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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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
There were 6,084,473 shares of common stock, $.01 par value, outstanding
as of August 14, 2003.
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1
ORBIT/FR, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- June 30, 2003
(Unaudited) and December 31, 2002..............................3
Consolidated Statements of Operations-- Three and six months
ended June 30, 2003 and 2002 (Unaudited).......................4
Consolidated Statements of Cash Flows-- Six months
ended June 30, 2003 and 2002 (Unaudited).......................5
Notes to Consolidated Financial Statements
(Unaudited)....................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................11
Item 3. Quantitative and Qualitative Disclosure of Market Risk..........14
Item 4. Controls and procedures.........................................14
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,
2003 2002
-------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,292 $ 3,030
Accounts receivable, less allowance of $272 and $254
in 2003 and 2002, respectively 2,336 4,160
Inventory 1,355 1,580
Costs and estimated earnings in excess of billings
on uncompleted contracts 966 683
Deferred income taxes 433 386
Other 518 302
-------- --------
Total current assets 7,900 10,141
Property and equipment, net 1,337 1,166
Deferred income taxes 158 135
Cost in excess of net assets acquired 381 381
Other 24 52
-------- --------
Total assets $ 9,800 $ 11,875
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 711 $ 1,017
Accounts payable--Parent 261 607
Accrued expenses 2,108 1,857
Customer advances 350 159
Income taxes payable 16 42
Billings in excess of costs and estimated earnings
on uncompleted contracts 443 1,426
Deferred income taxes 284 284
-------- --------
Total liabilities, all current 4,173 5,392
-------- --------
Stockholders' equity:
Preferred stock: $.01 par value:
Authorized shares -- 2,000,000
Issued and outstanding shares--none -- --
Common stock: $.01 par value:
Authorized shares -- 10,000,000
Issued shares -- 6,084,473 61 61
Additional paid-in capital 15,173 15,173
Accumulated deficit (9,364) (8,508)
Treasury stock -- 82,900 shares (243) (243)
-------- --------
Total stockholders' equity 5,627 6,483
-------- --------
Total liabilities and stockholders' equity $ 9,800 $ 11,875
======== ========
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,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Contract revenues $ 3,281 $ 2,972 $ 7,865 $ 6,805
Cost of revenues 2,417 2,111 5,549 4,946
----------- ----------- ----------- -----------
Gross profit 864 861 2,316 1,859
Operating expenses:
General and administrative 609 699 1,204 1,373
Sales and marketing 550 620 1,181 1,141
Research and development 303 276 593 540
----------- ----------- ----------- -----------
Total operating expenses 1,462 1,595 2,978 3,054
----------- ----------- ----------- -----------
Operating loss (598) (734) (662) (1,195)
Other income (expense), net (36) 95 (69) 97
----------- ----------- ----------- -----------
Loss before income taxes and cumulative
effect of change in accounting principle (634) (639) (731) (1,098)
Income tax expense 49 53 125 140
----------- ----------- ----------- -----------
Loss before cumulative effect of
change in accounting principle (683) (692) (856) (1,238)
Cumulative effect of change in
accounting principle -- -- -- (301)
----------- ----------- ----------- -----------
Net loss $ (683) $ (692) $ (856) $ (1,539)
=========== =========== =========== ===========
Basic and diluted loss per share
before cumulative effect of change in
in accounting principle $ (.11) $ (.12) $ (.14) $ (.21)
cumulative effect of change in
accounting principle -- -- -- (.05)
----------- ----------- ----------- -----------
Basic and diluted loss per share $ (.11) $ (.12) $ (.14) $ (.26)
=========== =========== =========== ===========
Weighted average number
common shares - basic and diluted 6,001,573 6,001,573 6,001,573 6,001,573
=========== =========== =========== ===========
See accompanying notes.
4
ORBIT/FR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------
2003 2002
------- -------
Cash flows from operating activities:
Net loss $ (856) $(1,539)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 211 208
Cumulative effect of change in accounting principle -- 301
Deferred income tax provision (70) (24)
Changes in operating assets and liabilities:
Accounts receivable 1,824 1,959
Inventory 225 421
Costs and estimated earnings in excess of billings
on uncompleted contracts (283) (686)
Other current assets (216) (17)
Accounts payable and accrued expenses (55) 226
Accounts payable--Parent (346) (305)
Customer advances 191 (411)
Income taxes payable (26) 15
Billings in excess of costs and estimated earnings
on uncompleted contracts (983) 190
------- -------
Net cash provided by (used in) operating activities (384) 338
------- -------
Cash flows from investing activities:
Purchase of property and equipment (382) (63)
------- -------
Net cash used in investing activities (382) (63)
------- -------
Cash flows from financing activities:
Repayment of note receivable 28 --
------- -------
Net cash provided by financing activities 28 --
------- -------
Net increase (decrease) in cash and cash equivalents (738) 275
Cash and cash equivalents at beginning of period 3,030 4,413
------- -------
Cash and cash equivalents at end of period $ 2,292 $ 4,688
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes $ 71 $ 61
======= =======
See accompanying notes.
