10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark one) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 0-3936 ORBIT INTERNATIONAL CORP. (Exact name of small business issuer as specified in its charter) DELAWARE 11-1826363 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 80 CABOT COURT, HAUPPAUGE, NEW YORK 11788 (Address of principal executive offices) 631-435-8300 (Issuer's telephone number, including area code) N/A (Former name, former address and formal fiscal year, if changed since last report) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ___ - APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of registrant's Common Stock, par value $.10, as of November 13, 2003 was 2,756,162. --------- Transitional Small Business Disclosure Format (check one): Yes___ No_X_ ---
INDEX Page No. ------- Independent Accountant's Report . . . . . . . . . . . . . . 3 Part I. Financial Information: Item 1 - Financial Statements: Condensed Consolidated Balance Sheet - September 30, 2003(unaudited) and December 31, 2002 . . . 4-5 Condensed Consolidated Statements of Operations (unaudited) Three and Nine Months Ended September 30, 2003 and 2002 . . . . . . . . . . . . . . 6 Condensed Consolidated Statement of Cash Flows (unaudited) Nine Months Ended September 30, 2003 and 2002 7-8 Notes to Condensed Consolidated Financial Statements. . . 9-13 Item 2 - Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . . . . 14-19 Item 3 - Controls and Procedures. . . . . . . . . . . . . 20 Part II. Other Information: Item 6 - Exhibits and Reports on Form 8K. . . . . . . . . 21 Signatures. . . . . . . . . . . . . . . . . . . . . . . . 22 Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . 23-28
INDEPENDENT ACCOUNTANT'S REPORT To the Board of Directors Orbit International Corp. We have reviewed the accompanying condensed consolidated balance sheet of Orbit International Corp. and Subsidiaries as of September 30, 2003, and the related condensed consolidated statements of operations for the nine-month and three-month periods ended September 30, 2003 and 2002 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above in order for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of operations, cash flows, and changes in stockholders' equity for the year then ended (not presented herein); and in our report dated February 28, 2003, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. GOLDSTEIN GOLUB KESSLER LLP New York, New York November 5, 2003
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET September 30, December 31, 2003 2002 -------------- ------------- (unaudited) ASSETS ------ Current assets: Cash and cash equivalents. . . . . . . . $ 662,000 $ 2,022,000 Investments in marketable securities . . 56,000 3,000 Accounts receivable (less allowance for doubtful accounts) . . . . . . . . . . . 2,661,000 1,355,000 Inventories. . . . . . . . . . . . . . . 7,184,000 7,109,000 Other current assets . . . . . . . . . . 184,000 154,000 Deferred tax assets. . . . . . . . . . . 390,000 75,000 -------------- ------------- Total current assets . . . . . . . . . . 11,137,000 10,718,000 Property and equipment - at cost, less accumulated depreciation and amortization . . . . . . . . . . . . . . 181,000 218,000 Goodwill . . . . . . . . . . . . . . . . 868,000 868,000 Other assets . . . . . . . . . . . . . . 869,000 853,000 Deferred tax assets. . . . . . . . . . . 200,000 275,000 -------------- ------------- TOTAL ASSETS . . . . . . . . . . . . . . $ 13,255,000 $ 12,932,000 ============== ============= See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (continued) September 30, December 31, 2003 2002 --------------- -------------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term obligations. $ 161,000 $ 201,000 Accounts payable. . . . . . . . . . . . . 955,000 1,048,000 Accrued expenses. . . . . . . . . . . . . 1,003,000 1,029,000 Notes payable . . . . . . . . . . . . . . - 766,000 Deferred income . . . . . . . . . . . . . 85,000 85,000 Customer advances . . . . . . . . . . . . - 47,000 Accounts payable, accrued expenses and reserves applicable to discontinued operations. . . . . . . . . . . . . . . . 257,000 555,000 --------------- -------------- Total current liabilities . . . . . . . . 2,461,000 3,731,000 Deferred income . . . . . . . . . . . . . 705,000 769,000 Long-term obligations . . . . . . . . . . 66,000 173,000 --------------- -------------- Total liabilities . . . . . . . . . . . . 3,232,000 4,673,000 --------------- -------------- STOCKHOLDERS' EQUITY Common stock - $.10 par value . . . . . . 402,000 313,000 Additional paid-in capital. . . . . . . . 24,536,000 24,168,000 Accumulated deficit . . . . . . . . . . . (5,065,000) (6,372,000) --------------- -------------- 19,873,000 18,109,000 Treasury stock, at cost . . . . . . . . . (9,850,000) (9,850,000) --------------- -------------- Total stockholders' equity. . . . . . . . 