-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PrZFlcUD4ixbND+/M+eUGebAhtOawHvkIJYjICB/CgVdp89FaWL4Kk17AC+B78pM KryXLqu0oXFEMv1k7wYIww== 0000074818-08-000021.txt : 20080814 0000074818-08-000021.hdr.sgml : 20080814 20080814161520 ACCESSION NUMBER: 0000074818-08-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080814 DATE AS OF CHANGE: 20080814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORBIT INTERNATIONAL CORP CENTRAL INDEX KEY: 0000074818 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 111826363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-03936 FILM NUMBER: 081019241 BUSINESS ADDRESS: STREET 1: 80 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 7136675601 MAIL ADDRESS: STREET 1: 80 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: ORBIT INSTRUMENT CORP DATE OF NAME CHANGE: 19911015 10-Q 1 form10-q.txt FORM 10-Q 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, 2008 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 0-3936 ORBIT INTERNATIONAL CORP. (Exact name of registrant 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) (Zip Code) 631-435-8300 (Registrant's telephone number, including area code) N/A (Former name, former address and formal 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 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 ___ - Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer Accelerated Filer Non-accelerated filer Smaller reporting company X Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act): Yes___ No X -- The number of shares outstanding of registrant's Common Stock, par value $.10, as of August 8, 2008 was 4,750,091. ---------
INDEX Page No. --------- Part I. Financial Information: Item 1 - Financial Statements: Condensed Consolidated Balance Sheet - June 30, 2008(unaudited) and December 31, 2007 3-4 Condensed Consolidated Statement of Operations for the Six and Three Months Ended June 30, 2008 and 2007 (unaudited) 5 Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7-16 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17-27 Item 3. - Quantitative and Qualitative Disclosures About Market Risk 27 Item 4T. - Controls and Procedures 27 Part II. Other Information: Item 4 - Submission of Matters to a Vote of Security Holders 28 Item 6 - Exhibits 28 Signatures 29 Exhibits 30-35
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET June 30, December 31, 2008 2007 -------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,171,000 $ 3,576,000 Investments in marketable securities 3,102,000 3,997,000 Accounts receivable (less allowance for doubtful accounts of $145,000) 3,561,000 4,561,000 Inventories 11,750,000 10,453,000 Costs and estimated earnings in excess of billings on uncompleted contracts 644,000 136,000 Deferred tax asset 987,000 1,025,000 Other current assets 167,000 331,000 ----------- ----------- Total current assets 22,382,000 24,079,000 Property and equipment, net 637,000 691,000 Goodwill 9,732,000 9,634,000 Intangible assets, net 2,645,000 2,969,000 Deferred tax asset 1,833,000 1,678,000 Other assets 632,000 634,000 ---------- ---------- TOTAL ASSETS $37,861,000 $39,685,000 =========== =========== See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (continued) June 30, December 31, 2008 2007 ----------- ----------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------ Current liabilities: Current portion of long-term obligations $ 1,777,000 $ 1,777,000 Note payable - bank 100,000 699,000 Accounts payable 1,205,000 1,384,000 Income taxes payable 7,000 162,000 Accrued expenses 1,227,000 1,395,000 Customer advances 576,000 163,000 Deferred income 143,000 332,000 ------------ ------------ Total current liabilities 5,035,000 5,912,000 Deferred tax liability 715,000 595,000 Deferred income 299,000 342,000 Long-term obligations, net of current maturities 5,918,000 6,753,000 ----------- ---------- Total liabilities 11,967,000 13,602,000 ------------ ----------- STOCKHOLDERS' EQUITY Common stock - $.10 par value, 10,000,000 shares authorized, 4,750,000 and 4,724,000 shares issued and outstanding at 2008 and 2007, respectively 475,000 472,000 Additional paid-in capital 20,860,000 20,766,000 Accumulated other comprehensive loss, net of tax (24,000) (33,000) Retained earnings 4,583,000 4,878,000 ----------- ------------ Total stockholders' equity 25,894,000 26,083,000 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,861,000 $39,685,000 ============ =========== See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) Six Months Ended Three Months Ended June 30, June 30, 2008 2007 2008 2007 ------- ------ ----- ------ Net sales $12,483,000 $12,374,000 $5,873,000 $6,154,000 Cost of sales 7,518,000 6,913,000 3,543,000 3,438,000 ----------- ----------- ----------- --------- Gross profit 4,965,000 5,461,000 2,330,000 2,716,000 ----------- ----------- ----------- --------- Selling, general and administrative expenses 5,249,000 4,459,000 2,631,000 2,238,000 Interest expense 182,000 182,000 80,000 87,000 Investment and other income, net (178,000) ( 255,000) ( 82,000) (126,000) ---------- ----------- ----------- ----------- (Loss) income before provision for income taxes (288,000) 1,075,000 (299,000) 517,000 Provision for income taxes 7,000 25,000 7,000 15,000 ---------- --------- --------- ---------- NET(LOSS) INCOME $(295,000) $1,050,000 $(306,000) $502,000 ========= ========== ========= ========= Net (loss) income per common share: Basic $ (.07) $ .24 $ (.07) $.12 Diluted $ (.07) $ .23 $ (.07) $.11 See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Six Months Ended June 30, 2008 2007 ------ ------ Cash flows from operating activities: Net (loss) income $(295,000) $ 1,050,000 Adjustments to reconcile net (loss) income to net cash used in operating activities: Share-based compensation expense 94,000 88,000 Amortization of intangible assets 324,000 218,000 Depreciation and amortization 100,000 61,000 Gain on sale of marketable securities - (15,000) Bond premium amortization 8,000 7,000 Bad Debt - 12,000 Deferred income (232,000) (42,000) Changes in operating assets and liabilities: Accounts receivable, net 1,000,000 141,000 Inventories (1,297,000) (1,181,000) Costs and estimated earnings in excess of billings on uncompleted contracts (508,000) - Due from ICS sellers 103,000 - Other current assets 19,000 (7,000) Other assets 2,000 (9,000) Accounts payable (179,000) 327,000 Accrued expenses (168,000) (122,000) Income taxes payable (155,000) - Customer advances 413,000 (659,000) ------------ ----------- Net cash used in operating activities (771,000) (131,000) Cash flows from investing activities: Additional ICS acquisition costs (56,000) - Purchases of property and equipment (46,000) (65,000) Sale of marketable securities 1,717,000 522,000 Purchase of marketable securities (816,000) (1,113,000) ----------- ------------ Net cash provided by (used in) investing activities 799,000 (656,000) Cash flows from financing activities: Proceeds from issuance of long-term debt 527,000 1,050,000 Stock option exercises 1,000 14,000 Repayments of long-term debt (1,961,000) (1,712,000) ------------ ----------- Net cash used in financing activities (1,433,000) (648,000) ---------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,405,000) (1,435,000) ----------- ----------- Cash and cash equivalents - January 1 3,576,000 3,935,000 --------- ----------- CASH AND CASH EQUIVALENTS - June 30 $ 2,171,000 $ 2,500,000 =========== ============ Supplemental cash flow information: Cash paid for interest $ 190,000 $218,000 ============ ======== See accompanying notes
