ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Orbit International Corp. (the "Company" or "Orbit") was incorporated under the laws of the State of New York on April 4, 1957 as Orbit Instrument Corp. In December 1986, the state of incorporation was changed from New York to Delaware and in July 1991, the name was changed to Orbit International Corp. The Company conducts its operations through its Orbit Instrument Division and its wholly owned subsidiaries, Behlman Electronics, Inc. and Tulip Development Laboratory, Inc. ("TDL") and its affiliated manufacturing company, TDL Manufacturing, Inc. ("TDLM")(collectively "Tulip"). Through its Orbit Instrument Division, which includes its wholly owned subsidiaries, Orbit Instrument of California, Inc. and Tulip, the Company is engaged in the design, manufacture and sale of customized electronic components and subsystems. Integrated Consulting Services, Inc., d/b/a Integrated Combat Systems, Inc. ("ICS"), acquired effective December 31, 2007 and based in Louisville, Kentucky, performs systems integration for gun weapons systems and fire control interface, as well as logistics support and documentation. Behlman Electronics, Inc. is engaged in the design and manufacture of distortion free commercial power units, power conversion devices and electronic devices for measurement and display.
On December 19, 2007, the Company completed the acquisition of all of the issued and outstanding stock of ICS effective December 31, 2007. The total transaction value was approximately $6,600,000 consisting of $5,400,000 in cash, of which $4,500,000 was funded by a five year term loan from its primary lender, approximately 120,000 shares of Orbit stock valued at approximately $1,000,000 and approximately $200,000 in acquisition costs. Additionally, there is a contingent earn out of $1,000,000, payable over the next three years, based on ICS's ability to attain certain revenue levels over the three year period.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company currently operates in two industry segments. The Electronics Group is comprised of the Company's Orbit Instrument Division, its Tulip subsidiary, and its ICS subsidiary, commencing December 31, 2007. Orbit Instrument Division and Tulip are engaged in the design and manufacture of electronic components and subsystems. ICS performs system integration for gun weapons systems and fire control interface as well as logistics support and documentation. The Power Group is comprised of the Company's Behlman subsidiary and is engaged in the design and manufacture of commercial power units.
The following sets forth certain selected historical financial information relating to the Company's business segments:
December 31, ------------ 2007(1) 2006(1) ------- -------
Net sales: - ---------
Electronics Group Domestic $15,503,000 $15,291,000 Foreign 1,162,000 1,031,000 ----------- ----------- Total Electronics Group $16,665,000 $16,322,000
Power Group Domestic $ 8,207,000 $ 8,170,000 Foreign 1,013,000 523,000 ----------- ------------- Total Power Group $ 9,220,000 $ 8,693,000
Operating income (2): - ----------------
Electronics Group $ 2,666,000 $ 3,017,000 Power Group $ 1,232,000 $ 996,000
Assets: - ------
Electronics Group $ 10,504,000 $ 8,680,000 Power Group $ 5,668,000 $ 4,853,000
(1) Does not include the operations of ICS since the acquisition was not effective until December 31, 2007. (2) Exclusive of corporate overhead expenses, interest expense and investment and other income- net, which are not allocated to the business segments.
Additional financial information relating to the business segments in which Orbit conducts its operations is set forth in Note 16 to the Consolidated Financial Statements appearing elsewhere in this report.
DESCRIPTION OF BUSINESS
GENERAL
Orbit's Electronics Group designs, manufactures and sells customized panels, components, and "subsystems" for contract program requirements to prime contractors, governmental procurement agencies and research and development ("R&D") laboratories. The Group primarily designs and manufactures in support of specific military programs. More recently, the Company has focused on providing commercial, non-military "ruggedized hardware" (hardware designed to meet severe environmental conditions) for prime contractor programs at cost competitive prices. Products include a variety of custom designed "plasma based telephonic intercommunication panels" for secure voice airborne and shipboard program requirements, "full-mil keyboards", "trackballs" and "data entry display devices". The Electronics Group's products, which in all cases are designed for customer requirements on a firm fixed price contract basis, have been successfully incorporated on surveillance aircraft programs, including E-2C, E-2D, Joint Surveillance Target Attack Radar Systems (J/STARS), Lookdown Surveillance Aircraft (AWACS) and P-3 (anti-submarine warfare) requirements, and shipboard programs, including AEGIS (Guided Missile Cruisers and Destroyers), DDG'S (Guided Missile Destroyers), BFTT (Battle Force Tactical Training), LSD'S (Amphibious Warfare Ships) and LHA'S (Amphibious Warfare Ships) applications, as well as a variety of land based guidance control programs including the TAD (Towed Artillery Digitization) fire control system. Through ICS, the Electronics Group also performs (i) analysis and evaluation of medium and major caliber Naval Gun Weapon Systems performance, including interoperability and compatibility with combat systems, interface systems, ammunition, subsystems and components, (ii) engineering requirements such as the design, integration and production of medium and major caliber Naval Gun Weapon Systems' components and (iii) engineering supplies and services in support of medium and major caliber Naval Gun Weapon Systems initiatives, including the development of test plans, test equipment, test articles/units, analyses, trouble shooting, repair, maintenance and reporting.
Orbit's Power Group manufactures and sells power supplies, AC power sources (equipment that produces power that is the same as what would be received from a public utility), "frequency converters" (equipment that converts local power to equivalent foreign power), "uninterruptible power supplies ("UPS")" (devices that allow a computer to operate while utility power is lost), associated analytical equipment and other electronic equipment. The military division of Behlman designs and manufactures "power conversion devices" (equipment that produces power that is the same as what would be received from a public utility) and electronic products for measurement and display.
PRODUCTS
Electronics Group
IFF- Identification Friend or Foe
Orbit Instrument has designed and developed a Remote Control Unit ("RCU") that has supported the Common Transponder ("CXP") program for both U.S. Navy and U.S. Army program requirements. Orbit's RCU has been fully qualified for shipboard, aircraft and ground based programs, which are now functional and supporting U.S. forces in air, sea and ground battlefield conditions. The Orbit RCU now has embedded proprietary software code for Mode S, Enhanced Traffic Alert and Collision Avoidance Systems ("ETCAS"), and Mode 5 IFF combat applications.
After shipping more than 3,000 units in support of U.S. Army and U.S. Navy CXP program requirements, Orbit has designed and qualified a new Integrated Remote Control Unit ("IRCU") which has been qualified to support U.S. Air Force retrofit, as well as new program opportunities.
Intercommunication Panels
The Orbit Instrument Division has designed and developed various types of shipboard communication terminals. Orbit also upgraded these panels with state-of-the-art displays and touch screens. These communication terminals support existing shipboard secure and non secure voice communication switches. In addition, the Orbit Instrument Division has also upgraded the communications Terminals with "telco-based" capability. The upgraded communication terminals are installed on combat information centers of various U.S. Naval ships.
The Orbit Instrument Division has designed and developed the next generation, Color LCD flat panel technology with a touch screen based Computer Controlled Action Entry Panel for the AEGIS Class Ships. The new Color Entry Panel (CEP) replaces our existing Plasma Entry Panel (PEP). The CEP has already been successfully manufactured and tested on several platforms.
Displays
The Electronics Group, through the Orbit Instrument Division and Tulip, have designed, developed, qualified and successfully supported a number of critical programs for prime contractor and government procurement agency requirements. The Electronics Group has designed displays using Electroluminescent ("EL"), Plasma, and Liquid Crystal Display ("LCD") technologies, for military and ruggedized environments.
Displays designed by Orbit's Electronics Group allow an operator, or, multiple operators to monitor and control radar systems for aircraft, helicopter, shipboard, ground based, and tracked vehicles systems on a number of critical defense electronics programs. The unique modular design technique allows Orbit's displays to provide "smart technology", high-speed graphics to operators in the most severe combat conditions. Tulip and Orbit Instrument displays are designed to meet both sunlight readable and night vision (NVIS"), and continue to operate after exposure to nuclear, biological and chemical ("NBC") environments.
Both Orbit Instrument and Tulip have penetrated a niche defense electronics marketplace by providing avionic displays and keyboards for a number of Air Force jet fighter, bomber, surveillance and tanker refueling programs. Displays may vary from four (4) inches, up to forty five (45) inches, incorporating multiple inputs and outputs for operator program requirements.
With years of prime contractor and procurement agency support, both Tulip and Orbit have designed and embedded displays for U.S. Army programs, providing multiple display systems supporting commander, fire control and GPS driver requirements for the Abrams, Bradley, and Challenger programs.
Tulip has developed a number of color LCD displays that have been qualified and currently support a number of helicopter, jet fighter, bomber, and tracked vehicle programs requirements.
Orbit Instrument has supported programs that now include displays, keyboards and track balls to form complete operator systems. These trays are qualified for sub-surface, shipboard, aircraft and tracked vehicle program opportunities.
Tulip has successfully designed and qualified an Input Device Assembly ("IDA"), which includes an integrated keyboard, trackball and display assembly that is worn (via Velcro), on the co-pilot's thigh during flight missions. This unique wearable system provides co-pilots with additional information that is easy to access, and does not require additional space with the cockpit environment.
Keyboards, Keypads and Pointing Devices
The Orbit Instrument Division and Tulip have designed a number of custom backlit keyboards and keypads to meet full military specifications. These keyboards and keypads have been designed for shipboard, airborne, sub-surface and land based program requirements, as well as for the Federal Aviation Administration. The keyboards include various microprocessor based serial interfaces, such as RS-232, RS-422, PS/2, USB and SUN type interfaces. Depending on the requirement, some of the backlit keyboards are night vision goggle compatible and designed for NVIS Green A or Green B night vision requirements.
Orbit designed/developed pointing devices, trackballs and force sticks. Orbit manufactures various militarized trackballs in various sizes for airborne, shipboard, Army and FAA requirements. The trackballs and the force sticks include various microprocessor based serial interfaces such as RS-232, RS-422, PS/2, USB and SUN type interfaces.
Tulip has successfully designed and qualified an Input Device Assembly (IDA), which is a fully integrated keyboard, trackball and display assembly that is worn (via Velcro) on the co-pilot's thigh during flight missions. This allows the aircraft to actually have four bullnose systems, the last being the Tulip designed IDA thigh pad.
Operator Control Trays
The Orbit Instrument Division designs and manufactures a variety of "operator control trays" that help organize and process data created by interactive communications systems, making such data more manageable for operator consumption. These trays are presently used to support patrol and surveillance airborne aircraft programs, "standard shipboard display console requirements" and shore land based defense systems applications. The operator trays are integrated with Orbit designed/developed keyboards, flat panel technology based computer controlled action entry panels, switch panels and pointing devices.