10,023,000 8,259,000 --------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $ 13,255,000 $ 12,932,000 =============== ============== See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Nine Months Ended Three Months Ended September 30, September 30, 2003 2002 2003 2002 -------- ---------- ----------- ---------- Net sales. . . . . $ 13,061,000 $ 12,309,000 $4,347,000 $4,213,000 Cost of sales. . . . . . . . 7,426,000 7,472,000 2,516,000 2,554,000 ------------- -------------- ----------- ---------- Gross profit . 5,635,000 4,837,000 1,831,000 1,659,000 ----------- ------------- ----------- ---------- Selling, general and administrative expenses . . . . . . . . 4,505,000 4,089,000 1,509,000 1,361,000 Interest expense 9,000 57,000 1,000 18,000 Investment and other income, net . . . ( 86,000) ( 107,000) ( 23,000) ( 37,000) ---------- ---------- --------- -------- Income before income tax. . 1,207,000 798,000 344,000 317,000 Income tax (benefit). ( 100,000) -. (100,000) - --------- -------- -------- ------- NET INCOME $1,307,000 $ 798,000 $444,000 $317,000 ========= ========= ======== ======== Net income per common share: (a) Net income Basic. . . . . . $ .48 $ .30 $ .16 $ .12 Diluted. . . . . . . . . . $ .45 $ .28 $ .15 $ .11 (a) Retroactively restated to reflect a twenty-five percent(25%) stock dividend effective August 15, 2003. See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Nine Months Ended September 30, 2003 2002 ------------ ----------- Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . $ 1,307,000 $ 798,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization . . . . . . . 59,000 54,000 Deferred income.. . . . . . . . . . . . . . (64,000) (64,000) Compensation expense related to issuance of warrants . . . . . . . . . . . . . . . . 164,000 - Deferred tax benefit. . . . . . . . . . . . (100,000) - Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . (1,306,000) 487,000 Inventories . . . . . . . . . . . . . . . . (75,000) 18,000 Other current assets. . . . . . . . . . . . (30,000) (77,000) Other assets. . . . . . . . . . . . . . . . (16,000) (96,000) Accounts payable. . . . . . . . . . . . . . (93,000) (279,000) Accrued expenses. . . . . . . . . . . . . . (26,000) 58,000 Customer advances . . . . . . . . . . . . . (47,000) 168,000 Accounts payable, accrued expenses and reserves applicable to discontinued operations. . . . . . . . . . . . . . . . . (298,000) (25,000) ------------ ----------- Net cash (used in) provided by operating activities. . . . . . . . . . . . . (525,000) 1,042,000 ------------ ----------- Cash flows (used in) investing activities: Purchases of property and equipment . . . . (22,000) (29,000) Purchase of marketable Securities . . . . . (53,000) -____ ------------ ----------- Net cash (used in) investing activities . . . (75,000) (29,000) (continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (continued) Nine Months Ended September 30, 2003 2002 ------------ ----------- Cash flows from financing activities: Repayments of long-term debt. . . . . . (147,000) (140,000) Net repayments of note payable. . . . . (766,000) (62,000) Proceeds from exercise of stock options 153,000 - _ ------------ ----------- Net cash (used in) financing activities (760,000) (202,000) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (1,360,000) 811,000 Cash and cash equivalents - January 1 . . 2,022,000 745,000 ------------ ----------- CASH AND CASH EQUIVALENTS - September 30, $ 662,000 $1,556,000 ============ =========== Supplemental cash flow information: Cash paid for: Interest. . . . . . . . . . . . . . . . $ 9,000 $ 57,000 See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (NOTE 1) - Basis of Presentation: ------- ----------------------- The financial information herein is unaudited. However, in the opinion of management, such information reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods being reported. Additionally, it should be noted that the accompanying consolidated financial statements do not purport to contain complete disclosures required for annual financial statements in conformity with generally accepted accounting principles. The results of operations for the nine and three months ended September 30, 2003, are not necessarily indicative of the results of operations for the full fiscal year ending December 31, 2003. These condensed consolidated statements should be read in conjunction with the Company's consolidated financial statements for the fiscal year ended December 31, 2002 contained in the Company's Form 10-KSB. On July 29, 2003, the Board of Directors approved a twenty-five percent (25%) stock dividend to shareholders of record on August 15, 2003. The payable date for the dividend was August 29, 2003. The stock dividend has been accounted for as a 5 for 4 stock split and all references to shares and per share amounts in the accompanying financial statements