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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, 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 November 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--September 30, 2003
(Unaudited) and December 31, 2002.................................................... 3
Consolidated Statements of Operations--Three and nine months
ended September 30, 2003 and 2002 (Unaudited)........................................ 4
Consolidated Statements of Cash Flows--Nine months
ended September 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................................................................ 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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,796 $ 3,030
Accounts receivable, less allowance of $267 and $254
in 2003 and 2002, respectively 2,409 4,160
Inventory 1,337 1,580
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,107 683
Deferred income taxes 420 386
Other 549 302
--------- -------
Total current assets 7,618 10,141
Property and equipment, net 1,297 1,166
Deferred income taxes 153 135
Cost in excess of net assets acquired 381 381
Other 16 52
--------- -------
Total assets $ 9,465 $11,875
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,003 $ 1,017
Accounts payable--Parent 315 607
Accrued expenses 1,981 1,857
Customer advances 68 159
Income taxes payable 48 42
Billings in excess of costs and estimated earnings
on uncompleted contracts 340 1,426
Deferred income taxes 284 284
--------- -------
Total liabilities, all current 4,039 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 (9,565) (8,508)
Treasury stock--82,900 shares (243) (243)
--------- -------
Total stockholders' equity 5,426 6,483
--------- -------
Total liabilities and stockholders' equity $ 9,465 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Contract revenues $ 4,236 $ 2,521 $ 12,101 $ 9,326
Cost of revenues 2,652 1,840 8,201 6,786
----------- ----------- ----------- -----------
Gross profit 1,584 681 3,900 2,540
Operating expenses:
General and administrative 623 702 1,828 2,075
Sales and marketing 765 507 1,946 1,648
Research and development 279 282 872 822
----------- ----------- ----------- -----------
Total operating expenses 1,667 1,491 4,646 4,545
----------- ----------- ----------- -----------
Operating loss (83) (810) (746) (2,005)
Other income, net (16) 7 (85) 104
----------- ----------- ----------- -----------
Loss before income tax expense (benefit) (99) (803) (831) (1,901)
Income tax expense (benefit) 101 (66) 226 74
----------- ----------- ----------- -----------
Net loss before cumulative effect of
change in accounting principle (200) (737) (1,057) (1,975)
Cumulative effect of change in
accounting principle -- -- -- (301)
----------- ----------- ----------- -----------
Net loss $ (200) $ (737) $ (1,057) $ (2,276)
=========== =========== =========== ===========
Basic and diluted loss per share before
cumulative effect of change in
in accounting principle $ (0.03) $ (0.12) $ (0.18) $ (0.33)
Cumulative effect of change in
accounting principle -- -- -- (0.05)
----------- ----------- ----------- -----------
Basic and diluted loss per share $ (0.03) $ (0.12) $ (0.18) $ (0.38)
=========== =========== =========== ===========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $(1,057) $(2,276)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 312 333
Cumulative effect of change in accounting principle -- 301
Deferred income tax benefit (52) (17)
Changes in operating assets and liabilities
Accounts receivable 1,751 2,071
Inventory 243 242
Costs and estimated earnings in excess of billings
on uncompleted contracts (424) (433)
Other assets (247) (58)
Accounts payable and accrued expenses 110 (145)
Accounts payable--Parent (292) (217)
Income taxes payable 6 2
Customer advances (91) (502)
Billings in excess of costs and estimated earnings
on uncompleted contracts (1,086) 544
------- -------
Net cash used in operating activities (827) (155)
Cash flows from investing activities:
Purchase of equipment (443) (202)
------- -------
Net cash used in investing activities (443) (202)
------- -------
Cash flows from financing activities:
Repayment of note receivable 36 36
------- -------
Net cash provided by financing activities 36 36
------- -------
Net decrease in cash and cash equivalents (1,234) (321)
Cash and cash equivalents at beginning of period 3,030 4,413
------- -------
Cash and cash equivalents at end of period $ 1,796 $ 4,092
======= =======
Supplemental disclosures of cash flow information:
Net cash paid during the period for income taxes $ 213 $ 269
======= =======
See accompanying notes.
5
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine months ended September 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)
SEPTEMBER 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 nine months
ended September 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 nine months
ended September 30, 2002.
