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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 SEPTEMBER 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 November 14, 2002.
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1
ORBIT/FR, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--September 30, 2002
(Unaudited) and December 31, 2001 .............................. 3
Consolidated Statements of Operations--Three and nine months
ended September 30, 2002 and 2001 (Unaudited) .................. 4
Consolidated Statements of Cash Flows--Nine months
ended September 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 ........................................................................ 18
2
ORBIT/FR, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,092 $ 4,413
Accounts receivable, less allowance of $501 and $427
in 2002 and 2001, respectively 3,008 5,079
Inventory 1,358 1,600
Costs and estimated earnings in excess of billings
on uncompleted contracts 910 477
Deferred income taxes 83 64
Other 227 169
-------- --------
Total current assets 9,678 11,802
Property and equipment, net 1,198 1,329
Deferred income taxes 215 217
Cost in excess of net assets acquired 381 682
Other 60 96
-------- --------
Total assets $ 11,532 $ 14,126
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 897 $ 794
Accounts payable--Parent 482 699
Accrued expenses 1,800 2,048
Customer advances 225 727
Income taxes payable 14 12
Billings in excess of costs and estimated earnings
on uncompleted contracts 961 417
Deferred income taxes 68 68
-------- --------
Total liabilities, all current 4,447 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 (7,906) (5,630)
Treasury stock--82,900 shares (243) (243)
-------- --------
Total stockholders' equity 7,085 9,361
-------- --------
Total liabilities and stockholders' equity $ 11,532 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Contract revenues $ 2,521 $ 4,640 $ 9,326 $ 14,364
Cost of revenues 1,840 3,786 6,786 10,480
----------- ----------- ----------- -----------
Gross profit 681 854 2,540 3,884
Operating expenses:
General and administrative 702 993 2,075 2,418
Sales and marketing 507 518 1,648 1,511
Research and development 282 253 822 613
----------- ----------- ----------- -----------
Total operating expenses 1,491 1,764 4,545 4,542
----------- ----------- ----------- -----------
Operating loss (810) (910) (2,005) (658)
Other income, net 7 28 104 54
----------- ----------- ----------- -----------
Loss before income tax expense (benefit) (803) (882) (1,901) (604)
Income tax expense (benefit) (66) 249 74 535
----------- ----------- ----------- -----------
Net loss before cumulative effect of
change in accounting principle (737) (1,131) (1,975) (1,139)
Cumulative effect of change in
accounting principle -- -- (301) --
----------- ----------- ----------- -----------
Net loss $ (737) $ (1,131) $ (2,276) $ (1,139)
=========== =========== =========== ===========
Basic and diluted loss per share before
cumulative effect of change in
in accounting principle $ (0.12) $ (0.19) $ (0.33) $ (0.19)
Cumulative effect of change in
accounting principle -- -- (0.05) --
----------- ----------- ----------- -----------
Basic and diluted loss per share $ (0.12) $ (0.19) $ (0.38) $ (0.19)
=========== =========== =========== ===========
Weighted average number
common shares - basic and diluted 6,001,573 6,001,573 6,001,573 6,010,582
=========== =========== =========== ===========
See accompanying notes.
4
ORBIT/FR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
------- -------
Cash flows from operating activities:
Net loss $(2,276) $(1,139)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 333 320
Amortization 116
Cumulative effect of change in accounting principle 301
Deferred income tax provision (benefit) (17) 179
Changes in operating assets and liabilities
Accounts receivable 2,071 (138)
Inventory 242 325
Costs and estimated earnings in excess of billings
on uncompleted contracts (433) (20)
Other assets (58) 16
Accounts payable and accrued expenses (145) 407
Accounts payable--Parent (217) 238
Income taxes payable 2 (13)
Customer advances (502) (6)
Billings in excess of costs and estimated earnings
on uncompleted contracts 544 (759)
------- -------
Net cash used in operating activities (155) (474)
Cash flows from investing activities:
Investment in capitalized software (92)
Purchase of equipment (202) (622)
------- -------
Net cash used in investing activities (202) (714)
------- -------
Cash flows from financing activities:
Repayment of note receivable 36 24
Purchases of treasury stock -- (26)
------- -------
Net cash (used in) provided by financing activities 36 (2)
------- -------
Net decrease in cash and cash equivalents (321) (1,190)
Cash and cash equivalents at beginning of period 4,413 5,868
------- -------
Cash and cash equivalents at end of period $ 4,092 $ 4,678
======= =======
Supplemental disclosures of cash flow information:
Net cash paid during the period for income taxes $ 269 $ 245
======= =======
See accompanying notes.