Command Display Units (CDU'S)
The Orbit Instrument Division currently has orders for command display panels that are being utilized for vehicular, shipboard and sheltered platform requirements. The display panels are flat panel technology based and include a Pentium based single board computer. Orbit designed/developed several models of the CDU to be used by U.S. Navy, U.S. Army and Marines, Korean and Canadian armies.
Mobile Key Panel Receivers
Tulip is under contract for the production of mobile key panel receivers that provide battlefield operators with real time position, velocity, navigation and timing (PVNT) information in a stand alone, hand-held, lightweight configuration.
MK 119 Gun Console System Computer (GCSC)
ICS is under multi-year contract for the MK 119 GCSC, an unmanned environmentally isolated shipboard enclosure that houses a standard 19 inch electronics rack containing processors, electronic devices and cooling and power conditioning equipment that perform processing, interfacing and data extraction functions.
MK 437 Gun Mount Control Panel (GMCP)
ICS is also under contract for the GMCP, a manned control panel located shipboard in the Gun Loader room. The GMCP consists of an interactive operator control/display terminal that provides operator interactions with the Gun Mount and the GCSC to allow the operator to enter ammunition and environmental pre-engagement data and allows monitoring of the Gun Mount status and operation. In the event of a loss of the Gun Console (GC) the GMCP can serve as a casualty mode of system operation.
Selected Products
ICS builds a wide range of system integration related products, including: fiber optic cables, specialty enclosures, traditional shipboard cable sets (both low smoke and non-low smoke) and training devices.
Power Group
Behlman's Commercial Power Supply Division designs and manufactures AC power sources. These products are used for clean regulated power and for frequency and voltage conversion applications. Behlman's AC power supplies are used on production lines, in engineering labs, for oil and gas exploration, on aircraft (both manned and unmanned), and on ships including related ground support.
Behlman's frequency converters are used to convert power from one frequency to another. They are used to test products to be exported to foreign countries from the point of origin (e.g. in the U.S., 60 Hz. is converted to 50 Hz). These frequency converters are used to supply 400 Hz aircraft and ship power from the local power grid that is 50 or 60 Hz. They are also used on airplanes to supply the 60 Hz. required by standard equipment such as computers from the 400 Hz. available on the aircraft. Behlman's products are being used for railroad signaling; its frequency converters are being manufactured for most of the passenger railroads in the United States. Behlman's power sources have power levels from 100 VA to 120,000 VA.
Behlman's UPS products are used for backup power when local power is lost. Behlman only competes in the "ruggedized", industrial and military markets. Behlman is now producing its UPS units for Aegis Destroyers, LHD Wasp Class ships and military aircraft.
Behlman's inverters which convert system battery power to AC are being used in electric, gas and water transmission systems and in utility substations.
Behlman's Custom Power Supply Division designs and manufactures power supplies that use commercial-off-the-shelf (COTS) power modules to meet its customers' environmental specifications. This technique requires less engineering and produces a more reliable unit in much less time.
Behlman also performs reverse engineering of analog systems for the United States Government or United States Government contractors to enable them to have a new supplier when the old manufacturer cannot or will not supply the equipment.
Behlman is a long time supplier to the Source Development Department of the NAVICP and has been given the opportunity to compete against prime contractors. Behlman has supplied products including positioning assemblies and power supplies for the F/18 FLIR system.
Behlman also operates as a qualified repair depot for many United States Air Force and Navy programs.
PROPOSED PRODUCTS
Electronics Group
The Orbit Electronics Group has continued to identify new program opportunities, which require new hardware and software designs to support prime contractors and defense procurement agency land, sea and air solutions.
Tulip continues to be a leading supplier of display and keyboard designs, supporting defense electronics and industrial program requirements. Tulip has developed a second LCD display configuration, which is supporting transit authority communication directly with the driver. This device is typically mounted within a bus, and allows the driver to input and receive information throughout the intended route. The significance of this market penetration is the specific transit authority operational requirements, where down time due to repeated failures is not an option. Tulip continues to support this transportation display requirement, and can provide solutions to each transit authority as new awards are released.
The Electronics Group has developed several new color smart displays for use on helicopter programs. Given the critical requirements of the helicopter missions, each configuration has been designed as sunlight readable, night vision qualified displays that provides the crew with real time data under extreme environmental combat requirements.
The Electronics Group continues to provide a family of display configurations that are designed with latest state of the art technologies, and combines various stand alone switch panels and data input devices onto a single display. These displays provides an operator with a single source of easy to access information that supports naval consoles, aircraft cockpits, armor vehicle suites and helicopter cockpit requirements.
The Orbit Instrument Division continues to develop new GPS Control Display Unit ("CDU") panels that support U.S. Army land navigation system requirements. A number of CDU panels have been designed as a total solution for customer requirements. As each foreign country procures this Fire Finder system from the prime contractor, critical country mapping and targeting code is written by the division segment, and embedded into the CDU as an operational requirement.
The Electronics Group continues to target ongoing retrofit programs, which are intended to extend the life cycle of ships, aircraft, and armored vehicles. To that extent, the Orbit Instrument Division and Tulip have designed latest state of the art LED switch panels, keyboards, and communication panels that are form fit and replaceable for units that have exceeded their intended operational usage. In all cases, the new technological designs supporting the switch panels, keyboards, and communication panels are intended to replace Orbit units, which have been operational in combat mode for decades. As the Electronics Group continues to receive new contract awards for program opportunities, developing replacement hardware to obsolete our previously designed units will continue to be a significant part of the Group's business strategy.
In response to market based influences ICS is planning to develop a family of shock-isolated cabinets to house both custom and COTS components. This family of cabinets will be qualified to the full spectrum of environmental criteria mandated by our Defense customer base.
Future modifications of the GCSC will incorporate touch sensitive displays, detailed built-in-test capabilities and a robust graphic interface.
Power Group
In an effort to expand its product base, Behlman is developing new higher power inverters. These products are designed to expand Behlman's presence in the utility market and to establish a presence in the military inverter market to be used on equipment such as Hummers.
Behlman is expanding its high power BL series to be used on new aircraft that utilize "wild frequency" systems.
Behlman is expanding its P series of low cost AC power supplies to add power factor corrected input and CE marking in order to enhance its sales to the European Community.
Behlman is developing a new line of ruggedized UPS to be used in military and high end industrial applications.
In response to customer requests, Behlman is developing COTS power supplies to be used in applications such as satellite, sonar and fire control optics. Behlman continues to be the company of choice by certain divisions of military procurement to replace obsolete power equipment with modern COTS versions.
SALES AND MARKETING
Products of the Electronics Group are marketed by Orbit Instrument Division's sales personnel and management. Products and services of ICS are marketed by ICS's management. Military products of the Power Group are marketed by Behlman's sales and program managers and other management personnel. Commercial products of the Power Group are sold by regional sales managers, manufacturer's representatives and non-exclusive distributors.
COMPETITION
Many of our competitors are well established, have reputations for success in the development and sale of their products and services and have significantly greater financial, marketing, distribution, personnel and other resources than us, thereby permitting them to implement extensive advertising and promotional campaigns, both in general and in response to efforts by additional competitors to enter into new markets and introduce new products and services.
The electronics industry is characterized by frequent introduction of new products and services, and is subject to changing consumer preferences and industry trends, which may adversely affect our ability to plan for future design, development and marketing of our products and services. The markets for electronic products, components and related services are also characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. We are constantly required to expend more funds for research and development of new technologies.
The Electronics Group's competitive position within the electronics industry is, in management's view, predicated upon the Orbit Instrument Division's and Tulip's manufacturing techniques, its ability to design and manufacture products which will meet the specific needs of its customers and its long-standing successful relationship with its major customers. (See "- Major Customers"). There are numerous companies, many of which have greater resources than the Company, capable of producing substantially all of the Company's products. However, to the Company's knowledge, none of such competitors currently produce nearly all of the products that the Electronics Segment produces.
Competition in the markets for the Power Group's commercial and military products depends on such factors as price, product reliability and performance, engineering and production. In particular, due primarily to budgetary restraints and program cutbacks, competition in Behlman's United States Government markets has been increasingly severe and price has become the major overriding factor in contract and subcontract awards. To the Company's knowledge, some of Behlman's regular competitors include companies with substantially greater capital resources and larger engineering, administrative, sales and production staffs than Behlman's.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company uses multiple sources for its procurement of raw materials and is not dependent on any suppliers for such procurement. The Company continuously updates its delivery schedules and evaluates availability of components so that they are received on a "just-in-time schedule". Occasionally, in the production of certain military units, the Company will be faced with procuring certain components that are either obsolete or difficult to procure. However, the Company has access to worldwide brokers using the internet to assure component availability. Nevertheless, there can be no assurance that such components will be available, and even if so, at reasonable prices.
MAJOR CUSTOMERS
A unit of BAE Systems, various agencies of the United States Government and Raytheon Company, accounted for approximately 14%, 12%, and 10%, respectively, of consolidated net sales of the Company for the year ended December 31, 2007. The loss of any of these customers would have a material adverse effect on the net sales and earnings of the Company. The Company does not have any significant long-term contracts with any of the above-mentioned customers.
The major customers of the Electronics Group are a unit of BAE Systems, various agencies of the United States Government, Raytheon Company, Lockheed Martin and Rockwell Collins, Inc., accounting for approximately 20%, 15%, 15%, 11% and 10%, respectively, of the net sales of such segment for the year ended December 31, 2007. The loss of any of these customers would have a material adverse effect on the net sales and earnings of the Electronics Group.
The major customers of the Power Group are Telephonics, Inc. and Baker Hughes Inc. accounting for approximately 16% and 10%, respectively, of the net sales of such segment for the year ended December 31, 2007. The loss of these customers would have a material adverse effect on the net sales and earnings of the Power Group.
Since a significant amount of all of the products which the Company manufactures are used in military applications, any substantial reduction in overall military spending by the United States Government could have a materially adverse effect on the Company's sales and earnings.
BACKLOG
As of December 31, 2007 and 2006 the Company's backlog was as follows:
2007 2006 ---- ----
Electronics Group $ 9,000,000 $11,000,000
Power Group 6,000,000 4,000,000 ----------- -----------
Total $15,000,000 $15,000,000 ========== ===========
The backlog of the Electronics Group at December 31, 2007 included $1,600,000 of backlog attributable to ICS.
Approximately $1,100,000 of the backlog at December 31, 2007 represents backlog under contracts that will be shipped beyond 2008.
The backlog at December 31, 2007 and December 31, 2006 does not include approximately $3,800,000 and $2,000,000, respectively, of orders not yet received under a Master Order Agreement received from a customer whereby the Company was authorized to procure material to complete such orders.
A significant amount of the Company's contracts are subject to termination at the convenience of the United States Government. The backlog is not influenced by seasonality.
