitions of Flam & Russell and AEMI. By acquiring suppliers of key components of microwave test and measurement systems that the Company does not already provide, the Company believes, but cannot assure that it will be able to increase gross margins.
MAINTAINING TECHNOLOGICAL LEADERSHIP. The Company believes that it has sophisticated and diversified technological capabilities and intends to strengthen its technologies by continuously designing and developing new software releases and hardware upgrades which offer greater performance and higher precision.
FOCUSING ON STANDARD PRODUCTS AND PROPRIETARY OFF-THE SHELF PRODUCTS. Given the diversified needs of the Company's customers, no two microwave test and measurement systems will be identical. However, the Company seeks to keep the costs of customization to a minimum by designing and delivering specific types of systems that maximize the use of the Company's proprietary off-the-shelf products. This approach enables the Company to optimize its margins while offering its customers tailor-made solutions built around proven high-quality and reliable products.
CONTINUED FOCUS ON EXPANDING U.S. AEROSPACE/DEFENSE MARKET. As a result of its strong reputation and extensive product line, the Company maintains a strong relationship with the U.S. Government. With expected increases in Homeland Security and Defense Department budgets, the Company expects to expand this relationship.
PURSUING GROWTH IN INTERNATIONAL MARKETS. Approximately 52% and 62% of the Company's revenues during 2003 and 2002 respectively were derived from international customers. The Company believes that in addition to domestic growth as a result of increases in Defense Department and Homeland Security budgets, the international microwave test and measurement marketplace will also grow over the next several years, due in large part to worldwide economic development, governmental policies aimed at improving the communications infrastructure in developing countries and the increasing globalization of commerce. The Company is devoting significant efforts to increasing its share of the international market for microwave test and measurement systems by strengthening and expanding its sales network through the establishment of foreign sales and customer service centers and the appointment of additional international sales representatives. In addition, the Company believes it has a competitive advantage due to the duty-free status of its products manufactured in Israel and sold into the European Union. As fully detailed under History on page 6, the vast majority of the Company's products fall under the jurisdiction of the Commerce Department and therefore are not be subject to the State Department's non-discretionary policy of denying the Company's license applications.
LEVERAGING TECHNOLOGICAL EXPERTISE TO EXPAND INTO COMPLIMENTARY MARKETS. The Company intends to leverage its technological expertise in microwave test and measurement systems to expand into complementary markets that the Company believes offer high growth potential and where the Company's technology provides competitive advantages.
Microwave Products. The Company believes that opportunities exist to apply the Company's core technologies to the design, manufacture and marketing of products that incorporate microwave technology. The Company intends to continue marketing its radial power combiners, amplifiers, antennas and mixers, and plans to develop and sell additional microwave-based products in the future. The Company believes its large customer base will give it a competitive advantage in marketing these products.
SYSTEMS AND PRODUCTS
Since its founding, the Company has expanded from distributing individual microwave test and measurement components to providing turnkey solutions, which can include chamber design, RF absorbing materials, antenna measurement and/or RCS subsystems, RF test equipment and software suites, and a wide range of microwave test and measurement solutions. Components of an ORBIT/FR
automated microwave test and measurement system include proprietary software and hardware products which can be combined into standard or customized configurations to meet customers' specific needs. One of the Company's principal strengths is its experienced design team that solves complex technical and practical problems.
MICROWAVE TEST AND MEASUREMENT SYSTEMS. The Company designs, manufactures and markets automated microwave test and measurement systems. In addition to providing most of these systems' component parts, the Company also integrates the systems and trains its customers in use of the systems. While most customers purchase fully integrated turnkey microwave test and measurement systems, the Company also sells its hardware and software products individually as replacement parts or components of custom-designed systems. The Company offers seven types of microwave test and measurement systems. The first, antenna measurement systems, are generic systems that can be adapted for many uses, and the other types are designed and sold in response to well-defined microwave test and measurement needs within specific industries. Prices for a typical ORBIT/FR system range from $50,000 to $500,000, but large systems have been sold for over $3 million.
Antenna Measurement Systems. All products and systems that receive or transmit microwave signals rely on antennas. Accordingly, items such as microwave radios, GPS receivers, field service/delivery equipment, satellite earth stations and guided missiles need to have their antennas tested to ensure satisfactory performance characteristics. The Company's antenna measurement systems offer both manufacturers and service providers user-friendly and cost-effective solutions for their antenna measurement needs. The systems test for signal quality, direction, strength and interference and can be adapted to perform testing in each of the stages of a product's life: development, qualification, production and maintenance. While antenna measurement systems differ significantly from one application to another, all of the Company's systems incorporate a personal computer running specialized proprietary software, a microwave receiver, a positioning subsystem, and at least one additional antenna or probe. The systems can be designed for use in a wide variety of different test environments, ranging from a small anechoic chamber to an outdoor range covering several acres. The Company offers three types of antenna measurement methods:
Far-field: Traditional method generally used outdoors Near-field: Cost-effective indoor method using mathematical conversion tools Compact Range: High-end indoor method using a microwave reflector
The Company also has developed advanced systems that combine these measurement methods, such as far-field and near-field, in a single chamber.
Cellular/PCS/Pager Systems. ORBIT/FR believes it is a leader in the design and delivery of high-performance test and measurement systems for manufacturers of cellular/PCS handsets and pagers. The Company has developed a standard system based on its spherical near-field technology that the Company sells as a turnkey off-the-shelf product. The system consists of the Company's software, receiver and positioning subsystem built into a small anechoic chamber together with a human torso. The positioning subsystem allows a probe to trace a sphere around the handset or pager held by the mannequin, thus fully sampling the complete microwave properties of the device under test.
Cellular/PCS Base Station Systems. The Company develops and sells test and measurement systems used to assess the microwave performance characteristics of cellular/PCS base stations. These systems enable cellular/PCS base station antenna manufacturers to design and build efficient and reliable products, and they allow wireless communications service providers to monitor more efficiently the performance of their base stations. The existing system design is based on the Company's cylindrical near-field technology and is designed for indoor use.
Satellite Systems. The Company develops and sells microwave test and measurement systems for satellites which test many aspects of satellite performance including beam location (to assess the satellite's "footprint"), channel purity and intermodulation, gain, G/T, pattern, EIRP and TMA/TDMA microwave timing. These systems also test the transmit and receive characteristics of the active array antennas used on most modern satellites and can have the ability to identify and diagnose malfunctions
within these complex antennas. The Company's satellite systems utilize either near-field or compact range technology. Both technologies are equally effective from a test and measurement viewpoint, but each offers certain benefits. A near-field system offers diagnostic capabilities and is generally less expensive than a comparably equipped compact range system, but a compact range system is faster and easier to use.
Automotive Systems. ORBIT/FR believes it is a leader in the design and delivery of high-performance test and measurement systems for automobile manufacturers and manufacturers of automotive sub-assemblies. The Company's systems incorporate both near-field and far-field technologies and are thus capable of microwave sampling over a wide range of frequencies. A typical system includes a large mechanical arm that sweeps over a large turntable. The car being tested rests on the turntable, and both the turntable and the mechanical arm are set in motion based upon instructions received from the Company's measurement software. The systems' broad capabilities are essential given a growing trend by automobile manufacturers to integrate advanced microwave technologies such as cellular/PCS, GPS-based direction-finding, data transfer, digital TV and collision-avoidance systems into their "smart" cars.
RCS Systems. The Company's Radar Cross Section ("RCS") measurement systems transmit microwave signals towards a passive target and then measure the energy reflected back towards the transmit source. In an RCS system, the passive target is typically a model or full scale aircraft or missile that is mounted on a special "low-RCS" testing pylon capable of rotating the target. Data collected at various rotation angles and frequencies can be processed to form an electromagnetic "image" of the target. This type of information enables the design engineer to assess more accurately the detailed radar signature of the target. The Company believes that it is a market leader in this field. Although current restrictions preclude the Company from obtaining a State Department license for exporting these systems outside the United States, the Company has submitted a formal request to the State Department seeking reinstatement of these export privileges. This product remains on the U.S. State Department's Munitions list.
Radome Systems. A radome is a dome-shaped casing that is placed on the leading edge of an aircraft or missile to protect the radar and direction-finding equipment. A radome is typically manufactured using fiberglass or other materials that are designed to be "transparent" to microwave signals. Testing is performed periodically to ensure that microwave signals are not degraded or deflected as they pass through the radome. The Company's systems are designed to measure radome performance by analyzing the path of microwave signals as they pass through the radome and then comparing it to the propagation path when the radome is not present. Radome systems use far-field measurement methods but rely on high positioning accuracy normally required by near-field systems. Although current restrictions preclude the Company from obtaining a State Department license for exporting these systems outside the United States, the Company has submitted a formal request to the State Department seeking reinstatement of these export privileges.
Custom Systems. From time to time, the Company designs and manufactures custom microwave test and measurement systems for a wide variety of uses and applications. To date, most of these systems have been built for the United States government. The Company's broad microwave and antenna expertise has enabled it to obtain these contracts, and the Company intends to bid for similar jobs in the future if the expertise gained in designing such systems is deemed to be of strategic value to the Company.
MICROWAVE TEST AND MEASUREMENT SOFTWARE PRODUCTS. ORBIT/FR offers automatic measurement software for microwave test and measurement systems. The Company's software products are Windows-based programs that provide the customer with a consistent user-friendly interface with the test and measurement system. The software products have a robust and modular structure that enables the Company to easily add features for current and future customers. The software uses far-field and/or near-field algorithms to generate accurate results, and the computational methodologies used have gained acceptance throughout the microwave test and measurement community. The software supports the Company's own measurement equipment as well as equipment manufactured by third parties. The
Company's software products are designed to be "off-the-shelf" but are versatile and can be customized by the Company's or the customer's technical personnel to suit specific needs.
While software can vary between systems, it always consists of three primary modules: data acquisition, data analysis and report writing. The software's data acquisition module records actual measurements as it controls the microwave measurement equipment, the positioning subsystem, and often the source antenna and/or the antenna being measured. Variables such as frequency, power level, amplitude, phase, rotary and/or linear motion, polarization, transmit/receive switching, electrical beam pointing and polarization switching are all controlled by the Company's measurement software. The multidimensional results obtained are stored in a computer file for subsequent analysis. The software's data analysis module processes the acquired data using sophisticated microwave and signal processing algorithms developed by the Company and the National Institute of Standards and Technology ("NIST"). The data analysis module transforms the acquired data into easily-understood numerical information and graphic representations, thus providing the customer with the data required to satisfy its internal requirements and those of its own customers. The software's report writing module can be customized to meet each customer's needs.