5
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(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 wireless communications, satellite,
automotive, aerospace/defense 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 months ended June 30, 2003 and 2002 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, 2003. 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 the amendment thereto on Form 10K/A for the year ended
December 31, 2002, filed on March 31, 2003 and April 30, 2003, respectively,
with the Securities and Exchange Commission, which included the consolidated
financial statements and footnotes for the year ended December 31, 2002.
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, 2003
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Share
Basic loss per share is calculated by dividing net loss by the weighted
average common shares outstanding for the period. Diluted loss per share is
calculated by dividing net loss by the weighted average common shares
outstanding for the period plus the dilutive effect of stock options. The
dilutive effect of stock options was not assumed for the three and six months
ended June 30, 2003 and 2002 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 net book value.
Based on the December 31, 2001 cost in excess of net assets acquired
balance, the Company reported 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.
4. INVENTORY
Inventory consisted of the following:
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
(UNAUDITED)
Work-in-process $ 720 $ 973
Parts and components 635 607
------ ------
$1,355 $1,580
====== ======
7
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
Lab and computer equipment $2,311 $1,972
Office equipment 946 1,158
Transportation equipment 332 336
Furniture and fixtures 37 44
Leasehold improvements 278 320
------ ------
3,904 3,830
Less accumulated depreciation 2,567 2,664
------ ------
Property and equipment, net $1,337 $1,166
====== ======
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
JUNE 30, DECEMBER 31,
2003 2002
----------- ----------
(UNAUDITED)
Accrued contract costs $ 453 $ 381
Accrued compensation 886 758
Accrued commissions 72 99
Accrued royalties 126 114
Accrued warranty 317 293
Other accruals 254 212
------- ------
$ 2,108 $1,857
======= ======
8
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. LONG-TERM CONTRACTS
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
Accumulated expenditures on uncompleted contracts $ 12,123 $ 9,796
Estimated earnings thereon (45) (136)
-------- --------
12,078 9,660
Less: applicable progress billings 11,555 10,403
-------- --------
Total $ 523 $ (743)
======== ========
The long-term contracts are shown in the accompanying balance sheets as follows:
JUNE 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
----------- ------------
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 966 $ 683
Billings on uncompleted contracts in excess of
costs and estimated earnings (443) (1,426)
-------- ---------
$ 523 $ (743)
======== =========
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 $61 per year. These agreements are to be evaluated on an annual basis.
9
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(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, 2003 and 2002.
Three months ended June 30, 2003 North America Europe Asia Total
- -------------------------------- ------------- ------ ------ -------
Sales to unaffiliated customers $1,736 $ 338 $1,207 $ 3,281
Cost of sales to unaffiliated customers 1,273 401 743 2,417
------ ----- ------ -------
Gross profit unaffiliated customers $ 463 $ (63) $ 464 $ 864
====== ===== ====== =======
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
======= ====== ====== =======
Six months ended June 30, 2003 North America Europe Asia Total
- ------------------------------ ------------- ------ ------ -------
Sales to unaffiliated customers $ 4,384 $ 897 $2,584 $ 7,865
Cost of sales to unaffiliated customers 3,166 878 1,505 5,549
------- ----- ------ -------
Gross profit unaffiliated customers 1,218 $ 19 $1,079 $ 2,316
======= ===== ====== =======
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
======= ====== ====== =======
In the table above, "North America" includes all United States operations,
and "Europe" includes subsidiaries in Germany and Israel.
10
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,
--------------------------- -------------------------
2003 2002 2003 2002
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Gross profit 26.3 29.0 29.4 27.3
General and
administrative 18.6 23.5 15.3 20.2
Sales and marketing 16.8 20.9 15.0 16.8
Research and development 9.2 9.3 7.5 7.9
Operating loss (18.2) (24.7) (8.4) (17.6)
Loss before
income taxes (19.3) (21.5) (9.3) (16.1)
Net loss (20.8) (23.3) (10.9) (22.7)
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002.
Revenues. Revenues for the three months ended June 30, 2003 were
approximately $3.3 million compared to approximately $3.0 million for the three
months ended June 30, 2002, an increase of approximately $300,000 or 10%.
Revenues from the defense, satellite, university and automotive markets
increased approximately $560,000, $420,000, $60,000, and $48,000, respectively.
Revenues from the wireless and EMC markets decreased approximately $618,000 and
$161,000, respectively. Geographically, revenues from North America and Asia
increased approximately $561,000 and $33,000, respectively, while revenues from
Europe decreased approximately $285,000 from prior year levels. The increase in
revenues are primarily a result of significant completion of North American
defense and Asian satellite contracts in the three months ended June 30, 2003.
