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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22583
ORBIT/FR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2874370
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
506 PRUDENTIAL ROAD, HORSHAM, PA 19044
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(215) 674-5100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
There were 6,084,473 shares of common stock, $.01 par value,
outstanding as of August 14, 2002.
1
ORBIT/FR, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- June 30, 2002
(Unaudited) and December 31, 2001............................ 3
Consolidated Statements of Operations-- Three and six months
ended June 30, 2002 and 2001 (Unaudited)..................... 4
Consolidated Statements of Cash Flows -- Three and six months
ended June 30, 2002 and 2001 (Unaudited)...................... 5
Notes to Consolidated Financial Statements
(Unaudited).................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk......... 15
PART II. Other Information
Item 1. Legal Proceedings.............................................. 16
Item 2. Changes in Securities and Use of Proceeds..................... 16
Item 3. Defaults upon Senior Securities................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures......................................................................... 17
2
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,688 $ 4,413
Accounts receivable, less allowance of $482 and $427
in 2002 and 2001, respectively 3,120 5,079
Inventory 1,179 1,600
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,163 477
Deferred income taxes 87 64
Other 209 169
-------- --------
Total current assets 10,446 11,802
Property and equipment, net 1,184 1,329
Deferred income taxes 218 217
Cost in excess of net assets acquired 381 682
Other 73 96
-------- --------
Total assets $ 12,302 $ 14,126
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,082 $ 794
Accounts payable--Parent 393 699
Accrued expenses 1,987 2,048
Customer advances 316 727
Income taxes payable 27 12
Billings in excess of costs and estimated earnings
on uncompleted contracts 607 417
Deferred income taxes 68 68
-------- --------
Total liabilities, all current 4,480 4,765
Stockholders' equity:
Preferred stock: $.01 par value:
Authorized shares--2,000,000
Issued and outstanding shares--none -- --
Common stock: $.01 par value:
Authorized shares--10,000,000
Issued and outstanding--6,084,473 61 61
Additional paid-in capital 15,173 15,173
Accumulated deficit (7,169) (5,630)
Treasury stock -- 82,900 shares (243) (243)
-------- --------
Total stockholders' equity 7,822 9,361
-------- --------
Total liabilities and stockholders' equity $ 12,302 $ 14,126
======== ========
See accompanying notes.
3
ORBIT/FR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Contract revenues $ 2,972 $ 4,820 $ 6,805 $ 9,724
Cost of revenues 2,111 3,211 4,946 6,694
----------- ----------- ----------- -----------
Gross profit 861 1,609 1,859 3,030
Operating expenses:
General and administrative 699 791 1,373 1,425
Sales and marketing 620 494 1,141 992
Research and development 276 201 540 361
----------- ----------- ----------- -----------
Total operating expenses 1,595 1,486 3,054 2,778
----------- ----------- ----------- -----------
Operating income (loss) (734) 123 (1,195) 252
Other income (loss), net 95 (12) 97 27
----------- ----------- ----------- -----------
Income (loss) before income taxes (639) 111 (1,098) 279
Income tax expense 53 128 140 287
----------- ----------- ----------- -----------
Net loss before cumulative effect of
change in accounting principle (692) (17) (1,238) (8)
Cumulative effect of change in
accounting principle -- -- (301) --
----------- ----------- ----------- -----------
Net loss $ (692) $ (17) $ (1,539) $ (8)
=========== =========== =========== ===========
Basic and diluted loss per share
before cumulative effect of change
in accounting principle $ (.12) $ .00 $ (.21) $ .00
cumulative effect of change in
accounting principle -- -- (.05) --
----------- ----------- ----------- -----------
Basic and diluted loss per share $ (.12) $ .00 $ (.26) $ .00
=========== =========== =========== ===========
Weighted average number
common shares - basic and diluted 6,001,573 6,008,127 6,001,573 6,015,161
=========== =========== =========== ===========
See accompanying notes.