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (NOTE 1) - Basis of Presentation and Summary of Significant Accounting Policies: ------ --------------------------------------------------------------------- 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 six and three months ended June 30, 2008 are not necessarily indicative of the results of operations for the full fiscal year ending December 31, 2008. These condensed consolidated statements should be read in conjunction with the Company's consolidated financial statements for the fiscal year ended December 31, 2007 contained in the Company's Form 10-K. The Company recognizes a substantial portion of its revenue upon delivery of product, however, revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased but have not been placed into production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period. Assets related to these contracts are included in current assets as they will be liquidated in the normal course of contract completion, although this may require more than one year. At June 30, 2008, the Company has various stock-based employee compensation plans. These plans provide for the granting of nonqualified and incentive stock options as well as restricted stock awards to officers, key employees and nonemployee directors. The terms and vesting schedules of stock-based awards vary by type of grant and generally the awards vest based upon time-based conditions. Share-based compensation expense was $94,000 and $51,000 for the six and three months ended June 30, 2008, respectively, and was $88,000 and $38,000 for the comparable 2007 periods. The Company estimated the fair value of its stock option awards on the date of grant using the Black-Scholes valuation model. The assumptions used for stock grants issued during the following periods were as follows: (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Six Months Ended June 30, 2008 2007 ---- ---- Expected Volatility 49.16% to 49.62% 51.19% Risk-free interest rate 3.70% to 4.16% 5.02% Expected life of options (in years) 3.6 3.6 Dividend Yield - - Expected volatility assumptions utilized for 2008 and 2007 were based on the volatility of the Company's stock price for 3.6 years prior to grant date. The risk-free rate is derived from the 10 year U.S. treasury yield on grant date. Expected life for 2008 and 2007 was based on prior history of option activity. Dividend yield is based on prior history of cash dividends declared. The Company's stock-based employee compensation plans allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation related to restricted stock granted is being amortized to compensation expense over the vesting period. The share based expense for these awards was determined based on the market price of the Company's stock at the date of grant applied to the total number of shares that were anticipated to vest. As of June 30, 2008, the Company had unearned compensation of $1,111,000 associated with these awards. Stock option activity during the six months ended June 30, 2008, under all stock option plans is as follows: Average Weighted Remaining Average Contractual Number of Exercise Term Shares Price (in years) ------ ----- ----------- Options outstanding, January 1, 2008 599,000 $3.15 4 Granted 9,000 7.51 10 Forfeited (4,000) 9.21 - Exercised (1,000) 1.26 - ------- ---- ---- Options outstanding, June 30, 2008 603,000 $3.17 4 ======= ===== === Outstanding exercisable at June 30, 2008 589,000 $3.06 4 ======= ===== === At June 30, 2008 the aggregate intrinsic value of options outstanding and exercisable was $2,357,000. The following table summarizes the Company's nonvested stock option activity for the six months ended June 30, 2008: (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Number of Weighted-Average Shares Grant-Date Fair Value ------ ----------------------- Nonvested stock options at January 1, 2008 9,000 $3.82 Granted 9,000 3.06 Vested (3,000) 3.92 Forfeited (4,000) 4.74 ------- ---- Nonvested stock options at June 30, 2008 11,000 $3.29 ====== ===== At June 30, 2008, there was approximately $18,000 of unearned compensation cost related to the above non-vested stock options. The cost is expected to be recognized over the next twelve months. The Company's only asset or liability that is measured at fair value on a recurring basis is marketable securities, based on quoted market prices in active markets. The Company had $1,375,000 invested in Auction Market Securities at June 30, 2008, which are included in Investments in Marketable Securities on the Company's Balance Sheet. Failed auctions have created liquidity issues for investors. However, the Company has redeemed $900,000 of its auction market securities at par since January 1, 2008. All of the Company's Auction Market Securities are held at Merrill Lynch who has agreed to buy back the securities from its investors beginning in 2009. All interest payments relating to these securities are current. (Note 2) - Acquisition: - --------- ------------ On December 19, 2007, the Company acquired all of the issued and outstanding stock of Integrated Consulting Services, Inc. d/b/a Integrated Combat Systems, Inc. ("ICS"). The reasons for the acquisition were the expansion of both customer and product bases, cross-marketing opportunities and the accretion to earnings. The acquisition was effective December 31, 2007. The total transaction value was approximately $6,650,000 consisting of $5,400,000 in cash, of which $4,500,000 was funded by a term loan, approximately 120,000 shares of Orbit stock valued at approximately $1,000,000 (based on the volume weighted average closing price of the Company's common stock for the twenty consecutive trading days ending December 14, 2007), and approximately $250,000 of direct costs related to the purchase of ICS. Additionally, there is a contingent earn out of $1,000,000 payable over the next three years based on ICS's ability to attain certain revenue levels over the three years. The ICS acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are included in the consolidated balance sheet as of December 31, 2007. The results of operations for the six and three months ended June 30, 2008 include the operations of ICS for the entire period since the acquisition was completed effective December 31, 2007. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) In accordance with SFAS No. 141, Business Combinations, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions made by management. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but will be reviewed at least annually for impairment. Purchased intangible assets with finite lives will be amortized on a straight-line basis over their respective estimated useful lives. Any additional goodwill relating to the $1,000,000 contingent earn out based on ICS's ability to attain certain revenue levels over the next three years will be recorded, if necessary, in future years. The total purchase price has been allocated as follows: Tangible assets and liabilities: Cash $1,942,000 Accounts receivable 579,000 Inventory 352,000 Other current assets 273,000 Property and equipment 260,000 Other long term assets 11,000 Accounts payable (111,000) Note payable (1,997,000) Accrued expenses (73,000) Income tax payable (132,000) Deferred income (247,000) -------- Total net tangible assets and liabilities 857,000 Amortizable intangible assets: Customer relationships 2,000,000 Non-compete agreement 100,000 Contract backlog 100,000 ----------- Total amortizable intangible assets 2,200,000 Goodwill 3,597,000 --------- Total purchase price $6,654,000 ========== The following summarized pro forma financial information presents the combined results of the Company as if the ICS acquisition had occurred as of January 1, 2007. Adjustments, which reflect amortization of purchased intangible assets, interest on debt to finance the acquisition, elimination of intercompany sales and purchases, recalculation of bonuses due to adjustments to net income, adjustment to income taxes payable, and reversal of interest expense incurred by ICS have been made to the combined results of operations for the six and three months ended June 30, 2007. The unaudited summarized pro forma financial information is presented for informational purposes only and may not be indicative of what the actual results of operations would have been had the acquisition occurred at the beginning of the periods presented nor does it purport to represent the results of operations for future periods. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Six Months Ended Three Months Ended June 30, June 30, 2007 2007 (Pro forma and Unaudited) (Pro forma and Unaudited) ------------------------ ------------------------- Net Sales $15,766,000 $8,057,000 - ---------- ============ ========== Net Income 2,004,000 1,131,000 - ----------- ========= ======== Basic earnings per share 0.45 0.26 - --------------------------- ==== ==== Diluted earnings per share 0.42 0.24 - ----------------------------- ==== ==== (NOTE 3) - Financing Arrangements: - -------- ----------------------- In December 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment. The agreement will continue from year to year thereafter unless sooner terminated for an event of default including non-compliance with financial covenants. Loans under the facility will bear interest equal to a certain percentage depending on a matrix related to a certain financial covenant, as defined, plus the one-month London Inter-bank offer rate (LIBOR) (2.46% at June 30, 2008). Outstanding borrowings under the facility were $100,000 at June 30, 2008. In April 2005, the Company entered into a five-year $5,000,000 Term Loan Agreement with the same aforementioned lender to finance the acquisition of Tulip. The Term Loan, which requires compliance with certain financial covenants, has fifty-nine (59) monthly principal payments of approximately $60,000 and a sixtieth (60th) payment of $1,488,000 in 2010. In December 2007, the interest rate was amended and the loan currently bears interest equal to an applicable margin based on a matrix related to a certain financial covenant, as defined, plus the one-month LIBOR. The loan's unpaid balance at June 30, 2008 was approximately $2,798,000. In April 2005, the Company entered into a five year $2,000,000 Promissory Note with the selling shareholders of Tulip at an interest rate of prime (5.00% at June 30, 2008) plus 2.00%. Principal payments of $100,000 were made on a quarterly basis along with accrued interest. In June 2007, the Company refinanced the balance due on the Promissory Note of $1,050,000 with its primary commercial lender. Under the terms of the new loan, monthly payments of $35,000 will be made over a thirty-month period, which commenced August 2007, along with accrued interest at a rate of 1.15% plus the one-month LIBOR. The term loan requires compliance with certain financial covenants. In December 2007 the interest rate was amended to equal an applicable margin based on a matrix related to a certain financial covenant, as defined, plus the one-month LIBOR. The loan's unpaid balance at June 30, 2008 was approximately $665,000. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) In December 2007, the Company entered into a five year $4,500,000 Term Loan Agreement with same aforementioned lender to finance the acquisition of ICS. The term loan, which requires compliance with certain financial covenants, has fifty-nine (59) monthly payments of approximately $54,000 and a sixtieth (60th) payment of approximately $1,339,000. The loan bears interest equal to the one-month LIBOR rate, plus an applicable margin based on a matrix related to a certain financial covenant, as defined. The loan's unpaid balance at June 30, 2008 was approximately $4,232,000. (NOTE 4) - Income (Loss) Per Share: ------ ----------------------- The following table sets forth the computation of basic and diluted income (loss) per common share: Six Months Ended Three Months Ended June 30, June 30, 2008 2007 2008 2007 ---- ---- ---- ---- Denominator: Denominator for basic Income (loss) per share - weighted-average common shares 4,504,000 4,309,000 4,508,000 4,312,000 Effect of dilutive securities: Employee and directors stock options - 227,000 - 230,000 Unearned portion of restricted stock awards - 109,000 - 110,000 -------- -------- ------- ------- Denominator for diluted Income (loss) per share - weighted-average common shares and assumed conversion 4,504,000 4,645,000 4,508,000 4,652,000 ========= ======== ========= ========= The numerator for basic and diluted income (loss) per share for the six and three month periods ended June 30, 2008 and 2007 is net income(loss). During the six and three months ended June 30, 2008, the Company had net losses and therefore did not include 273,000 and 256,000 incremental common shares, respectively, in its calculation of diluted net loss per common share since an inclusion of such securities would be anti-dilutive. Options to purchase 10,000 shares of common stock were outstanding during the six and three months ended June 30, 2007, but were not included in the computation of diluted earnings per share. The inclusion of these options would have been anti-dilutive due to the options' exercise prices being greater than the average market price of the Company's common shares during the respective periods. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Approximately 281,000 and 224,000 shares of common stock were outstanding during the six and three months ended June 30, 2008 and 2007, respectively, but were not included in the computation of basic earnings per share. These shares were excluded because they represent the unvested portion of restricted stock awards. (NOTE 5) - Cost of Sales: ------- --------------- For interim periods, the Company estimates its inventory and related gross profit. (NOTE 6) - Inventories: - ------- ----------- Inventories are comprised of the following: June 30, December 31, 2008 2007 ---- ---- Raw Materials $ 6,909,000 $ 6,146,000 Work-in-process 4,090,000 3,639,000 Finished goods 751,000 668,000 ---------- ----------- TOTAL $11,750,000 $10,453,000 ========== =========== (NOTE 7) - Comprehensive Income(Loss): - ------- -------------------------- For the six and three months ended June 30, 2008, total comprehensive loss, net of tax was $286,000 and $289,000, respectively. For the comparable periods during 2007, total comprehensive income was $1,016,000 and $477,000, respectively. Comprehensive income (loss) consists of net income (loss) and unrealized gains and losses on marketable securities. (NOTE 8) - Business Segments: - -------- ----------------- The Company operates through two business segments. The Electronics Segment is comprised of the Orbit Instrument Division and Tulip and ICS Subsidiaries. The Orbit Instrument Division and Tulip are engaged in the design, manufacture and sale of customized electronic components and subsystems. ICS performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation. The Company's 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 results of operations for the six and three months ended June 30, 2008 include the operations of ICS for the entire period since the acquisition was completed effective December 31, 2007. 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 six and three month periods ended June 30, 2008 and 2007: (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Six Months Ended Three Months Ended June 30, June 30, 2008 2007 2008 2007 ----- ----- ----- ----- Net sales: Electronics Domestic $ 7,013,000 $ 7,918,000 $3,016,000 $4,017,000 Foreign 779,000 535,000 435,000 236,000 ---------- ----------- --------- ---------- Total Electronics 7,792,000 8,453,000 3,451,000 4,253,000 Power Units Domestic 3,771,000 3,435,000 1,951,000 1,580,000 Foreign 950,000 486,000 501,000 321,000 ---------- ----------- ---------- --------- Total Power Units 4,721,000 3,921,000 2,452,000 1,901,000 Intersegment sales (30,000) - (30,000) - ---------- ---------- --------- --------- Total $12,483,000 $12,374,000 $5,873,000 $6,154,000 =========== =========== ========= ========= (Loss) income from operations: Electronics $ (170,000) $ 1,510,000 $ (278,000) $ 751,000 Power Units 546,000 200,000 323,000 89,000 Intersegment profit (4,000) - (4,000) - General corporate expenses not allocated (656,000) (708,000) (342,000) (362,000) Interest expense (182,000) (182,000) (80,000) (87,000) Investment and other income 178,000 255,000 82,000 126,000 ----------- ------------ ------------ ----------- (Loss) income before income taxes $ (288,000) $ 1,075,000 $( 299,000) $ 517,000 =========== =========== =========== ===========
20 (NOTE 9) - Goodwill and Other Intangible Assets: - -------- ------------------------------------- The Company applies 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. At June 30, 2008, the Company's intangible assets other than goodwill consist of the following: Estimated Gross Net Useful Carrying Accumulated Carrying Life Value Amortization Value ---- ----- ------------ ----- Customer relationships 15 Years $2,000,000 $ ( 67,000) $1,933,000 Contract backlog 1-5 Years 1,750,000 (1,121,000) 629,000 Non-Compete Agreements 3 Years 415,000 (332,000) 83,000 ------- ---------- --------- $4,165,000 $(1,520,000) $2,645,000 ========== ============ ========== (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) At December 31, 2007, the Company's intangible assets other than goodwill consist of the following: Estimated Gross Net Useful Carrying Accumulated Carrying Life Value Amortization Value ---- ----- ------------ --------- Customer relationships 15 Years $2,000,000 - $2,000,000 Contract backlog 1-5 Years 1,750,000 (907,000) 843,000 Non-Compete Agreements 3 Years 415,000 (289,000) 126,000 ------- ---------- ----------- $4,165,000 $(1,196,000) $2,969,000 ========== =========== ========== Amortization expense for the next five years is expected to be as follows: Year ending December 31, 2008 $ 299,000 2009 497,000 2010 250,000 2011 133,000 2012 133,000 2013 133,000 --------- Total $1,445,000 ========== The Company recognized amortization expense of $324,000 and $148,000 for the six and three months ended June 30, 2008 and 2007, respectively. The Company recorded amortization expense of $218,000 and $109,000, respectively, in the comparable 2007 periods. (NOTE 10) - Income Taxes: - ---------- -------------- For the six and three months ended June 30, 2008, the Company utilized net operating loss carryforwards to offset income taxes except for a $7,000 state and local income tax expense in Kentucky. For the comparable periods in 2007, the Company utilized net operating loss carryforwards to offset income taxes except for a $15,000 and $10,000 state income tax expense, respectively, in Pennsylvania. The Company recognized a $120,000 and $59,000 deferred tax expense for the six and three months ended June 30, 2008, respectively. This expense was recorded since the Company's deferred tax liability relating to its goodwill is required to be separately stated on its financial statements apart from its deferred tax asset. Also, during the six and three months ended June 30, 2008, the Company recorded a deferred tax benefit of $120,000 and $59,000, respectively, by reducing its valuation allowance on its deferred tax asset. This was due to an increase in the Company's projected future profitability as well as an increase in the probability of attaining that profitability. During the six months ended June 30, 2008, the Company also recorded a net $3,000 decrease in its deferred tax asset due to the tax benefit associated with its unrealized holding loss on marketable securities and the tax benefit associated with stock options exercised. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) On January 1, 2007, the Company adopted Financial Accounting Standards Board("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - - an interpretation of FASB Statement No. 109"("FIN 48"). This interpretation provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is "more likely that not" that the position is sustainable based on its technical merits. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no impact of FIN 48 to the Company's consolidated financial position, results of operations or cash flows for the six and three month periods ending June 30, 2008 and 2007. (NOTE 11) - Related Party Transactions: - ---------- ----------------------------- Tulip leases its facilities from a limited partnership, the ownership of which is controlled by the former shareholders of Tulip. The five-year lease commenced April 2005 and provides for monthly payments of $9,100 and increases by 2% each year for the first two renewal periods and by 3% for the final two renewal periods. For the six and three months ending June 30, 2008, the total amount paid under this lease was approximately $58,000 and $30,000, respectively. For the comparable periods in 2007 the amounts were $56,000 and $28,000, respectively. (NOTE 12) - Recent Accounting Pronouncements: - ---------- ----------------------------------- In April, 2008, the FASB issued FSP FASB 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") and expands the disclosure requirements of SFAS 142. The provisions of FSP 142-3 are effective for the Company as of January 1, 2009. The provisions of FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The Company is currently evaluating the impact of the adoption of FSP 142-3 on its consolidated financial statements. Item 2. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Overview - ------------------- The results of operations for the three months and six months ended June 30, 2008 include the results of ICS which was acquired effective December 31, 2007. The Company recorded a decrease in revenues for the three months ended June 30, 2008 due to a shipment delay of a product covered under a substantial contract for the Orbit Instrument Division. Net sales decreased by 4.6% for the quarter but exclusive of ICS, net sales would have decreased by 25.7%. However, sales from the Company's Power Group increased by 29.0% for the quarter compared to the prior year. Due to lower gross margins, higher selling, general and administrative expenses and decreased investment and other income during the current period, the Company recorded a net loss of $306,000 for the three months ended June 30, 2008, compared to net income of $502,000 for the three months ended June 30, 2007. Net sales increased by 0.9% for the six months but exclusive of ICS, net sales would have decreased by 19.3%. However, sales from the Company's Power Group increased by 20.4% for the six months compared to the prior year. Due to lower gross margins, higher selling, general and administrative expenses and decreased investment and other income during the current period, the Company recorded a net loss of $295,000 for the six months ended June 30, 2008, compared to net income of $1,050,000 for the six months ended June 30, 2007. Our backlog at June 30, 2008 was approximately $15,300,000 compared to $16,900,000 at June 30, 2007. Backlog was $13,700,000 at March 31, 2008. The Company expects increased bookings in the coming months. There is no seasonality to the Company's business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments are pursuing a significant amount of business opportunities and our confidence level remains high with respect to receiving many of the orders we are pursuing although timing is always an uncertainty. Nevertheless, we remain very encouraged by our business environment and we expect much improved operating results in the second half of 2008. Our success of the past few years has significantly strengthened our balance sheet evidenced by our 4.5 to 1 current ratio at June 30, 2008. We currently have a $3,000,000 credit facility in place. 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 based on 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, goodwill impairment, valuation of share-based compensation and revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method. 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 (specific, average and 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. However, world events have forced our country into various situations of conflict whereby equipment is used and parts may be needed for repair. This could lead to increased product demand as well as the use of some older inventory items that the Company had previously determined obsolete. Deferred tax asset - -------------------- At June 30, 2008, the Company had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and federal and state net operating loss carry-forwards of approximately $21,000,000 and $7,000,000, respectively that expire through 2025. Approximately, $17,000,000 of federal net operating loss carry-forwards expire between 2010-2012. In addition, the Company receives a tax deduction when their employees exercise their non-qualified stock options thereby increasing the Company's deferred tax asset. The Company records 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. Due to the Company's record of profitability, the acquisition of ICS, and the unprecedented amount of new opportunities in the prototype and preproduction stage, the Company increased its projection for profitability for future periods and increased its estimate of probability that it will attain those profit levels; thereby reducing its valuation allowance on its deferred tax asset. Impairment of Goodwill - ------------------------ The Company has significant intangible assets including 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. The Company applies Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, the costs of certain intangible assets are no longer subject to amortization. These costs are reviewed for potential impairment on an annual basis. During the first quarter of 2008, the Company determined that there was no impairment to its goodwill and other intangible assets Share-Based Compensation - ------------------------- Effective January 1, 2006, the Company began recognizing share-based compensation under SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based awards. Total share-based compensation expense was $94,000 and $51,000 for the six and three months ended June 30, 2008, respectively, compared to $88,000 and $38,000 for the respective prior year periods. The estimated fair value of stock options granted was calculated using the Black-Scholes model. This model requires the use of input assumptions. These assumptions include expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. Revenue and Cost Recognition - ------------------------------- Revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period. Assets related to these contracts are included in current assets as they will be liquidated in the normal course of contract completion, although this may require more than one year. Results of Operations - --------------------- Three month period ended June 30, 2008 v. June 30, 2007 - ------------------------------------------------------- The Company currently operates in two industry segments. Its Orbit Instrument Division and its Tulip subsidiary are engaged in the design and manufacture of electronic components and subsystems and its ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation (the "Electronics Group"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Group"). The results of operations for the three months ended June 30, 2008 include the operations of ICS for the entire period since the acquisition was completed effective, December 31, 2007. Consolidated net sales for the three month period ended June 30, 2008 decreased by 4.6% to $5,873,000 from $6,154,000 for the three month period ended June 30, 2007 despite the inclusion of ICS in the current period and increased sales from the Power Group. Sales from the Electronics Group decreased by 18.9%, despite the inclusion of ICS in the current period. During the quarter, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for several modifications to a product that was under a substantial contract with many of the units scheduled for shipment during the second quarter. As a result of this request, those deliveries were delayed to a later, yet undetermined date resulting in significantly lower than expected revenues for the operating unit. This loss of sales, along with decreased sales from the Company's Tulip subsidiary resulted in the significant decrease in sales for the Electronics Group despite the inclusion of ICS. Sales from the Power Group increased by 29.0% for the quarter as compared to the prior year. Gross profit, as a percentage of sales, for the three months ended June 30, 2008 decreased to 39.7% from 44.1% for the three month period ended June 30, 2007. This decrease resulted from a lower gross profit from the Company's Electronics Group due to a decrease in sales from both the Orbit Instrument Division and Tulip and despite approximately $190,000 of deferred warranty income recorded by ICS during the quarter; and despite a higher gross profit from the Power Group principally due to increased sales and to product mix. Selling, general and administrative expenses increased by 17.6% to $2,631,000 for the three month period ended June 30, 2008 from $2,238,000 for the three month period ended June 30, 2007 principally due to the inclusion of ICS's selling, general and administrative costs of $410,000 in the current period. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended June 30, 2008 increased to 44.8% from 36.4% for the three month period ended June 30, 2007 principally due to the aforementioned increase in costs along with the reduction in sales from the Electronics Segment. Interest expense for the three months ended June 30, 2008 decreased to $80,000 from $87,000 for the three months ended June 30, 2007 due to a decrease in interest rates and despite an increase in the amounts owed to lenders in the current period due to the acquisition of ICS. Investment and other income for the three month period ended June 30, 2008 decreased to $82,000 from $126,000 for the three-month period ended June 30, 2007 principally due to a decrease in the amounts invested during the current period and to a decrease in interest rates. Loss before income tax provision was $299,000 for the three months ended June 30, 2008 compared to income before tax provision of $517,000 for the three months ended June 30, 2007. The decrease in income was principally due to the decrease in sales from both the Orbit Instrument Division and Tulip, a decrease in gross profit, an increase in selling, general and administrative expenses, a decrease in investment and other income and despite the decrease in interest expense and increased revenues and profitability from the Power Group. The income tax provision for the three months ended June 30, 2008 was $7,000 compared to $15,000 for the three months ended June 30, 2007 consisting of state income taxes that cannot be offset by any state net operating loss carry-forwards. As a result of the foregoing, net loss for the three months ended June 30, 2008 was $306,000 compared to net income of $502,000 for the three months ended June 30, 2007. Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended June 30, 2008 decreased to a loss of $21,000 for the three months ended June 30, 2008 compared to income of $743,000 for the three months ended June 30, 2007. Listed below is the EBITDA reconciliation to net income: Three months ended June 30, 2008 2007 ---- ---- Net (loss) income $(306,000) $502,000 Interest expense 80,000 87,000 Income tax expense 7,000 15,000 Depreciation and amortization 198,000 139,000 ------- ------- EBITDA $ (21,000) $743,000 ========== ======== EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of the Company's growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. EBITDA is presented as additional information because the Company believes it is useful to our investors and management as a measure of cash generated by our business operations that will be used to service our debt and fund future acquisitions as well as provide an additional element of operating performance. Six month period ended June 30, 2008 v. June 30, 2007 - ----------------------------------------------------- Consolidated net sales for the six month period ended June 30, 2008 increased by 0.9% to $12,483,000 from $12,374,000 for the six month period ended June 30, 2007 due to the inclusion of ICS in the current period and increased sales from the Power Group. Sales from the Electronics Group decreased by 7.8%, despite the inclusion of ICS in the current six month period. During the current period, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for several modifications to a product that was under a substantial contract with many of the units scheduled for shipment during the second quarter. As a result of this request, those deliveries were delayed to a later, yet undetermined date resulting in significantly lower than expected revenues for the operating unit. In addition, the Orbit Instrument Division also experienced an unrelated customer delivery issue in the first quarter of the current period that resulted in a shipment shortfall for that period, which was not resolved by June 30, 2008. The Company still expects this issue to be resolved by year-end. This loss of sales, along with decreased sales from the Company's Tulip subsidiary resulted in the decrease in sales for the Electronics Group despite the inclusion of ICS in the current period. Sales from the Power Group increased by 20.4% for the current six month period compared to the prior year. Gross profit, as a percentage of sales, for the six months ended June 30, 2008 decreased to 39.8% from 44.1% for the six month period ended June 30, 2007. This decrease resulted from a lower gross profit from the Company's Electronics Group due to a decrease in sales from both the Orbit Instrument Division and Tulip and despite approximately $190,000 of deferred warranty income recorded by ICS during the period; and despite a higher gross profit from the Power Group principally due to increased sales and to product mix. Selling, general and administrative expenses increased by 17.7% to $5,249,000 for the six month period ended June 30, 2008 from $4,459,000 for the six month period ended June 30, 2007 principally due to the inclusion of ICS's selling, general and administrative costs of $842,000 in the current period. Selling, general and administrative expenses, as a percentage of sales, for the six month period ended June 30, 2008 increased to 42.0% from 36.0% for the six month period ended June 30, 2007 principally due to the aforementioned increase in costs along with the reduction in sales from the Electronics Segment. Interest expense for the six months ended June 30, 2008 of $182,000 was equal to the amount that was reported for the six months ended June 30, 2007 due to an increase in the amounts owed to lenders in the current period due to the acquisition of ICS that was offset by a decrease in interest rates. Investment and other income for the six month period ended June 30, 2008 decreased to $178,000 from $255,000 for the six-month period ended June 30, 2007 principally due to a decrease in the amounts invested during the current period and to a decrease in interest rates. Loss before income tax provision was $288,000 for the six months ended June 30, 2008 compared to income before tax provision of $1,075,000 for the six months ended June 30, 2007. The decrease in income was principally due to the decrease in sales from both the Orbit Instrument Division and Tulip, a decrease in gross profit, an increase in selling, general and administrative expenses, a decrease in investment and other income and despite increased revenues and profitability from the Power Group. The income tax provision for the six months ended June 30, 2008 was $7,000 compared to $25,000 for the six months ended June 30, 2007 consisting of state income taxes that cannot be offset by any state net operating loss carry-forwards. As a result of the