have been retroactively restated to reflect the stock dividend. The Company has elected to apply Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock options issued to employees (intrinsic value) and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. Had the Company elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123, the Company's net income and income per common share would have been as follows: (continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Nine Months Ended Three Months Ended September 30, September 30, 2003 2002 2003 2002 ---------- -------- -------- --------- Net Income - as reported . . . . . . . $1,307,000 $798,000 $444,000 $ 317,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards,net of related tax effects . . 106,000 - 103,000 - ---------- -------- -------- --------- Net Income - pro forma . . . . . . . . $1,201,000 $798,000 $341,000 $ 317,000 ========== ======== ======== ========= Basic income per share - as reported . $ 0.48 $ 0.30 $ 0.16 $ 0.12 ========== ======== ======== ========= Basic income per share - pro forma . . $ 0.44 $ 0.30 $ 0.12 $ 0.12 ========== ======== ======== ========= Diluted income per share - as reported $ 0.45 $ 0.28 $ 0.15 $ 0.11 ========== ======== ======== ========= Diluted income per share - pro forma . $ 0.41 $ 0.28 $ 0.11 $ 0.11 ========== ======== ======== =========
(NOTE 2) - Financing Arrangement: ------- ---------------------- In February 2003, the Company entered into a $2,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and machinery and equipment. The agreement will continue from year to year thereafter unless sooner terminated for an event of default including compliance with financial covenants. Loans under the facility will bear interest equal to the sum of 2.75% plus the one-month London Inter-bank offer rate (LIBOR) (1.12% at September 30, 2003). No amounts have been borrowed under the credit facility. (NOTE 3) - Income Per Share: ------- ------------------ The following table sets forth the computation of basic and diluted income per common share: (continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Nine Months Ended Three Months Ended September 30, September 30, 2003 2002 2003 2002 --------- --------- --------- --------- Denominator: Denominator for basic Income per share - weighted-average common shares . . . . . . . . . . . 2,703,000 2,637,000 2,745,000 2,637,000 Effect of dilutive securities: Employee and directors stock options. . . . . . . . 231,000 181,000 280,000 193,000 Warrants . . . . . . . . . . - - 16,000 - --------- --------- --------- --------- Denominator for diluted income per share - weighted-average common shares and assumed conversion . . . . . . . . . 2,934,000 2,818,000 3,041,000 2,830,000 ========= ========= ========= =========
The numerator for basic and diluted income per share for the nine and three month periods ended September 30, 2003 and 2002 is net income. Options to purchase 191,248 and 416 shares of common stock were outstanding during the nine and three months ended September 30, 2003, respectively, and options to purchase 31,034 and 367,275 shares were outstanding for the same periods ended September 30, 2002, but were not included in the computation of diluted earnings per share. The inclusion of these options would have been antidilitive due to the options' exercise prices being greater than the average market price of the Company's common shares during the respective periods. The exercise prices for these options range from $4.83 to $7.20 for September 30, 2003 and from $3.00 to $7.20 for September 30, 2002. (NOTE 4) - Cost of Sales: ------- --------------- For interim periods, the Company estimates its inventory and related gross profit. (continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) (NOTE 5) - Inventories: -------- ----------- Inventories are comprised of the following: September 30, December 31, 2003 2002 -------------- ------------- Raw Materials . $ 3,736,000 $ 3,665,000 Work-in-process 3,017,000 3,020,000 Finished goods. 431,000 424,000 -------------- ------------- TOTAL . . . . $ 7,184,000 $ 7,109,000 ============== =============
(NOTE 6) - Business Segments: --------- ------------------ The Company operates through two business segments. Its Electronics Segment, through the Orbit Instrument Division, is engaged in the design, manufacture and sale of customized electronic components and subsystems. Its Power Units Segment, through the Behlman Electronics, Inc. subsidiary, is engaged in the design, manufacture and sale of distortion free commercial power units, power conversion devices and electronic devices for measurement and display. The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately as they manufacture and distribute distinct products with different production processes. The following is the Company's business segment information for the nine and three month periods ended September 30, 2003 and 2002.
