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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from __________ to _______________
Commission File Number: 0-25548
ORBIT TECHNOLOGIES INC.
(Name of small business issuer in its charter)
Delaware 84-100269
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Palomar Triad One
2011 Palomar Airport Road, Suite 100
Carlsbad, California 92009
(Address of principal executive offices)
Registrant's telephone number, including area code: 760/930-8944
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, no par value
(Title of class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes ____ No X
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. X
Issuer's revenues for the year ended December 31, 1996 were $ -0-.
On December 31, 1996, the aggregate market value of the voting stock
held by non-affiliated totaled approximately $5,075,757 based on the closing
stock price as reported by The OTC-BB of the NASDAQ Stock Market.
At December 31,1996, 29,405,904 shares of Common Stock were
outstanding.
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. DESCRIPTION OF BUSINESS
The Company is filing this periodic report after the due date that is
prescribed by current regulations. Information presented is as of December 31,
1996, unless otherwise specifically indicated to the contrary. Despite the
foregoing, this report is not intended to cover all matters and events to the
date of filing this report.
This Form 10-KSB contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" in Exhibit 99 and elsewhere in
this Form 10-KSB. The following summary is qualified in its entirety by the
more detailed information and the consolidated financial statements, including
the notes thereto, appearing elsewhere in this Form 10-KSB.
General
Orbit Technologies, Inc. (the "Company" or "Orbit") was incorporated under the
laws of the state of Delaware in 1985. The Company's mandate is to develop
base technologies into commercially viable products, which are licensed or sold
to affiliated and/or unaffiliated entities that are responsible for the
production and marketing of such products. The technologies described herein
are undergoing certain feasibility studies and testing, and none has proved
commercially feasible, except for the TiTRODE type electrodes.
The Company is the owner of various patents pending and issued related to a
number of core technologies. The Company intends to file patents to cover new
technologies it develops or acquires and to cover improvements to existing
patents.
The Company also retains independent engineers, research consultants,
institutes, independent business entities, and other technical and business
consultants as needed to develop and analyze technologies. The Company is
focusing on two technologies which it believes have potential to yield
commercially viable products. The Company may license each technology or
specific application.
The Company or its licensee must, with regard to each technology, after
examination and testing, determine whether the technology may be commercially
viable. At that time, the Company or the licensee must develop a plan to
exploit such technology. Such plan may require the raising of additional funds
to exploit the technology, including the establishment of a marketing
organization to sell such technology. Alternatively, the Company or the
licensee may subcontract the manufacturing, or enter into a joint venture with
existing companies that have manufacturing or marketing capabilities or further
license the technologies to companies that have such capabilities. Upon
further licensing, the Company or the licensee may receive royalty payments.
Any technology may also be sold outright with or without future payments based
on sales. Therefore, each technology that may be commercially viable might be
exploited in a different manner and no assurances can be given as to how or
whether such technology may be successfully exploited. To the extent that the
Company seeks to internally exploit any technology, the Company may require
substantial additional capital. There can be no assurance that such additional
capital may be raised or that the terms of such capital may not result in
substantial dilution to the shareholders of the Company.
Ceramic Silicone Foam
The Company has acquired and is developing the technology to produce a
non-flammable, non-toxic foam material known as "Ceramic Silicone Foam"
("CSF"). CSF possesses the familiar nature of standard foams manufactured by
others and may be used in myriad products from household goods to space craft
seating, but differs in that it remains intact above the melting point of many
metals. This characteristic affords CSF the possibility of becoming the
product of specification wherever flammability is a concern, such as in
aircraft, public ground transportation and health care and penal institutions.
CSF also has the potential to be effective as a sound suppresser and in toxic
waste containment environments. Examples of applications, which take advantage
of these qualities, include sound suppression and flame resistance under
automobile hoods and side body panels. Patents are pending for this technology
and no CSF has been sold to date.
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Additional testing will be required on CSF to determine its fire retardance,
anti-flammability, non-toxicity, physical resiliency, thermal resistance,
thermal insulation properties, tensile strength and resistance to atmospheric
decay.
In May 1996, the Company was awarded a contract to participate in the
Department of Energy's Landfill Stabilization Project to evaluate materials for
treating existing hazardous waste at the Idaho National Engineering
Laboratory's Subsurface Disposal Areas. These landfill sites are composed of a
variety of mixed waste materials including radioactive waste. Several
different materials have been selected for testing and Orbit was awarded a
category sole source contract to test and evaluate its CSF. The contract
provides for initial bench testing with options that can be exercised for more
extensive field-testing.
In November 1996, the Company signed a Teaming Agreement with Ecology and
Environment, Inc. (International Specialists in the Environment), for the sole
purpose of identifying and pursuing mutually agreeable business opportunities
within the U. S. Departments of Energy and Defense, and other federal and state
government agencies and the private sector where the environmental application
of the CSF technology is possible. Identification and pursuit of business
opportunities includes technology development (i. e. both system design and
application identification and construction), sales and client development
efforts, the bid/proposal process, and the contract negotiation process
regarding awarded projects.
In May 1997, the Company was awarded a subcontract by Lockheed Martin Idaho
Technologies Company to test and evaluate Orbit's CSF as a stabilizing media
for sodium and nitrate salts which include chromium, as part of the contract
awarded by the Idaho National Engineering and Environmental Laboratory's
(INEEL) Radioactive Waste Management Complex (RWMC). Subcontractors under the
contract to Orbit are the University of Akron's Microscale Physiochemical
Engineering Center, Department of Civil Engineering and Pierpoint Environmental
Management Services.
In August 1997, Lockheed Martin expanded the initial subcontract to include two
additional nitrate-type surrogate waste materials containing cadmium and an
organic solvent.
In September 1997, Orbit Technologies, Inc., Ecology and Environmental, Inc.,
and The University of Akron submitted a proposal entitled "Low- activity Waste
Stabilization using Ceramic Silicon Foam (CSF)" to the Department of Energy -
Idaho Operations Office.
Nuclear/Toxic Waste Containment Technology
The Company's nuclear waste containment technology has proven effective in a
laboratory setting in containing nuclear waste and radioactive particles. The
Company uses CSF as a base material to create a unique compound through the
addition of certain proprietary materials. The final CSF material is specially
designed and formulated to be application specific based on the required
performance factors.
In 1994, the Company engaged the Kurchatov Institute for Nuclear Physics in
Moscow, Russia to conduct a six stage study involving the determination of
structural peculiarities, component distribution, radioactive absorption
elements, the influence of temperature, pressure and the investigation of
resistance in corrosion active mediums. Additional factors in the study
included the impact of internal alpha and gamma radiation, and the manner in
which liquid and solid radioactive wastes are encapsulated in the CSF matrix.
At that time, the Chairman of the State Committee on Atomic Energy of Ukraine
agreed to a two pronged testing protocol for the Chernobyl problem: (1) to
continue laboratory testing on the basis of the Kurchatov Institute's
recommendations called for under the "Implementation Program", and (2) on-site
technological testing at the Chernobyl site. If the Company's CSF is chosen as
the material of choice, the Ukraine may pay the Company a license fee
concurrently with the execution of any such license. The subsequent test and
evaluation phases required additional funding. Adequate funding has not been
available for the follow-on test and evaluation. No assurances can be given
that the necessary funding can be obtained or that further testing will prove
successful or any such license will be consummated or any license fee paid.
Successful completion of these tests, in whole or in part, could permit the
Company to pursue contracts for the encapsulation and disposal of significant
quantities of high, medium and low levels of nuclear/toxic waste.
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Metafusion Process
Metafusion describes a material coating process (the "Metafusion Process").
The Metafusion Process encompasses the fusion, by chemical or physical means,
of materials at the atomic level. The reaction takes place at room temperature
and at ambient pressure. The process uses very little power, no toxic
materials are used and no contaminated waste is produced. The Metafusion
Process permits the surface of a metal or alloy to be coated with another metal
or alloy so that the applied material is actually fused onto and into the
atomic structure of the surface of the substrate material. The process is
achieved by electrical excitation of the electrons of the coating and substrate
materials by the application of a mid-range frequency pulsed electrical current
that has been generated to coincide with the natural resonance of the atoms.
The process results in the fusion of the materials and an intermingling of the
atoms at the boundary causing an interdispersion of the materials. The
Metafusion Process does not generate excessive heat that can alter the
properties of the substrate material. The Metafusion Process can be
accomplished without expensive or sophisticated equipment.
The Metafusion Process has been scientifically corroborated by a number of
independent entities, including Ontario Research Foundation of Mississauga,
Ontario, which validated the solid Metafusion Process by analyzing the coating
of steel and copper with titanium carbide. The results of the analysis showed
the presence of the coating material to a depth of five (5) microns into the
substrate. Hardness tests conducted at the Materials Sciences Laboratory of
the University of California at Los Angeles and the Surface Science Laboratory
of Mountain View, California revealed significant penetration of the applied
materials into the substrate.
The Company believes that the Metafusion Process has myriad commercial
applications. Potential applications include printed circuits, cutting blades,
tools and dies, jewelry, automotive parts, corrosion resistance in extreme
conditions, and multi-layer applications for the reduction of heat expansion
coefficients.
The Metafusion Process was utilized to coat copper-alloy resistance welding
electrodes (welding tips) through the fusion of titanium carbide or molybdenum
tungsten onto and into copper-alloy welding tips ("TiTRODEs"). The Chrysler
Corporation ("Chrysler") has successfully tested TiTRODE electrodes for use on
its assembly lines. Chrysler has conducted 18 months of testing on the TiTRODE
type electrodes and has since integrated them into four of its manufacturing
plants. TiTRODE type electrodes are being sold to Chrysler by Huys Industries,
Inc., a Canadian Corporation, with which the Company claims to have an
agreement beginning in January 1994 whereby the two parties would share net
revenues derived from the sale of TiTRODEs. To date, the Company believes
Chrysler has purchased over one million TiTRODE type electrodes from Huys
Industries, Inc. The net revenues from the sale of TiTRODEs to Chrysler have
not been dispersed to the Company and the Company has requested an accounting
to determine the amount of money due to it pursuant to the above referenced
agreement. Huys has not complied with the request for an accounting and
Orbit's management is evaluating its rights with respect to Huys Industries,
Inc.
The Company holds patents for the original Metafuse Process. The Company is
working on upgrades to the TiTRODE application of the Metafuse Process and also
on specific application patents as the development of the Ceramic Silicone Foam
technology continues.
The Company had also licensed certain uses of the Metafusion Process to Davis,
Joseph & Negley, a company formerly affiliated with Mr. Joseph. See Certain
Relationships and Related Transactions.
Other Technologies
The Company is currently evaluating other technologies. The Company is
continually searching for technologies, which may yield commercially viable
products and would fit specifically into the Company's area of expertise.
Government Regulation
The production and marketing of the Company's products and technologies and its
ongoing research and development activities are subject to regulation for
safety, efficacy and quality by numerous governmental authorities in the United
States and other countries. Failures or delays by the Company or its
affiliates or licensees in obtaining the required regulatory approvals would
adversely affect the marketing of products being developed by the Company and
the Company's ability to receive product revenues or royalties. See Risk
Factors, Exhibit 99.
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Human Resources
As of December 31, 1996, the Company had four full time employees. The
Company also retains independent engineers, research consultants, institutes,
independent business entities, and other technical and business consultants as
needed to develop and analyze technologies and create business strategies.
Research and Development
Research and development expenses for the years ended December 31, 1996 and
1995 were $15,364 and $314,725, respectively.
Item 2. DESCRIPTION OF PROPERTY
The Company maintains its principal executive offices in Carlsbad, California
where it occupies a 2,800 square foot office at 2011 Palomar Airport Road,
Suite 100, Carlsbad, California 92009 pursuant to a lease expiring in July
1998. Additional facilities, utilized for the development of CSF, are located
at 6790 Bear Swamp Road, Medina, Ohio 44256, under a lease agreement that
expired in May 1997.
Item 3. LEGAL PROCEEDINGS (Also see Item 12. Certain Relationships and Related
Transactions)
The Company is involved in certain legal proceedings incidental to its normal
business activities. As of the date hereof, the Company is not party to any
material litigation except as described below, nor to the knowledge of
Management is there any material litigation or claim threatened or contemplated
against the Company. Most of the litigation is related to or actions by past
Directors and Officers, and their affiliates in which a determination of the
respective rights and duties of the parties is sought. This includes an
adjudication of the validity of common stock issued to Messrs. Joseph,
Singletary, Wall, and others. The Company is a party to the following
proceedings:
Emerson v. Wall, Ruffa, Orbit, Case No. 95 - 1866R (CGA), was commenced on
October 24, 1995, in the United States District Court, Southern District of
California. Plaintiff seeks money damages from Richard A. Wall, Ruffa & Ruffa,
and Orbit emanating from the sales of her residence to Mr. Wall. Although the
court has dismissed Ruffa & Ruffa and Wall, it is Orbit's belief that Emerson's
claim to Orbit stock and money damages has no merit. Plaintiff and Orbit have
entered into a settlement agreement to resolve this action over which the court
has maintained jurisdiction.
Sansone v. Joseph et al. An action filed April 5, 1996 in the Superior Court
of San Diego, Case No. 698631 to recover on a $50,000 pursuant to a note signed
by Orbit and Joseph. Plaintiff obtained Judgment for the full amount of the
debt and attached $60,000 of sales proceeds owed to Joseph in satisfaction of
the Judgment.
In the wake of the Company's demand to surrender stock to the Company for
cancellation, Mr. Joseph initiated the case, Joseph v. Orbit Technologies Inc.,
in the Superior Court of California, County of San Diego, Case No. 701380 on
June 27, 1996. Mr. Joseph sought money damages for the Company's refusal to
acknowledge the validity of his claims to the Company's stock. Alternately,
Mr. Joseph sought return of consideration he allegedly provided the Company for
stock. The Company filed a Cross Complaint against Messrs. Joseph, Singletary,
and their affiliates, to cancel all Company stock claimed to be owned by them,
their affiliates, and to recover money damages for fraud, breach of fiduciary
duties and negligence. The trial began on September 29, 1997. On October 21,
1997, in a Judgment rendered by the San Diego Superior Court of California, the
Court ordered the surrender and cancellation of approximately 11,000,000 shares
claimed by Adrian Joseph; et al.; Mikimak, Ltd., a Bahamian corporation
controlled by Mr. Joseph; and shares claimed by Tatum C. Singletary. In
addition the Court found by clear and convincing evidence that Joseph committed
actual fraud with respect to the issuance of shares and also that stock
approved by Orbit's Board of Directors on September 15, 1992, was in large
measure, to replace stock which had previously been awarded by the Board of
Directors for OTI Technologies, Inc., a Canadian corporation, and thus was
fraudulent. Joseph has filed an appeal. The Company is continuing to identify
additional shares that may be subject to cancellation.