POSITIONER SUBSYSTEMS. The positioner subsystem is the collection of equipment that holds the device under test and causes it to be moved according to the needs of the test. A typical positioner subsystem may include the following components:
Positioners. A positioner is the item upon which the device under test is placed while it is being tested. The Company's positioners are rugged, yet highly precise devices that adjust themselves in accordance with the positioning instructions received from the measurement software. Special circuitry and mechanical design features built into the positioner enable the data acquired from the antenna under test to travel efficiently through the positioner to the computer to be analyzed. The Company's simple positioners rotate around a single axis, while the Company's more elaborate positioners incorporate up to three axes. An automated microwave test and measurement system requires one or more positioners. The Company offers over 200 different positioner models and believes that its positioners are among the most accurate.
Positioner Controllers and Power Control Units. The Company manufactures positioner controllers and power control units ("PCUs") as well as models that combine these two products into one component. Working together, the positioner controller and the PCU act as the "translators" between the microwave software and the positioner. The positioner controller receives digital instructions from the microwave software and translates them into analog signals understood by the PCU. These analog signals are then amplified by the PCU to provide precisely calibrated DC power to the positioner's electric motors, which then operate at a user-defined speed to move the antenna or device under test through the desired positions. The Company offers four positioner controller models, two PCU models and four models that combine both positioner controller and PCU.
Planar Scanners. A planar scanner is a rectangular device that enables a probe antenna to be moved along an x- and y-axis so that its position at any time is known and can be exactly replicated. Planar scanners are mounted to enable the probe to be moved throughout the height and width dimensions of the scanner. Scanners enable test engineers to accurately and reliably analyze many aspects of the microwave signals radiating from the antenna or device under test. The Company offers 24 standard scanners ranging in size from 3 feet x 3 feet to over 100 feet x 100 feet.
Pylons and Model Towers. Pylons and model towers are used in many microwave test and measurement applications and range in size from very large to very small. Large pylons can carry substantial loads in indoor or outdoor environments, and certain models can even support a full-sized aircraft. Pylons are almost always used in RCS systems.
OTHER MICROWAVE PRODUCTS. The Company has developed several microwave products used in the larger microwave industry.
Radial Power Combiners. The Company's radial power combiners offer a highly efficient electromagnetic mechanism to combine several identical low-energy signals together to make a single high-energy signal. Radial power combiners have many uses, but their most common application is in high-power microwave transmitters.
Antennas, Probes and Other Microwave Accessories. The Company designs and manufactures antennas, probes and other microwave accessories. These products are used in the Company's microwave test and measurement systems, and they are also sold to customers as stand-alone items.
SALES AND MARKETING
The Company markets and sells its products in the United States through direct regional sales managers and through independent sales representatives that target specific geographic and strategic markets. Internationally, the Company has established sales and customer service centers in Israel and Germany and has representatives for sales, marketing and customer support throughout Europe and Asia.
The Company's engineers and other technical staff support the efforts of the sales force. Since a customer's engineers typically play an important role in the procurement decision, the Company's engineers work closely with them to help them understand the advantages of the Company's products and systems. Additional business from existing customers is pursued through the joint efforts of both the sales force and the engineers and other technical staff who have worked closely with the customer's engineers and who understand the customer's needs. If a customer has already purchased a microwave test and measurement system from ORBIT/FR, the Company believes it has an advantage over competitors in obtaining orders for system upgrades as well as any additional systems that the customer may wish to purchase at a later date. Typically, a substantial portion of the Company's revenues in a given year is generated by customers for whom the Company has previously provided products or systems.
The Company generates sales leads for new customers through referrals from existing customers and other industry suppliers, its reputation in the industry, its on-line catalog (found at WWW.ORBITFR.COM), advertising in trade publications, participation in conferences and trade shows, and on the World Wide Web.
CUSTOMER SUPPORT
The Company is committed to providing customer satisfaction through superior service and support of its products. Through its Customer Service Response Center ("CSRC") the Company handles warranty support, field service, technical support, training, service contracts, spare parts and user documentation issues. Through a trained customer service representative and a direct phone number (1-800-ORBIT59) the Company is positioned to provide solutions upon notification. ORBIT/FR's customer service capabilities are achieved by providing comprehensive training through offices located in the U.S., Europe and Israel.
CUSTOMERS
The Company has performed several hundred world wide installations for customers in the aerospace/defense, wireless communications, satellite, and automotive industries. Representative customers that have purchased systems from the Company include:
Aerospace/Defense................... Aerospatiale, Allgon, Ball Aerospace, Boeing, BAE Systems, Dassault, Elta, Ericsson Microwave, General Electric, Israel Aircraft Industry, ITT Avionics, JPL, Lockheed Martin/Loral, Mitsubishi Heavy Industries, NASA, Northrop-Grumman, Nurad, Pratt & Whitney, Racal Avionics, Raytheon, Rockwell International, SAAB Missiles, SPAR Aerospace, Texas Instruments, Tracor/AEL and the United States Air Force, Army and Navy.
Wireless Communications............. Alcatel, Andrew, AT&T, Bell Atlantic, BAE, Bosch, Celwave, Chelton, Daewoo, Ericsson, GTE, IBM, ITT, Korea Mobile Telecom, Lucent Technologies, Motorola, NEC, Nokia, Northern Telecom, NTT, Qualcomm, RCA, SiemensPlessey, Thales Antennas, Telebras and Tenovis.
Satellite .......................... Astrium, DASA, Elenia Spazio, Harris, Lockheed Martin, Space Systems/Loral, Raytheon and TRW.
Automotive.......................... BMW, Daimler-Chrysler, Ford, Fuba, Mitsubishi, SAAB, Samsung and Toyota.
The Company's customers are located in the Americas (the United States, Canada, Brazil and Argentina), Europe (the United Kingdom, France, Germany, Israel, Italy, Holland, Spain, Austria, Denmark, Poland, Finland, Norway, Sweden, Switzerland and Portugal) and throughout the rest of the world (Japan, Korea, Thailand, Taiwan, Singapore, Indonesia, Australia and South Africa). See Note 7 of the Notes to Consolidated Financial Statements for a discussion of the geographic concentration of the Company's revenues. For each of the years ended December 31, 2003, and 2002 one customer accounted for 11% of the Company's revenues.
PRODUCTION AND SUPPLIERS
The Company's engineers, based in the United States, Germany and Israel, are responsible for product design and development and for overseeing the production of the Company's products. While the Company maintains a production facility in Horsham, PA, most of the production of the Company's products is performed by subcontractors. Alchut is currently the Company's principal subcontractor for electro-mechanical production, primarily in connection with the manufacturing of positioners. The Company believes that Alchut currently offers the best available combination of quality, reliability and price. By giving three months notice, the Company has the right to select any other subcontractor.
While the Company produces most of the component parts for its microwave test and measurement systems, it purchases certain components from outside vendors for turnkey microwave test and measurement systems, including personal computers, shielded enclosures and microwave absorbers.
BACKLOG
At December 31, 2003 and 2002, the Company's backlog was approximately $12.7 million and $9.0 million, respectively. The Company includes in backlog only those orders for which it has received and accepted a completed purchase order. Such orders are generally subject to cancellation by the customer with payment of a specified charge. The delivery lead time on the Company's products and systems generally averages approximately three months, but can be as short as a few days and as long as 12 months or more. Because of the possibility of customer changes in delivery schedules, cancellation of orders and potential shipment delays, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to adapt to rapidly changing technological circumstances within the industries it serves and to continue to meet the needs of its customers. Accordingly, the timely development and introduction of new products is essential to maintain the Company's competitive position. Utilizing its internal research and development staff, augmented by external consultants, the Company develops all of its products in-house. A significant portion of the Company's research and development efforts has been conducted in direct response to the specific requirements of customers' orders, and, accordingly, such amounts are included in the cost of sales when incurred and the related funding is included in net revenues at such time. Research and
development expenses of the Company for fiscal years ended December 31, 2003, 2002 and 2001 were $1,132,000, $1,144,000 and $1,142,000 respectively.
COMPETITION
The Company believes that its current systems and products compete effectively with the systems and products offered by its competitors on the basis of product functionality, speed and accuracy, reliability, price, ease of use and technical support. The market for automated microwave test and measurement products, systems and services, however, is highly competitive and is characterized by continuing advances in products and technologies.. These companies also have established relationships with current and potential customers of the Company. The Company also competes, on a limited basis, with the internal development groups of its existing and potential customers, many of whom design and develop parts of their own microwave test and measurement systems. The Company's business, operating results and financial condition could be materially adversely affected by such competition. The Company's primary competitors in the microwave test and measurement market are MI Technology (formerly Scientific Atlanta's microwave division), Nearfield Systems, Inc., ETS , and March Microwave.
PROPRIETARY RIGHTS
The Company is heavily dependent on its proprietary technology. The Company relies on a combination of confidentiality agreements with its employees, license agreements, copyrights, trademarks and trade secret laws to establish and protect rights to its proprietary technology. The Company does not hold any material patents. All of the Company's software is shipped with a security lock which limits software access to authorized users. Generally, the Company does not license or release its source code. Effective copyright and trade secret protection of the Company's proprietary technology may be unavailable or limited in certain foreign countries.
EMPLOYEES
As of December 31, 2003, the Company had a total of 82 employees. The Company considers its relations with its employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company occupies approximately 18,000 square feet of space at its headquarters in Horsham, Pennsylvania under a lease expiring in October 2008. The current annual base rent is approximately $124,000. The Company also maintains sales, engineering, technical support and program management facilities in Israel and Germany, and its manufacturing facilities in Santee, California. The Company's current aggregate annual rental expenses for these additional facilities are approximately $365,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
During June 1998 the Company reported it was subject to a pending investigation by the U.S. Customs Service related to its past export practices. On November 10, 1999 the Company reported that the U.S. District Court accepted its guilty plea pursuant to a plea agreement (the "Plea Agreement") with the U.S. Attorney's Office reached in September 1999. The Company pleaded guilty to two counts of violating the Arms Control Act arising form its export to China of a defense article and defense services without the required export licenses, in or about November 1997 and January 1998. On March 2, 2000, the Company reported that the U.S. District Court granted final approval of the agreed upon fine of $600,000 under the Plea Agreement and the fine was paid. The Court did not impose any probation on the Company.