European and Asian wireless revenues recognized during the three months ended
June 30, 2002 were not completely replaced during 2003.
11
Cost of revenues. Cost of revenues for the three months ended June 30,
2003 were approximately $2.4 million compared to approximately $2.1 million for
the three months ended June 30, 2002. Gross margins decreased to 26% for the
three months ended June 30, 2003 from 29% for the three months ended June 30,
2002. The decreased margins are a result of cost overruns on large European
wireless contracts, and the relocation Advanced Electromagnetics, Inc.
General and administrative expenses. General and administrative expenses
for the three months ended June 30, 2003 were $609,000 compared to $699,000 for
the three months ended June 30, 2002, a decrease of approximately $90,000 or
13%, a result of the Company's shift of resources from general and
administrative expenses to cost of revenues during the three months ended June
30, 2003. As a percentage of revenues, general and administrative expenses
decreased to 18.6% for the three months ended June 30, 2003 from 23.5% for the
three months ended June 30, 2002.
Sales and marketing expenses. Sales and marketing expenses for the three
months ended June 30, 2003 were $550,000 compared to $620,000 for the three
months ended June 30, 2002, a decrease of approximately $70,000 or 11.3%. This
decrease is a result of the Company's focus on streamlining its worldwide sales
and marketing activities. As a percentage of revenues, sales and marketing
expenses decreased to 16.8% for the three months ended June 30, 2003, from 20.9
% for the three months ended June 30, 2002.
Research and development expenses. Research and development expenses for
the three months ended June 30, 2003 were $303,000 compared to $276,000 for the
three months ended June 30, 2002, an increase of $27,000 or 9.8%, due mainly to
the Company's continued expenditures on development activity focused on new
software development. As a percentage of revenues, research and development
expenses decreased to 9.2% for the three months ended June 30, 2003, from 9.3%
for the three months ended June 30, 2002.
Other income (loss). Other income (loss), net, for the three months ended
June 30, 2003 was a loss of approximately $36,000 compared to income of $95,000
for the three months ended June 30, 2002, a difference of approximately
$130,000. The 2003 loss is a result of a decrease in the Company's interest
income due to a reduction in interest rates and cash balances available for
investment, and foreign currency translation losses recognized during the three
months ended June 30, 2003.
Income taxes. Income tax expense for the three months ended June 30, 2003
was $49,000 compared to $53,000 of income tax expense for the three months ended
June 30, 2002, a decrease in expense of $4,000. Although no income tax benefit
on losses was recorded during the quarter ended June 30, 2003, the Company's
income tax expense for the three months ended June 30, 2003 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. No such impairment was recognized
during the three months ended June 30, 2003.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002.
Revenues. Revenues for the six months ended June 30, 2003 were
approximately $7.9 million compared to approximately $6.8 million for the six
months ended June 30, 2002, an increase of
12
approximately $1.1 million or 16%. Revenues from the defense, satellite, and
automotive markets increased approximately $2.3 million, $586,000, and $69,000,
respectively. Revenues from the wireless, university and EMC markets decreased
approximately $1.5 million, $207,000 and $136,000, respectively. Geographically,
revenues from North America increased approximately $2.1 million, while revenues
from Europe and Asia decreased approximately $669,000, and 331,000, respectively
from prior year levels. The increase in revenues are primarily a result of
significant completion of North American defense and Asian satellite contracts
in the six months ended June 30, 2003. European and Asian wireless revenues
recognized during the six months ended June 30, 2002 were not completely
replaced during the 2003.
Cost of revenues. Cost of revenues for the six months ended June 30, 2003
were approximately $5.5 million compared to approximately $4.9 million for the
six months ended June 30, 2002. Gross margins increased to 29.4% for the six
months ended June 30, 2003 from 27.3% for the six months ended June 30, 2002.
The increased margins are due to greater efficiencies related to greater
beginning backlog.
General and administrative expenses. General and administrative expenses
for the six months ended June 30, 2003 were $1,204,000 compared to $1,373,000
for the six months ended June 30, 2002, a decrease of approximately $169,000 or
12%, a result of the Company's shift of resources from general and
administrative expenses to cost of revenues during the six months ended June 30,
2003. As a percentage of revenues, general and administrative expenses decreased
to 15.3% for the six months ended June 30, 2003 from 20.2% for the six months
ended June 30, 2002.
Sales and marketing expenses. Sales and marketing expenses for the six
months ended June 30, 2003 were $1,181,000 compared to $1,141,000 for the six
months ended June 30, 2002, an increase of approximately $40,000 or 4%. This
increase is a result of the Company's focus on streamlining its worldwide sales
and marketing activities, the investment in senior marketing personnel and its
increased focus on worldwide marketing opportunities. As a percentage of
revenues, sales and marketing expenses decreased to 15.0% for the six months
ended June 30, 2003, from 16.8% for the six months ended June 30, 2002.