Jeffer, Mangels, Butler & Marmaro, LLP v. Orbit Technologies, Inc.. Action
filed in Los Angeles Superior Court, on September 17, 1996, Case No. BS 041
354, by former attorneys of Orbit to recover attorney fees. Orbit stipulated
to arbitration of fee dispute and entry of an interim arbitration award in the
amount of approximately $110,000, subject to any defenses, offsets or claims,
which Orbit asserted in the form of a legal malpractice claim. The company's
legal malpractice action was denied as a result of the retainer agreement
signed by Mr. Joseph in his capacity when he was
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with the Company. Mr. Joseph was a personal client of Jeffer, Mangels, Butler
& Marmaro prior to Orbit's involvement with the firm. Orbit declined to
participate in the arbitration and appealed the Judgment.
Benveniste, et. al. v. Orbit and Its Officers. The action was filed on March
6, 1997 in the Los Angeles Superior Court as Case No. BC167043. The action is
to collect principal, interest and other fees and damages relating to various
promissory notes executed between the plaintiffs and Orbit during 1995
aggregating $600,000 and loans made during 1992 aggregating $197,000.
The plaintiffs allege that the defendants violated the securities laws of the
state of California and made negligent misrepresentations related to the
Company's technologies, thereby inducing them to loan monies to the Company.
The plaintiffs also allege that, pursuant to an oral agreement with an officer
of the Company, the exercise price for various stock options to acquire Orbit
stock was reduced to $0.10 per share and the conversion price under various
convertible loan agreements between the plaintiffs and Orbit was also reduced
to $0.10. Further, the plaintiffs allege that they have not received 500,000
shares of Orbit stock promised as additional compensation under such
agreements.
Orbit contends that the plaintiffs loaned money to another entity (other than
Orbit) in 1992 for which Orbit has no liability. Additionally, Orbit contends
that the plaintiffs hold substantial shares of Orbit common stock which are
void and/or voidable. Orbit has filed a Cross Complaint seeking to cancel
invalidly issued stock and recover money damages in excess of $7 million.
Management denies the contention that there was an oral agreement to reduce the
exercise and conversion prices of certain financial instruments. Management
further denies the contentions there were violations of securities laws, that
misrepresentations were made to plaintiffs and that other complaints possess
any merit.
Since February 1996, management has attempted to contact the subject note
holders on numerous occasions via correspondence and telephone in an attempt to
discuss the issues surrounding the loan agreements, set-off, and the respective
claims against both parties. Attempts to amiably resolve the issues have been
unsuccessful to date. The trial is scheduled for My 13, 1998.
Orbit Technologies Inc., et al. v. Lahey, et al. The action filed by Richard
Benveniste and Edgar R. Benveniste on June 2, 1997 in the Delaware Court of
Chancery, Case No. 15720-NC, on behalf of themselves and purportedly on behalf
of the Company against James B. Lahey, James A. Giansiracusa, Ian C. Gent,
Stephen V. Prewett, and William N. Whelen. The Complaint sought a
determination by the Court of Chancery ( i ) as to who constituted the valid
Directors of the Company in connection with a written consent action initiated
by the plaintiffs {and signed by Richard A. Wall & Associates GmbH (Authorized
representative Kurt Seifman), Kurt Seifman, JTR Associates (Authorized
representative William P. Ruffa, Jr.), William P. Ruffa, Jr., Pacific
Equities, Inc. (Authorized representative Richard A. Wall), Richard A. Wall,
Cynthia L. Wall, Eleanor Moscatel (By her attorney-in-fact, Richard
Benveniste), Julie Benveniste (By her attorney-in-fact, Richard Benveniste),
Chad Nellis (Son of Cynthia Wall and step son of Richard A. Wall), Mikimak
Limited, and Frank A. Visco}, and ( ii ) in the alternative, that the Company
be required to hold an annual meeting of shareholders. In response to the
Complaint, on June 20, 1997 the defendants filed their motion to dismiss or, in
the alternative, to stay the Delaware litigation in favor of litigation
relating to the validity of claimed holdings in the Company that was pending in
the state courts of California (Joseph v. Orbit Technologies Inc.). On
September 2, 1997, a hearing on the defendant's motion to dismiss was held at
which time the Court of Chancery decided to defer a decision on the defendant's
motion to dismiss until such time as an annual meeting of the Company's
shareholders ws held. The Court thereafter ordered that the Company hold its
annual meeting. The date for the shareholder meeting has not been established
pending further discussions between the parties.
Jacobs v. Orbit. This action was filed on June 27, 1997, in the Superior
Court of California, County of Los Angeles as Case No. BC 173600. The
plaintiff, who has provided legal representation for Orbit, OTI Technologies
Inc. (a Canadian Corporation), Adrian Joseph, Richard A. Wall, Ruffa & Ruffa,
and other individuals who have brought groundless actions against the Company,
seeks money damages allegedly attributable to his inability to sell restricted
stock. Management believes this action has no merit.
Wilson v. Orbit. This action was filed on September 15, 1997, in the Superior
Court of California, County of Los Angeles as Case No. BC 177867. The plaintiff
seeks money damages allegedly attributable to his inability to sell restricted
stock. Management believes this action has no merit.
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While the outcome of any such proceedings cannot be accurately predicted, the
Company does not believe the ultimate resolution of any such existing matters
would have a material adverse effect on its financial position or results of
operation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended December
31, 1996 to a vote of the Company's securities holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On April 29, 1994, the Company's Common Stock became reported by the NASD OTC
Electronic Bulletin Board (the "OTC-BB") and continues to be traded on such
reporting market on a limited basis. The table below shows the high and low
bid prices as reported by the OTC-BB. The bid prices represent inter-dealer
quotations, without adjustments for retail mark-ups, markdowns or commissions
and may not necessarily represent actual transactions.
Calendar Year ended December 31:
<TABLE>
<CAPTION>
1994 High Low
<S> <C> <C>
Second Quarter (from April 29) $ 14.00 $ 5.00
Third Quarter 11.00 7.00
Fourth Quarter 7.82 0.50
1995
First Quarter $ 0.75 0.35
Second Quarter 2.00 0.75
Third Quarter 1.31 0.75
Fourth Quarter 0.34 0.18
1996
First Quarter $ 0.50 0.15
Second Quarter 0.80 0.18
Third Quarter 0.43 0.15
Fourth Quarter (through December 15) 0.40 0.15
</TABLE>
There were approximately 1300 shareholders of record of Common Stock as of
December 31, 1997. The Company has not paid cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.
During 1996 the Company converted $950,000 of principal and related accrued
interest of $114,783 into 4,861,091 shares of common stock pursuant to
exemptions under Section 4(2) and or Regulation D., under the Securities Act of
1933, as amended. Substantially all of the debt conversions were executed at a
conversion rate of $0.22.
ITEM 6. MANAGEMENT'S PLAN OF OPERATION
Overview
This discussion contains forward-looking statements. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. See Risk Factors, Exhibit 99. Readers
are cautioned not to place undue reliance on these forward-looking statements
that speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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Since its inception, the Company has been engaged in the acquisition and
development of certain technologies in the fields of coatings technologies and
material science. The Company's net operating losses incurred since inception
are primarily the result of two factors: (1) the Company's unsuccessful search
for license, joint venture, or partnership arrangements with entities in
industries aligned with the Company's technologies, and (2) a lack of
technological and business focus. Net losses for the fiscal years ended
December 31, 1996 and 1995, were $2,027,506 and $4,147,782, respectively. It
is anticipated that net operating losses will continue and will possibly
increase through at least the next two years.
The Company's business plan and near term strategy will focus the Company's
limited human resources and funding on developing two technologies, the
Metafusion Process and CSF. One of management's primary objectives is the
successful commercialization of these two technologies. Once this is
accomplished, the Company will be better poised to develop each technology for
multiple market applications.
Financial Condition
For the fiscal years ended December 31, 1995 and 1996, the Company had revenues
of $0. General and administrative expenses decreased from $1,744,445 in 1995
to $854,727 in 1996. For the years ending December 31, 1995 and December 31,
1996, the Company incurred an operating loss of $4,147,782 and $2,027,506,
respectively. The operating loss decrease of $2,120,276 is principally due to
expenses incurred for the year ended December 31, 1995 in connection with stock
options granted to consultants and employees amounting to approximately
$1,669,000. Furthermore, on December 27, 1996 the Company entered into a
settlement agreement with O. G. Sansone in connection with prior purchases of
the Company's Common Stock. The settlement agreement provides for the Company
to issue a $250,000 promissory note and a $250,000 payment via the issuance of
2,941,176 shares of the Company's restricted common stock. The Company's
rights, titles, patents, and equipment in the "TiTRODE/Metafuse" technology
collateralize the $250,000 promissory note.
TiTRODEs are being sold to Chrysler by an entity unaffiliated (Huys Industries
Inc.) with the Company, but with which the Company has an agreement beginning
in January 1994 whereby the two parties would share equally net revenues
derived from the sale of TiTRODEs to Chrysler. To date, the Company believes
that the Chrysler Corporation has purchased over one million TiTRODE type
electrodes. The net revenues from the sale of TiTRODEs to Chrysler have not
been disbursed to the Company and the Company has requested an informal
accounting to determine the amount of money due to it pursuant to the above
referenced agreement. The Company at this time cannot predict the outcome of
this request for an informal accounting. Huys has not complied with the request
for an accounting and Orbit's management is evaluating its rights with respect
to Huys Industries, Inc.
Plan of Operation
The Company's business plan and near term strategy will focus the Company's
limited human resources on the commercial development of the Metafusion Process
and CSF. Orbit's primary objective is the successful commercialization of
these two technologies. The Company has initiated strategic plans and is
actively seeking partnership arrangements and joint ventures in addition to
potential licensees. Once this is accomplished, the Company will be better
poised to develop each technology for multiple market applications.
In August 1995, the Company entered into an agreement with an automation firm
for the development of manufacturing equipment for producing TiTRODEs. The
first automated machine has been completed with partial completion of the
second machine. The company is searching for qualified partners for product
commercialization. The selected partner would either license the specific
application of the Metafuse technology or become a party of a joint venture
agreement with Orbit. To date, the funding necessary to move the TiTRODE
Project forward has not been available and the Company remains focused on
progress in developing the CSF technology.
In May 1996, the Company was awarded a sole source contract, within its
category, to participate in the Department of Energy's Landfill Stabilization
Project. This Project evaluates materials for treating existing hazardous
waste at the Idaho National Engineering Laboratory's Subsurface Disposal Areas.
Several materials in other categories have also been selected for testing. The
contract provides for initial bench testing with an option that can be
exercised for more extensive field-testing.
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The results of preliminary testing and analysis in Idaho was the development of
a "White Paper" which recommended a much more extensive evaluation of Orbit's
CSF be conducted to evaluate its use for Calcine Waste Stabilization at the
Idaho facility. Calcine waste is specific to the Idaho facility and there are
about 13,000,000 pounds of material to be processed. Part of this study
actually produced three non- radioactive samples of CSF, which produced
acceptable results. A conceptual process design was also performed as well as
initial cost estimates generated. This study has had wide spread distribution
within the DOE.
In November 1996, the Company entered into a Teaming Agreement with Ecology &
Environmental, Inc. (International Specialists in the Environment), for the
sole purpose of identifying and pursuing mutually agreeable business
opportunities within the U. S. Departments of Energy and Defense, and other
federal and state government agencies and private sectors where the
environmental application of CSF technology is possible. Identification and
pursuit of business opportunities includes technology development (i. e. both
system design and application identification and construction), sales and
client development efforts, the bid/proposal process, and the contract
negotiation process regarding awarded projects.
In May 1997, the Company was awarded a contract by Lockheed Martin Idaho
Technologies Company to test and evaluate Orbit's proprietary Ceramic Silicon
Foam (CSF) as a stabilizing media for sodium and nitrate salts which include
chromium, from the Idaho National Engineering and Environmental Laboratory's
(INEEL) Radioactive Waste Management Complex (RWMC). Subcontractors under the
contract to Orbit are the University of Akron's Microscale Physiochemical
Engineering Center, Department of Civil Engineering and Pierpoint Environmental
Management Services.
In August 1997, Lockheed Martin expanded the initial contract to include two
additional nitrate-type surrogate waste materials containing cadmium and an
organic solvent.
In September 1997, Orbit Technologies, Inc., Ecology and Environmental, Inc.,
and The University of Akron submitted a proposal entitled "Low- activity Waste
Stabilization using Ceramic Silicon Foam (CSF)" to the Department of Energy -
Idaho Operations Office.
Until completion of the development of a technology and the commencement of
sales, the Company will have no operating revenues but will continue to incur
substantial expenses. No assurances can be given that the Company can complete
development of any technology or that, if any technology is fully developed,
that it can be manufactured on a large-scale basis or at a feasible cost.
Further, no assurance can be given that any technology will receive market
acceptance. Being a start-up stage entity, the Company is subject to all the
risks inherent in the establishment of a new enterprise and the marketing and
manufacturing of a new product, many of which risks are beyond the control of
the Company.
Liquidity and Capital Resources
At December 31, 1995, the Company had an accumulated deficit and a working
capital deficit of $11,108,832 and $3,409,658, respectively. At December 31,
1996, the Company had an accumulated deficit and a working capital deficit of
$13,136,339 and $3,170,881, respectively. The Company had a ratio of
liabilities to tangible assets of approximately 12.9 to 1 as of December 31,
1996. The Company is also in default of a significant number of notes that
total approximately $1,150,000 in principal as of December 31, 1996. The
report of the Company's independent certified public accountants includes an
uncertainty paragraph with regard to the ability of the Company to continue as
a going concern.