SPECIAL FEATURES OF UNITED STATES GOVERNMENT CONTRACTS
Orders under United States Government prime contracts or subcontracts are customarily subject to termination at the convenience of the U.S. Government, in which event the contractor is normally entitled to reimbursement for allowable costs and a reasonable allowance for profits, unless the termination of a contract was due to a default on the part of the contractor.
During the year ended December 31, 2007, the Power Group was a subcontractor to a prime contractor on a program that was terminated by the U.S. Government, under which the Company expects to recover all its costs of approximately $200,000. The termination claim is currently under review by the U.S. Government.
During the year ended December 31, 2006, the Power Group recovered substantially all of its costs associated with a $299,000 contract terminated by the U.S. Government. No other material terminations of contracts of either the Electronics Group or the Power Group at the convenience of the U.S. Government occurred during the years ended December 31, 2007 and 2006.
A significant portion of the Company's revenues are subject to audit under the Vinson-Trammel Act of 1934 and other federal statutes since they are derived from sales under United States Government contracts. The Company believes that adjustments to such revenues, if any, will not have a material effect on the Company's financial position or results of operations.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $1,203,000 and $1,110,000 of research and development expenses during the years ended December 31, 2007 and 2006, respectively. During the years ended December 31, 2007 and 2006, the Company recognized revenue of approximately $690,000 and $705,000, respectively, for customer funded research and development.
PATENTS
The Company does not own any patents which it believes are of material significance to its operations.
EMPLOYEES
As of March 14, 2008, the Company employed 146 persons, all on a full-time basis except for two part-time employees. Of these, the Electronics Group employed 97 people, consisting of 23 in engineering and drafting, 6 in sales and marketing, 18 in direct and corporate administration and the balance in production. The Power Group employed 49 people, consisting of 13 in engineering and drafting, 6 in sales, 3 in direct and corporate administration and the balance in production.
ITEM 1A.
ITEM 1A. RISK FACTORS
This report and other reports filed by us with the Securities and Exchange Commission contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of certain uncertainties set forth below and elsewhere in this report, as well as additional risks and uncertainties of which we are currently unaware. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements".
RISKS RELATING TO THE COMPANY
WE ARE HEAVILY DEPENDENT UPON THE CONTINUANCE OF MILITARY SPENDING AS A SOURCE OF REVENUE AND INCOME.
A significant amount of all the products we manufacture are used in military applications. The attacks of September 11, 2001 and subsequent world events have led the U.S. Government to increase the level of military spending necessary for domestic and overseas security. We are heavily dependent upon military spending as a source of revenues and income. Accordingly, any substantial future reductions in overall military spending by the U.S. Government could have a material adverse effect on our sales and earnings.
WE COULD ENCOUNTER DIFFICULTIES IN PROCURING CONTRACTS BECAUSE OF A REDUCTION IN THE LEVEL OF INDUSTRY-WIDE FUNDING AND PRICING PRESSURES.
We continue to pursue many business opportunities, including programs in which we have previously participated but, in the event of industry-wide funding and pricing pressures, we could encounter delays in the awards of these contracts. We continue to seek new contracts which require incurring up-front design, engineering, prototype and pre-production costs. While we are attempting to negotiate contract awards for reimbursement of product development, there is no assurance that sufficient monies will be set aside by our customers, including the U.S. Government, for such effort. In addition, even if the U.S. Government agrees to reimburse development costs, there is still a significant risk of cost overrun, which may not be reimbursable. Furthermore, once we have completed the design and pre-production stage, there is no assurance that funding will be provided for future production.
A significant amount of our contracts are subject to termination at the convenience of the U.S. Government. Orders under U.S. Government prime contracts or subcontracts are customarily subject to termination at the convenience of the U.S. Government, in which event the contractor is normally entitled to reimbursement for allowable costs and a reasonable allowance for profits, unless the termination of a contract was due to a default on the part of the contractor.
WE ARE DEPENDENT ON CERTAIN OF OUR CUSTOMERS AND WE DO NOT HAVE ANY LONG-TERM CONTRACTS WITH THESE CUSTOMERS.
A unit of BAE Systems, various agencies of the United States Government, and Raytheon Company, accounted for approximately 14%, 12%, and 10%, respectively, of consolidated net sales of the Company for the year ended December 31, 2007. A unit of BAE Systems, various agencies of the U.S. Government, Raytheon Company, Lockheed Martin and Rockwell Collins, Inc., accounted for approximately 20%, 15%, 15%, 11% and 10%, respectively, of the net sales of our Electronics Group for the year ended December 31, 2007. Telephonics, Inc. and Baker Hughes Inc., accounted for approximately 16%, and 10%, respectively, of the net sales of our Power Group for the year ended December 31, 2007. We do not have any significant long-term contracts with any of the above-mentioned customers. The loss of any of these customers would have a material adverse effect on our net sales and earnings. Due to major consolidations in the defense industry, it has become more difficult to avoid dependence on certain customers for revenue and income.
WE ARE DEPENDENT UPON OUR SENIOR EXECUTIVE OFFICERS AND KEY PERSONNEL FOR THE OPERATION OF OUR BUSINESS.
We are dependent for the operation of our business on the experience, technology knowledge, abilities and continued services of our senior officers, Dennis Sunshine, President and Chief Executive Officer, Bruce Reissman, Executive Vice President and Chief Operating Officer, and Mitchell Binder, Executive Vice President and Chief Financial Officer as well as the Chief Operating Officers at each of our operating units. The loss of services of any of such persons would be expected to have a material adverse effect upon our business and/or our prospects. Our future success is dependent upon, among other things, the successful recruitment and retention of key personnel including executive officers, for sales, marketing, finance and operations. We face significant competition for skilled and technical talent. No assurance can be made that we will be successful in attracting and retaining such personnel. If we are unable to retain existing key employees or hire new employees upon acceptable terms when necessary, our business could potentially be adversely affected.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR RECENT ACQUISITION.
We may face challenges managing our recent acquisition of ICS together with our other existing operations in different geographic locations. These risks include the integration of ICS with the operations, technologies and management of the Company and the attendant risks associated with such acquisition, including possible unanticipated liabilities, unanticipated costs, and diversion of management attention.
There can be no assurance that we will successfully integrate or profitably manage ICS's business, that our consolidated business will achieve sales levels, profitability, efficiencies or synergies that justify the ICS acquisition, or that ICS will result in increased earnings for us in any future period. We may not be able to manage all of our combined operations effectively, and failure to do so could have a material adverse effect on the Company's business, financial condition and/or operating results.
WE MAY NOT BE SUCCESSFUL IN OUR EXPANSION EFFORTS.
Part of our business strategy is to expand our operations through strategic acquisitions. Through the past several years, we reviewed various potential acquisitions and believe there are numerous opportunities presently available, although there is increased competition among private equity firms and other entities seeking similar type acquisitions. In April 2005, we completed the acquisition of Tulip and in December 2007, we completed the acquisition of ICS. While there can be no assurance we will obtain the necessary financing to complete additional acquisitions, even if we do, there can be no assurance that we will have sufficient income from operations of such acquired companies to satisfy the interest payments, in which case, we will be required to pay them out of Orbit's operations which may be adversely affected. Furthermore, there can be no assurance we will be able to successfully complete the integration of any future acquired business and that such acquisition will be profitable and enable us to grow our business.
WE MAY HAVE DIFFICULTY PROCURING CERTAIN RAW MATERIALS ON TERMS SATISFACTORY TO US.
We use multiple sources for our procurement of our raw materials and we are not dependent on any suppliers for such procurement. Occasionally, however, in the production of certain military units, we may be faced with procuring certain components that are either obsolete or difficult to procure. Although we believe that with our access to worldwide brokers using the Internet we can obtain the necessary components, there can be no assurance that such components will be available, and even if so, at reasonable prices.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Company owned its plant and executive offices, located at 80 Cabot Court, Hauppauge, New York, which consists of 60,000 square feet (of which approximately 50,000 square feet are available for manufacturing operations) in a two-story, brick building, which was completed in October 1982 and expanded in 1985. The Company is currently operating at approximately 70% of capacity. In March 2001, the Company completed a sale leaseback transaction whereby it sold its land and building for $3,000,000 and entered into a twelve-year net lease with the buyer of the property. The lease provides for an annual payment of $360,000 with 10% increases in the fourth, seventh and tenth years of the lease. The lease expires in February 2013, but may be extended by the Company at its option through 2025. During the extension period, the lease provides for an annual rent of $527,076 with 10% increases in the fourth, seventh and tenth years of the extended lease.
Behlman leased 1,700 square feet in Ventura, California, which was used as a selling office. The lease provided for monthly payments of $1,679 from January 1, 2005 through December 31, 2005 and increased to $1,730 from January 1, 2006 through December 31, 2006 and to $1,781 from January 1, 2007 to December 31, 2007. In December 2007, Behlman entered into a new lease for a 2,000 square foot facility in Newbury Park, California, which will be used as a selling office for all of the Company's operating units. The five year lease provides for monthly payments of approximately $2,100 with annual increases of approximately 3%. The lease provides for an option to renew for an additional five years at a monthly rent equal to the rent charged for comparable space in the geographical area.
On April 4, 2005, Tulip entered into a five-year lease for 19,000 square feet at 1765 Walnut Drive, Quakertown, Pennsylvania, which is used for manufacturing, engineering and administration. The facility is operating at full capacity. The lessor of this facility is a limited partnership, the ownership of which is controlled by the former shareholders of Tulip. The lease provides for monthly payments of $9,100 for the first year and increases by 2% each year for the first two renewal periods and by 3% for the final two renewal periods.
ICS operates out of two facilities in Louisville, KY, one of which is used for engineering, logistics and administration and the other for manufacturing. The lease for engineering, logistics and administration is for approximately 10,000 square feet and provides for monthly payments of approximately $5,900, which expires in March 2009 and includes an option to extend the lease for an additional five years at 115% of the current rent. The facility is currently operating at approximately 75% of capacity The lease for manufacturing space is for approximately 13,000 square feet and provides for monthly payments of approximately $4,300, which expires in April 2009 and includes an option to extend the lease for an additional five years at 115% of the current rent. The facility is currently operating at approximately 85% of capacity. ICS also entered into a three year lease for a sales office in Virginia Beach, VA, which consists of approximately 800 square feet and provides for monthly rent of approximately $1,000. The lease expires in December 2008 and ICS has no plans to renew.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is quoted on the Nasdaq Capital Market under the symbol ORBT.
The following table sets forth the high and low sales prices of the Company's common stock for each quarter from January 1, 2006 through its fiscal year ended December 31, 2007, as reported on the Nasdaq Capital Market.