4
ORBIT/FR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2002 2001
------- -------
Cash flows from operating activities:
Net loss $(1,539) $ (8)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 208 192
Amortization 73
Cumulative effect of change in accounting principle 301
Deferred income tax provision (24) 3
Changes in operating assets and liabilities:
Accounts receivable 1,959 (333)
Inventory 421 25
Costs and estimated earnings in excess of billings
on uncompleted contracts (686) (417)
Other current assets (17) (4)
Accounts payable and accrued expenses 226 737
Accounts payable--Parent (305) 32
Customer advances (411) 219
Income taxes payable 15 (17)
Billings in excess of costs and estimated earnings
on uncompleted contracts 190 (665)
------- -------
Net cash provided by (used in) operating activities 338 (163)
Cash flows from investing activities:
Purchase of property and equipment (63) (365)
Increase in software development costs -- (92)
------- -------
Net cash used in investing activities (63) (457)
------- -------
Cash flows from financing activities:
Purchase of treasury stock -- (26)
------- -------
Net cash used in financing activities -- (26)
------- -------
Net increase (decrease) in cash and cash equivalents 275 (646)
Cash and cash equivalents at beginning of period 4,413 5,868
------- -------
Cash and cash equivalents at end of period $ 4,688 $ 5,222
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes $ 61 $ 65
======= =======
See accompanying notes.
5
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. OWNERSHIP AND BASIS OF PRESENTATION
ORBIT/FR, Inc. (the "Company"), was incorporated in Delaware on
December 9, 1996, as a wholly owned subsidiary of Orbit-Alchut Technologies,
Ltd., an Israeli publicly traded corporation (hereinafter referred to as the
"Parent"). The Company develops, markets, and supports sophisticated automated
microwave test and measurement systems for the aerospace/defense, wireless
communications, satellite, automotive, and electromagnetic compatibility (EMC)
industries, and manufactures anechoic foam, a microwave absorbing material that
is an integral component of microwave test and measurement systems. ORBIT/FR,
Inc., a holding company, supports its world wide customers through its
subsidiaries ORBIT/FR Engineering, LTD (hereinafter referred to as
"Engineering", Israel), ORBIT/FR Europe, (Germany), Advanced Electromagnetics,
Inc. ("AEMI", San Diego, CA), and Orbit Advanced Technologies, Inc. and Flam and
Russell, Inc. (Horsham, PA). The Company sells its products to customers
throughout Asia, Europe, Israel, and North and South America.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying unaudited consolidated financial statements for the
three and six month periods ended June 30, 2002 and 2001 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial statements have been included. The results of interim
periods are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. The consolidated financial statements and
footnotes should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in this Form
10-Q and the Company's Form 10-K and Proxy Statement for the period ended
December 31, 2001, filed on April 1, 2002 and April 30, 2002, respectively, with
the Securities and Exchange Commission, which included the consolidated
financial statements and footnotes for the year ended December 31, 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions of the Company and its wholly-owned subsidiaries have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
6
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing net income
(loss) by the weighted average common shares outstanding for the period. Diluted
income (loss) per share is calculated by dividing net income (loss) by the
weighted average common shares outstanding for the period plus the dilutive
effect of stock options. The dilutive effect of stock options was not assumed
for the three and six month periods ended June 30, 2002 and 2001 because the
effect of these securities is antidilutive.
Reclassification
Certain amounts for June 30, 2001 have been reclassified for
comparative purposes.
3. ADOPTION OF NEW ACCOUNTING STANDARD REGARDING GOODWILL AND OTHER INTANGIBLE
ASSETS
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and became
effective for the Company on January 1, 2002. SFAS No. 142 addresses how
goodwill and other intangible assets should be accounted for upon their
acquisition and afterwards. The primary impact of SFAS No. 142 on the Company is
that existing goodwill ("cost in excess of net assets acquired") is no longer
amortized beginning in 2002. Instead of amortization, goodwill is subject to an
assessment for impairment on a reporting unit basis by applying a
fair-value-based test annually, and more frequently if circumstances indicate a
possible impairment. If a reporting unit's net book value is more than its fair
value and the reporting unit's net book value of its goodwill exceeds the fair
value of that goodwill, an impairment loss is recognized in an amount equal to
the excess goodwill net book value.