5
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine month periods ended September 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)
SEPTEMBER 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 nine month periods ended September 30, 2002 and 2001 because the
effect of these securities is antidilutive.
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 over the 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 nine months
ended September 30, 2002.
7
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine month periods
ended September 30, 2002 and September 30, 2001 would have been as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net loss $ (737) $ (1,131) $ (2,276) $ (1,139)
Add back: goodwill amortization -- 11 -- 32
--------- --------- --------- ---------
Adjusted net loss $ (737) $ (1,120) $ (2,276) $ (1,107)
========= ========= ========= =========
Basic loss per share:
Reported net loss $ (0.12) $ (0.19) $ (0.38) $ (0.19)
Add back: goodwill amortization (0.00) 0.00 (0.00) 0.01
--------- --------- --------- ---------
Adjusted net loss $ (0.12) $ (0.19) $ (0.38) $ (0.18)
========= ========= ========= =========
4. INVENTORY
Inventory consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
Work-in-process $ 702 $ 763
Parts and components 656 837
------ ------
$1,358 $1,600
====== ======
8
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
Lab and computer equipment $1,968 $1,856
Office equipment 1,134 1,042
Transportation equipment 298 314
Furniture and fixtures 44 45
Leasehold improvements 319 317
------ ------
3,763 3,574
Less accumulated depreciation 2,565 2,245
------ ------
Property and equipment, net $1,198 $1,329
====== ======
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
Accrued contract costs $ 353 $ 537
Accrued compensation 759 740
Accrued commissions 73 116
Accrued royalties 104 119
Accrued warranty 303 281
Other accruals 208 255
------ ------
$1,800 $2,048
====== ======
9
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. LONG-TERM CONTRACTS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
Accumulated expenditures on uncompleted contracts $ 8,830 $ 12,687
Estimated earnings thereon 148 1,087
-------- --------
8,978 13,774
Less: applicable progress billings 9,029 13,714
-------- --------
Total $ (51) $ 60
======== ========
The long-term contracts are shown in the accompanying balance sheets as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 910 $ 477
Billings in excess of costs and estimated earnings
on uncompleted contracts (961) (417)
-------- --------
$ (51) $ 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)
SEPTEMBER 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 from other geographic locations in Europe, Asia, and North America.
The following table represents financial information by geographic region for
the three and nine months ended September 30, 2002 and 2001.
Three months ended September 30, 2002 North America Europe Asia Total
------------- ------ ------ -------
Sales to unaffiliated customers $ 884 $ 581 $1,056 $ 2,521
Cost of sales to unaffiliated customers 643 502 695 1,840
------ ------ ------ -------
Gross profit unaffiliated customers $ 241 $ 79 $ 361 $ 681
====== ====== ====== =======
Three months ended September 30, 2001 North America Europe Asia Total
------------- ------ ------ -------
Sales to unaffiliated customers $2,020 $ 882 $1,738 $ 4,640
Cost of sales to unaffiliated customers 1,805 800 1,181 3,786
------ ------ ------ -------
Gross profit unaffiliated customers $ 215 $ 82 $ 557 $ 854
====== ====== ====== =======
Nine months ended September 30, 2002 North America Europe Asia Total
------------- ------ ------ -------
Sales to unaffiliated customers $3,207 $2,147 $3,972 $ 9,326
Cost of sales to unaffiliated customers 2,395 1,943 2,448 6,786
------ ------ ------ -------
Gross profit unaffiliated customers $ 812 $ 204 $1,524 $ 2,540
====== ====== ====== =======
Nine months ended September 30, 2001 North America Europe Asia Total
------------- ------ ------ -------
Sales to unaffiliated customers $6,154 $3,208 $5,002 $14,364
Cost of sales to unaffiliated customers 4,735 2,559 3,186 10,480
------ ------ ------ -------
Gross profit unaffiliated customers $1,419 $ 649 $1,816 $ 3,884
====== ====== ====== =======
In the table above, "North America" includes all United States operations,
and "Europe" includes subsidiaries in Germany and Israel.