On November 2, 1999, the Company announced that pursuant to Section 38(g)(4) of the Arms Export Control Act, its export license applications for Munitions List products were subject to a denial
policy under the International Traffic in Arms Regulations (ITAR), effective as of November 2, 1999, as a result of the Plea Agreement. As a result of the U.S. State Department's approval of the Company's Commodity Jurisdiction, announced by the Company on March 5, 2000, the vast majority of the Company's products are not subject to the State Department's non-discretionary policy of denying license applications. The Company has submitted a formal request seeking reinstatement of its export privileges.
The Company is currently seeking to re-establish its International Traffic in Arms (ITAR) export privileges, denied since November 1999, through a settlement with the U.S. Department of State. The Company has been informed that any such settlement will involve the payment of a civil penalty which cannot be currently estimated.
The Company is not currently subject to any additional material legal proceedings and is not aware of any other threatened litigation unasserted claims or assessments that could have a material adverse effect on the Company's business, operating results, or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4.1 EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's executive officers, and certain key employees.
Ze'ev Stein has served as Chairman of the Board since October 1998. Mr. Stein served as acting Chief Executive Officer of the Company from October 1998 to October 2001. He has also served as a Director of the Company and its predecessor since March 1996. Since July 1994, Mr. Stein has served as a Director of Alchut and since September 1996, Mr. Stein has also served as the Vice-President of Operations of Alchut. From 1991 to 1996, Mr. Stein was the General Manager of Stein Special Art, Ltd., located in Ra'anana, Israel.
Israel Adan was named President and Chief Executive Officer in October 2001. From March 2001 through October 2001, Mr. Adan served as the President of FireMedia Communications Inc., From 1999 to 2001 Mr. Adan was senior vice president of SigmaOne Communications Corp. where he was responsible for the worldwide development of wireless location technologies and services. Prior to that Mr. Adan served as President of Tadiran (USA), a leading telecommunications equipment and systems provider, operating in numerous capacities during his 15 years at the company.
Dave Lubbe was named Chief Financial Officer in July 2000. From 1997 to 2000 Mr. Lubbe served as the Company's Controller.
John Aubin was named Chief Technology Officer, and served as Vice President of Measurement Systems since 1996 to 2001. From 1991 to 1996, Mr. Aubin was Vice President in charge of the Antenna Measurement Business Area for Flam & Russell.
Moshe Pinkasy has served as the Managing Director of Engineering since January 1997. From February 1996 to December 1996, Mr. Pinkasy was Alchut's Manager of the Microwave Test and Measurement Business in Israel. From 1992 to 1996, Mr. Pinkasy served, in various capacities, as the Mechanical Engineering Department Manager for Alchut.
Marcel Boumans has served as the Managing Director of the GmbH since March 1997. Since January 1, 2000, Mr. Boumans has been responsible for sales and customer support for Europe. From June 1995 to March 1997, Mr. Boumans was a Systems Design Engineer for Dornier Satelliten Systeme GmbH, the satellite systems subsidiary of Daimler-Benz Aerospace. From 1990 to 1995, Mr. Boumans was a Systems Design Engineer for Dornier GmbH, the communications and defense subsidiary of Daimler-Benz Aerospace.
Gabriel Sanchez has served as President of AEMI since its establishment in March of 1980. Prior to that period, Mr. Sanchez worked for Plessy Microwave and Emerson and Cumming.
Mark Bates was named the Company's Vice President of Software Development, U.S.A. in January 2000, and has served in several software development capacities since joining the company in 1995.
William Campbell joined the Company as Vice President, Engineering and Program Management in December 2001. Mr. Campbell managed Optical Transponder development and production activities at JDS Uniphase Transmission Systems Division from 2000 to 2002. Prior to that Mr. Campbell worked for BAE systems where he served as Business Area Director of High Power Transmission Systems, and other various program management activities during his 13 years at the company.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On April 11, 2003, the Company's Common Stock was delisted from the Nasdaq Stock Market and began trading on the electronic over-the-counter quotation system of the National Association of Securities Dealers (the "NASD"), the Over-the-Counter Bulletin Board (the "OTCBB") under the symbol "ORFR." The OTCBB is a regulated quotation service for subscribing members of the NASD that displays the real-time quotes, last-sale prices and volume information in over-the-counter securities. The OTCBB market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
The following table sets forth the high and low bid prices per share for the Common Stock for the periods indicated below as reported to the NASD by the NASD's member firms. For the first quarter of 2003 the table includes the high and low sale prices per share for the Common Stock reported by Nasdaq.
On March 7, 2004, there were 34 holders of record o f the Company's Common Stock. Based on information received by the Company from its stock transfer agent, the Company believes that there are approximately 2,000 beneficial owners of its Common Stock.
The Company has never paid any cash dividends on its Common Stock and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to reinvest its earnings, if any, in the development and expansion of the Company's business. Any future declaration of cash dividends will be at the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Operations Data: (amounts in thousands, except per share data)
Consolidated Balance Sheet Data: (amounts in thousands)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, intangible assets, income taxes, financing operations, warranty obligations, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The following accounting policies are the most critical and could impact our results of operations.
Revenue Recognition. The Company recognizes revenue and profit as work progresses on long-term, fixed price contracts using the percentage-of-completion method, which measures the percentage of costs incurred to date to the estimated total costs for each contract when such costs can be reasonably estimated. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a contract can be made. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
Bad Debts. The Company maintains an allowance for estimated losses resulting from the non-payment of accounts receivable. If the estimate is not sufficient to cover actual losses, the Company is required to take additional charges to its earnings.
Deferred Taxes. The Company recorded a deferred tax allowance as a result of the Company reporting negative operating income and due to uncertainty with regard to the Company's ability to generate sufficient taxable income in the future to realize the deferred tax asset.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Revenues for the year ended December 31, 2003 were approximately $16.0 million compared to approximately $13.1 million for the year ended December 31, 2002, an increase of approximately $2.9 million or 22%. Revenues from the defense, satellite and automotive markets increased approximately $4.0 million, $464,000, and $98,000, respectively. Revenues from the wireless, electromagnetic compatibility (EMC), higher education markets decreased approximately $949,000, $370,000, and $303,000, respectively. Geographically, revenues from North America, Asia, and Europe increased $2.7 million, $150,000 and $43,000 respectively. Increased 2003 defense revenues were a result of the completion of several significant U.S. defense contracts, while 2003 satellite revenues increased in Asia. European and Asian wireless revenues recognized during 2002 were not completely replaced during 2003.
Cost of revenues. Cost of revenues for the year ended December 31, 2003 were approximately $10.7 million compared to approximately $9.3 million for the year ended December 31, 2002. Gross margin percentage for the year ended December 31, 2003 increased to 33.1% from 28.7% for the year ended December 31, 2002. The increased margins are due primarily to greater efficiencies related to greater beginning backlog and increased productivity recognized on large U.S. defense and Asian satellite contracts.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2003 totaled approximately $2.6 million compared to approximately $2.8 million for the year ended December 31, 2002, a decrease of approximately $200,000 due primarily to the Company's reallocation of existing resources to sales and marketing and other operational activities. As a percentage of revenues, general and administrative expenses decreased to 16.0% for the year ended December 31, 2003, down from 21.2% for the year ended December 31, 2002.
Sales and marketing expenses. Sales and marketing expenses for the year ended December 31, 2003 were $2.7 million compared to $2.3 million for the year ended December 31, 2002. The current year increase is a result of the Company's investment in senior marketing personnel and increases in advertising, trade show, and publication costs. As a percentage of revenues, sales and marketing expenses decreased to 17.1% for the year ended December 31, 2003, from 17.8% for the year ended December 31, 2002.
Research and development expenses. Research and development expenses for the years ended December 31, 2003 and 2002 were $1.1 million. These costs represent the Company's continuing efforts in the development of its 959Spectrum software suite and improve its existing compact range technology.
Other income (loss). Other income (loss), net, for the year ended December 31, 2003 was a loss of approximately $73,000 compared to an income of $59,000 for the year ended December 31, 2002, a difference of approximately $132,000. This decrease is primarily a result of the reduction in the Company's cash balances available for investment, declining interest rates, and foreign currency losses recognized during 2003.
Income taxes. Income tax expense for the year ended December 31, 2003 was $134,000 compared to $145,000 of income tax expense for the year ended December 31, 2002, a decrease in expense of $11,000. The Company records income tax expense on profitable operations and income tax benefits on losses recorded by its foreign subsidiaries where applicable.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues for the year ended December 31, 2002 were approximately $13.1 million compared to approximately $18.6 million for the year ended December 31, 2001, a decrease of approximately $5.5 million or 30%. Revenues from the wireless, defense, EMC, satellite and automotive markets decreased approximately $3.1 million, $1.6 million, $442,000, $292,000 and $342,000, respectively. Revenues from the higher education market increased approximately $234,000. Geographically, revenues from North America, Europe, and Asia decreased $2.9 million, $2.1 million and $446,000 respectively. The decrease in revenues related to the wireless, defense, and satellite industries was a result of significant completion of North American, Asian and European contracts in the year ended December 31, 2001, not repeated in the year ended December 31, 2002.
Cost of revenues. Cost of revenues for the year ended December 31, 2002 were approximately $9.3 million compared to approximately $13.6 million for the year ended December 31, 2001. Gross margin percentage for the year ended December 31, 2002 increased to 28.7% from 27.0% for the year ended December 31, 2001. This increase is primarily due to the cost revaluations and one time inventory write-offs recorded in 2001.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2002 totaled approximately $2.8 million compared to approximately $3.2 million for the year ended December 31, 2001, a decrease of approximately $400,000 due primarily to the non recurrence of bad debt expense recorded during the year ended December 31, 2001. As a percentage of revenues, general and administrative expenses increased to 21.2 % for the year ended December 31, 2002 from 17.2% for the year ended December 31, 2001.
Sales and marketing expenses. Sales and marketing expenses for the year ended December 31, 2002 were $2.3 million compared to $2.1 million for the year ended December 31, 2001. The current year increase is a result of the Company's effort to increase awareness of its products in the marketplace. As a percentage of revenues, sales and marketing expenses increased to 17.8% for the year ended December 31, 2002, from 11.2% for the year ended December 31, 2001.
Research and development expenses. Research and development expenses for the years ended December 31, 2002 and 2001 were $1.1 million. These costs represent the Company's continuing efforts in the development of its 959Spectrum software suite.