Based on the December 31, 2001 cost in excess of net assets acquired
balance, the Company will report lower amortization of goodwill and higher
operating profit of approximately $43 for the full year 2002 compared to the
full year 2001. The Company tested the goodwill of AEMI for impairment during
the first quarter of 2002 using a present value of future cash flows valuation
method. This process resulted in an impairment of $301 which is accounted for as
a cumulative effect of a change in accounting principle during the six months
ended June 30, 2002.
7
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. ADOPTION OF NEW ACCOUNTING STANDARD REGARDING GOODWILL AND OTHER INTANGIBLE
ASSETS (CONTINUED)
Had the Company accounted for goodwill in accordance with SFAS No. 142
in 2001, net income and earnings per share for the three and six month periods
ended June 30, 2002 and June 30, 2001 would have been as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ------------------------
2002 2001 2002 2001
------- ------ --------- ------
Reported net loss $ (692) $ (17) $ (1,539) $ (8)
Add back: goodwill amortization -- 10 -- 21
------- ------ --------- ------
Adjusted net loss $ (692) $ (7) $ (1,539) $ 13
======= ====== ========= ======
Basic loss per share:
Reported net loss $ (0.12) $ 0.00 $ (0.26) $ 0.00
Add back: goodwill amortization (0.00) 0.00 (0.00) 0.00
------- ------ --------- ------
Adjusted net loss $ (0.12) $ 0.00 $ (0.26) $ 0.00
======= ====== ========= ======
4. INVENTORY
Inventory consisted of the following:
JUNE 30, DECEMBER 31,
2002 2001
----- ------
(UNAUDITED)
Work-in-process $ 557 $ 763
Parts and components 622 837
------ ------
$1,179 $1,600
====== ======
8
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
JUNE 30, DECEMBER 31,
2002 2001
------ ------
(UNAUDITED)
Lab and computer equipment $1,893 $1,856
Office equipment 1,083 1,042
Transportation equipment 298 314
Furniture and fixtures 44 45
Leasehold improvements 319 317
------ ------
3,637 3,574
Less accumulated depreciation 2,453 2,245
------ ------
Property and equipment, net $1,184 $1,329
====== ======
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
JUNE 30, DECEMBER 31,
2002 2001
------ ------
(UNAUDITED)
Accrued contract costs $ 529 $ 537
Accrued compensation 773 740
Accrued commissions 102 116
Accrued royalties 105 119
Accrued warranty 276 281
Other accruals 202 255
------ ------
$1,987 $2,048
====== ======
9
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. LONG-TERM CONTRACTS
JUNE 30, DECEMBER 31,
2002 2001
------- -------
(UNAUDITED)
Accumulated expenditures on uncompleted contracts $11,582 $12,687
Estimated earnings thereon 763 1,087
------- -------
12,345 13,774
Less: applicable progress billings 11,789 13,714
------- -------
Total $ 556 $ 60
======= =======
The long-term contracts are shown in the accompanying balance sheets as follows:
JUNE 30, DECEMBER 31,
2002 2001
------- -------
(UNAUDITED)
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 1,163 $ 477
Billings in excess of costs and estimated earnings
on uncompleted contracts (607) (417)
------- -------
$ 556 $ 60
======= =======
8. RELATED PARTY TRANSACTIONS
Engineering and the Parent have an agreement, whereby Engineering
purchases from the Parent electrical and mechanical production services. In
addition, the Parent provides other administrative services, including, but not
limited to, bookkeeping, computer, legal, accounting, cost management,
information systems, and production support. Engineering pays the Parent for
these services based upon a rate of cost of production services plus 21%.
Engineering is leasing office space from the Parent on an annual basis, for a
rental of $55 per year. These agreements are to be evaluated on an annual basis.
10
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates exclusively in one industry segment, the business
of developing, marketing and supporting sophisticated automated microwave test
and measurement systems. In addition to its principal operations and markets in
the United States, the Company conducts sales, customer support and service
operations out of other geographic locations in Europe, Asia, and North America.
The following table represents financial information by geographic region for
the three and six months ended June 30, 2002 and 2001.