Nine Months Ended Three Months Ended September 30, September 30, 2003 2002 2003 2002 ----------- ----------- ---------- ---------- Net sales: Electronics. . . . $ 7,152,000 $ 8,745,000 $2,576,000 $2,780,000 Power Units Domestic . . . . 5,439,000 3,222,000 1,598,000 1,252,000 Foreign. . . . . 470,000 342,000 173,000 181,000 ----------- ----------- ---------- ---------- Total Power Units. 5,909,000 3,564,000 1,771,000 1,433,000 ----------- ----------- ---------- ---------- Total. . . . . . . $13,061,000 $12,309,000 $4,347,000 $4,213,000 =========== =========== ========== ========== (continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Income (loss) from operations: Electronics. . . . $ 1,574,000 $2,122,000 $ 852,000 $ 654,000 Power Units. . . . 594,000 (718,000) (41,000) (117,000) General corporate expenses not allocated. . . . . (1,034,000) (656,000) (485,000) (239,000) Interest expense . . (9,000) (57,000) (1,000) (18,000) Investment and other income . . . . . . 82,000 107,000 19,000 37,000 ------------ ----------- ---------- ---------- Income before income taxes . . . $ 1,207,000 $ 798,000 $ 344,000 $ 317,000 ============ =========== ========== ==========
(NOTE 7) - Goodwill and Other Intangible Assets: --------- ----------------------------------------- Effective January 1, 2002, Orbit adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires that an intangible asset with a finite life be amortized over its useful life and that goodwill and other intangible assets with indefinite lives not be amortized but evaluated for impairment. The Company concluded, as of March 31, 2002 and again in the first quarter of 2003, that there was no impairment to goodwill and, pursuant to SFAS 142, goodwill is no longer being amortized. (NOTE 8) - Income Taxes --------- ------------- During the third quarter of 2003, due to increased profitability, the Company adjusted its valuation allowance on its deferred tax asset thereby realizing $100,000 in an income tax benefit. No provision for current income taxes was made during the nine months ended September 30, 2003 and 2002, due to the utilization of federal and state net operating loss carryforwards. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Critical Accounting Policies ------------------------------ The discussion and analysis of the Company's financial condition and the results of its operations are based on the Company's financial statements and the data used to prepare them. The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. On an on-going basis, we re-evaluate our judgments and estimates including those related to inventory valuation, the valuation allowance on the Company's deferred tax asset and goodwill impairment. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect more significant judgments and estimates in the preparation of the consolidated financial statements. Inventories ----------- Inventory is valued at the lower of cost (first in, first out basis) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for the Company's products can be forecasted based on current backlog, customer options to reorder under existing contracts, the need to retrofit older units and parts needed for general repairs. Although the Company makes every effort to insure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have an impact on the level of obsolete material in its inventory and operating results could be affected, accordingly. Deferred tax asset -------------------- At December 31, 2002, the Company had an alternative minimum tax credit of approximately $564,000 with no limitation on the carry-forward period and net operating loss carry-forwards of approximately $25,600,000 that expire through 2021. The Company places a valuation allowance to reduce its deferred tax asset when it is more likely than not that a portion of the amount may not be realized. The Company estimates its valuation allowance based on an estimated forecast of its future profitability. Any significant changes in future profitability resulting from variations in future revenues or expenses could affect the valuation allowance on its deferred tax asset and operating results could be affected, accordingly. During the quarter, due to increased profitability, the Company adjusted its valuation allowance on its deferred tax asset thereby realizing $100,000 in an income tax benefit. Impairment of Goodwill ------------------------ The Company has significant intangible assets related to goodwill and other acquired intangibles. In determining the recoverability of goodwill and other intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets. If these estimates or their related assumptions change in the future, the company may be required to record impairment charges for those assets not previously recorded. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible assets". Under the provisions of SFAS 142, the cost of certain intangibles will no longer be subject to amortization but was reviewed for potential impairment during the first quarter of 2002 and then on an annual basis thereafter. During the first quarter of 2003, the Company determined that there was no impairment to its goodwill and other intangible assets. Material Changes in Results of Operations ---------------------------------------------- Three month period ended September 30, 2003 v. September 30, 2002 --------------------------------------------------------------------------- The Company currently operates in two industry segments. Its Orbit Instrument Division is engaged in the design and manufacture of electronic components and subsystems (the "Electronics Segment"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Units Segment"). Consolidated net sales for the three month period ended September 30, 2003 increased by 3.2% to $4,347,000 from $4,213,000 for the three month period ended September 30, 2002 principally due to 24% higher sales recorded from its Power Units Segment that was partially offset by 7% lower sales recorded by its Electronics Segment. Gross profit, as a percentage of sales, for the three months ended September 30, 2003 increased to 42.1% from 39.4% for the three months ended September 30, 2002. This increase resulted from a higher gross profit realized by the Electronics Segment due principally to product mix. The increase was despite a lower gross profit realized by the Power Unit Segment also principally due to product mix and despite an increase in the Segment's sales. Selling, general and administrative expenses for the three month period ended September 30, 2003 increased to $1,509,000 from $1,361,000, or 10.9%, for the three month period ended September 30, 2002 principally due to higher corporate administrative costs. During the quarter, the Company recorded non-cash net charges of $88,000 principally due to the issuance of warrants to its investment banker. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended September 30, 2003 increased to 34.7% from 32.3 % for the three month period ended September 30, 2002 principally due to the aforementioned costs that was partially offset by increased sales during the current period. Interest expense for the three month period ended September 30, 2003 decreased to $1,000 from $18,000 for the three month period ended September 30, 2002 principally due to the payoff of the outstanding balance under the Company's credit facility with an asset-based lender in the first quarter of 2003. Investment and other income for the three month period ended September 30, 2003 decreased to $23,000 from $37,000 for the three month period ended September 30, 2002 principally due to a decrease in funds available for investment during the current period and due to lower interest rates. Net income before income tax benefit for the three month period ended September 30, 2003 increased to $344,000 from $317,000 for the three month period ended September 30, 2002. Net income before income tax benefit for the current quarter includes non-cash net charges of $88,000 principally due to the issuance of warrants to the Company's investment banker. During the quarter, due to increased profitability, the Company adjusted its valuation allowance on its deferred tax asset thereby realizing $100,000 in an income tax benefit. Net income for the three month period ended September 30, 2003 was $444,000 compared to net income of $317,000 for the three month period ended September 30, 2002 principally due to improved gross margins from the Company's Electronics Segment. The net effect of the non-cash charge related to the issuance of warrants to its investment banker and the income tax benefit resulting from an adjustment to the Company's deferred tax asset was not material to the income for the quarter. Nine month period ended September 30, 2003 v. September 30, 2002 -------------------------------------------------------------------------- Consolidated net sales for the nine month period ended September 30, 2003 increased by 6.1% to $13,061,000 from $12,309,000 for the nine month period ended September 30, 2002 principally due to 65.8% higher sales recorded from its Power Units Segment that was partially offset by 18.2% lower sales recorded by its Electronics Segment. Gross profit, as a percentage of sales, for the nine months ended September 30, 2003 increased to 43.1% from 39.3% for the nine month period ended September 30, 2002. This increase resulted from a higher gross profit realized by the Power Units Segment due principally to an increase in this Segment's sales and due to product mix, as well as to a slightly higher gross profit realized by the Company's Electronics Segment due principally to product mix and despite a decrease in the Segment's sales for the