foregoing, net loss for the six months ended June 30, 2008 was $295,000 compared to net income of $1,050,000 for the six months ended June 30, 2007. Earnings before interest, taxes and depreciation and amortization (EBITDA) for the six months ended June 30, 2008 decreased to $318,000 for the six months ended June 30, 2008 compared to $1,535,000 for the six months ended June 30, 2007. Listed below is the EBITDA reconciliation to net income: Six months ended June 30, 2008 2007 ---- ---- Net (loss) income $(295,000) $1,050,000 Interest expense 182,000 182,000 Income tax expense 7,000 25,000 Depreciation and amortization 424,000 278,000 ------- ------- EBITDA $ 318,000 $1,535,000 ========== ========== Material Change in Financial Condition - ------------------------------------------ Working capital decreased to $17,347,000 at June 30, 2008 compared to $18,167,000 at December 31, 2007. The ratio of current assets to current liabilities was 4.5 to 1 at June 30, 2008 compared to 4.1 to 1 at December 31, 2007. Net cash used in operations for the six month period ended June 30, 2008 was $771,000, primarily attributable to the net loss for the period, the non cash deferred income, an increase in inventory and costs and estimated earnings in excess of billings, a decrease in accounts payable, accrued expenses and income taxes payable and despite the non cash amortization of intangible assets, the decrease in accounts receivable and the increase in customer advances. Net cash used in operations for the six-month period ended June 30, 2007 was $131,000, primarily attributable to the increase in inventory and the decrease in accrued expenses and customer advances that was partially offset by the net income for the period, the non-cash amortization of intangible assets, the decrease in accounts receivable and the increase in accounts payable. Cash flows provided by investing activities was $799,000, primarily attributable to the sale of marketable securities that was partially offset by the purchase of marketable securities, the purchase of property and equipment and additional costs associated with the ICS acquisition. Cash flows used in investing activities for the six-month period ended June 30, 2007 was $656,000, attributable to the purchase of marketable securities and property and equipment that was partially offset by the sale of marketable securities. Cash flows used in financing activities was $1,433,000, primarily attributable to the repayment of long term debt that was partially offset from loan proceeds from the Company's line of credit. Cash flows used in financing activities for the six-month period ended June 30, 2007 was $648,000, attributable to the repayments of long term debt that was partially offset by the issuance of long term debt. In December 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment. In April 2005, the Company entered into a five-year $5,000,000 Term Loan Agreement to finance the acquisition of Tulip and its manufacturing affiliate. In December 2007, the Company entered into a five-year $4,500,000 Term Loan Agreement to finance the acquisition of ICS. In connection with the new Term Loan entered into in December 2007, the interest rates on both Term Loan Agreements and the credit facility were amended to equal a certain percentage plus the one month LIBOR depending on a matrix related to a certain financial covenant. At June 30, 2008, the interest rate was equal to the sum of 1.50% plus the one-month LIBOR (2.46% at June 30, 2008). The credit facility will continue from year to year unless sooner terminated for an event of default including non-compliance with certain financial covenants. Principal payments under the two term loan facilities are approximately $113,000 per month. In April 2005, the Company entered into a five year $2,000,000 Promissory Note with the selling shareholders of Tulip at an interest rate of prime plus 2.00% (5.00% at June 30, 2008). Principal payments of $100,000 were made on a quarterly basis along with accrued interest. In June 2007, the Company refinanced the balance due on the Promissory Note of $1,050,000 with its primary commercial lender. Under the terms of a new Term Loan, monthly payments of $35,000 will be made over a thirty-month period along with accrued interest at a rate of 1.50% plus the one-month LIBOR. The Company's contractual obligations and commitments as of June 30, 2008, are summarized as follows: Less than 1-2 3-5 Total One Year Years Years ----- ---------- ------ ------ Long-term debt $7,695,000 $1,777,000 $3,614,000 $2,304,000 Note Payable 100,000 100,000 - - Employment Contracts 4,717,000 1,962,000 2,755,000 - Operating leases 2,775,000 739,000 1,144,000 892,000 --------- --------- --------- ------- Total contractual Obligations $15,287,000 $4,578,000 $7,513,000 $3,196,000 =========== ========== ========== ========== 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 - ------------------------- During the second quarter, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for the immediate development of certain modifications to a product for the Division. This "out of scope" support caused a delay in a significant amount of shipments scheduled for the quarter which resulted in a decrease in revenue and profitability for the three and six month periods ended June 30, 2008. The Division is working closely with this customer and once the testing is completed of the modified unit, the Company expects deliveries to recommence on an expedited basis. In addition, the Orbit Instrument Division also experienced an unrelated customer delivery issue in the first quarter of the current period that resulted in a shipment shortfall for that period, which was not resolved by June 30, 2008. The Company still expects this issue to be resolved by year-end. In April 2005, the Company completed the acquisition of Tulip and its operations became part of the Company's Electronics Group. In December 2007, the Company completed the acquisition of ICS which also became part of the Electronics Group. The Company's Electronics Group and the Custom Division of its Power Group 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 benefited from an increasing defense budget. Although the Electronics Group and the Custom Division of the Power Group are pursuing several opportunities for reorders, as well as new contract awards, the Company has normally found it difficult to predict the timing of such awards. In addition, the Company has an unprecedented amount of new opportunities that are in the prototype or pre-production stage. These opportunities generally move to a production stage at a later date but the timing of such is also uncertain. There is no seasonality to the Company's business. The Company's revenues are generally determined by the shipping schedules outlined in the purchase orders received from its customers. The Company stratifies all the opportunities it is pursuing by various confidence levels. The Company generally realizes a very high success rate with those opportunities to which it applies a high confidence level. The Company currently has a significant amount of potential contract awards to which it has applied a high confidence level. However, because it is difficult to predict the timing of awards for most of the opportunities