Three months ended June 30, 2002 North America Europe Asia Total
- -------------------------------- ------------- ------ ------ ------
Sales to unaffiliated customers $1,174 $ 624 $1,174 $2,972
Cost of sales to unaffiliated customers 888 560 663 2,111
------ ------ ------ ------
Gross profit unaffiliated customers $ 286 $ 64 $ 511 $ 861
====== ====== ====== ======
Three months ended June 30, 2001 North America Europe Asia Total
- -------------------------------- ------------- ------ ------ ------
Sales to unaffiliated customers $2,080 $1,061 $1,679 $4,820
Cost of sales to unaffiliated customers 1,430 825 956 3,211
------ ------ ------ ------
Gross profit unaffiliated customers $ 650 $ 236 $ 723 $1,609
====== ====== ====== ======
Six months ended June 30, 2002 North America Europe Asia Total
- ------------------------------ ------------- ------ ------ ------
Sales to unaffiliated customers $2,323 $1,566 $2,916 $6,805
Cost of sales to unaffiliated customers 1,752 1,442 1,752 4,946
------ ------ ------ ------
Gross profit unaffiliated customers $ 571 $ 124 $1,164 $1,859
====== ====== ====== ======
Six months ended June 30, 2001 North America Europe Asia Total
- ------------------------------ ------------- ------ ------ ------
Sales to unaffiliated customers $4,134 $2,326 $3,264 $9,724
Cost of sales to unaffiliated customers 2,930 1,759 2,005 6,694
------ ------ ------ ------
Gross profit unaffiliated customers $1,204 $ 567 $1,259 $3,030
====== ====== ====== ======
In the table above, "North America" includes all United States
operations, and "Europe" includes subsidiaries in Germany and Israel.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-Q contains forward
looking statements (as such term is defined in the Securities Exchange Act of
1934 and the regulations thereunder), including without limitation, statements
as to the Company's financial condition, results of operations and liquidity and
capital resources and statements as to management's beliefs, expectations or
options. Such forward looking statements are subject to risks and uncertainties
and may be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors, as and when applicable, are discussed in the
Company's filings with the Securities and Exchange Commission including its most
recent Registration Statement on Form S-1, and in its most recent Annual Report
on Form 10-K, as amended, a copy of which may be obtained from the Company upon
request and without charge (except for the exhibits thereto).
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage
of revenues for the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ----- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Gross profit 29.0 33.4 27.3 31.2
General and
administrative 23.5 16.4 20.2 14.7
Sales and marketing 20.9 10.2 16.8 10.2
Research and development 9.3 4.2 7.9 3.7
Operating income (loss) (24.7) 2.6 (17.6) 2.6
Income (loss) before
income taxes (21.5) 2.3 (16.1) 2.9
Net loss (23.3) (0.4) (22.7) (0.1)
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001.
Revenues. Revenues for the three months ended June 30, 2002 were
approximately $2.9 million compared to approximately $4.8 million for the three
months ended June 30, 2001, a decrease of approximately $1.8 million or 38%.
Revenues from the defense, wireless, and satellite markets decreased
approximately $997,000, $867,000, and $137,000, respectively. Revenues from the
EMC and automotive markets increased approximately $57,000 and $26,000,
respectively. The Company recorded revenues of approximately $71,000 in the
higher education market. Geographically, revenues from North America, Asia and
Europe decreased $905,000, $505,000, and $437,000 respectively. The decrease in
revenues related to the wireless, defense, and satellite industries was a result
of significant completion of North American, Asian and European contracts in the
three months ended June 30, 2001, not repeated in the three months ended June
30, 2002.
12
Cost of revenues. Cost of revenues for the three months ended June 30,
2002 were approximately $2.1 million compared to approximately $3.2 million for
the three months ended June 30, 2001. Gross margins decreased to 29.0% for the
three months ended June 30, 2002 from 33.4% for the three months ended June 30,
2001. The decreased margins are due to reduced revenue levels and estimated cost
overruns on large existing contracts.
General and administrative expenses. General and administrative
expenses for the three months ended June 30, 2002 were $699,000 compared to
$791,000 for the three months ended June 30, 2001, a decrease of approximately
$92,000 or 12%. The current year decrease was primarily due to a reduction in
bad debt expense recorded during the three months ended June 30, 2002. As a
percentage of revenues, general and administrative expenses increased to 23.5%
for the three months ended June 30, 2002 from 16.4% for the three months ended
June 30, 2001.