11
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Gross profit 27.0 18.4 27.2 27.0
General and
administrative 27.8 21.4 22.2 16.8
Sales and marketing 20.1 11.2 17.7 10.5
Research and development 11.2 5.4 8.8 4.3
Operating loss (32.1) (19.6) (21.5) (4.6)
Loss before
income taxes (31.9) (19.0) (20.4) (4.2)
Net loss (29.2) (24.4) (24.4) (7.9)
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001.
Revenues. Revenues for the three months ended September 30, 2002 were
approximately $2.5 million compared to approximately $4.6 million for the three
months ended September 30, 2001, a decrease of approximately $2.1 million or
46%. Revenues from the defense market for both periods totaled approximately
$900,000, while revenues from the wireless, EMC, automotive, higher education,
and satellite markets decreased approximately $1.2 million, $351,000, $250,000,
$184,000, and $110,000 respectively. Geographically, revenues from North
America, Asia and Europe decreased $1.1 million, $682,000, and $301,000
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 September 30, 2001, not
repeated in the three months ended September 30, 2002.
12
Cost of revenues. Cost of revenues for the three months ended September
30, 2002 were approximately $1.8 million compared to approximately $3.8 million
for the three months ended September 30, 2001. Gross margins increased to 27.0%
for the three months ended September 30, 2002 from 18.4% for the three months
ended September 30, 2001. The increase in margins is a result of a revaluation
of large defense related contracts, and one time increases in inventory reserves
taken during the three months ended September 30, 2001, not repeated in the
three months ended September 30, 2002.
General and administrative expenses. General and administrative expenses
for the three months ended September 30, 2002 were $702,000 compared to $993,000
for the three months ended September 30, 2001, a decrease of approximately
$291,000 or 29%. The current year decrease was primarily due to the non
recurrence of bad debt expense recorded during the three months ended September
30, 2001. As a percentage of revenues, general and administrative expenses
increased to 27.8% for the three months ended September 30, 2002 from 21.4% for
the three months ended September 30, 2001.
Sales and marketing expenses. Sales and marketing expenses for the three
months ended September 30, 2002 were $507,000 compared to $518,000 for the three
months ended September 30, 2001, a decrease of approximately $11,000 or 2%. As a
percentage of revenues, sales and marketing expenses increased to 20.1% for the
three months ended September 30, 2002, from 11.2% for the three months ended
September 30, 2001.
Research and development expenses. Research and development expenses for
the three months ended September 30, 2002 were $282,000 compared to $253,000 for
the three months ended September 30, 2001, an increase of $29,000 or 11%, due to
increased software development activities.
Other income. Other income, net, for the three months ended September 30,
2002 was approximately $7,000 compared to a $28,000 for the three months ended
September 30, 2001, a decrease of approximately $21,000.
Income taxes. Income tax benefit for the three months ended September 30,
2002 was $66,000 compared to a $249,000 income tax expense for the three months
ended September 30, 2001, a decrease in expense of $315,000. The Company records
income tax expense on profitable operations and income tax benefits on losses
recorded by its foreign subsidiaries.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001.
Revenues. Revenues for the nine months ended September 30, 2002 were
approximately $9.3 million compared to approximately $14.4 million for the nine
months ended September 30, 2001, a decrease of approximately $5.1 million or
35%. Revenues from the wireless, defense, EMC, satellite and automotive markets
decreased approximately $2.9 million, $1.2 million, $484,000, 448,000 and
$170,000, respectively. Revenues from the higher education market increased
approximately $177,000. Geographically, revenues from North America, Europe, and
Asia decreased $2.9 million, $1.1 million, and $1.0 million 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 nine months ended September 30, 2001, not repeated in the nine
months ended September 30, 2002.
Cost of revenues. Cost of revenues for the nine months ended September 30,
2002 were approximately $6.8 million compared to approximately $10.5 million for
the nine months ended September 30, 2001. Gross margins remained at to 27.0% for
both periods.