On May 27, 1997, the Company entered into an installment loan agreement with
Ruth P. Brittingham for $300,000 payable in $100,000 installments on May 27,
1997, September 5, 1997 and December 3, 1997. The installment loan bears
interest at 12% per annum and is due on May 27, 1998. The loan agreement
provides for a minimum semi-annual interest payment of $6,000 commencing
December 6, 1997. The Company's rights, titles and patents, to the technology
known as "Ceramic Silicone Foam" collateralize the installment note. The
Company will record the additional consideration as interest expense amounting
to $42,750 which is based on the fifty percent (50%) of the fair market value
at the common stock at May 27, 1997, the date of the installment loan
agreement. Furthermore, the Company granted the shareholder the right to
purchase 150,000 shares of restricted common stock at seventy-five percent
(75%) of the fair market value for a period of 180 days commencing May 27,
1997, the date of the installment agreement. (See also Item 12. Certain
Relationships and Related Transactions)
8
<PAGE> 10
The Company will require additional financing. No assurance can be given that
additional financing can be obtained, or if obtainable, that the terms will be
satisfactory to the Company. The Company has limited working capital. In
order to finance its proposed business, the Company will need to obtain
additional financing. To date, the Company has funded its operations from the
private sales of Common Stock or convertible notes (many of which have been
converted into Common Stock). Such sales have been able to fund only minimal
operations and technological developments. Development and exploitation of
technologies have been delayed by lack of adequate funding.
ITEM 7. FINANCIAL STATEMENTS
See the Financial Statements and Notes thereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
James B. Lahey 62 President, Chief Executive Officer, and Director
James A. Giansiracusa 49 Vice President - Operations, Secretary and Director
Ian C. Gent 54 Chief Financial Officer and Director
Stephen V. Prewett 52 Vice President - Technology Development and Director
William N. Whelen, Jr. 59 Director
</TABLE>
James B. Lahey became President and a director of the Company in March 1995.
From 1993 through 1994 he was President and Executive Vice President of
Sensotron, Inc., which develops technologically advanced transducer products.
From 1989 to 1992 he was Corporate Executive Vice President of W. S. Shamban &
Co., a manufacturer of engineered sealing systems. He has previously held
senior management positions with W. R Grace & Co. and Ausimont U.S.A. Mr.
Lahey holds a degree in Civil Engineering.
James A. Giansiracusa has been the Secretary of the Company since October 1993
and became Vice President-Operations in January 1994. Before joining the
Company, Mr. Giansiracusa was a Lieutenant Colonel in the United States Marine
Corps where his duties included command billets in both aviation and infantry.
He was also a consultant for Wackenhut Services International, an international
security firm, from 1991 to 1992. During Mr. Giansiracusa's military service
he, at times, was responsible for over 1,300 persons and $20,000,000 in capital
assets. Mr. Giansiracusa participated in strategic planning relative to many
global scenarios. Mr. Giansiracusa was awarded a Master of Science degree in
Systems Management from the University of Southern California in 1983.
Ian C. Gent has been a consultant to the Company since September 1994. Mr.
Gent became Chief Financial Officer and a director of the Company in April
1995. He has provided advice in the areas of investment banking, corporate
structuring, and organizational strategies. Mr. Gent has also assisted with
securities compliance and investor relations. Between 1989 and 1994 he was
Vice President and Director of the Canadian Commerce Group of Fleet Bank of New
York, a member of the Fleet Financial Group. In January 1994 he became
President and Chief Executive Officer of West Niagara Capital Corporation, a
private Canadian merchant banking company specializing in technology and real
estate consulting. During his 27 years experience in the securities and
banking industries, he has held positions as Vice
9
<PAGE> 11
President, Merrill Lynch Royal Securities in Canada, Managing Director of a
regional broker dealer, President and Chief Operating Officer of Southern Tier
Gas Producers, and President and Chief Executive Officer of GDM Securities, a
wholly owned subsidiary of Goldome Savings Bank. Mr. Gent has a Bachelor of
Science in Business Administration from Ashland College, Ohio and has completed
several advanced management and industry programs. Dr. Stephen V. Prewett has
been a consultant to the Company since July 1994 and has provided technological
assessment support, technology transfer guidance, and license agreement
negotiations. He became Vice President - Technology Development in July 1994
and a director of the Company in April 1995. Dr. Prewett has extensive nuclear
industry experience and has served in a variety of positions with the
Department of Energy, including Senior Nuclear Engineer from 1976 to 1982. Dr.
Prewett was also Director of Environmental Safety and Health and Manager of
Environmental Affairs with Gen Corp, a multi-national manufacturing company
from 1982 to 1984. Dr. Prewett's background includes market assessment,
identifying teaming partners for new technology implementations, and strategy
assessment to identify market trends and industry growth areas. Dr. Prewett
received a Bachelor of Science in Applied Physics degree from East Carolina
University, and Masters and Doctorate degrees from Virginia Polytechnic
Institute in Nuclear Science and Engineering.
William N. Whelen, Jr. was appointed a director of the Company in September
1996, filling the vacancy following the resignation of Mr. Joseph. Mr. Whelen
has spent the last thirty years in the investment banking business. He has
served with two Philadelphia firms, Suplee Mosley, Close and Kerner, and Jenney
Montgomery Scott. Today Mr. Whelen is a registered representative of Simon
Securities, New Jersey. Mr. Whelen has an electrical engineering degree from
Widener University of Chester, Pennsylvania.
There is no family relationship between any of the Company's directors and
officers. There are no arrangements or understandings between any director or
executive officer and any other person pursuant to which any person has been
elected or nominated as a director or executive officer.
SECTION 16(a) - Beneficial Ownership Reporting compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than
10% of the Company's stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than 10% beneficial owners are required by
applicable regulations to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely upon a review of the copies of such forms furnished to the Company
and information involving securities transactions of which the Company is
aware, the Company believes that during the fiscal year ending December 31,
1996, there was compliance with all Section 16(a) filing requirements
applicable to its executive officers, directors and greater than 10% beneficial
stockholders.
ITEM 10. EXECUTIVE COMPENSATION
Cash Compensation
The following table presents, for each of the last three fiscal years, the
annual compensation earned by the chief executive officer and the most highly
compensated executive officers of the Company for the three fiscal years ended
December 31, 1996:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation Awards
-----------------------------
Annual Compensation
Name and Principal ------------------------------------ Securities Underlying All Other Annual
Position Year Salary Bonus Options/SAR Compensation
- ------------------ ----- ------ ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
James B. Lahey, 1996 $120,000(1) 0 0 0
President 1995 $120,000(1) 0 800,000 0
1994 0 0 0 0
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C> <C>
James A 1996 $ 132,000(1) 0 0 0
Giansiracusa, Vice 1995 $ 132,000(1) 0 1,406,593 0
President, Operations 1994 $ 47,800 0 0 0
Stephen V. Prewett, 1996 $ 108,000(1) 0 0 0
Vice President, 1995 $ 108,000(1) 0 594,783 0
Technology 1994 $ 12,000
Development
Adrian Joseph, Chief 1996 $ 0 0 0 0
Executive Officer 1995 $ 193,172(2) 0 0 0
1994 $ 256,193(2) 0 0 0
</TABLE>
(1) Messrs. Lahey, Giansiracusa, and Prewett are entitled to deferred
compensation in the amounts of $138,500, $149,000 and $119,950,
respectively, from deferrals in the two fiscal years reflected in the
above table.
(2) Includes cash paid to Mr. Joseph and his company, Mikimak, Ltd. Mr.
Joseph was terminated as Chief Executive Officer in February 1996.
The amounts described above do not include other compensation and benefits
provided to Messrs. Lahey, Giansiracusa, Prewett, and Joseph during the fiscal
years described that in the aggregate did not exceed the lesser of $50,000 or
10% of the executive's annual salary and bonus.
The Company entered into Employment Agreements effective April 1, 1995, with
its key employees, Messrs. Lahey, Giansiracusa, and Prewett, to serve in the
positions set forth above for a period of two years, and unless otherwise
terminated, to continue year by year thereafter. The basic annual salaries
under the Employment Agreements are $120,000, $132,000, and $108,000,
respectively, subject to a 40% deferral that will be paid when the Company's
financial condition permits such payment. Such individuals also received
stock options under the 1995 Stock Option Plan for 300,000 shares, 500,000
shares, and 500,000 shares, respectively. During portions of 1995 and 1996,
key officers have deferred salaries in amounts significantly greater than 40%
so that cash could be applied to the Company's operations.
Compensation of Directors
Directors received no payment for their services as directors during 1996,
although the Company's By-Laws provide that directors shall receive $500 for
each meeting. The compensation of officers and directors is subject to review
and adjustment from time to time by the Board of Directors.
Stock Options
The following table presents information for the named officer in the Summary
Compensation Table with respect to options exercised during fiscal year ended
December 31, 1996 and unexercised options held as of the end of the fiscal
year.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-the-
Acquired on Value Options/SARs at FY-End (#) Money Options/SARs at FY-End ($)
Name Execercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexerciable
---- -------------- ------------ ------------------------- ------------------------
<S> <C> <C> <C> <C>
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C>
James B. Lahey 0 0 800,000/0 $144,000/$0 (1) (2)
James A. Giansiracusa 0 0 1,356,593/0 $244,186/$0 (1) (2)
Stephen V. Prewett 0 0 594,783/0 $107,060/$0 (1) (2)
Adrian Joseph 0 0 0/0 0/0
</TABLE>
(1) Values reflected above are based on the closing price of $ .18 per
share of the Company's Common Stock for the last business day of the
fiscal year.
(2) During the year ended 1995, options granted under the Option Plan to
three officers of the Company exceeded the 500,000 prescribed limit
provided for under the Plan. Management believes that the options were
granted in compliance with the Plan and has asked counsel to review the
transactions and advise the Company of the appropriate or necessary
action to address the issue.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1996 29,405,904 shares of Common Stock were outstanding.
Management maintains that as of December 31, 1997 the Company had approximately
24,658,739 shares of common stock outstanding, par value $.01 per share (the
"Common Stock"). This number of shares is the result of the cancellation of
approximately 6,066,830 shares claimed by Adrian Joseph; et al.; Mikimak, Ltd.,
a Bahamian corporation controlled by Mr. Joseph; and shares claimed by Tatum
C. Singletary under an order dated October 21, 1997, Case No. 701380. The
number of outstanding shares does include approximately 6,000,000 shares held
by other persons or entities that the Board maintains were not validly issued.
The following table sets forth, as of December 31, 1996, certain information as
to shares of the Common Stock owned by (i) each person known by management to
beneficially own more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors, and (iii) all executive officers and directors of the
Company as a group:
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Beneficial Percent of Outstanding
Shares Owned Ownership
- ------------------------------------ ------------------------------- ----------------------
<S> <C> <C>
James B. Lahey (1,5) 800,000 3%
James A. Giansiracusa (2,5) 1,356,593 6%
Ian C. Gent (3,5) 12,500 *
Stephen V. Prewett (4,5) 594,783 2%
William N. Whelen, Jr. (5) ---- *
All Officers and Directors as a group 2,763,876 11%
(5 persons)(6)
</TABLE>
- --------------------------------
* Amount held represents less than 1%.
(1) Includes 800,000 shares of Common Stock subject to currently
exercisable options.
(2) Includes 1,356,593 shares of Common Stock subject to currently
exercisable options.
(3) Includes 12,500 shares of Common Stock subject to currently exercisable
options.
(4) Includes 594,783 shares of Common Stock subject to currently
exercisable options.
12
<PAGE> 14
(5) The address for these individuals is the address of the Company.
(6) Includes 2,763,876 shares of Common Stock subject to currently
exercisable options.
(7) Does not include shares owned by Ruth P. Brittingham, 4,022,292, 16%;
S. A. Power Corporation, 2,000,000, 8%; and O. G. Sansone & Colleen Sansone
Defined Benefit Pension Fund, 2,758,670, 11%. Such persons or entities did not
beneficially hold more than 5% of the Company's outstanding shares as of
December 31, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Adrian Joseph, former Chairman and Chief Executive Officer of the Company
previously represented that he or a Bahamian corporation controlled by him,
Mikimak, Ltd., had sold various technologies to the Company in exchange for
Common Stock. An internal audit has disclosed the apparent inaccuracy of Mr.
Joseph's representations. It appears the Company acquired the technologies from
sources other than Mr. Joseph or Mikimak, Ltd. As a result, the holdings of
Mr. Joseph, his family and Mikimak, Ltd. have been in question. On February
12, 1996, the Board of Directors removed Mr. Joseph as Chairman and Chief
Executive Officer. Mr. Joseph later resigned as a director. In an action filed
by Mr. Joseph that began on September 29, 1997, the San Diego Superior Court
cancelled all the shares of Orbit stock previously claimed by Messrs. Joseph,
his family and his Bahamian corporation, Mikimak, Ltd. and past president and
director Tatum C. Singletary. Pursuant to the Judgement and Order issued on
October 21, 1997 by the San Diego Superior Court of California, Case No.
701380, the Company has cancelled 6,066,830 shares of common stock.
During fiscal 1993, Richard A. Wall received an advance from the Company in the
amount $35,700 based on an alleged promissory note in favor of the Company due
on or before December 31, 1993. Pacific Equities, Ltd., of which Mr. Wall is
an officer, also executed an alleged promissory note in favor of the Company in
the original principal amount of $92,572 in connection with payment for
warrants exercised by Pacific Equities during 1993. Said note was due with
interest computed at the rate of 5% per annum at any time prior to the end of
fiscal 1994. Mr. Wall was contacted with regard to the payment for warrants
exercised, and was given an opportunity to provide evidence of the alleged
notes or the required consideration. Mr. Wall did not respond to
correspondence from the Company, and management considers the shares invalid.
The Company is in the process of canceling the subject shares.
On September 28, 1988, the Company entered into a license agreement with Davis,
Joseph & Negley ("DJN"), an entity with which Mr. Joseph was formerly
affiliated, pursuant to which the Company licensed certain specific
applications of metafusion, which describes a materials coating process (the
"Metafusion Process"). The Metafusion Process relating to the deposition of
metallic coatings on conducting surfaces. In consideration of such license,
DJN agreed to assume the Company's indebtedness to Mr. Joseph at the time in
the amount of $175,000. In addition, DJN agreed to pay the Company a royalty
equal to 3% of DJN's gross sales for all devices manufactured by DJN and 5% of
all monies actually received by DJN from its direct or indirect sublicenses of
the technology. Neither DJN nor any of its sublicensees have manufactured any
devices and, therefore, no royalties have been paid. The license shall
terminate concurrent with the latest to expire of the various patents issued
covering the Metafusion Process.