Sales and marketing expenses. Sales and marketing expenses for the
three months ended June 30, 2002 were $620,000 compared to $494,000 for the
three months ended June 30, 2001, an increase of approximately $126,000 or 26%.
The current year increase is a result of the Company's efforts to increase
awareness of its products in the marketplace. As a percentage of revenues, sales
and marketing expenses increased to 20.9% for the three months ended June 30,
2002, from 10.2% for the three months ended June 30, 2001.
Research and development expenses. Research and development expenses
for the three months ended June 30, 2002 were $276,000 compared to $201,000 for
the three months ended June 30, 2001, an increase of $75,000 or 37%, due
primarily to increased software development activities. Software development
costs capitalized during the three months ended June 30, 2001 were subsequently
written off.
Other income. Other income, net, for the three months ended June 30,
2002 was approximately $95,000 compared to a $12,000 loss for the three months
ended June 30, 2001, an increase of approximately $107,000. This increase is
primarily a result of favorable foreign currency translation rates.
Income taxes. Income tax expense for the three months ended June 30,
2002 was $53,000 compared to $128,000 of income tax expense for the three months
ended June 30, 2001, a decrease in expense of $75,000. Although no income tax
benefit on losses was recorded during the quarter ended June 30, 2002, the
Company's income tax expense for the three months ended June 30, 2002 reflects
income taxes recorded by its profitable foreign operations.
Cumulative effect of a change in accounting principle. During the three
months ended March 31, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142"). Under SFAS No. 142, goodwill is no longer amortized over its estimated
useful life, but is subject to an annual fair value based assessment. This fair
value assessment resulted in an impairment of $301,000 at January 1, 2002, which
was accounted for as a cumulative effect of a change in accounting principle
during the three months ended March 31, 2002.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001.
Revenues. Revenues for the six months ended June 30, 2002 were
approximately $6.8 million compared to approximately $9.7 million for the six
months ended June 30, 2001, a decrease of approximately $2.9 million or 30%.
Revenues from the wireless, defense, satellite, and EMC markets decreased
approximately $1.6 million, $1.2 million, $339,000, and $137,000, respectively.
Revenues from the automotive market increased approximately $68,000, while the
Company recorded revenues of approximately $361,000 in the higher education
market. Geographically, revenues from North America,
13
Europe, and Asia decreased $1.8 million, $760,000, and $349,000 respectively.
The decrease in revenues related to the wireless, defense, and satellite
industries was a result of significant completion of North American, Asian and
European contracts in the six months ended June 30, 2001, not repeated in the
six months ended June 30, 2002.
Cost of revenues. Cost of revenues for the six months ended June 30,
2002 were approximately $4.9 million compared to approximately $6.7 million for
the six months ended June 30, 2001. Gross margins decreased to 27.3% for the six
months ended June 30, 2002 from 31.2% for the six months ended June 30, 2001.
The decreased margins are due to reduced revenue levels and estimated cost
overruns on large existing contracts.
General and administrative expenses. General and administrative
expenses for the six months ended June 30, 2002 and 2001 were $1.4 million. As a
percentage of revenues, general and administrative expenses increased to 20.2 %
for the six months ended June 30, 2002 from 14.7% for the six months ended June
30, 2001.
Sales and marketing expenses. Sales and marketing expenses for the six
months ended June 30, 2002 were $1.1 million compared to $992,000 for the six
months ended June 30, 2001. The current year increase is a result of the
Company's effort to increase awareness of its products in the marketplace. As a
percentage of revenues, sales and marketing expenses increased to 16.8% for the
six months ended June 30, 2002, from 10.2% for the six months ended June 30,
2001.
Research and development expenses. Research and development expenses
for the six months ended June 30, 2002 were $540,000 compared to $361,000 for
the six months ended June 30, 2001, an increase of $179,000 or 50%, due
primarily to increased software development activities, and the capitalization
of software development costs during the six months ended June 30, 2001.
Software development costs capitalized during the six months ended June 30, 2001
were subsequently written off.
Other income. Other income, net, for the six months ended June 30, 2002
was approximately $97,000 compared to $27,000 for the six months ended June 30,
2001, an increase of approximately $70,000. This increase is primarily a result
of favorable foreign currency translation rates.