General and administrative expenses. General and administrative expenses
for the nine months ended September 30, 2002 totaled approximately $2.1 million
compared to approximately $2.4 million for the nine months ended September 30,
2001, a decrease of approximately $343,000 due primarily to the non
13
recurrence of bad debt expense recorded during the nine months ended September
30, 2001. As a percentage of revenues, general and administrative expenses
increased to 22.2% for the nine months ended September 30, 2002 from 16.8% for
the nine months ended September 30, 2001.
Sales and marketing expenses. Sales and marketing expenses for the nine
months ended September 30, 2002 were $1.6 million compared to $1.5 million for
the nine months ended September 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 17.7% for the nine months ended September 30, 2002, from 10.5% for the nine
months ended September 30, 2001.
Research and development expenses. Research and development expenses for
the nine months ended September 30, 2002 were $822,000 compared to $613,000 for
the nine months ended September 30, 2001, an increase of $209,000 or 35%, due to
increased software development activities, and the capitalization of software
development costs incurred prior to September 30, 2001. Software development
costs capitalized prior to June 30, 2001 were subsequently written off.
Other income. Other income, net, for the nine months ended September 30,
2002 was approximately $104,000 compared to $54,000 for the nine months ended
September 30, 2001, an increase of approximately $50,000. This increase is
primarily a result of favorable foreign currency translation rates.
Income taxes. Income tax expense for the nine months ended September 30,
2002 was $74,000 compared to $535,000 of income tax expense for the nine months
ended September 30, 2001, a decrease in expense of $461,000. The Company records
income tax expense on profitable operations and income tax benefits on losses
recorded by its foreign subsidiaries.
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 nine months ended September 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 used in operating activities during the nine months ended
September 30, 2002 was $155,000, compared to $474,000 used in operating
activities during the nine months ended September 30, 2001. The most significant
use of cash in operating activities during the nine months ended September 30,
2002 came from the Company's $2.3 million net loss. The Company's most
significant contribution to cash provided by operating activities resulted from
reductions in the accounts receivable balances of approximately $2.1 million.
Net cash used in investing activities during the nine months ended
September 30, 2002 for the purchase of property, plant and equipment was
$202,000. Net cash used in investing activities during the nine months ended
September 30, 2001 was $714,000, related to purchases of property and equipment
was $622,000 and for the capitalization of software development costs was
$92,000.
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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 nine months ended September 30, 2002, approximately 40% 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 September 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--NONE
ITEM 5. OTHER INFORMATION
As previously reported, on February 14, 2002, the staff (the "Staff") of
The Nasdaq Stock Market, Inc. notified the Company that it was not in compliance
with Marketplace Rule 4310(c)(4) because the minimum closing bid price for its
Common Stock had been below $1.00 per share for a period of thirty consecutive
days. The Staff initially advised the Company that it would be given until
August 13, 2002 to comply with the minimum bid price requirement in order to
maintain its listing on The Nasdaq SmallCap Market. On August 14, 2002 the Staff
further advised the Company that in light of its compliance with the initial
listing requirements for the Nasdaq SmallCap market related to stockholders'
equity, the Company has been granted an additional 180 days' grace period to
demonstrate compliance. On November 5, 2002, the Company received an additional
notice from the Staff notifying the Company that it was not in compliance with
Marketplace Rule 4310(c)(7) because the minimum public float requirement for its
Common Stock had fallen below $1,000,000 for the previous 30 trading days. The
Staff advised the Company that it would be given until February 3, 2003 to
comply with the minimum public float requirement in order to maintain its
listing on The Nasdaq SmallCap Market. At that time the Company may appeal the
Staff's determination to a Listing Qualifications Panel.
The Company is currently considering all available options in order to
regain compliance with the Marketplace Rules. However, if the Company fails to
correct these deficiencies, Nasdaq will provide delisting notification to the
Company, which may then go through an appeals process. A delisting of the
Company's shares from The Nasdaq SmallCap Market could have a material adverse
affect on the price of the Common Stock, could adversely affect the liquidity of
the shares held by the Company's shareholders, and could restrict the Company's
ability to raise additional capital in the future.
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.
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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 -- NONE
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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 November 14, 2002
By: /s/ Israel Adan
------------------------------
President and Chief Executive Officer
Date: November 14, 2002 By: /s/ Dave Lubbe
------------------------------
Chief Financial Officer
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