On August 29, 1991, the Company entered into an additional license with DJN to
use the Metafusion Process as it relates to superconductivity. In
consideration of the issuance of said license, DJN agreed to pay the Company
$120,000, $20,000 of which was paid upon the execution of the agreement and
$100,000 which was paid in September 1994, and to pay a royalty equal to 5% of
DJN's gross income derived from the sale of products manufactured by DJN or any
direct or indirect sublicensees. The license terminates in the event the
additional license fee is not paid or upon the expiration of the last patent
covering the Metafusion Process.
On June 10, 1993, a contemplated subsidiary of the Company, the TiTRODE
Corporation ("TTC"), entered into a loan agreement with Leslie Lai in the
original principal amount of $200,000. Pursuant to the loan agreement, the
loan was to become due on or before December 25, 1994, with interest computed
at the rate of 15%. In addition, the lender was to receive warrants entitling
her to purchase up to ten percent of TTC's outstanding common stock exercisable
for a ten (10) year period for $4,000. Pursuant to an agreement dated as of
December 31, 1993, the lender agreed to accept 200,000 shares of Orbit Common
Stock. In addition, the Company agreed to repay the principal amount with
interest.
13
<PAGE> 15
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C> <C>
1. Amended and Restated Bylaws. (1)
2. Restated Certificate of Incorporation (as amended). (1)
3. Consolidated Statement of Operations for the years ended December 31, 1994, 1993, and 1992. (1)
4. Consolidated Statement of Shareholder Equity for the years ended December 1994, 1993, and 1992. (1)
5. Consolidated Statement of Cash Flows for the years ended December 1994, 1993, and 1992. (1)
6. Notes to Consolidated Financial Statements. (1)
7. Unaudited Interim Financial Statements. (1)
8. Consolidated Balance Sheets at September 30, 1995 (unaudited) and December 31, 1994. (1)
9. Consolidated Statement of Operation for the nine months ended September 30, 1995 and 1994 (unaudited). (1)
10. Notes to Consolidated Financial Statements (unaudited). (1)
11. Form of Indemnification Agreement (1)
12. Agreement with Ukraine (1)
13. 1995 Stock Option Plan and Form S-8 Registration Statement (1)*
14. Research Agreement with UCLA (1)
15. License Agreement with UCLA (1)
16. Computation of Earnings Per Share (1)
17. Consolidated Balance Sheets at March 31, 1996 and December 31, 1995. (2)
18. Consolidated Statements of Operations for the Six Months Ended March 31, 1996 and 1995. (2)
19. Consolidated Statements of Operations for the Three Months Ended March 31, 1995 and 1994. (2)
20. Consolidated Statement of Cash Flows for the Six Months Ended March 31, 1996 and 1995. (2)
21. Notes to Consolidated Financial Statements for the Period Ended March 31, 1996. (2)
22. Consolidated Balance Sheets at June 30, 1996 and December 31, 1995. (3)
23. Consolidated Statements of Operations for the Six Months Ended June 30, 1996 and 1995. (3)
24. Consolidated Statements of Operations for the Three Months Ended June 30, 1995 and 1994. (3)
25. Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1995. (3)
26. Notes to Consolidated Financial Statements for the Period Ended June 30, 1996. (3)
27. Consolidated Balance Sheets at September 30, 1996 and December 31, 1995. (4)
28. Consolidated Statements of Operations for the Nine Months Ended September 30, 1996 and 1995. (4)
29. Consolidated Statements of Operations for the Three Months Ended September 30, 1996 and 1995. (4)
30. Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996 and 1995. (4)
31. Notes to Consolidated Financial Statements for the Period Ended September 30, 1996. (4)
99. Risk Factors.
- ------------------------------
</TABLE>
*Management Compensation Plan
Note: Certain previously filed exhibits are no longer being incorporated by
reference (and therefore not numerically listed) as the underlying documents
have either expired or are no longer material or relevant.
(1) Previously filed as part of the Form 10 filed in May 1995 and which
are hereby incorporated by reference.
(2) Previously filed as part of the Form 10-QSB for the Period Ending
March 31, 1996.
(3) Previously filed as part of the Form 10-QSB for the Period Ending June
30, 1996.
(4) Previously filed as part of the Form 10-QSB for the Period Ending
September 31, 1996.
(b) Reports on Form 8-K
A report on Form 8-K has not been filed relating to the Letter of Resignation
of past Director Adrian Joseph and the Resignation of Ian C. Gent as Chief
Financial Officer.
14
<PAGE> 16
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Orbit Technologies Inc.
By: /S/ JAMES B. LAHEY
-------------------------------------------
James B. Lahey
Chief Executive Officer and Chairman of the
Board of Directors
Date: February 23, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/S/ JAMES B. LAHEY Chief Executive Officer and February 23, 1998
------------------------------ Chairman of the Board (Chief
James B. Lahey Executive Officer)
/S/JAMES A. GIANSIRACUSA Vice President- Operations, Chief February 23, 1998
------------------------------ Financial Officer (Chief Financial
James A. Giansiracusa and Accounting Officer),
Secretary, and Director
/S/ IAN C. GENT Director February 23, 1998
------------------------------
Ian C. Gent
/S/STEPHEN V. PREWETT Vice President - Technology February 23, 1998
------------------------------ Development and Director
Stephen V. Prewett
/S/WILLIAM N. WHELEN Director February 23, 1998
------------------------------
William N. Whelen, Jr.
</TABLE>
15
<PAGE> 17
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
FINANCIAL REPORT
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<PAGE> 18
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO FINANCIAL REPORT
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Page Nos.
---------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEET F-3
At December 31, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
For the Years Ended December 31, 1996 and 1995
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-5
For the Years Ended December 31, 1996 and 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
For the Years Ended December 31, 1996 and 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-27
</TABLE>
F-1
<PAGE> 19
To the Stockholders of
Orbit Technologies Inc. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Orbit
Technologies Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the years ended December 31, 1996 and 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Orbit Technologies
Inc. and Subsidiaries as of December 31, 1996, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1995,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred a net loss of
approximately $2,028,000 during the year ended December 31, 1996, and, as of
that date, had a working capital deficiency of approximately $3,171,000 and
stockholders' deficiency of approximately $3,088,000. As described more fully
in Notes 1, 6 and 9 to the consolidated financial statements, the Company is in
default on its loan agreements with various individuals, certain of whom have
filed a lawsuit, and is in arrears on accounts with certain vendor creditors
which, among other things, causes the balances to become due on demand. The
Company is not aware of any alternate sources of capital to meet such demands,
if made. Those conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/S/ TABB, CONIGLIARO & McGANN, P.C.
TABB, CONIGLIARO & McGANN, P.C.
New York, NY
October 23, 1997
F-2
<PAGE> 20
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 188
Prepaid expenses 10,353
Advances to officer 1,341
------------
Total current assets 11,882
Property and Equipment - at cost, net of accumulated depreciation 250,829
Intangible assets, net of accumulated amortization 78,071
Other assets 4,015
------------
Total assets $ 344,797
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 1,429,395
Due to stockholders 200,466
Notes payable 1,552,902
------------
Total current liabilities 3,182,763
Long-term note payable 250,000
------------
Total liabilities 3,432,763
------------
Commitments, contingencies and other matters
(Notes 1, 6, 9 and 13) --
Stockholders' deficiency:
Preferred stock - par value $.01 per share
1,000,000 shares authorized and outstanding 10,000
Common stock - par value $.01 per share;
50,000,000 shares authorized;
29,405,904 shares issued and outstanding 294,060
Additional paid-in capital 9,845,247
Accumulated deficit (13,136,339)
Unearned compensation and finance charges (90,000)
Notes receivable from stockholders (10,934)
------------
Total stockholders' equity (3,087,966)
------------
Total liabilities and stockholders' deficiency $ 344,797
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 21
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Total revenues $ - $ -
------------ ------------
Operating expenses:
Research and development 15,364 314,725
General and administrative 854,727 1,744,445
Compensatory element of stock options 360,000 1,669,476
------------ ------------
Total operating expenses 1,230,091 3,728,646
------------ ------------
Operating loss (1,230,091) (3,728,646)
------------ ------------
Other income (expense)
Miscellaneous income -- 47,079
Interest expense (268,965) (159,815)
Loss from litigation settlement (500,000) --
------------ ------------
Total other income (expense) (797,415) (419,136)
------------ ------------
Net loss $ (2,027,506) $ (4,147,782)
============ ============
Per share data:
Net Loss Per Common Share $ (.09) $ (0.20)
============ ============
Weighted average number of common
shares and common stock equivalents outstanding 23,426,059 21,060,961
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 22
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 -- $ -- 17,176,86 $ 171,769 $ 5,903,191
Issuance of stock for financing fees -- -- 575,000 5,750 252,500
Additional Issuance of stock in settlement
of convertible promissory notes -- -- 1,335,543 13,356 (13,356)
Shares issued under non-statutory plan -- -- 1,117,727 11,177 --
Shares issued under incentive stock option plan -- -- 12,500 125 6,125
Issuance of stock -- -- 1,000 10 --
Stock issued in connection with
compensatory obligations -- -- 210,000 2,100 23,800
Compensatory element of stock options -- -- -- -- 2,119,476
Amortization of unearned compensation -- -- -- -- --
Amortization of unearned financing fees -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995 -- -- 20,428,637 204,287 8,291,736
Issuance of stock for conversion of notes payable 1,000,000 10,000 5,861,091 58,611 1,296,173
Issuance of stock in settlement of litigation -- -- 2,941,176 29,412 220,588
Stock issued in connection with
compensatory obligations -- -- 175,000 1,750 36,750
Payments received on notes receivable
from stockholders -- -- -- -- --
Amortization of unearned compensation -- -- -- -- --
Amortization of unearned financing fees -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 $ -- 31,405,904 $ 314,060 $ 9,845,247
============ ============ ============ ============ ============
Unearned Notes
Compensation Receivable
Accumulated and Finance from
Deficit Charges Stockholders Total
----------- ------------ ------------ -----
<S> <C> <C> <C> <C>
Balances at December 31, 1994 (6,961,050) $- $- $ (866,090)
Issuance of stock for financing fees -- (258,250) -- --
Additional Issuance of stock in settlement
of convertible promissory notes -- -- -- --
Shares issued under non-statutory plan -- -- (11,044)) 133
Shares issued under incentive stock option plan -- -- (6,250) --
Issuance of stock -- -- -- 10
Stock issued in connection with
compensatory obligations -- -- -- 25,900
Compensatory element of stock options -- (720,000) -- 1,399,476
Amortization of unearned compensation -- 270,000 -- 270,000
Amortization of unearned financing fees -- 229,800 -- 229,800
Net loss (4,147,782) -- -- (4,147,782)
------------ ------------ ------------ ------------
Balances at December 31, 1995 (11,108,832) (478,450) (17,294) (3,108,553)
Issuance of stock for conversion of notes payable -- -- -- 1,364,784
Issuance of stock in settlement of litigation -- -- -- 250,000
Stock issued in connection with
compensatory obligations -- -- -- 38,500
Payments received on notes receivable
from stockholders -- -- 6,360 6,360
Amortization of unearned compensation -- 360,000 -- 360,000
Amortization of unearned financing fees -- 28,450 -- 28,450
Net loss (2,027,507) -- -- (2,027,507)
------------ ------------ ------------ ------------
Balances at December 31, 1996 $(13,136,339) $ (90,000) $ (10,934) $ (3,087,966)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 23
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,027,506) $(4,147,782)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 15,773 39,651
Amortization of unearned and deferred finance costs 28,450 306,400
Notes issued in settlement of consulting fees -- 274,250
Compensatory element of stock options 360,000 1,669,476
Stock issued in settlement of current liabilities 38,500 25,900
Loss on litigation settlement 500,000 --
Loss on disposal of fixed assets -- 4,377
Cash provided by (used in) the change in assets and liabilities:
Decrease (increase) in prepaid expenses -- 14,118
(Increase) decrease in advances to officer -- (1,341)
(Increase) decrease in deposits -- (2,627)
Increase in accounts payable and accrued liabilities 721,997 374,268
(Decrease) increase in due to shareholders 1,116 (17,350)
----------- -----------
Net cash used in operating activities (361,670) (1,460,660)
----------- -----------
Cash flows from investing activities
Cost of license and patents -- (54,550)
Capital expenditures (47,583) (152,935)
----------- -----------
Net cash used in investing activities: (47,583) (207,485)
----------- -----------
Cash flows from financing activities
Loan proceeds 428,250 1,740,000
Loan repayments (29,872) (4,559)
Deferred financing costs -- (76,600)
Proceeds from issuance of common stock -- 143
Repayment of notes receivable from stockholders 6,360 --
----------- -----------
Net cash provided by financing activities 404,738 1,658,984
----------- -----------
Decrease in cash (4,515) (9,161)
Cash - beginning 4,703 13,864
----------- -----------
Cash - ending $ 188 $ 4,703
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 24
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS
Orbit Technologies Inc. (the "Company") was incorporated in the
State of Delaware on April 29, 1985. The Company is a
commercial technology research and development company holding
rights to certain patents and their technologies.
The Company's business plan is to develop certain technologies
until commercially viable products are possible and to license
or sell these technologies to affiliated and/or unaffiliated
entities which are responsible for the production and marketing
of any products resulting therefrom. Since its incorporation in
1985, the Company has pursued the research, development,
acquisition and licensing of certain technologies. The Company
concentrated its efforts in the areas of coatings technologies
and new materials technologies. While the technologies are
undergoing certain feasibility studies and testing, none has
proved commercially feasible, except for the TiTRODE type
electrodes. To date, the Company has not financially benefitted
from the commercialization of the TiTRODE electrode (see Note
7).
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern.