4. INVENTORY
Inventory consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
(UNAUDITED)
Work-in-process $ 826 $ 973
Parts and components 511 607
------- ------
$ 1,337 $1,580
======= ======
7
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
Lab and computer equipment $2,349 $1,972
Office equipment 939 1,158
Transportation equipment 349 336
Furniture and fixtures 38 44
Leasehold improvements 281 320
------ ------
3,956 3,830
Less accumulated depreciation 2,659 2,664
------ ------
Property and equipment, net $1,297 $1,166
====== ======
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
Accrued contract costs $ 364 $ 381
Accrued compensation 893 758
Accrued commissions 126 99
Accrued royalties 112 114
Accrued warranty 304 293
Other accruals 182 212
-------- --------
$ 1,981 $ 1,857
======== ========
8
ORBIT/FR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. LONG-TERM CONTRACTS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
(UNAUDITED)
Accumulated expenditures on uncompleted contracts $ 12,839 $ 9,796
Estimated earnings thereon 203 (136)
-------- --------
13,042 9,660
Less: applicable progress billings 12,275 10,403
-------- --------
Total $ 767 $ (743)
======== ========
The long-term contracts are shown in the accompanying balance sheets as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
(UNAUDITED)
Costs and estimated earnings on uncompleted
contracts in excess of billings $ 1,107 $ 683
Billings on uncompleted contracts in excess of
costs and estimated earnings (340) (1,426)
------- -------
$ 767 $ (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)
SEPTEMBER 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 nine months ended September 30, 2003 and 2002.
Three months ended September 30, 2003 North America Europe Asia Total
- ----------------------------------------- ------------- ------ ---- -----
Sales to unaffiliated customers $ 1,667 $ 715 $ 1,854 $ 4,236
Cost of sales to unaffiliated customers 1,008 486 1,158 2,652
------- ------- ------- -------
Gross profit unaffiliated customers $ 659 $ 229 $ 696 $ 1,584
======= ======= ======= =======
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
======= ======= ======= =======
Nine months ended September 30, 2003 North America Europe Asia Total
- ----------------------------------------- ------------- ------ ---- -----
Sales to unaffiliated customers $ 6,051 $ 1,612 $ 4,438 $12,101
Cost of sales to unaffiliated customers 4,173 1,364 2,664 8,201
------- ------- ------- -------
Gross profit unaffiliated customers $ 1,878 $ 248 $ 1,774 $ 3,900
======= ======= ======= =======
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
======= ======= ======= =======
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2003 2002 2003 2002
---- ----- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Gross profit 37.4 27.0 32.2 27.2
General and
administrative 14.7 27.8 15.1 22.2
Sales and marketing 18.1 20.1 16.1 17.7
Research and development 6.6 11.2 7.2 8.8
Operating loss (2.0) (32.1) (6.2) (21.5)
Loss before
income taxes (2.3) (31.9) (6.9) (20.4)
Net loss (4.7) (29.2) (8.7) (24.4)
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002.
Revenues. Revenues for the three months ended September 30, 2003 were
approximately $4.2 million compared to approximately $2.5 million for the three
months ended September 30, 2002, an increase of approximately $1.7 million or
68%. Revenues from the defense, wireless, university and EMC markets increased
approximately $1.2 million, $507,000, $80,000, and $31,000, respectively.
Revenues from the satellite and automotive markets decreased approximately
$139,000 and $12,000, respectively. Geographically, the Company realized
increased revenues in all market segments. Revenues for the three months ended
September 30, 2003 from Asia, North America, and Europe increased approximately
$798,000, 783,000 and $134,000, respectively over prior year levels. The
increase in revenues is primarily
11
a result of significant completion of North American defense and Asian and
European wireless contracts in the three months ended September 30, 2003.
Cost of revenues. Cost of revenues for the three months ended September
30, 2003 were approximately $2.7 million compared to approximately $1.8 million
for the three months ended September 30, 2002. Gross margins increased to 37%
for the three months ended September 30, 2003 from 27% for the three months
ended September 30, 2002. The increased margins are a result of increased
productivity recognized on large North American Defense, and Asian wireless
contracts.
General and administrative expenses. General and administrative
expenses for the three months ended September 30, 2003 were $623,000 compared to
$702,000 for the three months ended September 30, 2002, a decrease of $79,000 or
11%, a result of the Company's shift of resources from general and
administrative to production activities during the three months ended September
30, 2003. As a percentage of revenues, general and administrative expenses
decreased to 14.7 % for the three months ended September 30, 2003 from 27.8% for
the three months ended September 30, 2002.
Sales and marketing expenses. Sales and marketing expenses for the
three months ended September 30, 2003 were $765,000 compared to $507,000 for the
three months ended September 30, 2002, an increase of $258,000 or 51%. This
increase is a result of the Company's investment in senior marketing personnel
in Europe and Asia, and marketing materials in the U.S. As a percentage of
revenues, sales and marketing expenses decreased to 18.1 % for the three months
ended September 30, 2003, from 20.1 % for the three months ended September 30,
2002.
Research and development expenses. Research and development expenses
for the three months ended September 30, 2003 were $279,000 compared to $282,000
for the three months ended September 30, 2002, a decrease of $3,000 or 1%. As a
percentage of revenues, research and development expenses decreased to 6.6% for
the three months ended September 30, 2003, from 11.2% for the three months ended
September 30, 2002.
Other income (loss). Other income (loss), net, for the three months
ended September 30, 2003 was a loss of approximately $16,000 compared to income
of $7,000 for the three months ended September 30, 2002, a difference of
$23,000. 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 September 30, 2003.