HIGH LOW ---- ---
2006:
First Quarter: $14.23 $8.90
Second Quarter: 10.12 6.70
Third Quarter: 7.49 4.55
Fourth Quarter: 8.25 6.63
2007:
First Quarter: $8.43 $7.04
Second Quarter: 9.35 7.38
Third Quarter: 9.67 6.84
Fourth Quarter: 9.30 8.02
HOLDERS As of March 13, 2008, the Company had 184 shareholders of record.
DIVIDENDS The Company has not paid or declared any cash dividends to date and does not anticipate paying any in the foreseeable future. The Company intends to retain earnings, if any, to support the growth of the business.
PERFORMANCE GRAPH The graph below compares the cumulative total shareholder return on the Common Stock for the last five fiscal years with the cumulative total return on the Nasdaq Stock Market-U.S. Index and a peer group of comparable companies (the "Peer Group") selected by the Company over the same period (assuming the investment of $100 in the Common Stock, the Nasdaq Stock Market-U.S. and the Peer Group on December 31, 2002, and the reinvestment of all dividends).
[GRAPHIC OMITTED]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG ORBIT INTERNATIONAL, THE NASDAQ STOCK MARKET-US INDEX AND A PEER GROUP (in dollars) Orbit International Peer Corp. Group NASDAQ
12/02 100.00 100.00 100.00 12/03 206.04 118.32 149.75 12/04 309.62 171.74 164.64 12/05 427.88 202.66 168.60 12/06 280.22 211.46 187.83 12/07 296.70 235.13 205.22
* The Peer Group is comprised of six companies in the defense electronics industry -Megadata Corp., La Barge, Inc., Miltope Group Inc., DRS Technologies, Inc., Esterline Technologies Corp., and Espey Manufacturing and Electronics Corp. Such companies were chosen for the Peer Group because they have similar market capitalizations to the Company and/or because they represent the line of business in which the Company is engaged. Each of the Peer Group issuers is weighted according to its respective market capitalization.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth, as of December 31, 2007:
- - the number of shares of the Company's common stock issuable upon exercise of outstanding options, warrants and rights, separately identified by those granted under equity incentive plans approved by the Company's stockholders and those granted under plans, including individual compensation contracts, not approved by the Company's stockholders (column a),
- - the weighted average exercise price of such options, warrants and rights, also as separately identified (column b), and
- - the number of shares remaining available for future issuance under such plans, other than those shares issuable upon exercise of outstanding options, warrants and rights (column c).
RECENT SALE OF UNREGISTERED SECURITIES
As previously reported by the Company on Form 8-K for December 19, 2007, approximately 120,000 shares of unregistered common stock was issued in connection with the ICS acquisition.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable, as the Company is a smaller reporting company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview - ------------------
The Company recorded an increase in operating results for the year ended December 31, 2007. Revenues increased by 3.5% and gross profit margins increased slightly for the year ended December 31, 2007, compared to the prior year. The increase in revenues was principally due to slight increases for both our Electronics and Power Groups. However, selling, general and administrative expenses also increased due to increased selling costs and higher corporate expenses. Interest expense decreased and investment and other income increased. Consequently, net income for the year ended December 31, 2007 increased by 6.7% compared to the prior year. Our backlog at December 31, 2007 was approximately $14,500,000 compared to $14,700,000 at December 31, 2006. There is no seasonality to the Company's business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments are pursuing a significant amount of business opportunities and our confidence level remains very high with respect to receiving many of the orders we are pursuing, although timing is always an uncertainty. Our success of the past few years has significantly strengthened our balance sheet evidenced by our 4.1 to 1 current ratio at December 31, 2007, which includes the balance sheet accounts of ICS. We currently have a $3,000,000 credit facility in place and the Company continues to explore acquisition opportunities that are compatible with our existing operations. We also have several financing alternatives available to us, if needed, in order to fund any potential acquisitions.
Forward Looking Statements - ----------------------------
Statements in this Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document are certain statements which are not historical or current fact and constitute "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual financial or operating results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such forward looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and the most recent results of the Company. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "may", "will", "potential", "opportunity", "believes", "belief", "expects", "intends", "estimates", "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and the results of its operations are based on the Company's financial statements and the data used to prepare them. The Company's financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we re-evaluate our judgments and estimates including those related to inventory valuation, the valuation allowance on the Company's deferred tax asset, goodwill impairment and the valuation of share-based compensation. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect more significant judgments and estimates in the preparation of the consolidated financial statements.
Inventories - -----------
Inventory is valued at the lower of cost (specific, average and first-in, first-out basis) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for the Company's products can be forecasted based on current backlog, customer options to reorder under existing contracts, the need to retrofit older units and parts needed for general repairs. Although the Company makes every effort to insure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have an impact on the level of obsolete material in its inventory and operating results could be affected, accordingly. However, world events have forced our country into various situations of conflict whereby equipment is used and parts may be needed for repair. This could lead to increased product demand as well as the use of some older inventory items that the Company had previously determined to be obsolete.
Deferred tax asset - ------------------
At December 31, 2007, the Company had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and federal net operating loss carry-forwards of approximately $21,000,000 that expire through 2025. Approximately, $18,000,000 of federal net operating loss carry-forwards expire between 2010-2012. In addition, the Company receives a tax deduction when their employees exercise their non-qualified stock options thereby increasing the Company's deferred tax asset. The Company records a valuation allowance to reduce its deferred tax asset when it is more likely than not that a portion of the amount may not be realized. The Company estimates its valuation allowance based on an estimated forecast of its future profitability. Any significant changes in future profitability resulting from variations in future revenues or expenses could affect the valuation allowance on its deferred tax asset and operating results could be affected, accordingly.
Impairment of Goodwill - ------------------------
The Company has significant intangible assets related to goodwill and other acquired intangibles. In determining the recoverability of goodwill and other intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for those assets not previously recorded. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, the costs of certain intangible assets are no longer subject to amortization. These costs were reviewed for potential impairment in 2007 and 2006 and will be reviewed on an annual basis thereafter.
Share-Based Compensation - -------------------------
Effective January 1, 2006, the Company began recognizing share-based compensation under SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based awards. Total share-based compensation expense was $180,000 for the year ended December 31, 2007. The estimated fair value of stock options granted in 2007 were calculated using the Black-Scholes model. This model requires the use of input assumptions. These assumptions include expected volatility, expected life, expected dividend rate, and expected risk-free rate of return.
RESULTS OF OPERATIONS:
Year Ended December 31, 2007 vs. Year Ended December 31, 2006 - -----------------------------------------------------------------------
The Company currently operates in two industry segments. Its Orbit Instrument Division and its Tulip subsidiary are engaged in the design and manufacture of electronic components and subsystems (the "Electronics Group"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Group"). On December 19, 2007, the Company completed the acquisition of ICS, effective December 31, 2007. ICS, which became part of the Company's Electronics Group, performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation. Since the effective date of the acquisition was December 31, 2007, ICS was not included in the Company's statement of operations for the year ended December 31, 2007.
Consolidated net sales for the year ended December 31, 2007 increased by 3.5% to $25,885,000 from $25,015,000 for the prior year principally due to a 2.1% and 6.1% increase in sales recorded from the Electronics Group and Power Group, respectively.
Gross profit, as a percentage of net sales, for the year ended December 31, 2007 increased to 43.4% from 43.3% for the prior year. This increase resulted from a higher gross profit recorded by the Power Group that was offset by a slightly lower gross profit recorded by the Electronics Group. The increase in gross profit (44.3% v. 43.6%) from the Power Group was principally due to the increase in sales and to product mix. The slight decrease in gross profit (42.9% v. 43.1%) from the Electronics Group was due principally to product mix.
Selling, general and administrative expenses for the year ended December 31, 2007 increased by 5.4% to $8,729,000 from $8,285,000 from the year ended December 31, 2006 principally due to higher selling costs (brochures and website design) incurred by the Electronics Group and due to higher corporate administrative costs particularly: i) $93,000 of costs related to implementation of internal controls over financial reporting as required by Section 404 of the Sarbanes Oxley Act and ii) $50,000 retainer paid to its investment banker to pursue strategic alternatives for the Company. Selling, general and administrative expenses, as a percentage of sales, for the year ended December 31, 2007 increased to 33.7% from 33.1% principally due to the increase in expenses without a commensurate increase in sales.
Interest expense for the year ended December 31, 2007 decreased to $332,000 from $443,000 for the year ended December 31, 2006 due to a decrease in the amounts owed to lenders in the current year and to a reduction in interest rates.
Investment and other income for the year ended December 31, 2007 increased to $447,000 from $358,000 for the prior year principally due to an increase in the amounts invested during the current year and despite a write-down of $50,000, related to certain corporate bonds held by the Company, for an unrealized loss that was determined to be other than temporary.
Income before income tax provision was $2,612,000 for the year ended December 31, 2007 compared to $2,459,000 for the year ended December 31, 2006. This increase was principally due to the increase in sales, the slight increase in gross margins, the decrease in interest expense and increase in investment and other income and despite the increase in selling, general and administrative expenses.
Income taxes for the year ended December 31, 2007 and December 31, 2006 consist of $30,000 and $40,000, respectively, in state income taxes that cannot be offset by any state net operating loss carry-forwards.
As a result of the foregoing, net income for the year ended December 31, 2007 was $2,582,000 compared to $2,419,000 for the year ended December 31, 2006, an increase of 6.7%.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the year ended December 31, 2007 increased slightly to $3,505,000 from $3,468,000 for the year ended December 31, 2006. Listed below is the EBITDA reconciliation to net income:
Year ended December 31, ------------- 2007 2006 ---- ----
Net income $2,582,000 $2,419,000 Interest expense 332,000 443,000 Income tax expense 30,000 40,000 Depreciation and amortization 561,000 566,000 ---------- ------------ EBITDA $3,505,000 $3,468,000 ========== ==========
EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of the Company's growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. EBITDA is presented as additional information because the Company believes it is useful to our investors and management as a measure of cash generated by our business operations that will be used to service our debt and fund future acquisitions as well as provide an additional element of operating performance.
Liquidity, Capital Resources and Inflation - ----------------------------------------------
Our consolidated balance sheet accounts include ICS at December 31, 2007. Working capital increased to $18,167,000 at December 31, 2007 as compared to $17,176,000 at December 31, 2006. The ratio of current assets to current liabilities was 4.1 to 1 at December 31, 2007 compared to 4.9 to 1 at December 31, 2006. This reduction was principally due to the term debt used to finance the acquisition of ICS.
Net cash provided by operating activities for the year ended December 31, 2007 was $1,477,000, primarily attributable to net income for the period, the non-cash amortization of intangible assets, depreciation and stock based compensation and the increase in accounts payable that was partially offset by the increase in accounts receivable and inventory and the decrease in customer advances. Net cash provided by operating activities for the year ended December 31, 2006 was $4,422,000, primarily attributable to the net income for the period, the non-cash amortization of intangible assets and stock based compensation, depreciation, an increase in accounts payable and customer advances and a decrease in other long term assets.
