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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
[_] 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.
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(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.)
5950 La Place Court, Suite 140
Carlsbad, California 92008
(Address of principal executive offices)
Registrant's telephone number, including area code: 760/918-9168
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, 1998 were $ -0-.
On December 31, 1998, the aggregate market value of the voting stock held
by non-affiliated totaled approximately $6,398,052 based on the closing stock
price as reported by The OTC-BB of the NASDAQ Stock Market.
At December 31, 1998; 31,990,261 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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PART I
Forward-Looking Statements
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.
Due to financial conditions the Company has not filed the Form 10-QSB's for 1998
and the Form 10-KSB encompasses the material developments during the year.
Moving forward the Company intends to file all quarterly reports as required by
current regulations.
Item 1. DESCRIPTION OF BUSINESS
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.
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.
General
The Company 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 its
Polymer Encapsulation Technology (PET) which it believes has potential to yield
a significant and commercially viable environmental product. PET provides
certain benefits to generators of radioactive and toxic wastes with a method to
stabilize and encapsulate such materials for environmentally safe disposal. The
Company may license the technology, seek a strategic alliances or establish
joint venture relationships with specific industry leaders.
The Company evaluates the commercial viability for each technology. When a
commercial application is developed, the Company will license the technology to
a licensee for a license fee and royalty payments. The licensee undertakes the
process of bringing applications of the technology to market independently or
through manufacturing and marketing utilizing joint ventures, selected partners,
or sublicensing. Specific applications of a particular technology may be
licensed to separate entities, each of whom is responsible for that particular
application. Additional funding may be required during these various phases of
technology development and commercialization
Polymer Encapsulation (PET) Technology
The Company has filed a new patent covering specific applications of its Polymer
Encapsulation Technology (PET). PET is a non-flammable, non-toxic polymer
formulation specifically designed for nuclear waste remediation, toxic waste
containment, and encapsulation of difficult to treat hazardous waste materials.
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Previously referred to as Orbit's "Ceramic Silicone Foam" ("CSF"), Orbit's new
Polymer Encapsulation Technology includes enhanced material properties and
formulations and improved application processes. PET remains intact above 1000
degrees C and exceeds the melting point of many metals. These properties make
PET a potentially viable solution to permanently contain many hazardous wastes.
Applications may exist in aerospace, public transportation, and health care. PET
also has the potential to be effective in providing chemical or thermal
barriers.
Additional testing will be required on PET to determine its fire retardance,
anti-flammability, non-toxicity, physical resiliency, thermal resistance,
thermal insulation properties, tensile strength and resistance to atmospheric
decay.
Nuclear/Toxic Waste Containment Technology
The Company's nuclear/toxic waste containment technology has proven effective in
a laboratory setting in containing nuclear waste and radioactive particles. The
Company uses polydimethylsiloxane (PDMS) polymers as a base material to create a
unique compound through the addition of certain proprietary materials and
formulation methods. The final encapsulation material is specially designed and
formulated to be application specific based on the required performance
criteria.
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,
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. Plan include a continuation of the commercialization evaluation
phase when additional funding becomes available.
The Company holds patents for the original Metafuse Process and has filed
specific patents for the Polymer Encapsulation Technology (PET).
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Other Technologies
Since 1996, the Company has been reevaluating and prioritizing other
technologies which it possesses. While the Company has devoted its efforts to
the development of its Polymer Encapsulation Technology (PET) system, efforts to
determine the viability of its other technologies will be pursued when
additional funding becomes available. There is, however, no assurance that such
funding will be obtained to facilitate these efforts.
The Company is continually searching for and evaluating other technologies which
may yield commercially viable products and would fit vertically or horizontally
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.
Human Resources
As of December 31, 1998, the Company employs three individuals. The Company
also retains independent engineers, research consultants, institutions,
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, 1998 and 1997
were $7,416 and $1,141, respectively.
Item 2. DESCRIPTION OF PROPERTY
The Company maintains its principal executive offices in Carlsbad, California
where it occupies a 1,500 square foot office at 5950 La Place Court, Suite 140,
Carlsbad, California 92008 pursuant to a lease expiring in July 2001.
Item 3. LEGAL PROCEEDINGS
Introduction
The Company is involved in 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. 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, Mikimak, Ltd., Joseph's Bahamian company, Tatum Singletary, Richard A.
Wall, Richard and Edgar Benveniste, and others. Other actions deal specifically
with the collection of debts owed by the Company. Subsequently, paragraphs 1
through 6 describe those actions.
The Company is a party to the following proceedings:
1. Benveniste, et. al. v. Orbit and Its Officers. The action was filed on
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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
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aggregating $600,000 and loans made during 1992 aggregating $197,000.
The plaintiffs, Richard and Edgar Benveniste, 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 $7,000,000.
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 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.
In June 1998, Orbit announced that it had reached a tentative accord to
eliminate pending litigation with various claimants.
In December 1998, the parties entered into a settlement agreement which resolves
all of the claims and the cross-claims. As part of the settlement,
approximately 5 million shares will be surrendered for cancellation by a variety
of parties including the Benvenistes. The Benvenistes have agreed to convert
debt to equity and will be issued approximately 5.7 million shares of stock.
(Also see Item 3., Introduction.)
2. Jeffer, Mangels, Butler & Marmaro, LLP v. Orbit Technologies, Inc. Action
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filed in Los Angeles Superior Court, on September 17, 1996, Case No. BS 041 354,
by former attorneys of Orbit to recover attorneys' 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 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 judgment has been awarded pursuant to the interim arbitration
award.
