<PAGE> 1
FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE EXCHANGE ACT
Commission File No. 0-25548
ORBIT TECHNOLOGIES, INC.
Delaware 841 00 1269
(State of Jurisdiction of (I. R. S. Employer Identification No.)
Incorporation or Organization)
2011 Palomar Airport Road, Suite 100, Carlsbad, California 92009
(Address of Principal Executive Offices)
(760) 930-8944
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
---- ----
The number of outstanding shares of the registrant's only class of common stock
as of March 31, 1997: 20,303,028.
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE> 2
INTRODUCTION. The Company is filing this periodic report after the due date that
is prescribed by current regulations. Information presented is as of March 31,
1997, 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-QSB 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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. (See accompanying Financial Report for the period
ended March 31, 1997.)
ITEM 2. PLAN OF OPERATION
Since its incorporation in 1985, the Company has engaged in the
research, development, acquisition and licensing of technologies. Initially, the
Company concentrated its efforts in the areas of coating technologies and new
materials technologies. The Company is currently focused on two technologies
that may provide the greatest potential in the short term for commercialization
and to generate a revenue stream. Once commercialization has been proven, it is
the intent of the Company to define specific, discrete product lines for each
application and develop multiple market applications.
The Company's business plan is to focus on specific technologies
discussed herein for multiple market applications and then possibly license each
to an unaffiliated entity which will engage in manufacturing, marketing, joint
venture and sub-licensing strategies with respect to each technology or
application thereof as best suits each technology.
Until completion of the development of a technology and the commencement
of sales of technology, 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, 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.
To date, the Company has funded its operations from the private sales of
Common Stock or notes (most 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.
The Company will require additional financing. No assurance can be given
that additional financing 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 in the next twelve months.
The Company is exploring additional sources of working capital including
borrowing, sales of securities, joint ventures and the 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. Further, the Company is in discussions with certain
investment bankers about offerings to raise additional capital. No assurance can
be given that the Company can successfully obtain any working capital or
complete any proposed offerings or if obtained, and that such funding will not
cause a dilution to shareholders of the Company.
TiTRODES are being sold to Chrysler Corporation by an entity
unaffiliated with the Company (Huys Industries, Inc.) under an agreement by
which the parties would share equally net revenues derived from the sale of
TiTRODES to Chrysler Corporation. The net revenues from the sale of TiTRODES to
Chrysler Corporation have not been disbursed 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 is examining ways to reduce its existing liabilities
including exchanging some of such liabilities with affiliates and others for
shares of its Common Stock. No assurance can be given that such efforts will be
successful.
<PAGE> 3
The Company does not expect to make any significant capital purchase in
1997, except for TiTRODE and Ceramic Silicone Foam (CSF).
The Company has been awarded small research and development contracts
based on initial positive results of tests by the Idaho National Engineering
Laboratory (INEL) for use of Orbit's Ceramic Silicon Foam (CSF) material for
stabilizing radioactive calcine waste. Orbit has made additional proposals for
continue evaluation of CSF for use at INEL and believes those proposals will
continue to receive positive consideration for future contracts.
In May, 1997, 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 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.
In November 1997, 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 private sectors 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 March 11, 1998, as a result of the success in the testing and
evaluating of CSF under a contract award from a Lockheed Martin contract, a
paper was presented at a conference in Tucson, Arizona, entitled Waste
Management 98.
Other Matters.
None.
PART II - OTHER INFORMATION
ITEM 1 . LEGAL PROCEEDINGS. No change.
ITEM 2. CHANGES IN SECURITIES. No change.
ITEM 3. DEFAULTS ON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None
<PAGE> 4
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements.
(2) Exhibits - See (C) below.
(b) REPORTS ON FORM 8-K. None.
(c) EXHIBITS.
(3)(i) Articles of Incorporation (1)
(3)(ii) By-laws. (1)
(10) Material contracts. (1)(2)
(15) Letter on unaudited interim financial information.(3)
(1) Previously filed as part of the Form 10 filed in May 1995 and which is
hereby incorporated by reference.
(2) Previously filed as part of the Form 10-KSB for 1996 and which is hereby
incorporated by reference.
(3) See Orbit Technologies Inc. and Subsidiaries Financial Report for the period
ended March 31, 1997.
<PAGE> 5
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ORBIT TECHNOLOGIES INC.