Cash flows used in investing activities for the year ended December 31, 2007 was $3,846,000, attributable to the acquisition of ICS, the purchase of marketable securities and fixed assets that was partially offset by the sale of marketable securities. Cash flows used in investing activities for the year ended December 31, 2006 was $3,266,000, primarily attributable to the purchase of marketable securities and fixed assets that was partially offset by the sale of marketable securities.
Cash flows provided by financing activities for the year ended December 31, 2007 was $2,010,000, attributable to loan proceeds primarily related to the acquisition of ICS and stock option exercises that was partially offset by repayments of debt. Cash flows used in financing activities for the year ended December 31, 2006 was $1,154,000, attributable to the repayments of debt that was partially offset by the proceeds from stock option exercises.
In June 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment. In April 2005, the Company entered into a five-year $5,000,000 Term Loan Agreement to finance the acquisition of Tulip and its manufacturing affiliate. In December 2007, the Company entered into a five-year $4,500,000 Term Loan Agreement to finance the acquisition of ICS. In connection with the new Term Loan entered into in December 2007, the interest rates on both Term Loan Agreements and the credit facility were amended to equal a certain percentage, depending on a matrix related to a certain financial covenant (as defined), plus the one month LIBOR. At December 31, 2007, the interest rate was equal to the sum of either 1.15% or 1.50% plus the one-month LIBOR (4.60% at December 31, 2007). The credit facility will continue from year to year unless sooner terminated for an event of default including non-compliance with certain financial covenants. Principal payments under the two term loan facilities are approximately $113,000 per month. The Company had outstanding borrowings of $699,000 under its credit facility at December 31, 2007.
In April 2005, the Company entered into a five year $2,000,000 Promissory Note with the selling shareholders of Tulip at an interest rate of prime plus 2.00% (7.25% at December 31, 2007). Principal payments of $100,000 were made on a quarterly basis along with accrued interest. In June 2007, the Company refinanced the balance due on the Promissory Note of $1,050,000 with its primary commercial lender. Under the terms of a new Term Loan, monthly payments of $35,000 will be made over a thirty-month period along with accrued interest, depending on a matrix related to a certain financial covenant (1.15% at December 31, 2007), (as defined), plus the one-month LIBOR(4.60% at December 31, 2007).
The Company's contractual obligations and commitments are summarized as follows:
Less than 1-3 4-5 After Obligation Total 1 Year Years Years 5 Years - ----------- ------ ------- ----- ----- -------- Long-term debt $8,530,000 $1,777,000 $4,824,000 $1,929,000 -
Note Payable 699,000 699,000 - - -
Employment contracts 6,104,000 2,190,000 3,914,000 - -
Operating leases 3,011,000 759,000 1,665,000 587,000 - --------- ------- --------- ------- -------
Total contractual obligations $18,344,000 $5,425,000 $10,403,000 $2,516,000 -
The Company's existing capital resources, including its bank credit facilities and its cash flow from operations are expected to be adequate to cover the Company's cash requirements for its operations. The Company believes that financing alternatives are available in order to fund future acquisitions.
Inflation has not materially impacted the operations of the Company.
Certain Material Trends - -------------------------
In April 2005, the Company completed the acquisition of Tulip and its operations became part of the Company's Electronics Group. In December 2007, the Company completed the acquisition of ICS which also became part of the Electronics Group. The Company's Electronics Group and the Custom Division of its Power Group are heavily dependent on military spending. The events of September 11, 2001, have put a tremendous emphasis on defense and homeland security spending and the Company has benefited from an increasing defense budget. Although the Electronics Group and the Custom Division of the Power Group are pursuing several opportunities for reorders, as well as new contract awards, the Company has normally found it difficult to predict the timing of such awards. In addition, the Company has an unprecedented amount of new opportunities that are in the prototype or pre-production stage. These opportunities generally move to a production stage at a later date but the timing of such is also uncertain.
There is no seasonality to the Company's business. The Company's revenues are generally determined by the shipping schedules outlined in the purchase orders received from its customers. The Company stratifies all the opportunities it is pursuing by various confidence levels. The Company generally realizes a very high success rate with those opportunities to which it applies a high confidence level. The Company currently has a significant amount of potential contract awards to which it has applied a high confidence level. However, because it is difficult to predict the timing of awards for most of the opportunities the Company is pursuing, it is also difficult to predict when the Company will commence shipping under these contracts. A delay in the receipt of any contract from its customer ultimately causes a corresponding delay in shipments under that contract. During 2007, due to shipping schedules, the Company's second half of the year was stronger than the first half. Once again for 2008, based on current and projected shipping schedules, the Company expects the second half of 2008 to be stronger than the first half.
Despite the increase in military spending, the Company still faces a challenging environment. The government is emphasizing the engineering of new and improved weaponry and it continues to be our challenge to work with each of our prime contractors so that we can participate on these new programs. In addition, these new contracts require incurring up-front design, engineering, prototype and pre-production costs. While the Company attempts to negotiate contract awards for reimbursement of product development, there is no assurance that sufficient monies will be set aside by its customers, including the United States Government, for such effort. In addition, even if the United States Government agrees to reimburse development costs, there is still a significant risk of cost overrun that may not be reimbursable. Furthermore, once the Company has completed the design and pre-production stage, there is no assurance that funding will be provided for future production. In such event, even if the Company is reimbursed its development costs it will not generate any significant profits.
The Company is heavily dependent upon military spending as a source of revenues and income. However, even increased military spending does not necessarily guarantee the Company increased revenues, particularly, when the allocation of budget dollars may vary depending on what may be needed for specific military conflicts Any future reductions in the level of military spending by the United States Government due to budget constraints or for any other reason, could have a negative impact on the Company's future revenues and earnings. In addition, due to major consolidations in the defense industry, it has become more difficult to avoid dependence on certain customers for revenue and income. Behlman's line of commercial products gives the Company some diversity and the additions of Tulip and ICS gives the Electronics Segment a more diversified customer base.
The Company's business strategy is to expand its operations through strategic, accretive acquisitions. Through the past several years, the Company reviewed various potential acquisitions and believes there are numerous opportunities presently available. In April 2005, it completed the acquisition of Tulip and in December 2007, it completed the acquisition of ICS. The Company has received offers from several financial institutions that have expressed an interest in helping the Company with acquisition financing. However, there can be no assurance it will obtain the necessary financing to complete additional acquisitions and even if it does, there can be no assurance that we will have sufficient income from operations of such acquired companies to satisfy the interest payments, in which case, we will be required to pay them out of Orbit's operations which may be adversely affected. The Company continues to review acquisition candidates but there is no assurance that an acquisition will be completed in 2008.
In the first quarter of 2007, the Company hired an investment banker to assist the Company in its efforts to pursue strategic acquisitions. During the second quarter of 2007, the Company expanded the activities of its investment banker to include the pursuit of alternative strategies, including the potential sale of the Company as a means of enhancing shareholder value. However, there is no assurance that a sale or any of the other strategic alternatives will be accomplished.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2007, the Company had amounts due to its primary lender under three separate term loans totaling approximately $8,530,000. Interests on these term loans are equal to the sum of either 1.15% or 1.50% plus the one-month LIBOR. In addition, the Company has a $3,000,000 line of credit with the same lender at a rate equal to the sum of 1.50% plus the one-month LIBOR. The Company had approximately $699,000 in borrowings under the line of credit at December 31, 2007. During 2006, LIBOR averaged approximately 5.32% and was 4.60% at December 31, 2007.
We are subject to changes in the prime rate based on the actions of the Federal Reserve that are generally determined by general market and economic fluctuations. Any hypothetical increase of 1% in interest rates will result in an increase of approximately $85,000 of annual interest expense exclusive of the impact of any borrowings under the Company's line of credit.
None of the Company's variable rate of interest arrangements are hedged by any derivative instruments. The Company believes that any moderate interest rate increases will not have any material adverse effect on its results of operations, liquidity or financial position.
The Company believes that it is not subject in any material way to any other forms of market risk.
ITEM 8
ITEM 8 . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this Item appears in Item 15 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the three months ended December 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a - 15(f) of the Securities Exchange Act of 1934.
The Company's management conducted an evaluation of the effectiveness of its internal control over financial reporting, as of December 31, 2007, based on the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
We believe that a controls system, no matter how well designed and operated, can not provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
There have not been any other material changes in the Company's affairs which have not been described in a report on Form 8-K during the fourth quarter ended December 31, 2007.
PART III ---------
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2008 Annual Meeting of Stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2008 Annual Meeting of Stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2008 Annual Meeting of Stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2008 Annual Meeting of Stockholders.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2008 Annual Meeting of Shareholders.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
1 . Financial Statements
2. Schedules- None.
3. Exhibits:
Exhibit No. Description of Exhibit - ------------ ------------------------
2.1 Stock Purchase Agreement, dated December 13, 2004, by and among Orbit International Corp., Tulip Development Laboratory, TDL Manufacturing, Inc. and the respective Shareholders of Tulip Development Laboratory, Inc. and TDL Manufacturing, Inc. Incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K for December 13, 2004.
2.2 Stock Purchase Agreement, dated December 19, 2007, by and among Orbit International Corp., Integrated Consulting Services, Inc. and the respective shareholders of Integrated Consulting Services, Inc. Incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K for December 19, 2007.
3.1 Certification of Incorporation, as amended. Incorporated by reference to Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991.
3.2 By-Laws, as amended. Incorporated by reference to Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988.
4.1 Orbit International Corp. 2003 Stock Incentive Plan. Incorporated by reference to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.
10.1 New Employment Agreement, dated as of December 14, 2007, between Registrant and Mitchell Binder. Incorporated by reference to Registrant's Current Report on Form 8-K for December 11, 2007.
10.2 New Employment Agreement, dated as of December 14, 2007, between Registrant and Bruce Reissman. Incorporated by reference to Registrant's Current Report on Form 8-K for December 11, 2007.
10.3 New Employment Agreement, dated as of December 14, 2007, between Registrant and Dennis Sunshine. Incorporated by reference to Registrant's Current Report on Form 8-K for December 11, 2007.
10.4 Form of Indemnification Agreement between the Company and each of its Directors dated as of September 10, 2001. Incorporated by reference to Exhibit 10(d) to Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2001.
10.5 Purchase and Sale Agreement between the Company and 80 Cabot Realty LLC dated February 26, 2001. Incorporated by reference to Exhibit 4(b) to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000.
10.6 Lease Agreement between the Company and 80 Cabot Realty LLC dated February 26, 2001. Incorporated by reference to Exhibit 4(b) to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000.