However, for the year ended December 31, 1996, the Company
incurred a net loss of approximately $2,028,000 and, as of that
date, had a stockholders' deficiency and a working capital
deficiency of approximately $3,088,000 and $3,171,000,
respectively. The Company is also in default on a significant
number of loan agreements which total approximately $1,150,000
in principal and interest as of December 31, 1996 and is in
arrears with substantially all of its other payables and accrued
liabilities. The Company requires additional funds to continue
research and development efforts and complete the necessary work
to commercialize its technologies. Until completion of the
development of a technology and the commencement of sales, the
Company will have no operating revenues, but will continue to
incur substantial expenses and operating losses. No assurances
can be given that the Company can complete development of any
technology or that, if any technology is fully developed, it can
be manufactured on a large scale basis or at a feasible cost.
Further, no assurance can be given that any technology will
receive market acceptance. These factors raise substantial
doubt about the Company's ability to continue as a going
concern.
The Company is exploring additional sources of working capital
including private borrowings, sales of its securities, joint
ventures and licensing of technologies. While no assurance can
be given, management believes the Company can raise adequate
capital to keep the Company functioning at a minimum level of
operation in 1997. Through September 30, 1997, the Company's
proceeds from all financing activities amounted to approximately
$408,000 (see Note 13).
The Company is exploring ways to reduce its existing liabilities
including exchanging certain of its liabilities for shares of
its common stock. During 1997, the Company exchanged $42,750 of
principal on various promissory notes outstanding at December
31, 1996 for shares of common stock (see Note 13).
To date, the Company has not been successful in restructuring
the remaining debt and the Company continues to be in default
under such agreements. Further, one group of note holders,
representing $600,000 of the promissory notes outstanding as of
December 31, 1996, has filed a lawsuit against the Company to
recover loans and other monies provided to the Company (see Note
9).
F-7
<PAGE> 25
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS (Continued)
The Company's ability to continue as a going concern is
dependent upon obtaining the additional financing, restructuring
and/or curing the defaults on its debt, completion of research
and development and the successful marketing of its
technologies. These financial statements do not include any
adjustments relating to the recoverability of recorded asset
amounts that might be necessary as a result of the above
uncertainty. Management believes that actions presently being
taken, as discussed above, provide the opportunity for the
Company to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and the following wholly-owned subsidiaries:
<TABLE>
<CAPTION>
Date of State of
Subsidiary Incorporation Incorporation
---------- ------------- -------------
<S> <C> <C>
The Titrode Corporation April 2, 1992 Delaware
Titherm Technology Corporation April 2, 1992 Delaware
Shield Safe, Inc. March 26, 1993 Delaware
The Metafuse Corporation March 31, 1993 Delaware
Electronic Recovery Systems, Inc. March 31, 1993 Delaware
Nuclear Shield International, Inc. February 4, 1994 Delaware
</TABLE>
All material intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition
Revenue from license fees is recognized in the year received.
Revenue from the sale of technology is recognized in the period
in which it is earned.
Deferred and Unearned Finance Costs
Deferred and unearned finance costs represent expenses incurred
and common shares issued to obtain financing for the Company and
are amortized over one year.
Equipment and Fixtures
Equipment and fixtures are recorded at cost. Depreciation is
provided using the accelerated and straight-line methods over
the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
Description Years
----------- -----
<S> <C>
Furniture and fixtures 7
Computer hardware and software 5
</TABLE>
F-8
<PAGE> 26
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
Patents which consist of legal costs and mandatory filing fees
are being amortized on the straight-line method over the shorter
of the estimated economic life of the patents or seventeen
years.
Amortization of license fee was provided for on the straight-line
method over seventeen years.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to
be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement 121 in the first
quarter of 1996 and there was no effect to the Company.
Income Taxes
The Company has adopted the Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" ("SFAS 109")
effective January 1, 1993. SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the
financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to
reverse. Adoption of the statement did not have a material
effect on the accompanying financial statements.
Research and Development Costs
Research and development costs are charged to expense as
incurred. The costs of materials and equipment that are
acquired or constructed for research and development activities,
and have alternative future uses (either in research and
development, marketing or production), are classified as
property and equipment and depreciated over their estimated
useful lives. Certain software development costs are
capitalized.
Per Share Data
Net loss per common share and common equivalent share has been
computed based on the weighted average number of shares of
common stock and common stock equivalents outstanding during
each year. Common stock equivalents are considered
anti-dilutive, hence, are not included in the weighted average
calculation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents.
F-9
<PAGE> 27
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Post Retirement Benefits
In December 1990, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Post Retirement Benefits Other than
Pensions" which was effective for years beginning after December
15, 1992. The Company has no liabilities for post retirement
and, therefore, this statement did not have an impact on the
financial statements.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily trade accounts
receivable. Ongoing credit evaluations of customers' financial
condition will be performed and generally no collateral will be
required.
Fair Value of Financial Instruments
Cash and cash equivalents, note receivable, accounts payable,
accrued expenses, due to stockholders and notes payable are
reflected in the accompanying consolidated balance sheets at
amounts considered by management to reasonably approximate fair
value.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires compensation expense to be recorded
(i) using the new fair value method or (ii) using existing
accounting rules prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations with proforma disclosure of
what net income and earnings per share would have been had the
Company adopted the new fair value method. The Company intends
to continue to account for its stock based compensation plans in
accordance with the provisions of APB 25.
F-10
<PAGE> 28
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following at
December 31, 1996:
<TABLE>
<S> <C>
Office furniture and fixtures $ 46,605
Research laboratory furniture
and fixtures 65,087
--------
111,692
Less: Accumulated depreciation 40,193
--------
71,499
Construction in progress (a)
Total
179,330
--------
$250,829
========
</TABLE>
(a) Represents progress payment on two machines which
have not been placed in service to date. Estimated
costs to complete both machines approximate $43,734
as of December 31, 1996.
Depreciation expense for the years ended December 31, 1996 and
1995 was $10,641 and $12,337, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31,
1996:
<TABLE>
<S> <C>
License $ 25,000
Patent Costs 87,212
--------
112,212
Less: Accumulated amortization 34,141
--------
$ 78,071
========
</TABLE>
Patent costs are being amortized over seventeen years on the
straight-line method.
The license fee had been amortized over seventeen years on the
straight-line method. The unamortized portion of the license fee
of $24,265 was fully charged against earnings during 1995. See
Note 12.
Amortization expense for the years ended December 31, 1996 and
1995 was $5,132 and $27,314, respectively.
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSE
Accounts payable and accrued expenses consist of the following at
December 31, 1996:
<TABLE>
<S> <C>
Salary and Related Taxes $ 419,762
Legal and Accounting 460,268
Interest 267,619
Consulting Fees 204,069
Miscellaneous 77,677
----------
$1,429,395
==========
</TABLE>
F-11
<PAGE> 29
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
a) Unsecured notes payable $ 170,000
b) Unsecured note payable 215,402
c) Unsecured note 274,250
d) Convertible notes 593,250
e) Promissory notes 300,000
f) Secured promissory notes 250,000
----------
1,802,901
Less current portion 1,552,902
----------
Total Long Term Note Payable $ 250,000
==========
</TABLE>
a) Represents four promissory notes aggregating $170,000, all
of which are past due, with interest at 15%.
b) On June 10, 1993, Titrode Corporation, a subsidiary of
Orbit Technologies, Inc. entered into a loan agreement with
a shareholder in the amount of $200,000. The loan was due
June 30, 1995 with interest at 15%. The agreement provided
for the lender to receive, as additional compensation,
warrants for ten percent of the issued and outstanding
stock of Titrode, exercisable for a ten-year period, for
$4,000. In December of 1993, the Titrode option was
exchanged for 200,000 shares of the Company's common stock.
During 1995, the entire principal balance of $200,000, plus
accrued interest aggregating $24,833, was replaced by a
promissory note payable by the Company. The new note
provides for monthly payment of $3,000 commencing November
1, 1995, with entire unpaid principal due November 1, 1998.
During 1996, the Company was in default under this
promissory note agreement.
c) Represents a settlement agreement entered into during 1995
to pay past due consulting fees. Under such agreement, the
Company is required to repay this debt from proceeds of
future equity or debt financings as follows:
<TABLE>
<CAPTION>
Repayment Amount
----------------
<S> <C>
6% of the 1st $1,000,000 $ 60,000
7% of the 2nd $1,000,000 70,000
8% of the 3rd $1,000,000 80,000
6.425% of the 4th $1,000,000 64,250
--------
274,250
========
</TABLE>
As part of the settlement agreement, the consultants were
granted five-year options to purchase 50,000 shares of the
Company at $1.06 per share.
d)(i) During the year ended December 31, 1995, the Company
received loans from various private investors aggregating
$1,415,000. In general, such loans are for one year periods,
convertible, together, with any accrued interest, into
common shares ranging from $0.50 to $0.75 per share, and
provide for interest ranging from 10% to 15% per annum.
F-12
<PAGE> 30
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 6 - NOTES PAYABLE (Continued)
Of the total notes outstanding, $400,000, $100,000 and
$915,000 are convertible at $0.50, $0.60 and $0.75 per
share, respectively. The notes are convertible upon the
effectiveness of a Registration Statement which includes
the underlying shares. In addition, $715,000 of the notes
were issued with attached warrants to purchase 476,662 and
238,331 shares of common stock at $0.50 and $1.50 per
share, respectively. Also, $100,000 of the notes have
warrants to purchase 66,666 shares of common stock each at
$0.50 and $1.50 per share, respectively. Certain of these
notes also have non-qualified options to purchase 1,150,000
shares of common stock at prices ranging from $0.30 to
$2.00 per share. These options expire at various dates
ranging from nine months to three years from the date of
the original notes.
During 1996, the Company converted $950,000 of principal
and related accrued interest amounting to $114,783 into
4,861,091 shares of common stock. The Company is in
default under the remaining note agreements (see Note 9).
d)(ii)During 1996, the Company has borrowed $177,250 in one
year promissory notes bearing interest at 10% per annum.
$77,250 of the notes and related accrued interest are
convertible into common stock at 50% of the asked market
price at any time, with automatic conversion upon the
effectiveness of a Registration Statement under the
Securities Act of 1933. The remaining $100,000 of the notes
and related accrued interest are convertible into common
stock at prices ranging from $0.10 - $0.22 per share of
debt. During November of 1996 the Company and certain of its
debt holders agreed to convert principal of $100,000 into
1,000,000 shares of common stock. To induce the note holders
described in note 6d(i) and (ii) to an early conversion, the
Company reduced the conversion rate provided for in certain
of the original convertible loan agreements. Substantially,
all of the debt conversions were executed at the conversion
rate of $0.22.
d)(iii)During the year ended December 31,1996 the Company
borrowed $51,000 from its officers and issued convertible
notes to reflect these borrowings. Each note bears interest
of 10% per annum and is due one year from the issuance date.
The notes principal and accrued related interest are
convertible into common stock at the rate of $0.10 and $0.22
per share of debt. Of the $51,000 principal balance
outstanding at December 31, 1996 $30,000 is convertible at
$0.10 per share and the remaining notes principal balance
are convertible at $0.22 per share.
d) (iv) During the first quarter of 1996, the Company borrowed
$200,000 under a one year promissory note which was
satisfied by issuance of 2,000,000 shares of common stock.
e) Represents one-year promissory notes due January and
February 1996 at interest ranging from 0% to 15% per annum.
The Company issued 575,000 shares of common stock as
additional compensation for these loans. In addition, the
note holders have non-qualified options to purchase 683,333
shares of common stock at prices ranging from $0.40 to $1.50
per share. These options expire at various dates ranging
from 45 days to three years from the date of the original
notes.
The Company is in default under a substantial portion of
these obligations (see Note 9).
F-13
<PAGE> 31
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 6 - NOTES PAYABLE (Continued)
f) As discussed further in Note 8, the Company entered into a
settlement agreement on December 27, 1996. Pursuant to the
agreement the Company issued a $250,000 secured promissory
note that is due on December 27, 2000. The promissory note
bears interest at 10% per annum and the Company is required
to make minimum partial interest payments of $6,000
semi-annually. The promissory note is collaterized by the
Company's equipment, rights, titles and patents pertaining
to the "TiTRODE/Metafuse" technology.
NOTE 7 - STOCKHOLDERS' EQUITY
a) Authorized Shares
The Board of Directors of the Company voted to amend the
articles of Incorporation to increase the authorized shares of
preferred stock from 10,000 shares to 1,000,000 shares and
reduce the par value from $100 per share to $.01 per share. The
Board of Directors of the Company has broad discretion to
create one or more series of preferred stock and to determine
the rights, preferences and privileges of any such series. In
addition, the Board of Directors of the Company voted to
increase the authorized shares of common stock from 3,000,000
shares to 20,000,000 shares and to keep the par value at $.01
per share. The amendment to the articles of incorporation was
filed with the State of Delaware on February 10, 1994.
Effective April 7, 1995, the articles of incorporation was
amended to increase the authorized shares of common stock from 20,000,000 shares
to 50,000,000 shares.
b) Issuance of Preferred Stock
The Company has authorized 1,000,000 shaes of stock having $.01
par value. The Company has not issued any stock nor has the company determined
the rights and privileges of the preferred class.
c) Common Stock Transactions
During 1996 and 1995, the Company issued 175,000 and 210,000
shares respectively of its common stock in settlement of
compensatory obligations of $38,500 and $25,900 for the years
ended December 31, 1996 and 1995, respectively.
As discussed further in Note 8, the Company entered into a
settlement agreement on December 27, 1996. Pursuant to the
agreement the Company was required to make a payment of
$250,000 through the issuance of 2,941,176 shares of the
Company's restricted common stock.
During November of 1996, the Company and certain of its debt
holders agreed to convert principal of $1,250,000 and related
accrued interest of $114,785 into 7,861,091 shares of common
stock.
F-14
<PAGE> 32
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
Common Stock Transactions (Continued)
To induce the note holders to an early conversion, the Company
reduced the conversion rate provided for in certain of the
original convertible loan agreements. Substantially, all of the
debt conversions were executed at the conversion rate of $0.22
per share of debt.
On December 28, 1993, the holders of the convertible promissory
notes, aggregating $509,298, converted their promissory notes
into 325,000 shares of the Company's common stock. The actual
share certificates were issued on October 31, 1994, along with
57,878 additional shares in consideration for the delay in
issuing the original shares. The note holders agreed not to
sell more than one half (-1/2) of the total number of shares
received for a period of twelve (12) months from the date the
certificates were received, the balance of the shares could be
sold at any time subsequent to May 15, 1995. In consideration
of the note holders' agreement not to sell more than one half of
the shares received during the initial twelve-month period, the
Company guaranteed the note holders will aggregate a value equal
to five ($5.00) per share for all shares received in the
conversion. Under the guarantee provisions described above, the
Company was required to issue an additional 1,335,543 shares of
its common stock in 1995.