- -----------------------
Registrant
Date: April 1, 1998 By: /S/ JAMES B. LAHEY
_________________________________
James B. Lahey, Chief Executive Officer
Chairman of the Board of Directors
Date: April 1, 1998 By: /S/ JAMES A. GIANSIRACUSA
________________________________
James A. Giansiracusa, Secretary/Chief
Financial Officer
<PAGE> 6
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
FINANCIAL REPORT
MARCH 31, 1997
<PAGE> 7
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
MARCH 31, 1997
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED BALANCE SHEETS F-1
At March 31, 1997 and December 31, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS F-2
For the Three Months Ended March 31, 1997 and 1996
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-3
For the Three Months Ended March 31, 1997 and 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS F-4
For the Three Months Ended March 31, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-5 - F-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
</TABLE>
PART II - OTHER INFORMATION
<PAGE> 8
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
At At
March 31, 1997 Dec. 31, 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,357 $ 188
Prepaid expenses -- 10,353
Advances to officer -- 1,341
------------ ------------
TOTAL CURRENT ASSETS 2,357 11,882
PROPERTY AND EQUIPMENT - At cost, net of accumulated
Depreciation 247,113 250,829
INTANGIBLE ASSETS, Net of accumulated amortization 76,788 78,071
OTHER ASSETS 4,015 4,015
------------ ------------
TOTAL ASSETS $ 330,273 $ 344,797
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIEN CY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued liabilities $ 1,556,547 $ 1,429,395
Due to stockholders 200,466 200,466
Notes payable 1,586,582 1,552,902
------------ ------------
TOTAL CURRENT LIABILITIES 3,343,595 3,182,763
LONG-TERM NOTE PAYABLE 250,000 250,000
TOTAL LIABILITIES 3,593,595 3,432,763
------------ ------------
CONTINGENCIES AND OTHER MATTERS (Notes 1, 2 and 3)
STOCKHOLDERS' DEFICIENCY:
Preferred stock - par value $.01 per share; issued and
outstanding - none -- --
Common stock - par value $.01 per share; 50,000,000
shares authorized; 31,638,173 and 31,405,904 shares
issued and outstanding as of March 31, 1997
and December 31, 1996, respectively 316,382 314,060
Additional paid-in capital 9,862,953 9,835,247
Accumulated deficit (13,431,723) (13,136,339)
Unearned compensation and financing charges -- (90,000)
Notes receivable from stockholders (10,934) (10,934)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (3,263,322) (3,087,966)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY 330,273 $ 344,797
============ ============
</TABLE>
See notes to consolidated financial statements.
F-1
<PAGE> 9
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
REVENUE $ -- $ --
------------ ------------
OPERATING EXPENSES
Research and development 6,841 12,209
General and administrative 158,430 225,056
Compensatory element of stock
options 90,000 90,000
------------ ------------
TOTAL OPERATING EXPENSES 255,271 327,265
------------ ------------
OPERATING LOSS (255,271) (327,265)
------------ ------------
OTHER EXPENSES
Interest expense 40,113 92,560
------------ ------------
TOTAL OTHER EXPENSES (40,113) (92,560)
------------ ------------
NET LOSS $ (295,384) $ (419,825)
============ ============
PER SHARE DATA:
NET LOSS PER COMMON SHARE $ (.01) $ (.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON STOCK EQUIVALENTS
OUTSTANDING 31,530,853 25,799,309
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 10
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 -- $ -- 31,405,904 $ 314,060 $ 9,835,247
Issuance of stock
for conversion of
notes payable -- -- 232,269 2,322 27,706
Amortization of
unearned compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at
March 31, 1997 -- $ -- 31,638,173 $ 316,382 $ 9,862,953
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Unearned Notes
Compensation Receivable
Accumulated and Finance from
Deficit Charges Stockholders Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances at
December 31, 1996 $(13,136,339) $ (90,000) $ (10,934) $ (3,087,966)
Issuance of stock
for conversion of
notes payable -- -- -- 30,028
Amortization of
unearned compensation -- (90,000) -- (90,000)
Net loss (295,384) -- -- (295,384)
------------ ------------ ------------ ------------
Balances at
March 31, 1997 $(13,431,723) $ -- $ (10,934) $ (3,263,322)
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 11
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(295,384) $(419,825)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 4,999 4,000
Amortization of unearned finance costs -- 28,450
Compensatory element of stock options 90,000 90,000
Cash provided by (used for) the change in
assets and liabilities:
Decrease (increase) in prepaid expenses 10,353 --
(Increase) decrease in advances to officer 1,341 --
Increase in accounts payable and
accrued liabilities 129,860 223,962
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (58,831) (73,413)
--------- ---------
CASH USED FOR INVESTING ACTIVITIES
Capital expenditures -- (64,084)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 61,000 189,750
Repayment of notes payable -- (27,561)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 61,000 162,189
--------- ---------
INCREASE IN CASH 2,169 24,692
CASH - BEGINNING 188 4,703
--------- ---------
CASH - ENDING $ 2,357 $ 29,395
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest -- $ 5,501
========= =========
Income taxes $ -- --
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of 232,269 shares of common stock for
conversion of notes payable and accrued interest $ 30,028 --
========= =========
Issuance of 2,000,000 shares of common stock
for conversion of notes payable $ -- $ 200,000
========= =========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 12
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
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
3.a).