Other income. Other income, net, for the year ended December 31, 2002 was approximately $59,000 compared to $82,000 for the year ended December 31, 2001, a decrease of approximately $23,000. This decrease is primarily a result of the reduction in the Company's cash balances available for investment and declining interest rates.
Income taxes. Income tax expense for the year ended December 31, 2002 was $145,000 compared to $669,000 of income tax expense for the year ended December 31, 2001, a decrease in expense of $524,000. The decrease is primarily due to the increase in the Company's income tax valuation allowance recorded in 2001 against its deferred tax assets. The Company records income tax expense on profitable operations and income tax benefits on losses recorded by its foreign subsidiaries where applicable.
Cumulative effect of a change in accounting principle. During the three months ended March 31, 2002, the Company adopted the Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Under SFAS No. 142, goodwill is no longer amortized over its estimated useful life, but is subject to an annual fair value based assessment. This fair value assessment resulted in an impairment of $301,000 at January 1, 2002, which was accounted for as a cumulative effect of a change in accounting principle during the year ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
During recent years the Company has satisfied its working capital requirements through cash flows from equity financing.
Net cash used in operating activities during the year ended December 31, 2003 was $35,000, compared to $1.2 million for the year ended December 31, 2002. The most significant use of cash in operating activities during the year ended December 31, 2003 came from the Company's $1.3 million net loss. The Company's most significant contributions to cash provided by operating activities resulted from reductions in the accounts receivable balances of approximately $134,000, and increases in accounts payable and accrued expenses, customer advances, and billings in excess of costs and estimated earnings on uncompleted contracts of $584,000, $297,000, and $431,000, respectively. Significant uses of cash in operating activities included the increase in other assets and decrease in accounts payable-Parent of $163,000 and $410,000, respectively.
Net cash used in investing activities during the year ended December 31, 2003 was $634,000. Approximately $262,000 of this amount was invested in anechoic foam manufacturing equipment at the Company's new Santee CA facility. Net cash used in investing activities during the year ended December 31, 2002 was $270,000, and related to purchases of property and equipment.
The Company has exposure to currency fluctuations as a result of billing certain of its contracts in foreign currency. When selling to customers in countries with less stable currencies, the Company bills in U.S. dollars. For the year ended December 31, 2003, approximately 74% of the Company's revenues were billed in U.S. dollars. Substantially all of the costs of the Company's contracts, including costs subcontracted to the Parent, have been, and will continue to be, U.S. dollar-denominated except for wages for employees of the Company's Israeli and German subsidiaries, which are denominated in local currency. The Company intends to continue to enter into U.S. dollar-denominated contracts.
INFLATION AND SEASONALITY
The Company does not believe that inflation or seasonality has had a significant effect on the Company's operations to date.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No.'s 141 and 142, "Business combinations" and "Goodwill and Other Intangibles." FASB 141 requires all business combinations initiated after July 1, 2001 to be accounted for using the purchase method. FASB 142 concluded that purchased goodwill would not be amortized but would be reviewed for impairment when
certain events indicate that the goodwill of a reporting unit is impaired. The impairment test uses a fair-value based approach, whereby if the implied fair value of a reporting unit's goodwill is less than its carrying amount, goodwill is considered to be impaired. FASB 142 does not require that goodwill be tested for impairment upon adoption unless an indicator of impairment exists at that date. However, it requires that a benchmark assessment be performed for all existing reporting units within six months of the date of adoption. SFAS 142 applies not only to goodwill arising from acquisitions completed after the effective date, but also to goodwill previously recorded. The Company adopted FASB 142 in the first quarter of 2002 and determined there was an impairment of $301,000 which was reflected as a cumulative effect of a change in accounting principle on the statement of operations for the year ended December 31, 2002.
In August 2001, the FASB issued SFAS No.143 "Accounting For Asset Retirement Obligations." This statement addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its financial position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supercedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," related to the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its financial position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity" which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This new standard did not impact the Company in 2003.
CERTAIN FACTORS
Certain information contained in this Form 10-K contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including without limitation, statements as to the Company's financial condition, results of operations and liquidity and capital resources and statements as to management's beliefs, expectations or options. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors are discussed in Item 1. "Business", Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and those set forth below.
RAPID TECHNOLOGICAL CHANGE. The microwave test and measurement industry is characterized by rapid technological change. The Company's future success will depend upon its ability continually to enhance its current products and to develop and introduce new products that keep pace with the increasingly sophisticated needs of its customers and the technological advancements of its competitors. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that will adequately meet the requirements of the marketplace.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily dependent upon its proprietary technology. The Company does not currently have any material patents and relies principally on trade secret and copyright laws to protect its technology. However, there can be no assurance that these steps will prevent misappropriation of its technology. Moreover, third parties could independently develop technologies that compete with the Company's technologies. Although the Company believes that its products and proprietary rights do not infringe patents and proprietary rights of third parties, there can be no assurance that infringement claims, regardless of merit, will not be asserted against the Company. In addition, effective copyright and trade secret protection of the Company's proprietary technology may be unavailable or limited in certain foreign countries.
DEPENDENCE ON ALCHUT; OPERATIONS IN ISRAEL. The Company maintains and will continue to maintain a number of relationships with Alchut, the major stockholder of the Company. Alchut is the Company's principal subcontractor for electro-mechanical production, primarily in connection with the production of positioners. In addition, Alchut provides general and administrative services for the Company's operations in Israel. Effective January 1, 2002, the Company and Alchut entered into an agreement under which Alchut will continue to provide these services for at least one year. Alchut maintains its production operations, and the Company maintains part of its engineering operations, in Israel. As a result, the Company may be directly influenced by the political, economic and military conditions affecting Israel.
RISKS OF FIXED-PRICE CONTRACTS. Virtually all of the Company's contracts for its systems and products are on a fixed-price basis. The profitability of such contracts is subject to inherent uncertainties as to the cost of completion. In addition to possible errors or omissions in making initial estimates, cost overruns may be incurred as a result of unforeseen obstacles, including both physical conditions and unexpected problems in engineering, design or testing. Since the Company's business may at certain times be concentrated in a limited number of large contracts, a significant cost overrun on any one contract could have a material adverse effect on the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH ENTERING NEW MARKETS. The Company has identified and is evaluating whether to enter into certain complementary markets. The Company's success in these markets will depend on, among other factors, the Company's ability to identify markets and develop technologies for such markets on a timely basis, hire and retain skilled management, financial, marketing and engineering personnel, successfully manage growth and obtain capital sufficient to finance such expansion. There can be no assurance that the Company will successfully enter these markets.
MANAGEMENT OF GROWTH. The Company believes that growth will be required to maintain the Company's competitive position. Future growth, coupled with the rapid evolution of the Company's markets, has placed, and is likely to continue to place, significant strains on its management, administrative, operating and financial resources, as well as increased demands on its internal systems, procedures and controls. The Company's ability to manage future growth will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis, to implement new systems as necessary and to expand, train, motivate and manage its sales and technical personnel. There can be no assurance that the Company will be able to manage its growth successfully. Failure to do so could have a material adverse effect on the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 2003 and 2002, international sales comprised approximately 52% and 62% of the Company's total sales, and the Company expects its international business to continue to account for a material part of its revenues. International sales are subject to numerous risks, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and burdens and costs of complying with a wide variety of international and U.S. export laws and regulatory requirements. The non discretionary three year denial policy for Munitions List items stemming from the U.S. Customs Plea agreement, further restricts future exports. This action was materially limited, when on March 5, 2000, the State Department notified the Company that it's Commodities Jurisdiction request submitted in 1998 was approved. The approval removes the vast
majority of the Company's antenna measurement software products and systems from the US Munitions List. These products now fall under the jurisdiction of the Commerce Department and therefore would not be subject to the State department's non discretionary policy of denying license applications. Although the export process will become much more efficient under Commerce regulations effective March 1, 2000, there can be no assurance that the Company will be able to continue to compete successfully in international markets or that its international sales will be profitable. Approximately 74% of the Company's sales in 2003 were denominated in U.S. dollars. Accordingly, the Company believes that it does not have significant exposure to fluctuations in currency. However, fluctuations in currency could adversely affect the Company's customers.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's operating results have varied from quarter to quarter in the past and may vary significantly in the future depending on factors such as the size and timing of significant contracts, the mix of third party products and the Company's proprietary products included in a particular contract, customers' budgetary constraints, increased competition, the timing of new product announcements and changes in pricing policies by the Company or its competitors, market acceptance of new and enhanced versions of the Company's products, changes in operating expenses and changes in general economic factors and export license delays and denials. The Company's expense levels are based, in part, on its expectations as to future revenue levels. If the Company's revenue levels were to be below expectations, the Company's operating results would likely be materially adversely affected.
DEPENDENCE ON QUALIFIED TECHNICAL PERSONNEL. The Company's operating results depend in large part upon the efforts of its microwave, software and systems engineers. The success of the Company's business therefore depends on its ability to attract and retain engineers and other technical personnel. There are a limited number of microwave engineers, and such individuals are sought both by microwave test and measurement companies such as the Company and by manufacturers of wireless products and telecommunications service providers. Competition for such personnel is intense. The Company has at times experienced difficulty in recruiting and retaining technical personnel, and there can be no assurance that the Company will not experience difficulties in the future in attracting and in retaining technical personnel.
DEPENDENCE ON KEY PERSONNEL. The success of the Company depends to a significant degree upon the contribution of its executive officers and other key personnel. There can be no assurance that the Company will be able to retain its managerial and other key personnel or to attract additional managerial and other key personnel if required.
PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS. The sale of products and systems by the Company may entail the risk of product liability and related claims. A product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Complex software and system products, such as those offered by the Company, may contain defects or failures when introduced or when new versions are released. There can be no assurance that, despite testing by the Company, errors will not be found in new products after commencement of commercial shipments, resulting in loss of market share or failure to achieve market acceptance. The Company maintains product liability insurance in the amount of $5.0 million and errors and omissions insurance in the amount of $1.0 million, although there can be no assurance that such coverage will be applicable to a particular claim or that the amounts of such insurance will be adequate if the Company experiences a significant claim. Although the Company has not experienced any significant claims to date related to its systems or products, the occurrence of such a claim could have a material adverse effect upon the Company's business, operating results and financial condition.