The Company's current management has conducted an internal audit
of its debt and equity structure. At this time, the Company's
management believes that certain stock issuances to the
Company's former chairman, Mikimak, Ltd. and others, during the
periods 1991 through 1993, were without consideration and are,
therefore, subject to cancellation (see Note 9).
d) Stock Options
The Company has granted options to purchase shares of the
Company's common stock to officers, key employees, consultants
and financing sources as follows:
(1) 1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "Option Plan")
was adopted by the Board of Directors and stockholders of
the Company in February 1995. Under the Option Plan,
5,000,000 shares of the Company's common stock (subject to
certain adjustments) are reserved for issuance upon the
exercise of options. Options granted under the Option Plan
may be either (i) options intended to constitute incentive
stock options under Section 422 of the Internal Revenue
Code of 1986 (the "Code"), as amended, or (ii)
non-qualified stock options. Incentive stock options may
be granted under the Option Plan to employees (including
officers and directors who are employees) of the Company
on the date of grant. Non-qualified options may be granted
to (i) officers and directors of the Company on the date of
the grant, without regard to whether they are employees,
and (ii) consultants or advisors to, agents or independent
representatives of the Company.
By its terms, the Option Plan is to be administered by a
committee(the "Committee") appointed by the Board of
Directors which shall consist of either the entire Board of
Directors, all of whom must be disinterested persons, or by
a committee of two or more persons (who must be directors),
all of whom must be disinterested persons and who serve at
the discretion of the Board of Directors. Subject to the
provisions of the Option Plan, the Committee has the
authority to determine the persons to whom options will be
granted, the exercise price, the term during which options
may be exercised and such other terms and conditions as it
deems appropriate. However, directors who are not officers
of the Company will only receive automatic grants of
non-qualified stock options on a periodic basis pursuant to
a formula specified in the Option Plan. The Option Plan
provides for a limit of up to 500,000 options per person.
F-15
<PAGE> 33
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
(1) 1995 Stock Option Plan (Continued)
Incentive stock options granted under the Option Plan may
not have an exercise price less than the fair market value
of the common stock on the date of the grant (or 110% of
the fair market value in the case of employees holding ten
percent or more of the voting stock of the Company).
Options granted under the Option Plan will expire, not more
than ten years from the date of the grant (5 years in the
case of incentive options of employees holding ten percent
or more of the voting stock of the Company) subject to
earlier termination under the Option Plan. Optionees under
the Option Plan may exercise their options by paying cash,
by using the cashless exercise procedure allowed under
Federal Reserve Regulation T or by tendering shares of
Company common stock that they already own. Options
generally become exercisable over a three-year period.
Included in incentive stock options exercised in 1995 are
options for 12,500 shares exercised by an officer of the
Company at $0.50 per share. The officer paid for the
shares by issuing a three-month note payable to the Company
aggregating $6,250. The note bears interest at 10% per
annum and is included in the accompanying consolidated
financial statements as a reduction of stockholders'
equity.
For options granted under the non-qualified plan,
compensation expense is recorded on the date of grant and
is measured by the amount per share that the fair market
value of the underlying shares on the date of grant exceeds
the grant price. In March of 1995, the Company granted
2,302,703 non-qualified stock options under the Option Plan
which were exercisable at $.01 per share. Compensation
expense for the year ended December 31, 1995 amounted to
$898,054 related to granting of these options. In August
of 1995, in connection with the employment agreements
described in Note 7, the Company granted non-qualified
stock options to three officers aggregating 900,000 shares.
The compensatory portion of such grants aggregated $720,000
and is being amortized over the twenty four-month period
commencing April 1, 1995. Amortization for the years ended
December 31, 1996 and 1995 was $360,000 and $270,000,
respectively.
During the year ended December 31, 1995, 1,117,727
non-qualified stock options were exercised at $0.01 per
share. Certain of the stockholders paid for such shares by
issuing three-month notes payable to the Company
aggregating $11,044. These notes bear interest at 10% per
annum and are included in the accompanying consolidated
financial statements as a reduction of stockholders'
equity.
During the year ended December 31, 1995 options granted
under the Option Plan to three officers of the Company
exceeded the 500,000 prescribed limit provided for in the
Option Plan. The options granted in excess of such limit
approximated 1,500,000 options.
Management believes that the options granted were in
compliance with the Option Plan and has asked its corporate
counsel to review the transactions and advise as to
compliance with the Plan. Management of the Company has
agreed to revise and/or cancel options granted to the
extent that its corporate counsel concludes that an
over-issuance had occurred.
(2) Non-Qualified Stock Options Outside the Option Plan
From time to time, the Company issues non-qualified stock
options outside the option plan described in (1) above.
These options are generally granted to consultants for past
services and are granted to note holders in connection with
financing agreements. During 1995, the Company recorded
compensation expense aggregating $501,422 related to the
granting of 1,285,696 non-qualified options, exercisable at
$.01 per share, outside of the Option Plan. The expense
was calculated on the date of grant and was measured by the
amount per share that the fair market value of the
underlying shares on the date of grant exceeded the grant
price.
F-16
<PAGE> 34
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
(3) Shares Under Option
There were no options granted or exercised during the year
ended December 31, 1996. The following is a summary of activity
and information relating to shares (rounded to whole shares)
subject to option under the above described plans for the year
ended December 31, 1995:
<TABLE>
<CAPTION>
Options Granted: Incentive Non-Qualified
Stock Options Stock Options
---------- ----------
<S> <C> <C>
1995 Stock Option Plan
($0.50 - $0.87/share) 1,028,900 --
1995 Stock Option Plan
($0.01/share) -- 3,202,703
Outside the Option Plan - consultants
($0.01 - $1.06/share) -- 1,595,696
Outside the Option Plan - financing
agreements ($0.30 - $2.00) -- 1,833,333
---------- ----------
1,028,900 6,631,732
---------- ----------
Options Exercised:
1995 Stock Option Plan
($0.50/share) 12,500 --
1995 Stock Option Plan
($0.01/share) -- 1,117,727
Outside the Option Plan
($0.01 - $1.06/share) -- --
---------- ----------
12,500 1,117,727
---------- ----------
Options Expired:
----------------
1995 Stock Option Plan
($0.50 - $0.87/share) -- --
1995 Stock Option Plan
($0.01/share) -- --
Outside the Option Plan - consultants -- --
Outside the Option Plan - financing
agreements ($0.30 - $2.00) -- 183,333
---------- ----------
-- 183,333
---------- ----------
Balance - End of Year:
1995 Stock Option Plan
($0.50 - $0.87/share) 1,016,400 --
1995 Stock Option Plan
($0.01/share) -- 2,084,976
Outside the Option Plan - consultants
($0.01 - $1.06/share) -- 1,595,696
Outside the Option Plan - financing
agreements ($0.30 - $2.00) -- 1,700,000
---------- ----------
Total Outstanding Options as of December 31, 1996
and 1995, all of which were exercisable at
December 31, 1995 1,016,400 5,360,672
---------- ----------
Total Value at Option Price $ 806,200 $1,647,907
========== ==========
Shares available for future grant:
1995 Stock Option Plan 768,397
==========
</TABLE>
F-17
<PAGE> 35
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
e) Warrants to Purchase Common Shares
Under various promissory notes agreements executed during
1995, the Company granted to certain note holders warrants
to purchase 848,323 shares of the Company's common stock.
The warrants, which carry certain anti-dilution provisions,
become issuable upon the conversion of the notes and become
exercisable one year from such issuance date. The warrants
are exercisable at prices ranging from $0.50 per share to
$1.50 per share. No warrants were issued or exercised during
the years ended December 31, 1996 and 1995.
NOTE 8 - LOSS FROM LITIGATION SETTLEMENT
On December 27, 1996, the Company entered into a settlement
agreement with a shareholder in connection with prior
purchases of the Company's common stock. The settlement
agreement provides for the Company to issue a $250,000
promissory note and a $250,000 payment through the issuance
of 2,941,176 shares of the Company's restricted common stock
which was deemed the fair market value at December 27, 1996.
Included in the year ended December 31, 1996 Statement of
Operations, the Company has recognized the loss from this
settlement amounting to $500,000.
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligation
At December 31, 1996, the Company had obligations under
various long-term operating leases for office space,
equipment and certain automobile. Estimated minimum annual
rentals under the leases are as follows:
<TABLE>
<CAPTION>
Period Ending
December 31,
-------------
<S> <C>
1997 $ 43,434
1998 17,646
-----------
$ 61,280
===========
</TABLE>
Rental expense for the years ended December 31, 1996 and
1995 was $35,695 and $44,160, respectively.
Employment and Consulting Agreements
On April 1, 1995, the Company entered into three employment
agreements with its officers. The agreements provide for
monthly salaries aggregating $30,000 and cover a two-year
period with automatic annual renewals. In addition to the
compensation described above, the Company granted these
officers 1,200,000 options, of which 900,000 were
exercisable at $.01 per share, under the Option Plan
described in Note 7(d). The officers have agreed to defer
40% of their respective salaries until a financing of at
least $3.5 million is raised by the Company. The accrued
salaries under these agreements at December 31, 1996
approximated $407,450.
F-18
<PAGE> 36
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Employment and Consulting Agreements (Continued)
During 1995, the Company entered into a consulting agreement
obligating the Company to pay $5,000 per month. The agreement
was for an initial term of six months which expired October
15, 1995. The Company exercised its option to terminate the
agreement effective February 22, 1996. Total consulting fee
for the year ended December 31, 1995 amounted to $42,500.
The Company had a consulting and employment agreement with its
former president which was to expire on January 31, 1995. The
agreement provided for a minimum fee of $144,000 and was based
on 10% of all private monies raised by the consultant,
exclusive of an additional 2% expense reimbursement. The
consultant was entitled to receive warrants and/or common
stock in the Company on a deal-by-deal basis. The agreement
also provided for an automobile allowance. This agreement was
terminated July 31, 1994. Included in due to stockholders as
of December 31, 1996 is $101,966 for services under the
agreement and other advances.
The Company had a consulting and employment agreement,
expiring January 31, 1995, with the former Chairman of the
Board of the Company. The agreement provided for annual
consulting fees of $144,000 for the first year and was subject
to an annual adjustment thereafter. This agreement also
provided for an automobile allowance. Included in due to
stockholders as of December 31, 1996 is $72,275 for services
under the agreement and other advances.
Potential Securities Act Liabilities
The Company has sold securities and notes without registration
under the Securities Act of 1933, as amended (the "Act"), or
without qualification under the securities (blue sky) laws of
certain states. As a result of such sales, and a subsequent
transfer of the shares by the original purchasers, the Company
has not determined it can claim valid exemptions for such
sales since the burden of proving any exemption is on the
Company.
Therefore, no assurances can be given as to the existence or
extent of any liability which may result for violating the
registration or qualification provisions of the federal or
state securities laws. The Company thus may have a continuing
contingent liability under the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and various state securities laws for an
undetermined amount for an undetermined period.
Potential Liability for Over-issuances
Between December 16, 1992 and February 17, 1994, the Company
issued more shares of its common stock than it had authorized
by its Certificate of Incorporation. Thus, approximately
15,000,000 shares of the Company common stock were
"overissued". Under the Uniform Commercial Code, the Company
is obligated to either refund the purchase price or go into
the market and repurchase available shares to cover the
over-issuance. The Company has done neither of these two
acts.
Potential Liability for Rescission of Dividends
In February 1994, the Company declared a stock dividend on a
10 to 1 basis of the following corporations, all of which are
subsidiaries of the Company. The Titrode Corporation, The
Metafuse Corporation, Electronics Recovery Systems, Inc.,
Titherm Technology Corporation and Shield Safe, Inc. In
connection with such dividends, each subsidiary was to receive
a license for a particular technology owned by the Company.
The Company's Board of Directors has subsequently rescinded
such stock dividends principally because of the concern that
such dividends may not comply with Delaware law since such
dividends would strip the Company of most of its valuable
assets. It is possible that a shareholder could challenge the
rescission of the dividend and it is unclear whether such
rescission will be upheld by a Delaware court. Thus, the
shareholders entitled to such dividends may have a right to
seek payment of such dividend.
F-19
<PAGE> 37
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Litigation/Disputes
a) The Metafuse technology was utilized to coat copper-alloy
resistance welding electrodes (welding tips) through the
fusion of titanium carbide or molybdenum tungsten onto and
into copper-alloy welding tips ("TiTRODEs"). TiTRODE
electrodes have been successfully tested by the Chrysler
Corporation ("Chrysler") for use on its assembly lines.
Chrysler has conducted 18 months of testing on the TiTRODE
type electrodes and has since integrated them into certain
of its manufacturing plants. TiTRODE type electrodes are
being sold to Chrysler by a Canadian corporation, with
which the Company claims to have an written agreement
beginning in January 1994, whereby the two parties would
share net revenues derived from the sale of TiTRODEs. The
net revenues from the sale of TiTRODEs to Chrysler have not
been dispersed to the Company and the Company has requested
an informal accounting to determine the amount of money due
to it pursuant to the above referenced written agreement.
No revenue has been recognized to date from this venture,
as the Company cannot predict the outcome of this request.
The Company intends to retain legal counsel to enforce its
written agreement.
b) Emerson v. Orbit Technologies, Inc. et al.. Plaintiff
claims that Richard A. Wall, a former officer of Orbit,
caused restricted stock to be issued to her without
disclosing the restriction. Emerson seeks damages of
approximately $125,000. Orbit is named as the issuing
corporation. Plaintiff failed to timely serve Wall and he
has been dismissed in the main action. Orbit has filed a
cross complaint against Wall for indemnification and, in
addition, is seeking to invalidate his Orbit stock holdings
and recover monies as a result of Wall's actions. Orbit's
Cross Claim for indemnification against Mr. Wall was
dismissed on procedural grounds. No discovery has yet been
conducted and, thus, it is impossible to estimate the
chances of success. However, since Orbit received no
consideration for the stock, the Company counsel believes
there are strong affirmative defenses to Emerson's claims.