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 three months ended March 31, 1997 and for the
year ended December 31, 1996, the Company incurred net losses of
approximately $295,000 and $2,028,000, respectively, and, as of
March 31, 1997, had a stockholders' deficiency and a working
capital deficiency of approximately $3,263,000 and $3,341,000,
respectively. The Company is also in default on a significant
number of loan agreements which total approximately $1,509,000 in
principal and interest as of March 31, 1997 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. From January 1 through December 31, 1997, the Company's
proceeds from all financing activities amounted to approximately
$408,000 (see Notes 2 and 4).
F-5
<PAGE> 13
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS (Continued)
The Company is exploring ways to reduce its existing liabilities
including exchanging certain of its liabilities for shares of its
common stock. From January 1 through April 15, 1997, the Company
exchanged $42,250 of principal on various promissory notes
outstanding at December 31, 1996 for shares of common stock (see
Notes 2 and 4).
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 March 31, 1997,
has filed a lawsuit against the Company to recover loans and other
monies provided to the Company (see Note 3).
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.
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the
interim financial statements include all adjustments necessary in
order to make the financial statements not misleading. The results
of operations for the three months ended are not necessarily
indicative of the results to be expected for the full year. For
further information, refer to the Company's audited financial
statements and footnotes thereto at December 31, 1996, included in
the Company's Form 10-KSB, filed with the Securities and Exchange
Commission.
NOTE 2 - CAPITALIZATION
Conversion of Debt to Equity
For the three months ended March 31, 1997 and for the year ended
December 31, 1996, the Company converted $27,250 and $950,000,
respectively, of principal, and related accrued interest amounting
to $2,779 and $114,783, respectively, into 232,269 and 4,861,091
shares, respectively, of common stock. The Company is in default
under the remaining note agreements.
F-6
<PAGE> 14
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 2 - CAPITALIZATION (Continued)
Borrowings Under Convertible Notes Payable
For the three months ended March 31, 1997 and for the year ended
December 31,1996 the Company borrowed $61,000 and $51,000,
respectively, 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 $112,000
principal balance outstanding at March 31, 1997 $30,000 is
convertible at $0.10 per share and the remaining notes principal
balance are convertible at $0.22 per share.
NOTE 3 - CONTINGENCIES AND OTHER MATTERS
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.
F-7
<PAGE> 15
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 3 - CONTINGENCIES AND OTHER MATTERS (Continued)
c) 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.
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 March 31, 1997 and 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.
d) 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.
F- 8
<PAGE> 16
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 3 - CONTINGENCIES AND OTHER MATTERS (Continued)
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.
e) 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.
f) 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.
Management contends that all of the debt and related fees and
shares of common stock are properly reflected on Orbit's books
as of March 31, 1997 and 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.
F-9
<PAGE> 17
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 3 - CONTINGENCIES AND OTHER MATTERS (Continued)
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 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.
Management 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 4- SUBSEQUENT EVENTS
Notes Payable
a) During the second quarter of 1997, the Company converted $15,000
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, 1999. 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 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.
F-10
<PAGE> 18
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 4- SUBSEQUENT EVENTS (Continued)
c) 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 collateralized by the
Company's equipment, rights, titles and patents pertaining to
the "TiTRODE/Metafuse" technology.
The Company defaulted on its initial semi-annual interest
payment that was due on June 27, 1997.
d) 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.
e) From April 1, 1997, through September 30, 1997, the Chairman of
the company has provided funds to the company amounting to
approximately $15,800. 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-11
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) ORBIT
TECHNOLOGIES, INC. AND SUBSIDIARIES BALANCE SHEET AS OF MARCH 31, 1997 AND
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
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