10.7 Term Loan and Security Agreement dated as of December 19, 2007, between Orbit International Corp. and Merrill Lynch Business Financial Services Inc. ("MLBFS"). Incorporated by reference to Exhibit 10.6 to Registrant's Current Report on Form 8-K for December 19, 2007.
10.8 Employment Agreement dated April 4, 2005 between Tulip Development laboratory, Inc. and Richard Hetherington. Incorporated by reference to Registrant's Current Report on Form 8-K for April 4, 2005.
10.9 Custody, Pledge and Security Agreement dated as of April 4, 2005, by and among the Company and Richard Hetherington, Joanne Hetherington, Larry M. Bateman and Stephen Hill. Incorporated by reference to Registrant's Current Report on Form 8-K for April 4, 2005.
10.10 Net Lease dated as of April 4, 2005 by and between Rudy's Thermo-Nuclear Devices, as Landlord, and TDL Manufacturing, Inc. and Tulip Development Laboratory, Inc. Incorporated by reference to Registrant's Current Report on Form 8-K for April 4, 2005.
10.11 Term Loan and Security Agreement dated as of April 4, 2005 between the Company and Merrill Lynch Financial Business Services Inc. Incorporated by reference to Registrant's Current Report on Form 8-K for April 4, 2005.
10.12 Collateral Installment Note to Merrill Lynch Financial Business Services Inc. dated as of April 4, 2005, from the Company. Incorporated by reference to Registrant's Current Report on Form 8-K for April 4, 2005.
10.13 Employment Agreement, dated December 19, 2007, between Integrated Consulting Services, Inc. and Kenneth J. Ice. Incorporated by reference to Registrant's Current Report on Form 8-K for December 19, 2007.
10.14 Employment Agreement, dated December 19, 2007, between Integrated Consulting Services, Inc. and Michael R. Rhudy. Incorporated by reference to Registrant's Current Report on Form 8-K for December 19, 2007.
10.15 Employment Agreement, dated December 19, 2007, between Integrated Consulting Services, Inc. and Julie A. McDearman. Incorporated by reference to Registrant's Current Report on Form 8-K for December 19, 2007.
10.16 Custody, Pledge and Security Agreement, dated as of December 19, 2007, by and among Orbit International Corp. ("Pledgor"), Kenneth J. Ice, Michael R. Rhudy and Julie A. McDearman ("Pledgees"), and Phillips Nizer LLP ("Custodian"). Incorporated by reference to Registrant's Current Report on Form 8-K for December 19, 2007.
10.17 Form of Contingent Promissory Note (three substantially similar notes were issued) from Orbit International Corp. to Kenneth J. Ice. Incorporated by reference to Registrant's Current Report on Form 8-K for December 19, 2007.
14.1 Form of Code of Ethics between the Company and its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. Incorporated by reference to Registrant's Annual Report on Form 10K-SB for the fiscal year ended December 31, 2003.
21.1* Subsidiaries of Registrant.
23.1* Consent of McGladrey & Pullen, LLP.
23.2* Consent of Goldstein Golub Kessler LLP.
31.1* Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. 1350.
31.2* Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. 1350.
32.1* Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2* Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. _________ * Filed herewith.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Orbit International Corp.
We have audited the consolidated balance sheet of Orbit International Corp. and Subsidiaries as of December 31, 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbit International Corp. and Subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management's assertion about the effectiveness of Orbit International Corp. and Subsidiaries' internal control over financial reporting as of December 31, 2007 included in the accompanying Management's Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.
MCGLADREY & PULLEN, LLP New York, New York
March 31, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Orbit International Corp.
We have audited the accompanying consolidated balance sheet of Orbit International Corp. and Subsidiaries as of December 31, 2006 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Orbit International Corp. and Subsidiaries as of December 31, 2006 and the results of their operations and their cash flows for the year then ended in conformity with United States generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
GOLDSTEIN GOLUB KESSLER LLP New York, New York
March 27, 2007
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
1. ORGANIZATION AND BUSINESS: --------------------------------- The consolidated financial statements include the accounts of Orbit International Corp. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany transactions have been eliminated in consolidation.
The Company currently operates in two industry segments, the Electronics Group and the Power Group. The Electronics Group is comprised of the Company's Orbit Instrument Division ("Orbit"), its Tulip subsidiary ("Tulip"), and newly acquired Integrated Consulting Services, Inc. d/b/a Integrated Combat Systems, Inc. ("ICS"). Orbit and Tulip are engaged in the design and manufacture of electronic components and subsystems. ICS performs system integration for gun weapons systems and fire control interface as well as logistics support and documentation. The Power Group is comprised of the Company's Behlman subsidiary and is engaged in the design and manufacture of commercial power units.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - -------------------------------------------------
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The Company maintains cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses on these accounts.
The Company's investments are classified as available-for-sale securities and are stated at fair value, based on quoted market prices, with the unrealized gains and losses, net of income tax, reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific-identification method. Interest and dividends on such securities are included in investment income.
Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers' ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible.
Inventories are priced at the lower of cost (specific, average and first-in, first-out basis) or market.
Property and equipment is recorded at cost. Depreciation and amortization of the respective assets are computed using the straight-line method over their estimated useful lives ranging from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the remaining term of the lease or the estimated useful life of the improvement, whichever is less.
When impairment indicators are present, the Company reviews the carrying value of its long-lived assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flow analyses.
The Company recognizes deferred tax assets and liabilities based on the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized.
Substantially all of the Company's revenue is recognized from the sale of tangible products. The Company records sales upon delivery of the units under its manufacturing contracts. ICS records revenue on its long-term contracts under the percentage-of-completion method.
All contracts are for products made to specific customer specifications with no right of return. All units are shipped with a one-year warranty.
The Company's freight and delivery costs were $79,000 and $90,000 for the years ended December 31, 2007 and 2006, respectively. These costs are included in selling, general and administrative expenses.
The fair value of the Company's long-term obligations is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Using this method, the Company's fair value of long-term obligations was not significantly different from the stated value at December 31, 2007 and 2006.
Research and development costs are expensed when incurred. The Company expensed approximately $1,203,000 and $1,110,000 for research and development during the years ended December 31, 2007 and 2006. These expenses are included in selling, general and administrative expenses.
Effective January 1, 2006, the Company began recognizing share-based compensation, under Statement of Financial Accounting Standards ("SFAS") No. 123 (R), Share Based Payment, for all awards granted during and after 2006 and for the unvested portion of previous award grants based on each award's grant date fair value. The Company implemented Statement No. 123 (R) using the modified prospective transition method. Under this transition method the Company's financial statements, pertaining to periods prior to adoption of SFAS No. 123 (R) have not been adjusted to reflect fair value of share-based compensation. Prior to January 1, 2006, the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by Statement of Financial Accounting ("SFAS") No. 123, Accounting for Stock-Based Compensation.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements and the effect of certain of the measurements on earnings (or changes in net assets) for the period. SFAS No. 157 and FASB Staff Position ("FSB") 157-b are effective for fiscal years beginning after November 15, 2007 and interim periods within those years. As proposed the effective date of SFAS No. 157 would be deferred to fiscal years beginning after November 15, 2008 and for interim periods within those years for certain non financial assets and liabilities. The Company is currently evaluating the effect, if any, that SFAS No. 157 will have on its consolidated financial position or results of operations. However, the Company does not expect the adoption of SFAS No. 157 to have a material effect on its financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment to FASB Statement No. 115 ("SFAS 159"). This statement provides entities with an option to report selected financial assets and liabilities at fair value. The statement is effective as of the beginning of the Company's first fiscal year beginning after November 15, 2007. The Company is currently evaluating the effect, if any, that SFAS No. 159 will have on its consolidated financial position or results of operations. However, the Company does not expect the adoption of SFAS No. 159 to have a material effect on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141(Revised 2007), "Business Combinations" ("SFAS No. 141R"). This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. That replaces Statement 141's cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. Statement 141's guidance resulted in not recognizing some assets and liabilities at the acquisition date, and it also resulted in measuring some assets and liabilities at amounts other than their fair values at the acquisition date. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. SFAS No. 141R will impact the Company in the event of any future acquisitions.
For comparability, certain 2006 amounts have been reclassified, where appropriate, to conform to the financial statement presentation in 2007.
3. ACQUISITION: - -------------------
On December 19, 2007, the Company acquired all of the issued and outstanding stock of Integrated Consulting Services, Inc. d/b/a Integrated Combat Systems, Inc. ("ICS"). The reasons for the acquisition were the expansion of both customer and product bases, cross-marketing opportunities and the accretion to earnings. The acquisition was effective December 31, 2007. The total transaction value was approximately $6,600,000 consisting of $5,400,000 in cash, of which $4,500,000 was funded by a term loan, approximately 120,000 shares of Orbit stock valued at approximately $1,000,000(based on the volume weighted average closing price of the Company's common stock for the twenty consecutive trading days ending December 14, 2007), and approximately $200,000 of direct costs related to the purchase of ICS. Additionally, there is a contingent earn out of $1,000,000 payable over the next three years based on ICS's ability to attain certain revenue levels over the three years. The ICS acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are included in the consolidated balance sheet as of December 31, 2007. The operating results of ICS are not included in the consolidated financial statements since the acquisition was not effective until December 31, 2007.
In accordance with SFAS No. 141, Business Combinations, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions made by management. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but will be reviewed at least annually for impairment. Purchased intangible assets with finite lives will be amortized on a straight-line basis over their respective estimated useful lives. Any additional goodwill relating to the $1,000,000 contingent earn out based on ICS's ability to attain certain revenue levels over the next three years will be recorded, if necessary, in future years. The total purchase price has been allocated as follows:
Tangible assets and liabilities: Cash $1,942,000 Accounts receivable 579,000 Inventory 352,000 Other current assets 315,000 Property and equipment 260,000 Other long term assets 11,000 Accounts payable (111,000) Note payable (1,997,000) Accrued expenses (73,000) Income tax payable (132,000) Deferred income (247,000) -----------
Total net tangible assets and liabilities 899,000
Amortizable intangible assets: Customer relationships 2,000,000 Non-compete agreement 100,000 Contract backlog 100,000 -----------
Total amortizable intangible assets 2,200,000
Goodwill 3,499,000 -----------
Total purchase price $6,598,000 ==========
The following summarized pro forma financial information presents the combined results of the Company as if the ICS acquisition had occurred as of January 1, 2007 and 2006. Adjustments, which reflect amortization of purchased intangible assets, interest on debt to finance the acquisition, elimination of intercompany sales and purchases, recalculation of bonuses due to adjustments to net income, adjustment to income taxes payable, and reversal of interest expense incurred by ICS have been made to the combined results of operations for the years ended December 31, 2007 and 2006. The unaudited summarized pro forma financial information is presented for informational purposes only and may not be indicative of what the actual results of operations would have been had the acquisition occurred at the beginning of the periods presented nor does it purport to represent the results of operations for future periods.