Income taxes. Income tax expense for the six months ended June 30, 2002
was $140,000 compared to $287,000 of income tax expense for the six months ended
June 30, 2001, a decrease in expense of $147,000. Although no income tax benefit
on losses was recorded during the quarter ended June 30, 2002, the Company's
income tax expense for the six months ended June 30, 2002 reflects income taxes
recorded by its profitable foreign operations.
Cumulative effect of a change in accounting principle. During the three
months ended March 31, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142"). Under SFAS No. 142, goodwill is no longer amortized over its estimated
useful life, but is subject to an annual fair value based assessment. This fair
value assessment resulted in an impairment of $301,000 at January 1, 2002, which
was accounted for as a cumulative effect of a change in accounting principle
during the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
During recent years the Company has satisfied its working capital
requirements through cash flows from equity financing.
Net cash provided by operating activities during the six months ended
June 30, 2002 was $348,000, compared to $163,000 used in operating activities in
the six months ended June 30, 2001. The most
14
significant contribution to cash provided by operating activities during the six
months ended June 30, 2002 came from the reductions in the Company's accounts
receivable balances of approximately $2.0 million. The Company's $1.5 million
net loss was its most significant use of cash in operating activities.
Net cash used in investing activities during the six months ended June
30, 2002 for the purchase of property, plant and equipment was $73,000. Net cash
used in investing activities during the six months ended June 30, 2001 was
$457,000, related to purchases of property and equipment was $365,000 and for
the capitalization of software development costs was $92,000.
The Company has exposure to currency fluctuations as a result of
billing certain of its contracts in foreign currency. When selling to customers
in countries with less stable currencies, the Company bills in U.S. dollars. For
the months ended June 30, 2002, approximately 32% of the Company's revenues were
billed in U.S. dollars. Substantially all of the costs of the Company's
contracts, including costs subcontracted to the Parent, have been, and will
continue to be, U.S. dollar-denominated except for wages for employees of the
Company's Israeli and German subsidiaries, which are denominated in local
currency. The Company intends to continue to enter into U.S. dollar-denominated
contracts.
INFLATION AND SEASONALITY
The Company does not believe that inflation or seasonality has had a
significant effect on the Company's operations to date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from fluctuations in foreign currency
exchange rates. We manage exposure to variability in foreign currency exchange
rates primarily through the use of natural hedges, as both liabilities and
assets are denominated in the local currency. However, different durations in
our funding obligations and assets may expose us to the risk of foreign exchange
rate fluctuations. We have not entered into any derivative instrument
transactions to manage this risk. Based on our overall foreign currency rate
exposure at June 30, 2002, we do not believe that a hypothetical 10% change in
foreign currency rates would materially adversely affect our financial position.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings
and is not aware of any threatened litigation, unasserted claims or assessments
that could have a material adverse effect on the Company's business, operating
results, or financial condition.
ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Stockholders of ORBIT/FR, Inc. was held on
June 6, 2002. At such meeting the Company's slate of directors were selected
for a one year term.
The voting results are as follows:
FOR WITHHELD
--------- --------
Ze'ev Stein 3,700,000 0
Gurion Meltzer 3,700,000 0
Uri Jenach 3,700,000 0
Doron Ginat 3,700,000 0
Dan Goffer 3,700,000 0
Additionally, the Company's selection of its auditors, Hoberman,
Miller, Goldstein, & Lesser, PC was ratified. The voting results of such
ratification were as follows: 3,700,000 for; zero against.
ITEM 5. OTHER INFORMATION--NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Israel Adan, President and Chief
Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Dave Lubbe, Chief Financial Officer.
b. REPORTS ON FORM 8-K
On May 21, 2002, the Company filed a report on Form 8-K
attaching correspondence from Ernst & Young LLP, the
Company's former independent accountant, regarding Ernst &
Young LLP's concurrence with the statements made by the
Company in the
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Company's Proxy Statement filed on April 30, 2002 concerning
the Company's dismissal of Ernst & Young LLP as its
independent accountant.
.
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ORBIT/FR, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORBIT/FR, INC.
---------------------------------
Registrant
Date August 14, 2002
By: /s/ Israel Adan
-----------------------------------
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Dave Lubbe
------------------------------------
Chief Financial Officer
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