COMPETITION. The market for automated microwave test and measurement products, systems and services is highly competitive and is characterized by continuing advances in products and technologies. In general, competition in this market comes from major microwave test and measurement vendors, some of which have a longer operating history, significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. These companies also have established relationships with current and potential customers of the Company. The Company also competes, on a limited basis, with the internal development groups of its existing and
potential customers, who may design and develop parts of their own microwave test and measurement systems. The Company's business, operating results and financial condition could be materially adversely affected by such competition.
FLUCTUATIONS IN CAPITAL SPENDING. The Company is dependent upon the wireless communications, satellite, automotive and aerospace/defense industries. Because these industries are characterized by technological change, pricing and gross margin pressure and, particularly in the aerospace/defense industry, government budget constraints, they have from time to time experienced sudden economic downturns. During these periods, capital spending is frequently curtailed and the number of design projects often decreases. Since the Company's revenues are dependent upon capital spending trends and new design projects, negative factors affecting these industries could have a material adverse effect on the Company's business, operating results and financial condition.
NO DIVIDENDS. The Company has never paid cash dividends on its Common Stock and does not anticipate that any cash dividends will be declared or paid in the foreseeable future.
ISSUANCE OF PREFERRED STOCK AND COMMON STOCK; ANTI-TAKEOVER PROVISIONS. Pursuant to its Amended and Restated Certificate of Incorporation, the Company has an authorized class of 2,000,000 shares of Preferred Stock which may be issued by the Board of Directors with such terms and such rights, preferences and designations as the Board may determine and without any vote of the stockholders, unless otherwise required by law. Issuance of such Preferred Stock, depending upon the rights, preferences and designations thereof, may have the effect of delaying, deterring or preventing a change in control of the Company. Issuance of additional shares of Common Stock could result in dilution of the voting power of the Common Stock purchased in this offering. In addition, certain "anti-takeover" provisions of the Delaware General Corporation Law among other things, may restrict the ability of the stockholders to approve a merger or business combination or obtain control of the Company.
MARKET FOR COMMON STOCK. The Company's Common Stock is traded on the OTCBB, which limits exposure to market analysts and, in turn, may limit volume of trading. Investors may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's common stock than would otherwise be the case were the Company's Common Stock listed on a more recognized stock exchange or quotation service. In addition, trading in the Company's common stock is currently subject to certain rules under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a "penny stock." Penny stocks are generally non-Nasdaq equity securities with a market price less than $5.00 per share. The penny stock rules require broker-dealers selling penny stocks to make certain disclosures about such stocks to purchasers thereof, and impose sales practice restrictions on broker-dealers in certain penny stock transactions. The additional burdens imposed upon broker-dealers by these rules may discourage them from effecting transactions in the Company's common stock, which could limit the liquidity of the common stock and the ability of the Company's stockholders to sell their stock in the secondary market.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The reports of independent auditors and consolidated financial statements and schedule are set forth in this report beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of filing date of this annual report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this annual report was being prepared. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and principal occupation of each director.
Ze'ev Stein has served as a director of the Company and its predecessor since March 1996 and began serving as Chairman of the Board of Directors in October 1998. Since July 1994, Mr. Stein has served as a Director of Alchut and since September 1996, Mr. Stein has also served as the Vice-President of Operations of Alchut. From 1991 to 1996, Mr. Stein was the General Manager of Stein Special Art, Ltd., located in Ra'anana, Israel.
Uri Jenach was named a director in November 1999, and has served as the General Manager of SophistiPak LTD, an engineering and packaging consulting company since 1993. Mr. Jenach has served as a Director of ORBIT/FR, Engineering, Ltd., a subsidiary of the Company since 1996. Mr. Jenach also serves as a Director of Orbit Avionics, Ltd.
Doron Ginat has served as the General Manager of Netivey Gemel Ltd. since December 2000. From 1997 to December 2000 Mr. Ginat was the General Manager of the Pension & Insurance Fund of the Construction Workers. Prior to 1997 Mr. Ginat was an Economic Advisor of the General Manager of the Israeli Ministry of Infrastructure, along with serving in the Israeli Military.
Gurion Meltzer has served as the Vice Chairman of the Board of directors since July of 2001. In addition, he currently sits on the boards of directors of Orbit Advanced Technologies, LTD., the Company's parent company, along with Clal Industries, Neviot, and Zur Sha Mir. Mr. Meltzer was Chairman of the Board of Bezek from 1995 to 1997. Mr. Meltzer resigned as a Director of the Company effective as of March 24, 2004.
Dan Goffer is the managing partner of Goffer, Guilman & Co., CPAs of Tel Aviv, Israel. Mr. Goffer specializes in analytical auditing and computer consulting implementations.
BOARD OF DIRECTORS
The Board of Directors met seven times during the last fiscal year. There were no directors who, during the last full fiscal year, attended in person or by phone fewer than 75% of the meetings of the Board of Directors.
The Company's Amended and Restated Certificate of Incorporation provides that the Board of Directors shall consist of not less than three nor more than thirteen members, the exact number to be fixed and determined from time to time by the Board. The Company's whole Board of Directors consists of five (5) directors.
COMMITTEES OF THE BOARD
The Board of Directors has maintained a Compensation Committee and an Audit Committee since 1997, and an Executive Committee since June 6, 2002. The current members of the Executive Committee, Compensation Committee and Audit Committee were appointed by the Company's Board of Directors in June 2002.
The Compensation Committee of the Board of Directors, subject to the approval of the Board of Directors, determines the compensation of the Company's executive officers and oversees the administration of executive compensation programs. The Compensation Committee did not meet during 2003. Mr. Ginat, Mr. Jenach and Mr. Goffer were independent, nonemployee directors.
The Audit Committee recommends outside accountants, reviews the results and scope of the annual audit, the services provided by the Company's independent auditors and the recommendations of the auditors with respect to the Company's accounting systems and controls. During 2003, the Audit Committee met three times and was composed of Mr. Ginat, Mr. Jenach and Mr. Goffer, all of whom are independent, nonemployee directors, with Mr. Goffer considered an audit committee financial expert within the meaning of the rules of the Securities and Exchange Commission. Representatives of the Company's independent auditing firm, Hoberman, Miller, Goldstein, and Lesser, P.C., "Hoberman, Miller," participated in these meetings and discussed their reviews of the Company's financial statements. No members of the Audit Committee, attended in person or by phone, fewer than 75% of the meetings of the Audit Committee.
The Executive Committee has, and may exercise, all the powers and authority of the Board of Directors in the Management of the business and affairs of the Corporation to the fullest extent permitted by Delaware General Corporation Law. The Executive Committee did not meet during 2003. Mr. Meltzer and Mr. Jenach are independent, nonemployee directors.
COMPENSATION OF DIRECTORS
Directors not receiving compensation as an officer or employee of the Company, or under a specific agreement receive $5,000 per year plus stock options upon being named a director. These Directors are entitled to receive up to $750 per meeting. All Director's options will vest in five cumulative annual increments commencing 12 months after the date of grant. Mr. Ginat, Mr. Jenach and Mr. Goffer earned fees totaling $8,000, $9,750 and $8,000, respectively, for serving on the Company's Board of Directors.
COMPENSATION PHILOSOPHY AND POLICY
Our compensation program generally is designed to motivate and reward our executive officers and other personnel responsible for attaining financial objectives that will contribute to the overall goal of enhancing stockholder value. In administering the program, the Compensation Committee assesses the performance of our business and our employees relative to those objectives. Our compensation program generally provides incentives to achieve annual and longer term objectives. The principal elements of the compensation plan include base salary, cash bonus awards and stock awards in the form of grants of stock options. These elements generally are blended in order to provide compensation packages which provide competitive pay, reward the achievement of financial objectives and align the interests of our executive officers and other high level personnel with those of our stockholders.
Base Salary. In setting base salaries for officers and employees, we consider the experience of the individual, the scope and complexity of the position, our size and growth rate, profitability, and the compensation paid by our competitors.
Bonuses. An incentive plan for all executives was established by the Compensation Committee of the Board of Directors for the year 2001. It is meant to incent executives for attaining predetermined profit levels for both individual business units and for the Company overall. The plan is calculated annually after year end results are audited and executives must be employed by the Company on December 31st.
Stock Awards. To promote our long-term objectives, stock awards are made to directors, officers and employees who are in a position to make a significant contribution to our long-term success. The stock awards are made to directors, employees and consultants pursuant to our 1997 Stock Option Plan, in the form of qualified and nonqualified stock options.
The Compensation Committee has discretion to determine which employees and consultants will be granted stock options, the number of shares to be optioned and the terms and conditions of such options. The full Board of Directors conducts the administration of the option plan with respect to options granted to directors or to officers subject to section 16 of the Exchange Act. The compensation committee, or the Board of Directors, as applicable, also has discretion to make adjustments to options in the event of a change in control or other corporate event including, without limitation, the discretion to accelerate the vesting of options or waive our repurchase right. Options currently outstanding generally vest over a five year period.
In selecting recipients and the size of grants, the Compensation Committee considers various factors such as the potential of the recipient, the salary of the recipient and competitive factors affecting our ability to attract and retain employees, prior grants, a comparison of awards made to officers in comparable positions at similar companies and the performance of our business.
During 2003, Mr. Stein was paid a base salary of $60,000 for serving as the Chairman of the Board of Directors of Orbit/FR, Engineering Ltd. In addition Ze'ev Stein Properties, Ltd, an Israeli corporation wholly-owned by Mr. Stein, was paid $133,000 under a managements services agreement.
No option awards were made to named executive officers during 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2003, the Company had a Compensation Committee comprised of Mr. Ginat, Mr. Jenach and Mr. Goffer, previously described under "Committees of the Board." Mr. Ginat, Mr. Jenach and Mr. Goffer were independent, non employee directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors and persons who own more than ten percent (10%) of the Company's Common Stock to file initial reports of ownership and reports of change of ownership with the SEC. The reporting persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to it, the Company believes that, during the year ended December 31, 2003, the executive officers and directors and persons who own more than ten percent (10%) of the Company's Common Stock then subject to Section 16(a) complied with all Section 16(a) filing requirements.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Information concerning Certain Executive Officers and Key Employees is set forth in Item 4.1 of this Annual Report on Form 10-K.
The Company has adopted an ethics policy for all employees, including members of management, which has been filed as an exhibit to this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table summarizes the compensation of the Chief Executive Officer and the other Named Executive Officers of the Company for fiscal years 2003, 2002 and 2001 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
(1) Represents premiums of $408 paid by the Company for group term life insurance, and a matching contribution by the Company of $3,366 under the Company's 401(k) savings plan.