period. Selling, general and administrative expenses for the nine month period ended September 30, 2003 increased to $4,505,000 from $4,089,000, or 10.2%, for the nine month period ended September 30, 2002 principally due to higher selling costs incurred by the Power Units Segment and due to higher corporate administrative costs. During the period, the Company recorded non-cash net charges of $88,000 principally due to the issuance of warrants to its investment banker. Selling, general and administrative expenses, as a percentage of sales, for the nine month period ended September 30, 2003 increased to 34.5% from 33.2% for the nine month period ended September 30, 2002 principally due to the aforementioned costs and despite increased sales during the current period. Interest expense for the nine month period ended September 30, 2003 decreased to $9,000 from $57,000 for the nine month period ended September 30, 2002 principally due to the pay off of the outstanding balance under the Company's credit facility with an asset-based lender in the first quarter of 2003. Investment and other income for the nine month period ended September 30, 2003 decreased to $86,000 from $107,000 for the nine month period ended September 30, 2002 principally due to a decrease in funds available for investment during the current period and to lower interest rates. Net income before income tax benefit for the nine month period ended September 30, 2003 increased to $1,207,000 from $798,000 for the nine month period ended September 30, 2002. Net income before income tax benefit for the current period includes non-cash net charges of $88,000 principally due to the issuance of warrants to the Company's investment banker. During the quarter, due to increased profitability, the Company adjusted its valuation allowance on its deferred tax asset thereby realizing $100,000 in an income tax benefit. Net income for the nine month period ended September 30, 2003 increased to $1,307,000 from $798,000 for the nine month period ended September 30, 2002 principally due to higher sales recorded from the Company's Power Units Segment and to improved gross margins from both operating segments. The net effect of the non-cash charge related to the issuance of warrants to its investment banker and the income tax benefit resulting from an adjustment to the Company's deferred tax asset was not material to the income for the period. Material Change in Financial Condition ------------------------------------------ Working capital increased to $8,676,000 at September 30, 2003 compared to $6,987,000 at December 31, 2002. The ratio of current assets to current liabilities increased to 4.53 to 1 at September 30, 2003 from 2.87 to 1 at December 31, 2002. Net cash used by operations for the nine month period ended September 30, 2003 was $525,000, attributable to an increase in accounts receivable, a decrease in reserves applicable to discontinued operations and the non cash effect of the income tax benefit that was partially offset by net income for the period and the non cash effect of the issuance of warrants to the Company's investment banker. The increase in accounts receivable at September 30, 2003 from the balance at December 31, 2002 was principally due to the timing of shipments made during those respective quarters pursuant to delivery schedules of the Company's customers. Net cash provided by operations for the nine month period ended September 30, 2002 was $1,042,000, primarily attributable to the net income for the period, a decrease in accounts receivable and an increase in customer advances that was partially offset by a decrease in accounts payable. Cash flows used in investing activities for the nine month period ended September 30, 2003 was $75,000, attributable to the purchases of marketable securities and property, plant and equipment. Cash flows used in investing activities for the nine month period ended September 30, 2002 was $29,000, attributable to the purchases of property, plant and equipment. Cash flows used in financing activities for the nine month period ended September 30, 2003 was $760,000, attributable to the repayments of long-term debt that was partially offset by the proceeds from stock option exercises. During the first quarter of 2003, the Company entered into a new credit facility with a commercial lender and used its cash to pay off the entire outstanding balance to its old asset-based lender. Cash flows used in financing activities for the nine month period ended September 30, 2002 was $202,000, attributable to the repayments of long-term debt. All operations of the discontinued apparel companies have been terminated. All losses and obligations of these apparel operations have been provided for, and accordingly, the Company does not anticipate using any significant portion of its resources towards these discontinued apparel operations. In January, 