Years ended December 31, 2007 2006 (Pro forma and Unaudited) -------------------------
Net Sales $31,260,000 $31,893,000 ============ ===========
Net Income 3,104,000 2,748,000 ========= =========
Basic earnings per share 0.69 0.62 ==== ====
Diluted earnings per share 0.65 0.58 ==== ====
4. INVENTORIES: - ------------------
Inventories consist of the following:
December 31, 2007 2006 ---- --------
Raw materials $ 6,146,000 $ 5,245,000 Work-in-progress 3,639,000 3,138,000 Finished goods 668,000 609,000 ------------ ------------ $10,453,000 $ 8,992,000 ============== ===========
5. MARKETABLE SECURITIES: - ----------------------------
Marketable securities at December 31, 2007 and 2006 are summarized as follows:
Unrealized Market Holding December 31, 2007 Cost Value Gain(loss) - ----------------- ---- ----- ----------
Equity Securities $2,275,000 $2,275,000 - Debt Securities 1,774,000 1,722,000 $ (52,000) ---------- ---------- ----------- Total $4,049,000 $3,997,000 $ (52,000) ========= ========== ===========
December 31, 2006 - -----------------
Equity Securities $2,500,000 $2,500,000 - Debt Securities 1,557,000 1,562,000 $ 5,000 ---------- ---------- ----------- Total $4,057,000 $4,062,000 $ 5,000 ========== ========== ===========
Maturities of marketable securities classified as available-for-sale at December 31, 2007 are as follows:
Due after one year through five years 1,018,000 Due after five years through ten years 701,000 Due after ten years 55,000 -------- $1,774,000 ========== During 2007, the decline in market value of certain available-for-sale securities was deemed to be other than temporary. Accordingly, the Company charged $50,000 against investment and other income-net, to record the impairment in value of these securities.
6. COMPREHENSIVE INCOME: - ---------------------------
For the years ended December 31, 2007 and 2006, total comprehensive income was $2,544,000 and $2,428,000, respectively. Comprehensive income consists of net income and unrealized gains and losses on marketable securities.
7. INTANGIBLE ASSETS: - --------------------------
The Company applies SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires that an intangible asset with a finite life be amortized over its useful life and that goodwill and other intangible assets with indefinite lives not be amortized but evaluated for impairment.
At December 31, 2007, the Company's intangible assets other than goodwill consist of the following:
Estimated Gross Net Useful Carrying Accumulated Carrying Life Value Amortization Value ------- ------- ------------ --------- Customer relationships 15 Years $2,000,000 $ - $2,000,000 Contract backlog 1-5 Years 1,750,000 (907,000) 843,000 Non-compete agreements 3 Years 415,000 (289,000) 126,000 ---------- ----------- --------- $4,165,000 $(1,196,000) $2,969,000 ========== =========== ==========
At December 31, 2006, the Company's intangible assets other than goodwill consist of the following:
Estimated Gross Net Useful Carrying Accumulated Carrying Life Value Amortization Value ------- ------- ------------ --------- Customer relationships 5 Years $1,650,000 $(577,000) $1,073,000 Non-compete agreements 3 Years 315,000 (184,000) 131,000 ---------- ------- ----------- $1,965,000 $(761,000) $1,204,000 ========== =========== ==========
Amortization expense for the next five years is expected to be as follows:
Year ending December 31,
2008 $ 623,000 2009 497,000 2010 250,000 2011 133,000 2012 133,000 ---------- Total $1,636,000 ==========
The Company recognized amortization expense of $435,000 for both of the years ended December 31, 2007 and 2006.
8. PROPERTY AND EQUIPMENT: - -------------------------------- Property and equipment at cost , consists of the following:
December 31, 2007 2006 ------ ------- Leasehold improvements $ 206,000 $ 132,000 Computer equipment 429,000 279,000 Machinery and equipment 1,384,000 1,326,000 Autos 101,000 60,000 Furniture and fixtures 675,000 595,000 ------------ ---------- 2,795,000 2,392,000 Accumulated depreciation and amortization (2,104,000) (1,978,000) ------------ ----------- $ 691,000 $ 414,000 ============= ============
The Company recognized depreciation and amortization expense of $126,000 and $131,000 for the years ended December 31, 2007 and 2006, respectively.
9. DEBT: - ------------ In June 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment. In December 2007, the interest rate calculation was amended. The agreement will continue from year to year thereafter unless sooner terminated for an event of default including non-compliance with financial covenants. Loans under the facility bear interest equal to a certain percentage depending on a matrix related to a financial covenant (as defined), plus the one-month LIBOR. At December 31, 2007 the interest rate was equal to the sum of 1.50% plus the one-month LIBOR (4.60% at December 31, 2007).Outstanding borrowings under the facility were $699,000 at December 31, 2007.
The Company's long-term debt obligations are as follows:
Principal payments due on the Company's long-term debt are as follows:
Year ending December 31, 2008 $ 1,777,000 2009 1,777,000 2010 2,404,000 2011 643,000 2012 and thereafter 1,929,000 ------------ $ 8,530,000 ===========
10. STOCK-BASED COMPENSATION PLANS: - -------------------------------------- The Company has various stock-based compensation plans, which provide for the granting of nonqualified and incentive stock options, as well as restricted stock awards to officers, key employees and nonemployee directors. The plans authorize the granting to officers and key employees, stock options and restricted stock awards, to acquire up to 1,891,000 common shares. Additionally, the plans authorize the granting to nonemployee directors of the Company options to acquire up to 125,000 common shares. Each plan grants options at the market value of the Company's stock on the date of such grant and all options expire ten years after granted. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee with vesting ranging from one to ten years. Generally the awards vest based upon time-based conditions. Stock option exercises are funded through the issuance of the Company's common stock. Stock compensation expense for the years ended December 31, 2007 and 2006 was $180,000 and $210,000, respectively.
The following table summarizes activity in stock options:
December 31, 2007 2006 - --------------- ---------------------------- --------------------
Average Weighted- Remaining Weighted- Average Contractual Average Exercise Term Exercise Options Price (in years) Options Price ------- ------- ---------- -------- ------ Outstanding at beginning of year 607,000 $3.03 5 615,000 $2.96
Granted 9,000 8.93 10 7,000 7.85
Forfeited (1,000) 7.11 - (2,000) 6.66
Exercised (16,000) 1.92 - (13,000) 1.55 -------- ------ ------ --------- -------- Outstanding at end of year 599,000 $3.15 4 607,000 $3.03 ======= ===== ===== ======== ======
Outstanding exercisable at end of year 590,000 $3.06 4 599,000 $2.97 ======= ===== ==== ======= ======
Weighted-average fair value of options granted during the year $3.82 $4.31 ===== ======
The following table summarizes information about stock options outstanding and exercisable at December 31, 2007: Options Outstanding Options Exercisable ------------------------------- --------------------- Weighted- average Weighted- Weighted- Weighted- Remaining average average average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - --------------- ----------- ----------- ------- ------------- ------- $ .60 - $1.07 169,000 3.00 $1.06 169,000 $1.06 $ 1.26 - $1.62 25,000 2.00 $1.34 25,000 $1.34 $ 1.92 - $2.04 143,000 2.00 $1.92 143,000 $1.92 $ 2.40 - $3.70 9,000 3.00 $3.42 9,000 $3.42 $ 4.51 - $9.28 253,000 6.00 $5.41 244,000 $5.28 - ------------------------------------------------------------------------------- $ .60 - $9.28 599,000 4.00 $3.15 590,000 $3.06 ===============================================================================
At December 31, 2007, 331,000 shares of common stock were reserved for future issuance of stock options, restricted stock and stock appreciation rights.
At December 31, 2007, the aggregate intrinsic value of options outstanding and exercisable was $3,301,000. At December 31, 2006, the aggregate intrinsic value of options outstanding was $3,112,000 and the aggregate intrinsic value of options exercisable was $3,110,000. The intrinsic value of options exercised during the years ended December 31, 2007 and 2006 was approximately $108,000 and $129,000, respectively.
The Company estimated the fair value of its stock option awards on the date of grant using the Black-Scholes valuation model. The assumptions used for stock option grants issued during the following periods were as follows:
December 31, 2007 2006 - ------------- ----- -------
Dividend Yield - -
Expected Volatility 50.05% to 51.19% 53.86% to 55.52%
Risk-free interest rate 5.00% 4.87% to 5.21%
Expected term of options (in years) 3.6 5.5
Expected volatility assumptions utilized for 2007 and 2006 were based on the volatility of the Company's stock price for 3.6 years and 3 years, respectively, prior to grant date. The risk-free rate is derived from the 10 year U.S. treasury yield on grant date. Expected term for 2007 was based on prior history of option activity. Expected term for 2006 was derived using the "simplified" method as allowed under the provisions of the Securities and Exchange Commission's Staff Bulletin No. 107 and represents the period of time that options are expected to be outstanding. Dividend yield is based on prior history of cash-dividends declared.
The following table summarizes the Company's nonvested stock option activity for the year ended December 31, 2007:
Number of Weighted-Average Shares Grant-Date Fair Value ------ -----------------------
Nonvested stock options at January 1, 2007 8,000 $4.31
Granted 9,000 3.82
Vested (7,000) 4.40
Forfeited (1,000) 3.89 ----- ----
Nonvested stock options at December 31, 2007 9,000 $3.82 ===== ======
At December 31, 2007, there was approximately $17,000 of unearned compensation cost related to the above non-vested stock options. The cost is expected to be recognized over the next six months.
During 2004, 294,000 shares of restricted stock were awarded to senior management under the 2003 Employee Stock Incentive Plan. These restricted stock awards may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation related to these restricted stock awards is being amortized to compensation expense over the vesting period. The vesting period for 13,000 and 281,000 of these shares is three and ten years, respectively. The share based expense for these awards was determined based on the market price of the Company's stock at the date of grant applied to the total number of shares that were anticipated to vest and then amortized over the vesting period. The amount of compensation expense related to restricted stock awards in 2007 and 2006 was $154,000 and $176,000, respectively. As of December 31, 2007, the Company has unearned compensation of $1,010,000 associated with these awards. Also, in accordance with SFAS No. 123 (R), the account "unearned compensation" recorded pursuant to APB 25 was reversed and is now a component of "additional paid-in capital".
Prior to the adoption of SFAS No. 123 (R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Statement No. 123 (R) requires the benefit of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows in the Statement of Cash Flows.