Orbit intend to vigorously defend and pursue all claims in
this action.
c) Orbit Technologies, Inc. v. First Liberty Investment Group,
Inc. ("First Liberty"). This is an action to recover
investment banking fees paid to the defendant by Orbit. A
settlement was reached in March of 1997, whereby First
Liberty agreed to pay Orbit $15,000 in full settlement of
all obligations.
d) Joseph vs. Orbit Technologies Inc. In October 1995, the
Company commenced an internal audit of its debt and equity
structure. In February 1996, preliminary findings of the
internal audit suggested that certain stock issuance to
former officers and related entities were without
consideration. This resulted in a request made by the
Company upon certain individuals, including former
directors and officers of the Company, to surrender stock
issued to and held by them for purposes of cancellation.
One of the individuals, subject to the internal audit and
request to surrender stock for cancellation, Adrian Joseph
("Joseph"), the Company's former chairman and president,
has initiated a judicial action in the Superior Court of
California, County of San Diego, seeking a declaration of
his rights in and to Orbit stock. The Company has sought
to cancel all stock held, possessed or controlled by Mr.
Joseph either in his individual capacity, his family or
corporations. The Company and current management prevailed
in that action as the court denied the challenge of Joseph.
Although Joseph's stock was not canceled in this action,
the court prevented Joseph from interfering with the
business of the Company for a period of one year or the
length of any action brought by the parties.
F-20
<PAGE> 38
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
d) Joseph vs. Orbit Technologies Inc. (Continued)
Adrian Joseph, Orbit former CEO, President and Chairman,
filed an action for declaratory relief seeking to validate
his stock holdings in Orbit. Orbit has cross-claimed
against Joseph and Tatum Singletary, another former
officer, seeking to invalidate prior issuance of stock in
connection with certain questionable transactions discussed
above.
On October 21, 1997, the San Diego Superior Court of
California ordered Joseph, Singletary, Mikimak, Ltd., a
foreign corporation controlled by Joseph, to surrender
10,418,988 shares of Orbit common stock to the extent that
said common stock are within their possession, custody or
control.
The Company has not retrospectively adjusted its
outstanding shares at December 31, 1996, since management
cannot determine the number of shares held by the
plaintiffs, and it is more likely than not the plaintiffs
will appeal the judgment.
e) Jeffer, Mangels, Butler & Marmaro, LLP v. Orbit
Technologies, Inc.. Action by former attorneys of Orbit to
compel arbitration to recover attorney fees. Orbit
stipulated to arbitration of fee dispute and stipulated to
entry of interim arbitration award in the amount of
approximately $110,000, subject to any defenses, offsets or
claims, which Orbit is asserting by way of a separate legal
malpractice action.
The Company's legal malpractice action was directed to
arbitration by a retainer agreement signed by Mr. Joseph,
in his capacity when he was with the Company, who was a
personal client of Jeffer, Mangels, Butler & Marmaro.
Prior to Orbit's involvement with the firm Orbit declined
to participate in the arbitration and is appealing the
Judgment based on the same. Orbit has filed a Notice of
Appeal.
f) Sansone v. Joseph, et al. Action by shareholder to recover
on $50,000 note signed by Joseph and Orbit which Orbit has
defaulted. Plaintiff has obtained a judgement against
Joseph for the full amount of the debt and has attached
$60,000 of sales proceeds owed to Joseph against which to
collect. Joseph has cross-claimed against Orbit for
indemnification. Based on documents reviewed to date, the
Company counsel believes that Orbit's exposure to Joseph on
the cross-claim appear minimal.
h) Benveniste, et. al. vs. Orbit and Its Officers. The action
was filed on March 6, 1997 in the Los Angeles Superior
Court. The action is to collect principal, interest and
other fees and damages relating to various promissory notes
executed between the plaintiffs and Orbit during 1995
aggregating $600,000 and loans made during 1992 aggregating
$197,000.
The plaintiffs allege that the defendants violated the
securities laws of the state of California and made
negligent misrepresentations related to Company's
technologies, thereby inducing them to loan monies to the
Company. The plaintiffs also allege that, pursuant to an
oral agreement with an officer of the Company, the exercise
price for various stock options to acquire Orbit stock was
reduced to $0.10 per share and the conversion price under
various convertible loan agreements between the plaintiffs
and Orbit was also reduced to $0.10. Further, the
plaintiffs allege that they have not received 500,000
shares of Orbit stock promised as additional compensations
under such agreements and that debt related to the 1992
loans of $197,000 is not reflected on the Company's books.
F-21
<PAGE> 39
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
h) Benveniste, et al vs. Orbit and its officers (continued)
Management contends that all of the debt and related fees
and shares of common stock are properly reflected on
Orbit's books as of December 31, 1996. The Company's
records reflect that the debt related to the 1992 loans of
$197,000 and related accrued interest was converted into
226,550 common shares of Orbit in 1993. Management also
contends that there was no oral agreement to reduce the
exercise and conversion prices of certain financial
instruments. Further, management contends that there were
no violations of securities laws, that no
misrepresentations were made to plaintiffs and all other
complaints are without merit.
Orbit contends that the plaintiffs loaned money to another
entity, other than Orbit in 1992, for which Orbit has no
liability. Additionally, Orbit contends that the
plaintiffs hold substantial shares of Orbit common
stock which are void and/or voidable. By its Cross
Complaint, Orbit seeks to cancel invalidly issued stock and
recover money damages.
Management also contends that there was no oral agreement
to reduce the exercise and conversion price of ceratin
financial instruments. Further, management contends that
there were no violations of securities laws, that no
misrepresentations were made to plaintiffs and all other
complaints are without merit.
Mangement has attempted to contact the subject note holders
on numerous occasions over the last twelve months to work
out the issues surrounding the loan agreements, set-off,
and the respective claims against both parties. Attempts
to amicably resolve the issues outside the court have been
unsuccessful to date.
NOTE 10 - INCOME TAXES
The components of deferred tax assets and liabilities at
December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Deferred Tax Assets:
Net operating loss carryforwards $3,234,800
Tax effects of temporary differences (1) 848,100
Start-up costs 362,600
----------
Total Gross Deferred Tax Assets 4,445,500
Less: Valuation allowance
4,445,500
----------
Net Deferred Tax Assets $ -
=========
</TABLE>
(1) Temporary difference giving rise to the deferred tax
asset at December 31, 1996 primarily relates to
compensatory element of its grants of stock options.
The net change in the valuation allowance for deferred tax assets was
an increase of $686,200.
F-22
<PAGE> 40
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - INCOME TAXES (Continued)
As of December 31, 1996, the Company had available
approximately $9,514,000 of net operating losses for income
tax purposes that may be carried forward to offset future
taxable income, if any. The Tax Reform Act of 1986 imposed
substantial restrictions on the utilization of net operating
loss carry forwards in the event of an ownership change as
defined by the Internal Revenue Code.
These carryforwards expire in the following approximate
amounts:
<TABLE>
<CAPTION>
Year of
Expiration
----------
<S> <C>
2000 $ 557,000
2001 726,000
2002 43,000
2003 2,000
2004 2,000
2005 1,000
2006 1,319,000
2007 937,000
2008 1,735,000
2009 933,000
2010 1,832,000
2011 1,427,000
----------
$9,514,000
==========
</TABLE>
A reconciliation of income tax expense at the statutory rate to
income tax expense at the Company's effective rate is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Computed tax at the statutory rate $ (689,520) $(1,410,246)
Non-deductible expenses 3,300 4,021
Tax effects of temporary
differences 235,000 613,148
Start-up costs (34,018) 170,091
Unutilized net operating loss 485,238 622,986
----------- -----------
$ - $ -
Income Tax Expense
=========== ===========
</TABLE>
F-23
<PAGE> 41
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 11- SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, 1996 and 1995, the
Company paid $9,120 and $71,433 for interest, respectively.
Non-Cash Transactions
During the year ended December 31, 1996:
a) The Company issued 175,000 shares of common stock as
consideration for current compensatory obligation amounting
to $38,500.
b) Convertible promissory notes and related accrued interest
aggregating $1,364,784 were converted to 7,861,091 shares of
common stock.
c) In connection with a legal settlement agreement, the
Company issued a $250,000 promissory note and 2,941,176
shares of its common stock valued at $250,000.
During the year ended December 31, 1995:
a) The Company issued 210,000 shares of its common stock as
consideration for current compensatory obligations.
b) Accrued interest of $24,833 was converted to long-term
debt.
c) Common stock issued and options exercised in exchange for
notes receivable from stockholders totaled $17,294.
NOTE 12 - LICENSE AND RESEARCH AGREEMENTS
On September 28, 1988, the Company entered into a license
agreement, as amended, with Davis, Joseph & Negley ("DJN")
pursuant to which the Company licensed certain technology
relating to the deposition of metallic coatings on
conducting surfaces known as the "Metafuse" process. DJN, in
consideration of the issuance of the license by the Company,
agreed to assume the Company's indebtedness to the Company's
Chairman of the Board in the amount of $175,000. In
addition, DJN agreed to pay the Company a royalty equal to
3% of DJN's gross sales for all devices manufactured by DJN
and 5% of all monies actually received by DJN from its
direct or indirect sublicenses. Neither DJN nor its
sublicensees have manufactured any devices and, therefore,
no royalties have been received. The license agreement shall
terminate concurrently with the latest to expire of the
letters patent issued to the Company. The Company does not
anticipate any royalties under this agreement.
On August 29, 1991, the Company entered into an additional
license agreement with DJN using the "Metafuse" process.
DJN, in consideration of the issuance of the license by the
Company, agreed to pay the Company $20,000 upon the
execution of the agreement and an additional payment of
$100,000 was received in July 1994. DJN agreed to pay the
Company a 5% royalty on the gross income derived from the
sale of licensed products manufactured by DJN or by any
direct or indirect sublicensee of DJN. Neither DJN nor its
sublicensees have manufactured any licensed products and,
therefore, no royalties have been received. The license
agreement shall terminate concurrently with the latest to
expire of the letters patent issued to the Company. The
Company does not expect any royalties under this agreement.
F-24
<PAGE> 42
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 12- LICENSE AND RESEARCH AGREEMENTS (Continued)
On May 13, 1994, the Company entered into a license agreement
with The Regents of the University of California ("The
Regents") for diamond and diamond film deposition and methods
of doping diamond films. The license agreement grants to the
Company an exclusive license to make, have made, use and sell
licensed products and to practice licensed methods. The
license also grants the Company the right to issue exclusive
or nonexclusive sublicenses to third parties. In
consideration for the license, the Company paid $25,000. The
agreement calls for a royalty of five percent of net sales
with a minimum royalty payment of $25,000 beginning
twenty-four months after the effective date of the agreement.
The agreement shall remain in effect for the life of the
last-to-expire patent, unless terminated earlier per the
agreement. The $25,000 fee was recorded as an intangible
asset and was being amortized over seventeen years. The
entire unamortized balance of $24,265 was written off in 1995
as a result of a dispute between the Company and the Regents.
The Company terminated the agreement in 1996.
On May 13, 1994, the Company also entered into a research
agreement with The Regents for the period June 1, 1994 - April
30, 1996. The work to be performed is in accordance with the
research proposal entitled "Semi-Conducting Diamond Films".
The cost to the Company for the performance under the
agreement is estimated to be $350,000, payable in eight
quarterly installments of $43,750 beginning on June 1, 1994.
Only the first installment due June 1, 1994 was paid and work
has been suspended. Either the Company or The Regents may
terminate the agreement by giving thirty days written notice
to the other. The quarterly installments are being
written-off in the period covered by the payment. Due to the
dispute described previously, only $75,000 was paid and
expensed during 1995. The Company terminated the agreement in
1996.
On January 20, 1995, the Company entered into a letter of
intent with the Yulin District Economics and Trade Development
Corporation in Guangxi, Peoples Republic of China ("YDETDC").
Pursuant to the letter of intent, the parties contemplated
entering into a joint venture to initially set up two mini
processing lines, each capable of processing one ton of
titanium per eight-hour shift. Current negotiations in the
formation of a joint venture agreement are at a standstill and
the Company does not expect this project to materialize. The
Company incurred legal and professional fees and other
expenses aggregating $329,000 related to this unsuccessful
project.
On March 8, 1995, the Company entered into a Heads of
Agreement with Rhone-Poulenc VSI Chemicals, a wholly owned
subsidiary of Rhone-Poulenc. The letter of intent
contemplates entering into a joint cooperation agreement to
test, evaluate, sell and manufacture Ceramic Silicone Foam
("CSF"). No assurances can be given that a joint cooperation
agreement will be entered into, the CSF can be successfully
sold or that the joint venture will be commercially
successful. The Company does not expect this project to be
completed.
In May 1996, the Company was awarded a contract to participate
in the Department of Energy's Landfill Stabilization Project
to evaluate materials for treating existing hazardous waste at
the Idaho National Engineering Laboratory's Subsurface
Disposal Areas. These landfill sites are composed of a
variety of mixed waste materials including radioactive waste.
Several different materials have been selected for testing and
Orbit was awarded a category sole source contract to test and
evaluate its CSF. The contract provides for initial bench
testing with options that can be exercised for more extensive
field-testing.
In November 1996, the Company signed a Teaming Agreement with
Ecology and Environment, Inc. (International Specialists in
the Environment), for the sole purpose of identifying and
pursuing mutually agreeable business opportunities within the
U.S. Departments of Energy and Defense, and other federal and
state government agencies and the private sector where the
environmental application of the CSF technology is possible.
Identification and pursuit of business opportunities includes
technology development (i.e., both system design and
application identification and construction), sales and client
development efforts, the bid/proposal process, and the
contract negotiation process regarding awarded projects.
F-25
<PAGE> 43
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 13- SUBSEQUENT EVENTS
Notes Payable
a) During the first quarter of 1997, the Company converted
$42,750 of principal and related accrued interest of
approximately $6,915 into 319,499 shares of the Company's
common stock.
b) On May 27, 1997, the Company entered into an installment
loan agreement with an individual shareholder to borrow
$300,000 payable in $100,000 installments on May 27,1997,
September 5, 1997 and December 3, 1997. The installment loan
bears interest at 12% per annum and is due on May 27, 1997.