(2) Represents premiums of $504 paid by the Company for group term life insurance, and a matching contribution by the Company of $3,877 under the Company's 401(k) savings plan.
(3) Represents premiums of $117 paid by the Company for group term life insurance.
(4) Represents premiums of $408 paid by the Company for group term life insurance, and a matching contribution by the Company of $2,585 under our 401(k) savings plan.
(5) Represents premiums of $381 paid by the Company for group term life insurance, and a matching contribution by the Company of $1,846 under our 401(k) savings plan.
(6) Represents premiums of $362 paid by the Company for group term life insurance, and a matching contribution by the Company of $3,556 under our 401(k) savings plan.
(7) Represents premiums of $408 paid by the Company for group term life insurance, and a matching contribution by the Company of $1,134 under our 401(k) savings plan.
(8) Represents premiums of $408 paid by the Company for group term life insurance, and a matching contribution by the Company of $3,247 under our 401(k) savings plan.
(9) Represents premiums of $504 paid by the Company for group term life insurance, and a matching contribution by the Company of $4,105 under our 401(k) savings plan.
(10) Represents premiums of $456 paid by the Company for group term life insurance.
(11) Represents contributions by the Company of under the retirement plan of ORBIT/FR Engineering Ltd.
STOCK OPTION GRANTS
No stock options were granted to the Named Executive Officers of the Company during 2003.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The table below shows 2003 year-end amounts and value of shares of Common Stock underlying outstanding options. The Named Executive Officers did not exercise any stock options in 2003.
(1) Based on the closing price of $1.55 on the OTCBB on December 31, 2003.
EMPLOYMENT AGREEMENTS
Ze'ev Stein. Effective January 1, 2003, the Company entered into a management services agreement with an Israeli corporation wholly owned by Mr. Stein. In consideration for services provided by Mr. Stein as Chairman of the Board of Directors of the Company, the agreement calls for the management company to receive annual fees of $133,000, payable in monthly installments of $11,083 (plus VAT if applicable). The management services agreement replaces Mr. Stein's employment agreement with the Company and may be terminated by either party upon appropriate written notice. Pursuant to an existing employment agreement, Mr. Stein continues to act as Chairman of the Board of the Company's wholly owned subsidiary, ORBIT/FR, Engineering, Ltd. whereby Mr. Stein is paid a base salary of $60,000 annually. Under both agreements, Mr. Stein is subject to certain non-disclosure, non-solicitation and non-competitive covenants.
Israel Adan. Effective October 15, 2001, the Company entered into an employment agreement with Israel Adan. Mr. Adan was named President and Chief Executive Officer of the Company. The agreement calls for Mr. Adan to receive a base salary of $150,000 and provides that Mr. Adan may be entitled to an annual bonus based upon achievement of certain annual objectives established by the Company's Board of Directors. Mr. Adan was also granted an option to purchase 60,000 shares of common stock at an exercise prices of $3.00 per share. Mr. Adan's employment agreement may be terminated by the Company for cause, which is defined as the material breach of the employment agreement by Mr. Adan or if Mr. Adan commits a material act of dishonesty or a material breach of trust or a fiduciary obligation with respect to the Company. Under the employment agreement, Mr. Adan is subject to certain non-disclosure, non-solicitation and non-
competitive covenants. Effective June 20, 2003 Mr. Adan's employment agreement was amended and restated to provide Mr. Adan with the right to receive a bonus payment in certain circumstances in the event of a change in control of the Company, as defined in the agreement, or the Sale of one or more of the Company's business units.
Gurion Meltzer. Effective July 24, 2001, the Company and Mr. Meltzer entered into a consulting agreement whereby Mr. Meltzer was elected as a director and Chair of the director's executive committee. In consideration for his services Mr. Meltzer will be paid an annual fee of $50,000, payable in six bi-monthly installments, and was granted an option to purchase 30,000 shares of common stock at an exercise price of $3.00 per share.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 30, 2004 certain information with regard to beneficial ownership (as determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of outstanding shares of the Company's Common Stock by (i) each person known by the Company to beneficially own five percent (5%) or more of the outstanding shares of the Company's Common Stock, (ii) each director and Named Executive Officer (as defined below) individually, and (iii) all executive officers and directors of the Company as a group:
* Less than 1% of the outstanding Common Stock.
(1) The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options within 60 days after the date of this report. Beneficial ownership may be disclaimed as to certain of the securities.
(2) Represents shares beneficially owned after the Company's initial public offering effective June 17, 1997.
(3) Represents 3,700,000 shares held by Alchut. Mr. Stein is a director and 57% beneficial stockholder of Alchut. Also includes 30,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Stein, which options became exercisable prior to the date of this Report on Form 10K.
(4) Represents 30,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Jenach, which options became exercisable prior to the date of this Report on Form 10K.
(5) Represents 18,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Ginat, which options became exercisable prior to the date of this Report on Form 10K. Does not include 12,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Ginat, which options become exercisable in five cumulative installments commencing 12 months after the dates of the original grants, which options are not exercisable within 60 days of the date of this report.
(6) Represents 12,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Meltzer, which options became exercisable prior to the date of this Report on Form 10K. Does not include 18,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Meltzer, which options become exercisable in five cumulative annual installments commencing 12 months after the date of original grant which options are not exercisable within 60 days of the date of this report.
(7) Represents 6,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Goffer, which options became exercisable prior to the date of this Report on Form 10K. Does not include 24,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Goffer, which options become exercisable in five cumulative annual installments commencing 12 months after the date of original grant which options are not exercisable within 60 days of the date of this report.
(8) Represents 40,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Adan, which options became exercisable prior to the date of this Report on Form 10K Statement. Does not include 20,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Adan, which options become exercisable in three cumulative annual installments commencing 12 months after the date of original grant which options are not exercisable within 60 days of the date of this report.
(9) Includes 21,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Bates, which options became exercisable prior to the date of this Report on Form 10K. Also includes 2,750 shares of Common Stock exercisable within 60 days of the date of this Report on Form 10K. Does not include 5,250 shares of Common Stock issuable upon the exercise of options granted to Mr. Bates, which options become exercisable in four cumulative installments commencing 24 months after the dates of the original grants, which options are not exercisable within 60 days of the date of this report.
(10) Includes 17,250 shares of Common Stock issuable upon the exercise of options granted to Mr. Lubbe, which options became exercisable prior to the date of this Report on Form 10K. Does not include 7,750 shares of Common Stock issuable upon the exercise of options granted to Mr. Lubbe, which options become exercisable in four cumulative installments commencing 24 months after the dates of the original grants, which options are not exercisable within 60 days of the date of this report.
(11) Includes 51,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Pinkasy, which options became exercisable prior to the date of this report.
(12) Includes 68,973 shares owned by Mr. Sanchez. Also includes 21,400 shares of Common Stock issuable upon the exercise of options granted to Mr. Sanchez, which options became exercisable prior to the date of this Report on Form 10K. Does not include 1,400 shares of Common Stock issuable upon the exercise of options granted to Mr. Sanchez, which options become exercisable in four cumulative installments commencing 24 months after the dates of the original grants, which options are not exercisable within 60 days of the date of this report.
(13) Includes the information contained in the notes above, as applicable.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information, as of the end of the fiscal year ended December 31, 2003, with respect to compensation plans under which the Company is authorized to issue shares of Common Stock.
- ------------------- (1) This plan consists of the Orbit/FR, Inc. 1997 Stock Option Plan.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Orbit/FR Engineering, Ltd. ("Engineering"), the Company's wholly-owned Israeli subsidiary, and Alchut have an agreement, whereby Engineering purchases from Alchut electrical and mechanical production services. Engineering pays Alchut for these services based upon a rate of cost plus 5%, totaling approximately $1,212,000 for the year ended December 31, 2003. In addition, Alchut provided other administrative services to Engineering, including but not limited to, bookkeeping, computer, legal, accounting, cost management, information systems, and production support, which amounted to $245,000 in 2003. These agreements are evaluated on an annual basis.
PART IV
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ACCOUNTANT FEES
The following table presents fees for professional services rendered by Hoberman, Miller for the audit of the Company's annual financial statements, review of the Company's interim financial statements and fees for other services rendered in 2003 and 2002.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Company's Audit Committee has policies and procedures that require the pre-approval by the Audit Committee of all fees paid to, and all services performed by, the Company's independent accounting firm. The Audit Committee approves the proposed services, including the nature, type, and scope of services contemplated and the related fees, to be rendered by the Company's independent accounting firm during the year. In addition, Audit Committee pre-approval is also required for those engagements that may arise during the course of the year that are outside the scope of the initial services and fees pre-approved by the Audit Committee.
Pursuant to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in the table above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
Independent Auditors' Report
Auditors' Report to the Shareholders of ORBIT/FR Engineering, LTD.
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2003 and
Consolidated Statements of Operations for the years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule filed as part of this report.
II Valuation and Qualifying Accounts
The financial statement schedule should be read in conjunction with the consolidated financial statements. Financial statement schedules not included have been omitted because they are not applicable as the required information is shown in the consolidated financial statements. (electronic filing only.)
(a)(3) Exhibits
The exhibits filed as part of this report are listed under exhibits as subsection (c)of this Item 15.
(b) Current Reports on Form 8-K
No report on Form 8-K was filed on behalf of the Registrant during the last quarter of the period covered by this report.