11. EMPLOYEE BENEFIT PLAN: - -----------------------------
A profit sharing and incentive-savings plan provides benefits to certain employees who meet specified minimum service and age requirements. The plan provides for contributions by the Company equal to 1/2 of employee contributions (but not more than 2% of eligible compensation) and the Company may make additional contributions out of current or accumulated net earnings at the sole discretion of the Company's board of directors.
The Company contributed approximately $237,000 and $220,000 to the plan during the years ended December 31, 2007 and 2006, respectively.
12. INCOME TAXES: - --------------------
The Company utilized net operating loss carryforwards to offset income taxes except for a $30,000 and $40,000 state income tax expense in Pennsylvania for the years ended December 31, 2007 and 2006, respectively.
At December 31, 2007 and 2006, the Company has an alternative minimum tax credit of approximately $573,000 with no limitation on the carryforward period. The Company also has federal and state net operating loss carryforwards of approximately $21,000,000 and $7,500,000, respectively, at December 31, 2007. The net operating loss carryforwards expire through 2025. Approximately, $18,000,000 of federal net operating loss carry-forwards expire between 2010-2012.
The Company recognized a $595,000 deferred tax expense for the year ended December 31, 2007. This expense was recorded since the Company's deferred tax liability relating to its goodwill is required to be separately stated on its financial statements apart from its deferred tax asset. The Company also recorded a deferred tax benefit of $595,000 by reducing its valuation allowance on its deferred tax asset. This was due to an increase in the Company's projected future profitability as well as an increase in the probability of attaining that profitability.
During the year ended December 31, 2006, the Company's deferred tax asset increased principally due to an income tax benefit relating to the exercise of stock options during the year. The reconciliation of income tax computed at the U.S. federal and state statutory tax rates to income tax expense is as follows:
December 31, 2007 2006 ---- ------ Tax at U.S. statutory rates 34.0% 34.0% State taxes 7.0 8.0 Utilization of net operating loss carryforward (40.0) (40.0) ----- ----- 1.0% 2.0% ====== ===== The deferred tax asset is comprised of the following:
December 31, 2007 2006 ------------ -----------
Alternative minimum tax credit carryforward $ 573,000 $ 573,000
Net operating loss and capital loss carryfowards (including pre-acquisition net operating loss carryforwards) 7,399,000 7,661,000
Temporary differences in bases of assets and liabilities:
Accounts receivable and inventory 176,000 254,000 Accrued expenses 140,000 137,000 Stock-based compensation 36,000 77,000 Goodwill - (442,000) Intangible assets 305,000 347,000 Deferred revenue 157,000 188,000 Property and equipment (53,000) (67,000) ---------- --------- 761,000 494,000
Total deferred tax asset 8,733,000 8,728,000
Valuation allowances (6,030,000) (6,678,000) ------------- ------------ Net deferred tax asset $2,703,000 $2,050,000 ============ ========== Deferred tax liability-goodwill $ (595,000) - ============ ============
Deferred income taxes are included in the accompanying balance sheet as follows:
2007 2006 ----- --------- Current asset $1,025,000 $ 717,000 Long-term asset 1,678,000 1,333,000 Long-term liability (595,000) - --------- ---------- $2,108,000 $2,050,000 =========== ==========
On January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). This interpretation provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is "more likely that not" that the position is sustainable based on its technical merits. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no impact of adoption to the Company's consolidated financial position, results of operations or cash flows for the year ended December 31, 2007. The Company's policy is to recognize any interest expense and penalties related to potential income tax matters as a component of income tax expense.
13. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK: - --------------------------------------------------------------
Sales to significant customers accounted for approximately 36% (14%, 12%, and 10%) and 45% (13%, 11%, 11% and 10%) of the Company's consolidated net sales for the years ended December 31, 2007 and 2006, respectively.
Significant customers of the Company's Electronics Group accounted for approximately 71% (20%, 15%, 15%, 11%, 10%) and 61% (16%, 15%, 15% and 15%) of the Electronics Group's net sales for the years ended December 31, 2007 and 2006, respectively.
Significant customers of the Company's Power Group accounted for approximately 26% (16% and 10%) and 36% (13%, 12% and 11%) of the Power Group's net sales for the years ended December 31, 2007 and 2006, respectively.
A substantial portion of the net sales is subject to audit by agencies of the U.S. government. In the opinion of management, adjustments to such sales, if any, will not have a material effect on the Company's consolidated financial position or results of operations.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade receivables from its customers.
The Company performs credit evaluations on its customers and collateral is generally not required. Credit losses are provided for in the consolidated financial statements during the period in which an impairment has been determined.
14. LEASING ARRANGEMENTS: - ---------------------------
The Company entered into a sale-leaseback of its operating facility in 2001. The initial term of the operating lease expires in 2013 and may be extended by the Company at its option through February 2025. The Company recorded a deferred gain on the sale which is being recognized over the initial term of the lease. Additional operating leases are for Tulip's facility, a sales office and vehicles.
Future minimum lease payments as of December 31, 2007 under all operating lease agreements that have initial or remaining noncancelable lease terms in excess of one year are as follows:
Year ending December 31, 2008 $ 759,000 2009 628,000 2010 531,000 2011 506,000 2012 507,000 Thereafter 80,000 ------------ Total future minimum lease payments $3,011,000 ===========
Rent expense for operating leases was approximately $567,000 and $525,000 for the years ended December 31, 2007 and 2006, respectively.
15. COMMITMENTS: - ------------------
The Company entered into new employment agreements with its three executive officers, effective January 1, 2008, and also has employment agreements with seven other principal officers, for aggregate annual compensation of $2,190,000. All employment contracts are for a term of three years except for one two year contract with an executive officer of the Company. In addition, the three senior officers will be entitled to bonuses based on certain performance criteria, as defined, and the other seven officers are entitled to bonuses based on a percentage of earnings before taxes, as defined. Total bonus compensation expense was approximately $384,000 and $380,000 for the years ended December 31, 2007 and 2006, respectively.
16. BUSINESS SEGMENTS: - ---------------------------
The Company currently operates in two industry segments. Its Orbit Instrument Division and its Tulip subsidiary are engaged in the design, manufacture, and sale of electronic components and subsystems (the "Electronics Group"). Its Behlman subsidiary is engaged in the design, manufacture, and sale of commercial power units (the "Power Group"). On December 19, 2007, the Company completed the acquisition of ICS, effective December 31, 2007. ICS, which became part of the Company's Electronics Group, performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation. Since the effective date of the acquisition was December 31, 2007, ICS was not included in the Company's statement of operations for the year ended December 31, 2007.
The Company's reportable segments are business units that offer different products. The Company's reportable segments are each managed separately as they manufacture and distribute distinct products with different production processes.
The following is the Company's business segment information as of and for the years ended December 31, 2007 and 2006
Year ended December 31, 2007 2006 - ----------------------- -------- -----------
Net sales:
Electronics Group: Domestic $15,503,000 $15,291,000 Foreign 1,162,000 1,031,000 ------------ ------------ Total Electronics Group 16,665,000 16,322,000 ------------ ------------ Power Group: Domestic 8,207,000 8,170,000 Foreign 1,013,000 523,000 ------------ ------------- Total Power Group 9,220,000 8,693,000 ------------ -------------- Total net sales $25,885,000 $25,015,000 ============ ==============
Income (expenses) from operations: Electronics Group $ 2,666,000 $3,017,000 Power Group 1,232,000 996,000 General corporate expenses not allocated (1,451,000) (1,469,000) Interest expense (332,000) (443,000) Investment and other income, net 497,000 358,000 ---------- ----------- Income before income tax provision $ 2,612,000 $2,459,000 =========== ===========
December 31, 2007 2006 ---- ----- Assets: Electronics Group $10,504,000 $ 8,680,000 Power Group 5,668,000 4,853,000 General corporate assets not allocated 23,513,000 17,952,000 ------------ ----------- TOTAL ASSETS $39,685,000 $31,215,000 ============= ============ Depreciation and amortization: Electronics Group $ 543,000 $ 544,000 Power Group 18,000 22,000 Corporate 14,000 40,000 ------------ ---------- TOTAL DEPRECIATION AND AMORTIZATION $ 575,000 $ 606,000 ============= ===========
17. NET INCOME PER COMMON SHARE: - ------------------------------------ The following table sets forth the computation of basic and diluted net income per common share:
Year Ended December 31, 2007 2006 ------ -------
Denominator: Denominator for basic net income per share - weighted-average common shares 4,404,000 4,302,000
Effect of dilutive securities: Unearned portion of restricted stock awards 47,000 101,000 Employee and director stock options 229,000 235,000 ---------- -------- Dilutive potential common shares 276,000 336,000
Denominator for diluted net income per share - weighted-average common shares and assumed conversions 4,680,000 4,638,000 ========== ===========
The numerator for basic and diluted net income per share for the years ended December 31, 2007 and 2006 is the net income for each year.
Stock options totaling 15,000 and 6,000 shares were outstanding during the years ended December 31, 2007 and 2006, but were not included in the computation of earnings per share. The inclusion of these instruments would have been antidilutive due to the options' exercise prices being greater than the average market price of the Company's common shares during the period.
18. RELATED PARTY TRANSACTION: - ----------------------------------
Tulip leases its facilities from a limited partnership, the ownership of which is controlled by the former shareholders of Tulip. The five-year lease commenced April 2005 and provides for monthly payments of $9,100 and increases by 2% each year for the first two renewal periods and by 3% for the final two renewal periods. For the years ended December 31, 2007 and 2006, the total amount paid under this lease was approximately $113,000 and $111,000, respectively.
- ------ 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, thereto duly authorized.
ORBIT INTERNATIONAL CORP.
Dated: March 31, 2008 By: /s/ Dennis Sunshine --------------------- Dennis Sunshine, President and Chief Executive Officer
Pursuant to the requirements of 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 dates indicated.
SIGNATURE TITLE DATE --------- ----- ----
/s/ Dennis Sunshine President, Chief Executive Officer - ------------------- and Director(Principal Executive Officer) March 31, 2008 Dennis Sunshine
/s/ Mitchell Binder Executive Vice President, Chief - -------------------- Financial Officer, and Mitchell Binder Director (Principal Financial and Accounting Officer) March 31, 2008
/s/ Bruce Reissman Executive Vice President, - ------------------- Chief Operating Officer and Bruce Reissman Director March 31, 2008
/s/ Fredric Gruder - ------------------- Fredric Gruder Director March 31, 2008
/s/ Bernard Karcinell - ---------------------- Bernard Karcinell Director March 31, 2008
/s/ Lee Feinberg - ----------------- Lee Feinberg Director March 31, 2008
/s/ Sohail Malad - ----------------- Sohail Malad Director March 31, 2008
/s/ Robert Mitzman - ------------------- Robert Mitzman Director March 31, 2008