2001, the Company closed on a new $1,000,000 credit facility with an asset based lender secured by accounts receivable, inventory and machinery and equipment of the Company. In October 2001, the credit facility from the asset-based lender was increased to $1,500,000. The agreement continued until February 2003 at which time the Company entered into a new $2,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and machinery and equipment. The new agreement will continue from year to year thereafter until sooner terminated for an event of default including compliance with certain financial ratios. Loans under the terminated facility did bear interest at the prime rate of the Chase Manhattan Bank (4.00% at September 30, 2003) plus 1.75% per annum. Loans under the new facility will bear interest equal to the sum of 2.75% plus the one-month London Inter-bank Offer rate (1.120% at September 30, 2003).
Less than 1-3 4-5 After 5 Obligation Total 1 Year Years Years Years ----------------- ----- ------ ----- ----- ---------- Long-term debt $ 184,000 $151,000 33,000 - - Capital lease Obligations 43,000 10,000 33,000 - - Operating leases 4,160,000 431,000 1,239,000 871,000 1,619,000 Other long-term Obligations 257,000 257,000 - - - Total contractual Obligations $4,644,000 $849,000 $1,305,000 $871,000 $1,619,000
The Company's existing capital resources, including its bank credit facilities, and its cash flow from operations are expected to be adequate to cover the Company's cash requirements for the foreseeable future. Inflation has not materially impacted the operations of the Company. Certain Material Trends ------------------------- The Company's Electronics Segment and the Custom Division of its Power Units Segment are heavily dependent on military spending. The events of September 11, 2001 have put a tremendous emphasis on defense and homeland security spending and the Company has seen improvement in bookings and revenue levels since 2001. The Company has realized a significant increase to the backlog of the Custom Division of its Power Unit Segment and shipments of these orders commenced in the third quarter of 2002 and are expected to continue for the remainder of 2003. The Company also had experienced a slowdown in its commercial division of its Power Units Segment due to a reduction in capital spending as a result of current economic conditions. However, the commercial division has realized an increase in bookings, particularly for military requirements for its standard commercial products. The Company has also seen the flow of new orders from its Electronics Segment running about comparable to the prior year. Although the Electronics Segment and the custom division of the Power Units Segment are pursing several opportunities for reorders as well as new contract awards, the Company has always found it difficult to predict the timing of such awards. In October 2003, the Electronics Segment received authorization from a significant customer to begin procuring material for a large contract that will be awarded to the Company at some future date. In the event that the Company does not receive any part of the contract award, it will be reimbursed by the customer for all purchases of material, as well as costs associated with procuring such material. The Company estimates that it will procure approximately $1,200,000 in material for this contract. However, it is uncertain when the contract will be awarded and when deliveries will commence under such contract. Despite the increase in military spending, the Company still faces a challenging environment. The government is emphasizing the engineering of new and improved weaponry and it continues to be our challenge to work with each of our prime contractors so that we can participate on these new programs. In addition, these new contracts require incurring up-front design, engineering, prototype and pre-production costs. While the Company attempts to negotiate contract awards for reimbursement of product development, there is no assurance that sufficient monies will be set aside by its customers, including the United States Government, for such effort. In addition, even if the United States Government agrees to reimburse development costs, there is still a significant risk of cost overrun which may not be reimbursable. Furthermore, once the Company has completed the design and pre-production stage, there is no assurance that funding will be provided for future production. In such event, even if the Company is reimbursed for its development costs it will not generate any significant profits. The Company is heavily dependent upon military spending, particularly the Department of the Navy, as a source of revenues and income. The U.S. Navy fleet has been significantly reduced in the past several years thereby impacting the procurement of equipment. Any further reductions in the level of military