(c) Exhibits
2.1 Stock Purchase Agreement dated March 31, 1997 by and among Advanced Electromagnetics, Inc., Anechoic Systems, Inc., Gabriel A. Sanchez, Barbara Sanchez and the Company. (1)
2.2 Share Exchange Agreement dated December 31, 1996 by and among Orbit-Alchut Technologies, Ltd., Orbit Advanced Systems, Ltd. And the Company. (1)
2.3 Asset Acquisition Agreement dated December 31, 1996 by and between Orbit-Alchut Technologies, Ltd. and Orbit F.R. Engineering, Ltd. (1)
2.4 Inventory Acquisition Agreement dated January 1, 1997 by and between Orbit-Alchut Technologies, Ltd. and Orbit F.R. Engineering, Ltd. (1)
2.5 Stock Purchase Agreement dated June 28, 1996 by and among Orbit Advanced Technologies, Inc., The Samuel T. Russell Trust, Richard P. Flam, Rickey E. Hartman, Lois A. R. Charles, Dorothy Russell, John Aubin, Norma D. Kegg and Flam & Russell, Inc. (1)
3.1 Amended and Restated Certificate of Incorporation of the Company. (2)
3.2 Bylaws of the Company. (2)
4.1 Specimen Common Stock Certificate of the Company. (2)
10.1 Employment Agreement dated February 15, 1997 by and between the Company and Aryeh Trabelsi. (1)
10.2 Employment Agreement dated January 1, 1997 by and between the Company and Moshe Pinkasy. (1)
10.3 1997 Equity Incentive Plan. (1)
10.4 Services Agreement dated January 1, 1997 by and among Orbit-Alchut Technologies, Ltd., Orbit F.R. Engineering, Ltd. and the Company. (1)
10.5 ORBIT/FR Inc. non-debarment agreement dated February 15, 2000 (electronic filing only.) (4)
10.6 Consulting agreement dated July 24, 2001 by and between the Company and Gurion Meltzer. (5)
10.7 Employment agreement dated September 5, 2001 by and between the Company and Ze'ev Stein. (5)
10.8 Amended and restated Employment agreement dated June 20, 2003_ by and between the Company and Israel Adan (5)
10.9 Management Agreement dated January 1, 2003 by and between the Company and Ze'ev Stein Properties, LTD.
14.0 Employee Ethics Policy
21.1 Subsidiaries of the Registrant. (3)
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Auditors.
24.1 Power of Attorney (included on signature page). 31.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Israel Adan, President and Chief Executive Officer.
31.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Dave Lubbe, Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Israel Adan, President and Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Dave Lubbe, Chief Financial Officer.
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-25015), filed with the Commission on April 11, 1997
(2) Incorporated by reference to Amendment 1 of the Company's Registration Statement on Form S-1 (File No. 333-25015), filed with the Commission on May 19, 1997
(3) Incorporated by reference to Amendment 2 of the Company's Registration Statement on Form S-1 (File No. 333-25015), filed with the Commission on June 5, 1997
(4) Incorporate by reference to Company's Annual report on Form 10-K filed on March 30, 2001
(5) Incorporate by reference to Company's Annual report on Form 10-K filed on March 31, 2003
ORBIT/FR, INC.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ORBIT/FR, INC
Date: March 30, 2004 /s/ Ze'ev Stein ----------------- Ze'ev Stein Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ze'ev Stein and each of them, his true and lawful attorney-in-fact and agent with full power of substitution or resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documentation in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the 30th day of March 2004.
ACKNOWLEDGMENT BY AGENT
I, Ze'ev Stein, have read the above power of attorney and am the person identified as the attorney-in-fact and agent for the principals whose signatures appear above. I hereby acknowledge that in the absence of a specific provision to the contrary in the power of attorney or in the Pennsylvania Probate, Estates and Fiduciaries Code (20 Pa. C.S.) when I act as an attorney-in-fact and agent:
I shall exercise the power for the benefit of the principals.
I shall keep the assets of the principals separate from my assets.
I shall exercise reasonable caution and prudence.
I shall keep a full and accurate record of all actions, receipts and disbursements on behalf of the principals.
March 30, 2004
/s/ Ze'ev Stein Ze'ev Stein Attorney-in-fact
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors Orbit/FR, Inc.
We have audited the consolidated balance sheets of Orbit/FR, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. Our audit also included the 2003 and 2002 Financial Statement Schedules listed in the index at item 15(a). These consolidated financial statements and Schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and Schedules based on our audits. We did not audit the financial statements of Orbit/FR Engineering, Ltd., a wholly owned subsidiary, which statements reflect total assets of $3,920,000 and $4,816,000 as of December 31, 2003 and 2002, respectively, and total revenues of $7,505,000 and $6,648,000, for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Orbit/FR Engineering, Ltd., is based solely on the report of the other auditors. The consolidated financial statements of Orbit/FR, Inc. and Subsidiaries for the year ended December 31, 2001, were audited by other auditors whose report dated March 14, 2002, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbit/FR, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules for the years ended December 31, 2003 and 2002, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the accompanying consolidated financial statements, as of January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform with the provisions of Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets."
(HOBERMAN, HILLER, GOLDSTEIN, LESSER, CPA's P.C)
February 19, 2004 New York, NY
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
ORBIT/FR ENGINEERING, LTD.
We have audited the accompanying balance sheets of Orbit/Fr Engineering, Ltd. ("the Company") as of December 31, 2003 and 2002, and the related statements of income, changes in shareholders' equity and cash flows for each of the years ended on those dates. These financial statements are the responsibility of the Company's board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States and in Israel, including those prescribed by the Israeli Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations, the changes in its shareholders' equity and its cash flows for each of the years ended on those dates, in conformity with generally accepted accounting principles in Israel, which do not differ in any significant respects from those followed in the United States.
As explained in Note 2b, the financial statements referred to above are presented in U.S. dollars in accordance with pronouncements of the Institute of Certified Public Accountants in Israel.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER March 21, 2004 A Member of Ernst & Young Global
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors Orbit/FR, Inc.
We have audited the accompanying financial statements of operations, stockholders' equity, and cash flows of Orbit/FR, Inc. for the year ended December 31, 2001. Our audit also included the 2001 financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Orbit/FR, Inc. for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania March 14, 2002
ORBIT/FR, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes.
ORBIT/FR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
See accompanying notes.
ORBIT/FR, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
See accompanying notes.
ORBIT/FR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
See accompanying notes.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership and Basis of Presentation
ORBIT/FR, Inc. (the "Company"), was incorporated in Delaware on December 9, 1996, as a wholly-owned subsidiary of Orbit-Alchut Technologies, Ltd., an Israeli publicly traded corporation (hereinafter referred to as the "Parent"). The Company develops, markets, and supports sophisticated automated microwave test and measurement systems for wireless communications, satellite, automotive, and aerospace/defense industries and manufactures anechoic foam, a microwave absorbing material that is an integral component of microwave test and measurement systems. ORBIT/FR, Inc., a holding company, supports its world wide customers through its subsidiaries ORBIT/FR Engineering, LTD (hereinafter referred to as "Engineering", Israel), ORBIT/FR Europe, (Germany), Advanced Electromagnetics, Inc. ("AEMI", San Diego, CA), and Orbit Advanced Technologies, Inc. and Flam and Russell, Inc, (Horsham, PA).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions of the Company and its wholly-owned subsidiaries have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company classifies as cash equivalents all highly liquid instruments with original maturities of three months or less at the time of purchase.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on accelerated methods for both financial reporting and income tax reporting purposes over the estimated useful lives as follows: office equipment -- 5-7 years; lab equipment -- 5 years; furniture and fixtures -- 7 years; transportation equipment -- 5 years; leasehold improvements -- 5 years.
Software Development Costs
Costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional development costs are capitalized in accordance with SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Capitalization ceases when the product is available for general release to customers and amortization over a three year period will commence. During the year ended December 31, 2001 the Company capitalized $92 of software development costs in connection with the development of its 959+ Nearfield software package. During the fourth quarter of 2001, the Company determined that the software is not saleable without substantial modification and upgrade to the existing program. As such, the Company determined that the net realizable value of the software in its current form as of December 31, 2001 was zero and wrote-off the remaining unamortized balance.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired represents the excess of costs over the fair value of the net assets of businesses acquired in connection with the Company's acquisition of Advanced Electromagnetics, Inc. (AEMI) in 1997. Through December 31, 2001, such amounts were amortized on a straight-line basis over twenty years. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") was issued in July 2001 and became effective for the Company on January 1, 2002. SFAS No. 142 addresses how goodwill and other intangible assets should be accounted for upon their acquisition and afterwards. The primary impact of SFAS No. 142 on the Company is that beginning in 2002, existing goodwill ("cost in excess of net assets acquired") is no longer amortized. Instead of amortization, goodwill is subject to an assessment for impairment on a reporting unit basis by applying a fair-value-based test annually, and more frequently if circumstances indicate a possible impairment. If a reporting unit's net book value is more than its fair value and the reporting unit's net book value of its goodwill exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess goodwill over the book value.
Based upon the December 31, 2001 cost in excess of net assets acquired balance, the Company reported lower amortization of $43 for the year ended December 31, 2002 compared to 2001, representing $0.01 per share. The Company tested the goodwill of AEMI for impairment during the first quarter of 2002 using the present value of future cash flows valuation method. This process resulted in an impairment of $301 which is accounted for as a cumulative effect of change in accounting principle during the year ended December 31, 2002.
The Company further tested the goodwill of AEMI for impairment at December 31, 2003 and 2002 using the present value of future cash flow valuation method and found that no additional adjustment for the value of goodwill was necessary.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue and Cost Recognition
The Company's principal sources of contract revenues are from engineering and design services and the production of electro-mechanical equipment. Revenues from long-term fixed-price development contracts performed principally under the Company's control are recognized on the percentage-of- completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract when such costs can be reasonably estimated. Contract costs include all direct material, labor and subcontractor costs and those indirect costs related to contract performance such as indirect labor, supplies and tool costs. General and administrative costs are charged to expense as incurred. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenue and are recognized in the period in which the revisions are determined. Revenues from electro-mechanical equipment sold to customers which are not part of a larger contract are recognized when the contract is substantially completed. Revenues recognized in excess of amounts billed are classified under current assets as costs and estimated earnings in excess of billings on uncompleted contracts. Amounts received from clients in excess of revenues recognized to date are classified under current liabilities as billings in excess of costs and estimated earnings on uncompleted contracts.
Research and Development
Internally funded research and development costs are charged to operations as incurred. Included in cost of revenues is customer-funded research and development costs of approximately $280, $90, and $135 for the years ended December 31, 2003, 2002, and 2001, respectively.
Concentrations of Credit Risk and Significant Customers
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of accounts receivable. To reduce credit risk relating to the Company's sales in the U.S. and overseas, the Company performs ongoing credit evaluations of its commercial customers' financial condition, but generally does not require collateral for government and domestic commercial customers. For certain foreign commercial customers, the Company generally requires irrevocable letters of credit in the amount of the total contract. At December 31, 2003, there were 13 bank guarantees in place for the Company's foreign customers. For the year ended December 31, 2003 and 2002 one customer accounted for 11% of the Company's revenues, while two customers accounted for 22% of the Company's revenues for the year ended December 31, 2001.
Warranty Expense
The Company provides for warranty costs on sales of its own product. Product warranty periods generally extend for one year from the date of sale.