The loan agreement provides for a minimum semi-annual interest
payment of $6,000 commencing December 6, 1997. The
installment note is collateralized by the Company's rights,
titles and patents, technology known as "Ceramic Silicone
Foam." As additional consideration for the $300,000 loan the
Company agreed to issue 300,000 shares of the Company's
restricted common stock to the shareholder. The Company will
record the additional consideration as interest expense
amounting to $42,750 which is based on the fifty percent (50%)
of the fair market value of the common stock at May 27,1997,
the date of the installment loan agreement. Furthermore, the
Company granted the shareholder the right to purchase 150,000
shares of restricted common stock at seventy-five present
(75%) of the fair market value for a period of 180 days
commencing May 27, 1997, the date of the installment
agreement.
c) On July 21, 1997, the Company borrowed $25,000 from a
private investor and issued a convertible promissory note that
matures July 21, 1998 and bears interest at 10% per annum.
The note principal balance and accrued interest can be
converted into the Company's common stock at a rate of $0.20
per share of debt.
d) From January 1, 1997, through September 30, 1997, the
Chairman of the company has provided funds to the company
amounting to approximately $83,000. Said loans bear interest
of 10% percent per annum and mature one year from the date of
issuance. Each loan is evidenced by a promissory note. The
principal and related accrued interest can be converted into
common stock at a rate of $0.10 - $0.20 per share of debt.
Litigation
Benveniste, et al. vs. Lahey, et al. On June 2, 1997,
Richard Benveniste and Edgar Benveniste filed suit in the
Delaware Court of Chancery on behalf of themselves and
purportedly on behalf of the Company against James B. Lahey,
James A. Giansiracusa, Stephen V. Prewett, Ian C. Gent and
William N. Whelen. The complaint sought a determination by
the Court of Chancery (I) as to who constituted the valid
directors of the Company in connection with a written consent
action initiated by the plaintiffs or, (ii) in the
alternative, that the Company be required to hold a annual
meeting of shareholders.
On September 2, 1997, the Court of Chancery decided to defer a
decision on the defendants' motion to dismiss until such time
as an annual meeting of the Company's shareholders was held.
The Court thereafter ordered that the Company hold its annual
meeting. The Company is in the process of completing the
Court's requirements and is scheduling a meeting before the
end of the 1997 year.
Jacobs vs. Orbit. This action was filed on June 27, 1997, in
the Superior Court of California, County of Los Angeles as
Case No. BC 173600. The plaintiff seeks money damages
allegedly attributable to his inability to sell restricted
stock. Management believes this action has no merit.
F-26
<PAGE> 44
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 13- SUBSEQUENT EVENTS (Continued)
Management Compensation Plan
On January 3, 1997, the Board of Directors instituted an
incentive compensation plan for the Company's key personnel.
The plan provides for the issuance of 100,000 shares of common
stock for each of the five events described as follows:
1. An increase in the common stock price to $1.00 per
share by December 31, 1997.
2. First revenue producing contract.
3. A singular funding of $1,000,000 or more.
4. The filing of registration statement or the reduction
of debt over $1,000,000 via a stock conversion or
other means.
5. Cancellation and or the surrender of shares by former
officers, directors, consultants, etc. who are
subject to various legal action by the Company.
If all the events are accomplished by December 31, 1997 an
additional 100,000 shares will be issued to each key personnel.
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORBIT
TECHNOLOGIES, INC, AND SUBSIDIARIES BALANCE SHEET AS OF DECEMBER 31, 1996 AND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMETNS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12
<PP&E> 291
<DEPRECIATION> 40
<TOTAL-ASSETS> 345
<CURRENT-LIABILITIES> 3,183
<BONDS> 250
0
10
<COMMON> 294
<OTHER-SE> (3,392)
<TOTAL-LIABILITY-AND-EQUITY> 345
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297
<INCOME-PRETAX> (2,028)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,028)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
<PAGE> 1
Exhibit 99
RISK FACTORS
THERE IS NO ASSURANCE THAT THE PROPOSED BUSINESS OF ORBIT DESCRIBED HEREIN WILL
BE COMMERCIALLY VIABLE. IN ADDITION, ACTUAL RESULTS OF THE DEVELOPMENT
ACTIVITIES, TECHNOLOGICAL DEVELOPMENTS, MARKET AND COMPETITIVE CONDITIONS,
RESULTS OF OPERATIONS AND OTHER FACTORS MAY REQUIRE SIGNIFICANT MODIFICATIONS
OF ALL OR PART OF THE PROPOSED BUSINESS.
Potential Securities Act Liabilities. Current management believes the
Company has sold securities and notes without registration under the Securities
Act of 1933, as amended (the "Act"), or without qualification under the
securities (blue sky) laws of certain states. As a result of such sales, and a
subsequent transfer of the shares by the original purchasers, the Company may
not be able to claim valid exemptions for such sales since the burden of
proving any exemption is on the Company. Therefore, no assurances can be given
as to any liability which may result from violations of the registration or
qualifications provisions of the federal or state securities laws. The Company
may thus may have a continuing contingent liability under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and various
state securities laws for an undetermined amount for an undetermined period.
Potential Corporation Law Liability. The Company is conducting an
internal audit, which has revealed that substantial shares of the Common Stock
issued to former directors, and officers may be subject to cancellation. This
would reduce the number of outstanding shares. Between December 16, 1992 and
February 17, 1994, the Company issued more shares of Common Stock than it had
authorized under its Certificate of Incorporation. Thus, approximately
18,000,000 shares of the Common Stock were "overissued."
Potential Liability for Rescission of Dividends. In February 1994,
the Company declared a stock dividend on a ten to one basis of the following
corporations, all of which were contemplated subsidiaries of the Company: the
TiTRODE Corporation, the Metafuse Corporation, Electronics Recovery Systems,
Inc., the Titherm Technology Corporation and Shield Safe, Inc. In connection
with such dividends, each subsidiary was to receive a license for a particular
technology owned by the Company. The Company's Board of Directors has
subsequently rescinded such stock dividends principally because of the concern
that such dividends may not comply with the Delaware General Corporations Law
since such dividends would strip the Company of most of its valuable assets.
It is possible that a shareholder could challenge the rescission of the
dividend and it is unclear whether a Delaware court will uphold such
rescission. Thus, the shareholders entitled to such dividends may have a right
to seek payment of such dividend.
Start-Up Company. To date the Company has been engaged in the
development of technologies and intends to commercially exploit certain of its
technologies with third parties. Until the commencement of sales or licensing
of the technologies, the Company will have no operating revenues but will
continue to incur substantial expenses. No assurances can be given that the
Company can complete development of any technologies or that if a technology
is, or in the future may be, fully developed, that it can be manufactured by
others on a large scale basis or at a feasible cost. Further, no assurance can
be given that any technology will receive market acceptance. The Company is
subject to all the risks inherent in the establishment of a new enterprise and
the marketing and manufacturing of new products, many of which risks are beyond
the control of the Company. There can be no assurances that the proposed
business of the Company described herein will be commercially viable. In
addition, actual results of the development activities, technological
developments, market and competitive conditions, results of operation and other
factors may require significant modification of all or part of the Company's
proposed business plan. See Item 6. Management's Plan of Operation.
Accumulated Deficit; Operating Losses; Going Concern. For the year
ended December 31, 1996, the Company incurred an aggregate operating loss of
$2,027,506. At December 31, 1996, the Company had an accumulated deficit of
$13,136,339 and a working capital deficit of $3,170,881. The Company has a
ratio of liabilities to tangible assets of 12.9 to 1 as of December 31, 1996.
Such operating losses, accumulated deficit and the working capital deficit have
increased since such date. The losses are principally due to (1) the Company's
unsuccessful search for license, joint venture, or partnership arrangements
with entities in industries aligned with the Company's technologies, and (2) a
lack of technological and business focus. The report of the Company's
independent certified public accountants is qualified with regard to the
ability of the Company to continue as a going concern.
1
<PAGE> 2
Significant Defaults. The Company is in default on a significant
number of notes that total approximately $1,150,000 in principal as of December
31, 1996. During 1996, the Company converted $950,000 of principal and related
accrued interest amounting to $114,783 into 4,861,091 shares of common stock.
See Notes to Consolidated Financial Statements, Note 6. Other debt is disputed
and the subject of litigation. See Item 3. Legal Proceedings.
Need for Additional Financing. The Company has limited working
capital. The Company will need to obtain additional financing. The lack of
sufficient financing impedes the Company's ability to commercialize those
technologies, which could bring the Company revenues in the shortest time. The
Company's business objectives may never be met due to a lack of capital. No
assurance can be given that additional financing can be obtained, or if
obtainable, that the terms will be satisfactory to the Company. The Company is
currently discussing future funding options with several investment parties.
See Item 6. Management's Plan of Operation. Liquidity and Capital Resources.
Status of Technology. The Company's technologies, whether patented or
unpatented, are in the development stage. The Company's technologies are
undergoing certain feasibility studies and testing, and none has proved in
actual operations to be commercially viable, except for the TiTRODE type
electrodes. Further, even if the Company may have to date received favorable
results in connection with such studies and tests, no assurances can be given
that any such technology will ultimately be commercially feasible. Except for
a technology similar to the Metafusion technology, none of the technologies are
currently used on any commercial applications and it cannot be assured when, if
ever, any technologies will reach such phase.
Risk of New Products and Technologies; Product Liability. The
marketing of the Company's proposed products has inherent risks. The proposed
technologies have not operated over time and under various conditions of actual
use. Even if a proposed product is successfully developed, manufactured and
marketed, the occurrence of warranty or product's liability, or retraction of
market acceptance due to a proposed product failure or failure of such product
to operate as expected could lead to potential product liability suits. The
Company does not currently have product liability insurance. Development of
new technologies for manufacture is frequently subject to unforeseen expenses,
difficulties and complications and in some cases such development cannot be
accomplished.
Product Viability. It will be a period of time before any product
resulting from the Company's development efforts can be commercially marketed,
sold and delivered. There can be no assurances as to when, if ever, the
proposed products can be commercially marketed, sold and delivered. In
addition, because of such development period and other potential delays, other
companies may develop and commence production of similar products prior to the
Company commencing any joint venture activities and/or licensing. See Item 1.
Description of Business.
Uncertainty of Market Acceptance; Government Regulation. There is no
assurance that the Company's proposed products will attain significant market
acceptance and generate revenues. Generally, market acceptance of a new and
unproven technology requires substantial efforts to inform potential customers
of such new technology's distinctive characteristics. This effort will be
crucial in marketing the Company's proposed products. Some of the Company's
technology and the proposed products, which result therefrom, if any, may be
subject to government regulations, including federal export and trade
regulation. See Item 1. Description of Business.
Technological Change. The technologies upon which any Company's
proposed products rely may undergo rapid development and change. There can be
no assurance that a technology utilized by the Company will be competitive in
light of possible further technological developments and will not become
obsolete.
Competition. There are many firms, substantially all with financial
resources, experience and technical staffs larger than those of the Company
which have or may have successfully develop products which meet some of the
needs intended to be met by the Company's proposed products and some of such
companies have established strong market positions in their products. These
competitors may respond vigorously to any threat to their established market
shares. In addition, other companies may be developing or planning the
development of devices competitive with the Company's proposed products.
Dependence on Licensees: Possible Joint Arrangements. In cases where
the Company licenses a technology, the licensees will be responsible for
causing any products to be manufactured and marketed. Therefore, in exploiting
any technology which is licensed, the Company will be dependent on the efforts
and ability (financial and otherwise) of the licensee. No assurances can be
given that definitive agreements to form joint ventures or arrangements will be
entered into, that the Company will be able to raise any funds required by any
joint venture or arrangement or that any joint venture or arrangements would
successfully exploit any technology.
2
<PAGE> 3
Risks of Foreign Operations. Certain studies and tests of the
technologies are being conducted outside of the United States. Certain
customers for these technologies may be outside the United States, in various
parts of the world, including Russia and Ukraine. Thus, the Company may be
subject to the risks of operations including currency fluctuations,
import/export controls, lack of a well-defined business or legal system,
arbitrary government actions, and instability of a political system.
Lack of Patent Protection. Patents do not cover most of the Company's
technologies. Of the technologies described herein, the Company's patents
cover only the electronic recovery systems and the original Metafusion Process.
Those patents held by the Company may be infringed upon by others and there can
be no assurance that the Company will be able to afford the high cost of filing
and pursuing an infringement action against any such alleged infringing party.
In addition, there can be no assurance that any particular aspect of the
Company's technologies will not be found to infringe the claims of other
existing patents. Certain technology embodied in the patents covering the
Company's Metafusion Process may incorporate technology embodied in patents
owned by other entities. Even if other patents infringed, Orbit may not have
the financial resources to prosecute. The Company has also filed a number of
patent applications. There can be no assurance that additional patents will be
issued in respect of the patent applications pending. The Company also relies,
to a lesser extent, on trade secrets and confidential disclosure agreements to
protect its technology. Neither the issuance of patents nor the use of trade
secrets will necessarily protect the Company from other persons using
technologies similar to those covered by the Company's patents or trade
secrets.
Lack of Full Time Research and Development Team. In addition to the
Company's officers, Orbit currently uses third party subcontractors and
non-affiliated laboratories to develop and review applications of its
technologies.
Dependence on Key Individuals. The success of the Company is
dependent upon, among other things, the services of Dr. Stephen V. Prewett.
Dr. Prewett is Vice President - Technology Development of the Company. The
loss of the services of Dr. Prewett for any reason could have a material
adverse effect of the prospects of the Company.
Transactions with Management. Over the past several years there have
been substantial transactions between the Company and members of management,
including Adrian Joseph, Tatum Singletary and Richard Wall. These transactions
include the alleged exchange of technology developed or purchased by Mr. Joseph
for shares of Common Stock and/or the payment of shares for debt or for
services rendered to others. No assurances can be given that the value of the
technology transferred or the services rendered or other items of value
exchanged equal the value of the Common Stock transferred to such parties.
Such transfers were not approved by an independent majority of the board of
directors and thus may not have been on the same terms as if they were
transactions with unaffiliated third parties. An audit is being conducted to
review these transactions. Management is currently attempting to rectify the
apparent misconduct in these transactions. See Item 3. Legal Proceedings and
Item 12. Certain Relationships and Related Transactions.
3