Income taxes. Income tax expense for the three months ended September
30, 2003 was $101,000 compared to a $66,000 income tax benefit for the three
months ended September 30, 2002, an increase in expense of $167,000. Although no
income tax benefit on losses was recorded during the quarter ended September 30,
2003, the Company's income tax expense for the three months ended September 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 September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002.
12
Revenues. Revenues for the nine months ended September 30, 2003 were
approximately $12.1 million compared to approximately $9.3 million for the nine
months ended September 30, 2002, an increase of approximately $2.8 million or
30%. Revenues from the defense, satellite, and automotive markets increased
approximately $3.5 million, $446,000, and $57,000, respectively. Revenues from
the wireless, university and EMC markets decreased approximately $1.0 million,
$127,000 and $105,000, respectively. Geographically, revenues from North America
and Asia increased approximately $2.8 million, and $466,000, respectively, while
revenues from Europe decreased approximately $535,000 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 nine months ended
September 30, 2003. European and Asian wireless revenues recognized during the
nine months ended September 30, 2002 were not completely replaced during 2003.
Cost of revenues. Cost of revenues for the nine months ended September
30, 2003 were approximately $8.2 million compared to approximately $6.8 million
for the nine months ended September 30, 2002, an increase of approximately $1.4
million. Gross margins increased to 32.2% for the nine months ended September
30, 2003 from 27.2% for the nine months ended September 30, 2002. The increased
margins are due to greater efficiencies related to greater beginning backlog and
increased productivity recognized on large North American Defense, and Asian
wireless contracts.
General and administrative expenses. General and administrative
expenses for the nine months ended September 30, 2003 were approximately $1.8
million compared to approximately $2.1 million for the nine months ended
September 30, 2002, a decrease of approximately $300,000 or 12%, a result of the
Company's shift of resources from general and administrative expenses to cost of
revenues during the nine months ended September 30, 2003. As a percentage of
revenues, general and administrative expenses decreased to 15.1% for the nine
months ended September 30, 2003 from 22.2% for the nine months ended September
30, 2002.
Sales and marketing expenses. Sales and marketing expenses for the nine
months ended September 30, 2003 were approximately $1.9 million compared to
approximately $1.6 million for the nine months ended September 30, 2002, an
increase of approximately $300,000 or 18%. 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 16.1% for the nine months ended September 30,
2003, from 17.7% for the nine months ended September 30, 2002.
Research and development expenses. Research and development expenses
for the nine months ended September 30, 2003 were $872,000 compared to $822,000
for the nine months ended September 30, 2002, an increase of $50,000 or 6%, 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 7.2% for the nine months ended September 30,
2003, from 8.8% for the nine months ended September 30, 2002.
Other income (loss). Other income (loss), net, for the nine months
ended September 30, 2003 was a loss of $85,000 compared to income of $104,000
for the nine months ended September 30, 2002, a difference of approximately
$189,000. 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 nine
months ended September 30, 2003.
Income taxes. Income tax expense for the nine months ended September
30, 2003 was $226,000 compared to $74,000 for the nine months ended September
30, 2002, an increase in expense of $152,000. Although no income tax benefit on
losses was recorded during the quarter ended September 30, 2003, the
13
Company's income tax expense for the nine months ended September 30, 2003
reflects income taxes recorded by its profitable foreign operations.
Cumulative effect of a change in accounting principle. During the nine
months ended September 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 of a change in accounting principle
during the nine months ended September 30, 2002. No such impairment was
recognized during the nine months ended September 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 nine months ended
September 30, 2003 was $827,000 compared to $155,000 used in operating
activities during the nine months ended September 30, 2002. No single
significant cash transaction occurred in either period. The Company's net loss,
adjusted for non cash items, used $797,000 of operating cash, compared to
approximately $1.7 million used in operating activities during the nine months
ended September 30, 2002. Changes in the Company's operating assets and
liabilities during the nine months ended September 30, 2003 used $30,000 in
operating cash compared to $1.5 million provided in the nine months ended
September 30, 2002.
Net cash used in investing activities during the nine months ended
September 30, 2003 for the purchase of property and equipment was $443,000.
Approximately $265,000 of this amount was invested in the Company's new absorber
manufacturing facility in Santee California. During the nine months ended
September 30, 2002 the Company purchased $202,000 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 nine months ended September 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
14
currency rate exposure at September 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
September 30, 2003, have concluded that the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company would be made known to them by others within the
Company, particularly during the period in which this quarterly report was being
prepared.
There has not been any change in the Company's internal controls over
financial reporting during the three months ended September 30, 2003 that
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting.
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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--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
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, 2003
By: /s/ Israel Adan
---------------------------------------
President and Chief Executive Officer
Date: November 14, 2003 By: /s/ Dave Lubbe
---------------------------------------
Chief Financial Officer
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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