the Company is pursuing, it is also difficult to predict when the Company will commence shipping under these contracts. A delay in the receipt of any contract from its customer ultimately causes a corresponding delay in shipments under that 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 that 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 its development costs it will not generate any significant profits. The Company is heavily dependent upon military spending as a source of revenues and income. However, even increased military spending does not necessarily guarantee the Company of increased revenues, particularly, when the allocation of budget dollars may vary depending on what may be needed for specific military conflicts Any future reductions in the level of military spending by the United States Government due to budget constraints or for any other reason, 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 addition of Tulip gives the Electronics Segment a more diversified customer base. The Company's business strategy is to expand its operations through strategic, accretive acquisitions. Through the past several years, the Company reviewed various potential acquisitions and believes there are numerous opportunities presently available. In April 2005, it completed the acquisition of Tulip and in December 2007, it completed the acquisition of ICS. The Company has received offers from several financial institutions that have expressed an interest in helping the Company with acquisition financing. However, there can be no assurance it will obtain the necessary financing to complete additional acquisitions and even if it does, there can be no assurance that we will have sufficient income from operations of such acquired companies to satisfy the interest payments, in which case, we will be required to pay them out of Orbit's operations which may be adversely affected. The Company continues to review acquisition candidates but there is no assurance that an acquisition will be completed in 2008. During the second quarter of 2007, the Company expanded the activities of its investment banker to include the pursuit of alternative strategies, including the potential sale of the Company as a means of enhancing shareholder value. In June 2008, the Company terminated such activities with the investment banker but continues to pursue strategic alternatives to enhance shareholder value. However, there is no assurance that a sale or any of the other strategic alternatives will be accomplished. Forward Looking Statements - ---------------------------- Statements in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Part II, Item 6A "Quantitative and Qualitative Disclosures About Market Risk", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for a discussion of the Company's exposure to market risk. There have been no material changes to the Company's market risk exposures since December 31, 2007. Item 4T. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the " Exchange Act ")) as of the end of the period covered by this report. Based on such evaluation, the Company's chief executive officer and chief financial officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) to ensure that information required to be disclosed by the Company in the reports that it submits under the Exchange Act is accumulated and communicated to its management, including the Company's principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Internal Control over Financial reporting There has been no change to the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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 A VOTE OF SECURITY HOLDERS An Annual Meeting of Stockholders of the Company was held on June 18, 2008. The holders of 4,723,753 shares of Common Stock of the Company were entitled to vote at the meeting, the holders of 4,372,822 shares of Common Stock, or approximately 93% of shares entitled to vote at the meeting, were represented by proxy. The following action took place: 1. The stockholders voted for the election of each of the following persons nominated to serve as a Director of the Company until the next annual meeting and until his successor is elected and qualified: Dennis Sunshine by 3,908,334 votes for and 464,488 against, Bruce Reissman by 3,907,922 votes for and 464,900 against, Mitchell Binder by 3,900,098 votes for and 472,724 against, Robert Mitzman by 3,908,084 votes for and 464,738 against, Bernard Karcinell by 3,900,073 votes for and 472,749 against, Lee Feinberg by 3,907,734 votes for and 465,088 against, Sohail Malad by 4,347,280 for and 25,542 against and Fredric Gruder by 4,347,280 for and 25,542 against. 2. The stockholders voted 4,368,898 for and 2,273 against the resolution relating to the appointment of McGladrey & Pullen LLP as the independent auditors and accountants for the Company for the year ended December 31, 2008 (1,649 votes abstained). ITEM 5. OTHER INFORMATION None ITEM 6. 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. 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: August 14, 2008 /s/ Dennis Sunshine ------------------- Dennis Sunshine, President, Chief Executive Officer and Director Dated: August 14, 2008 /s/Mitchell Binder ------------------ Mitchell Binder, Executive Vice President, Chief Financial Officer and Director EX-31.1 2 ceocertification.txt CEO CERTIFICATION EXHIBIT 31.1 I, Dennis Sunshine, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer 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 registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant'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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant'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 registrant'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 registrant's internal control over financial reporting. Date: August 14, 2008 /s/ Dennis Sunshine ------------------- Dennis Sunshine Chief Executive Officer EX-31.2 3 cfocertification.txt CFO CERTIFICAITON EXHIBIT 31.2 I, Mitchell Binder, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer 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 registrant 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 registrant, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant'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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant'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 registrant'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 registrant's internal control over financial reporting. Date: August 14, 2008 /s/ Mitchell Binder ------------------- Mitchell Binder Chief Financial Officer EX-32.1 4 ceo906certification.txt CEO 906 CERTIFICATION 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-Q for the quarterly period ended June 30, 2008 (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: August 14, 2008 /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. EX-32.2 5 cfo906certification.txt CFO 906 CERTIFICATION 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-Q for the quarterly period ended June 30, 2008 (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: August 14, 2008 /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. -----END PRIVACY-ENHANCED MESSAGE-----