Income Taxes
The Company uses the liability method to account for income taxes. Accordingly, deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for financial reporting purposes and the amounts reportable for income tax purposes. The Company files a consolidated federal income tax return with its domestic subsidiaries.
Foreign Currency Translation
The Company's functional currency for operations in Israel is the U.S. dollar. The Company's functional currency for operations of its German subsidiary is the local currency. Foreign currency transaction gains and losses, are recognized currently in the consolidated statements of operations and are not material to operations.
For the years ended December 31, 2003, and 2002, approximately 26% and 15%, respectively, of the Company's revenue was billed in currencies other than the U.S. dollar. Substantially all of the costs of the Company's contracts, including costs subcontracted to the Parent, have been U.S. dollar denominated transactions.
Loss Per Share
Basic loss per share is calculated by dividing the net loss by the weighted average common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss by the weighted average common shares outstanding for the period plus the dilutive effect of stock options. The dilutive effect of stock options is not included in 2003, 2002, and 2001 as inclusion of such options is antidilutive.
Stock-Based Compensation
The Company follows APB Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25") and the related interpretations in accounting for its stock-based compensation plans. Note 13 includes the required disclosures and pro forma information provided under FASB Statement No. 123 Accounting for Stock-Based Compensation ("SFAS 123"). Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying common stock at the date of grant, no compensation expense is recognized.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses reported in the consolidated balance sheets equal or approximate fair value due to their short maturities.
Impact of Recent Accounting Pronouncements
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No.'s 141 and 142, "Business combinations" and "Goodwill and Other Intangibles." FASB 141 requires all business combinations initiated after July 1, 2001 to be accounted for using the purchase method. FASB 142 concluded that purchased goodwill would not be amortized but would be reviewed for impairment when certain events indicate that the goodwill of a reporting unit is impaired. The impairment test uses a fair-value based approach, whereby if the implied fair value of a reporting unit's goodwill is less than its carrying amount, goodwill is considered to be impaired. FASB 142 does not require that goodwill be tested for impairment upon adoption unless an indicator of impairment exists at that date. However, it
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires that a benchmark assessment be performed for all existing reporting units within six months of the date of adoption. SFAS 142 applies not only to goodwill arising from acquisitions completed after the effective date, but also to goodwill previously recorded. The Company adopted FASB 142 in the first quarter of 2002 and determined there was an impairment of $301,000 which was reflected as a cumulative effect of a change in accounting principle on the statement of operations for the year ended December 31, 2002.
In August 2001, the FASB issued SFAS No.143 "Accounting For Asset Retirement Obligations." This statement addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its financial position, results of operations, or cash flows.
In August 2001, the FASB issued SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supercedes both SFAS No. 121 , "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," related to the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its financial position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity" which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This new standard did not impact the Company in 2003.
2. INVENTORY
Inventory consists of the following:
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. RELATED PARTY TRANSACTIONS
Engineering and the Parent have an agreement, whereby Engineering purchases from the Parent electrical and mechanical production services. In addition, the Parent provides other administrative services, including but not limited to, bookkeeping, computer, legal, accounting, cost management, information systems, and production support. Engineering pays the Parent for these services based upon a rate of cost of production services plus 20%. Engineering is leasing office space from the Parent on an annual basis, for a rental of $63 per year. These agreements are to be evaluated on an annual basis, and are intended to be at market value.
The Company paid $245, $202 and $302 in 2003, 2002 and 2001, respectively, to the Parent for administrative services.
Included in cost of revenues for the years ended December 31, 2003, 2002 and 2001 are approximately $1,212, $1,021, and $1,359, respectively, relating to the production services provided by the Parent.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities and certain equipment under noncancelable operating lease agreements which expire in various years through 2012. Rent expense for the years ended December 31, 2003, 2002 and 2001 was approximately $609, $550, and $537, respectively. Future minimum lease payments under noncancelable operating leases with initial terms of one year or more are as follows at December 31, 2003: $507 in 2004; $439 in 2005; $450 in 2006; $439 in 2007; $303 in 2008, and $500 thereafter.
In connection with the Company's efforts to re-establish its International Traffic in Arms (ITAR) export privileges, denied since November 1999, the Company is seeking a settlement with the U.S. Department of State. The Company has been informed that any such settlement will involve the payment of a civil penalty which cannot be currently estimated.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates exclusively in one industry segment, the business of developing, marketing and supporting sophisticated automated microwave test and measurement systems. In addition to its principal operations and markets in the United States, the Company conducts sales, customer support and service operations out of other geographic locations in Europe, Asia, and North America. The following table represents financial information by geographic region for the years ended December 31, 2003, 2002, and 2001:
In table above "North America" includes all domestic operations, and "Europe" includes subsidiaries in Germany and Israel.
8. INCOME TAXES
Pretax loss for the years ended December 31 was taxed in the following jurisdictions:
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant portion of deferred tax assets and liabilities consist of the following:
As of December 31, 2003, the Company has net operating loss carryforwards of approximately $7,477 for federal income tax purposes which begin to expire in 2023. The Company also has a German net operating loss carryforward of approximately $1,476 which will be available indefinitely.
As of December 31, 2003, the Company has net operating loss carryforwards of approximately $283 and tax credits of approximately $114, which the Company acquired in its acquisition of Flam & Russell, Inc. The tax benefit of these losses and credits may be limited both in time and amount due to limitations imposed by Section 382 of the Internal Revenue Code. These net operating loss and credit carryforwards expire during various dates through 2009.
The Company increased its valuation allowance on its deferred tax asset during 2003 as a result of the Company reporting negative operating income, and due to the uncertainty with regard to the Company's ability to generate sufficient taxable income in the future to realize the entire deferred tax asset. A valuation allowance has also been recorded due to the uncertainty with respect to the ultimate realization of the deferred tax asset recorded in connection with the Company's German subsidiary.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES (continued)
The components of income tax expense (benefit) are as follows:
A reconciliation of income tax expense at the U.S. Federal statutory tax rate and the actual income tax expense is as follows:
9. RESEARCH AND DEVELOPMENT
Prior to 1994, the Company received research and development funding from the Binational Industrial Research and Development Foundation ("BIRD") and the Chief Scientist of the Ministry of Industry and Trade ("Chief Scientist"). Under terms of the BIRD grants, the Company is obligated to repay 100% to 150% of the funding received at rates ranging from 2 1/2% to 5% of the annual sales of the product developed under the grants. For the year ended December 31, 2001 royalties under this program were approximately $7. At December 31, 2003 and 2002 the Company had outstanding contingent obligations to BIRD of $46. Under the terms of the Chief Scientist grant, the Company is obligated to pay royalties at a rate of 2% of revenues generated from the sale of certain products up to the amount of the grant. For the years ended December 31, 2003, 2002, and 2001, royalties under this program were approximately $60, $59 and $57, respectively. At December 31, 2003 the Company had an outstanding contingent obligations to the Chief Scientist of $571. Such contingent obligation is payable in future periods based upon annual sales of products developed under the grants.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. RETIREMENT PLANS
The Company has retirement plans which cover substantially all employees who have attained the age of 21 and have completed 3 months of service. Eligible employees make voluntary contributions to the plans up to specified percentages of their annual compensation as defined in the plans. Under the plans, the Company makes discretionary matching contributions determinable each plan year and additional contributions based on annual eligible compensation for each participant. The plans are funded on a current basis. For the years ended December 31, 2003, 2002 and 2001, the Company's contributions to the plans were $71, $79 and $67, respectively.
11. LONG-TERM CONTRACTS
Long-term contracts in process accounted for using the percentage-of-completion method are as follows:
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. STOCK OPTION PLAN
During March 1997, the Board of Directors adopted, and the Company's Stockholders approved, the Company's 1997 Equity Incentive Plan (the "Incentive Plan") which provides for awards of 800,000 shares of the Company's stock. Options granted generally vest over five years and typically have a life of ten years. The purpose of the Incentive Plan is to promote the long-term retention of the Company's key employees and certain other persons who are in a position to make significant contributions to the success of the Company. The Incentive Plan permits grants of incentive stock options ("ISOs"), options not intended to qualify as ISOs ("nonqualified options"), stock appreciation rights ("SARs"), restricted, unrestricted and deferred stock awards, performance awards, loans and supplemental cash awards, and combinations of the foregoing (all referred to as "Awards").
Detail information concerning the Incentive Plan is as follows at December 31:
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. STOCK OPTION PLAN (CONTINUED)
The Company has elected to follow APB 25 and the related interpretations in accounting for stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, requires the use of option valuation models that were not developed for use in valuing stock options. Under APB 25, because the exercise price of the Company's stock options equals or exceeds the market price of the underlying common stock on the date of grant, no compensation expense is recognized.
Pro-forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for stock options under the fair value method of SFAS 123. The fair value for the Company's stock options granted is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002 and 2001; risk-free interest rate of 5.5%; no expected dividend payments; volatility factor of the expected price of the Company's common stock, based on historical volatility, of 101.0% and 108.1%; and a weighted-average expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. As noted above, the Company's stock options are vested over an extended period. In addition, option models require the input of highly subjective assumptions including future stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimates, in management's opinion, the Black-Scholes model does not necessarily provide a reliable measure of the fair value the Company's stock options.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. STOCK OPTION PLAN (CONTINUED)
For purposes of pro-forma disclosure under FASB 123, the estimated fair value of the Company's options is amortized over the options vesting period. The impact of the repricing has been considered in the pro-forma information. The Company's pro-forma information is as follows:
13. STOCKHOLDERS' EQUITY
Common Stock
The holders of shares of Common Stock are entitled to one vote for each share on record on any matters to be voted on by the stockholders. The holders of Common Stock are entitled to receive dividends if declared by the Board of Directors and to share ratably in the assets of the Company legally available for distribution to its stockholders in the event of liquidation, dissolution or winding-up of the Company. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights.
Preferred Stock
The Company's Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of shares of Preferred Stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. The holders of Preferred Stock would normally be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of the Common Stock. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of Common Stock.
Treasury Stock
On June 24, 1998, the Company's Board approved the repurchase of up to 300,000 shares of its stock. The Company repurchased 82,900 shares for $243 as of December 31, 2003. The treasury shares have been recorded at cost.
ORBIT / FR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows:
Schedule II - Valuation and Qualifying Accounts ORBIT/FR, Inc. and Subsidiaries December 31, 2003
EXHIBIT INDEX