spending by the United States Government and/or further reductions to the U.S. fleet could have a negative impact on the Company's future revenues and earnings. In addition, due to major consolidations in the defense industry, it has become more difficult to avoid dependence on certain customers for revenue and income. Behlman's line of commercial products gives the Company some diversity and the Orbit Instrument Division as well as the custom division of the Company's Power Unit Segment has introduced certain of its products into commercial and foreign markets as well as to other Departments of Defense. Forward Looking Statements ---------------------------- Statements in this Item 2 "Management's Discussion and Analysis or Plan of Operation" and elsewhere in this document are certain statements which are not historical or current fact and constitute "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual financial or operating results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such forward looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and the most recent results of the Company. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "may", "will", "potential", "opportunity", "believes", "belief", "expects", "intends", "estimates", "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. Item 3. CONTROLS AND PROCEDURES The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with regard to significant deficiencies and material weaknesses) in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of management's evaluation. PART II- OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submissions of Matters to Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on form 8-K (a) Exhibits Exhibit Number Description --------------- ----------- 31.1* Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). 31.2* Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). 32.1* Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. 32.2* Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. ___________ * Filed with this report. (b) Reports on 8-K On August 7, 2003, the Company filed a current report on Form 8-K under Item 9. Regulation FD Disclosure and Item 12. Disclosure of Results of Operations relating to its press release issued on August 6, 2003, announcing the Company's operating results for its second quarter and six months ended June 30, 2003. SIGNATURES ---------- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORBIT INTERNATIONAL CORP. ------------------------ Registrant Dated: November 13, 2003 /s/ Dennis Sunshine --------------------------- Dennis Sunshine, President, Chief Executive Officer and Director Dated: November 13, 2003 /s/Mitchell Binder ------------------------- Mitchell Binder, Vice President-Finance, Chief Financial Officer and Director EXHIBIT 31.1 I, Dennis Sunshine, certify that: 1. I have reviewed this report on Form 10-QSB of Orbit International Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))* for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) *; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting. Date: November 13, 2003 /s/ Dennis Sunshine ------------------------ Dennis Sunshine Chief Executive Officer *Indicates material omitted in accordance with SEC Release Nos. 33-8238 and 34-47986. EXHIBIT 31.2 I, Mitchell Binder, certify that: 1. I have reviewed this report on Form 10-QSB of Orbit International Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))* for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) *; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting. Date: November 13, 2003 /s/ Mitchell Binder ------------------------ Mitchell Binder Chief Financial Officer *Indicates material omitted in accordance with SEC Release Nos. 33-8238 and 34-47986. EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Dennis Sunshine, Chief Executive Officer of Orbit International Corp., certify, pursuant to 18 U.S.C. 1350, as enacted by 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2003 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Orbit International Corp. Dated: November 13, 2003 /s/ Dennis Sunshine ------------------------ Dennis Sunshine Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Orbit International Corp. and will be retained by Orbit International Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Mitchell Binder, Chief Financial Officer of Orbit International Corp., certify, pursuant to 18 U.S.C. 1350, as enacted by 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2003 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Orbit International Corp. Dated: November 13, 2003 /s/ Mitchell Binder ------------------------ Mitchell Binder Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Orbit International Corp. and will be retained by Orbit International Corp. and furnished to the Securities and Exchange Commission or its staff upon request.