Research and development expenses. Research and development expenses for
the six months ended June 30, 2003 were to $593,000 compared to $540,000 for the
six months ended June 30, 2002, an increase of $53,000 or 10%, due mainly to the
Company's continued expenditures on development activity focused on new software
development. As a percentage of revenues, research and development expenses
decreased to 7.5% for the six months ended June 30, 2003, from 7.9% for the six
months ended June 30, 2002.
Other income (loss). Other income (loss), net, for the six months ended
June 30, 2003 was a loss of approximately $69,000 compared to income of $97,000
for the six months ended June 30, 2002, a difference of approximately $166,000.
The 2003 loss is a result of a decrease in the Company's interest income due to
a reduction in interest rates and cash balances available for investment, and
foreign currency translation losses recognized during the six months ended June
30, 2003.
Income taxes. Income tax expense for the six months ended June 30, 2003
was $125,000 compared to $140,000 of income tax expense for the six months ended
June 30, 2002, a decrease in expense of $15,000. Although no income tax benefit
on losses was recorded during the quarter ended June 30, 2003, the Company's
income tax expense for the six months ended June 30, 2003 reflects income taxes
recorded by its profitable foreign operations.
Cumulative effect of a change in accounting principle. During the six
months ended June 30, 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
13
of a change in accounting principle during the six months ended June, 2002. No
such impairment was recognized during the six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
During recent years the Company has satisfied its working capital
requirements through cash flows from equity financing. Net operating losses
recorded in recent years have caused negative cash flows from operating
activities.
Net cash used in operating activities during the six months ended June 30,
2003 was $384,000 compared to $338,000 provided by operating activities during
the six months ended June 30, 2002. No significant cash transaction occurred in
either period. The Company's net loss, adjusted for non cash items, used
$714,000 of operating cash, compared to $1,054,000 used in operating activities
during the six months ended June 30, 2002. Changes in the Company's operating
assets and liabilities during the six months ended June 30, 2003 provided
$330,000 in operating cash compared to $1,392,000 provided in the six months
ended June 30, 2002.
Net cash used in investing activities during the six months ended June 30,
2003 for the purchase of property and equipment was $382,000. Approximately
$258,000 of this amount was invested in the Company's new absorber manufacturing
facility in Santee California. During the six months ended June 30, 2002 the
Company purchased $63,000 in property and equipment.
The Company has exposure to currency fluctuations as a result of billing
certain of its contracts in foreign currency. When selling to customers in
countries with less stable currencies, the Company bills in U.S. dollars. For
the six months ended June 30, 2003, approximately 20% 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, 2003, we do not believe that a hypothetical 10% change in
foreign currency rates would materially adversely affect our financial position.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within
90 days of filing date of this quarterly report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures
14
were adequate and effective to ensure that material information relating to the
Company would be made known to them by others within the Company, particularly
during the period in which this quarterly report was being prepared. There were
no significant changes in the Company's internal controls or in other factors
that could significantly affect the Company's internal controls and procedures
subsequent to the Evaluation Date, nor any significant deficiencies or material
weaknesses in such internal controls and procedures requiring corrective
actions.
15
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--NOT APPLICABLE
ITEM 5. OTHER INFORMATION--NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
Israel Adan, President and Chief Executive Officer.
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
Dave Lubbe, Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
Israel Adan, President and Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
Dave Lubbe, Chief Financial Officer.
b. REPORTS ON FORM 8-K
1. The Company filed a Form 8-K on April 10, 2003, reporting that, on
April 9, 2003, the Company received a letter from The Nasdaq Stock
Market, Inc. notifying the Company that the Nasdaq Listing
Qualifications Panel rejected the Company's appeal of the Nasdaq
Staff Determination to delist the Company's securities from The
Nasdaq SmallCap Market because the Company's Common Stock failed to
meet The Nasdaq SmallCap Market continued listing requirement for
minimum market value of public float. The report further stated
that the Company's securities would be delisted from The Nasdaq
SmallCap Market effective April 11, 2003, and would be immediately
eligible for quotation on the OTC Bulletin Board effective with the
open of business on April 11, 2003, under the symbol ORFR.
16
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, 2003 By: Israel Adan
/s/ Israel Adan
-------------------------------------
President and Chief Executive Officer
Date: August 14, 2003 By: Dave Lubbe
/s/ Dave Lubbe
-------------------------------------
Chief Financial Officer
17
INDEX TO EXHIBITS
Number Description
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Israel
Adan, President and Chief Executive Officer
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Dave
Lubbe, Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Israel
Adan, President and Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Dave
Lubbe, Chief Financial Officer
18