3. Orbit Technologies Inc., et al. v. Lahey, et al. The action filed by
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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
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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 court of California (Adrian 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 was held. The Court thereafter ordered that the Company hold its
annual meeting. As part of the global settlement involving the Benvenistes, it
is anticipated that this case will be dismissed unless Orbit decides to use it
as a vehicle for addressing issues to be resolved as part of the settlement in
the State of Delaware. The Company is hoping that the resolution of all these
issues will allow the Company to call a shareholders meeting in the second
quarter of 1999. (Also see Item 3., Introduction.)
4. Brian Jacobs v. Orbit Technologies Inc. This action was filed on June 27,
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1997, in the Superior Court of California, County of Los Angeles as Case No. BC
173600. Brian Jacobs, 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, sought money damages allegedly attributable to his
inability to sell restricted stock. Management believes this action has no
merit.
This action is included as part of the global settlement including other
claimants. Jacob's claims have been settled as part of the Benveniste litigation
and Jacobs will surrender all claimed stock to the Company. Orbit did not
contribute to that settlement and the action has been dismissed. (Also see Item
3., Introduction.)
5. William A. Wilson v. Orbit Technologies Inc. This action was filed on
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September 15, 1997, in the Superior Court of California, County of Los Angeles
as Case No. BC 177867. The plaintiff, Ambassador William A. Wilson, sought money
damages allegedly attributable to his inability to sell restricted stock.
Management believes this action has no merit.
This action is included as part of the global settlement including other
claimants. Orbit settled the claim by agreeing to issue 75,000 shares of stock
to Wilson and accept the surrender of 30,000 shares of stock claimed by
Ambassador Wilson and the action has been dismissed. (Also see Item 3.,
Introduction.)
6. Howdy Kabrins v. Orbit Technologies, Inc. This action was filed on
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September 4, 1998 in the Superior Court of California, for the County of San
Diego, North County Branch, Case No. N0 79127. Plaintiff seeks payment pursuant
to a Convertible Promissory Note upon which the defendant has not paid.
The action has been settled by the plaintiff agreeing to convert half of the
outstanding balance of the debt, approximately $68,280, into stock at a
conversion price of $0.25 per share and Kabrins has agreed to accept a 10% Note
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for the remainder of the debt.
While the outcome of any such proceedings cannot be accurately predicted, the
Company does not believe the ultimate resolution of any such existing matters
has had or will 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 year ended December 31, 1998 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 was 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:
1997 High Low
First Quarter $0.34 $0.16
Second Quarter 0.36 0.16
Third Quarter 0.49 0.28
Fourth Quarter 0.67 0.32
1998
First Quarter $0.62 $0.34
Second Quarter 0.52 0.30
Third Quarter 0.42 0.20
Fourth Quarter 0.30 0.16
1999
First Quarter $0.33 $0.18
There were approximately 1500 shareholders of record of Common Stock as of
December 31, 1998. The Company has not paid cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.
During 1998 the Company converted $440,332 of principal and related accrued
interest of $93,903 into 4,340,059 shares of common stock pursuant to exemptions
under Section 4(2) and or Regulation D., under the Securities Act of 1933, as
amended.
Item 6. MANAGEMENT'S PLAN OF OPERATION
Since 1996, the Company has focused on the development and use of its
polydimethalsiloxane-based Polymer Encapsulation Technology (PET) as a method
for stabilizing and encapsulating various radioactive and toxic waste materials
leading to a final waste form for disposal.
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Significant progress has been attained as evidenced by the success achieved on
test and evaluation contracts completed for Lockheed Martin Idaho Technologies
Company (LMITCO) in conjunction with the U. S. Department of Energy, Idaho
Operations Office, at their Idaho Falls waste site. The Company's business plan
and near term strategy will focus the Company's human resources and funding on
developing the Polymer Encapsulation Technology (PET) as a modern technology
solution to various radioactive and toxic waste materials identified for
environmentally safe disposal.
As a next step in product acceptance, Lockheed Martin Idaho Technologies Company
and Orbit, together with input from the Microscale Physiochemical Laboratory at
the University of Akron and Ecology and Environmental, Inc. (Orbit's Teaming
Partner) have recently completed the Scope of Work that will lead to a follow-on
calcine evaluation contract utilizing Orbit's PET as a potential transportation
medium in addition to a stabilization and encapsulation material. The
elastomeric properties and material characteristics provided by PET are of
particular benefit in eliminating the potential risk that would occur in the
transportation of the waste from one site to another for long term storage or
disposal. It is estimated that this evaluation phase will be completed in late
1999.
After product performance evaluations are successfully completed for stabilizing
and encapsulating the waste, a pilot plant evaluation is normally conducted.
The pilot plant demonstrates actual processing methods and applications
incorporating both PET and selected waste materials.
Building on the successes achieved under the Lockheed Martin contracts, the
marketing strategy is to build a substantial government and private sector
business in which Orbit's system will be used in the containment of various
radioactive and heavy metal wastes. Work has begun with initial contacts being
made with industry leaders in the waste management and waste remediation sectors
and potential end-users of the technology. Ultimately, the Company plans to
develop strategic relationships with prime contractors throughout the waste
management industry.
Until completion of the final 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.
Background
In May 1996, the Company was awarded a sole source contract, within its
category, to participate in the U. S. 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.
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 that produced acceptable
results. A conceptual process design was also performed as well as initial cost
estimates
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generated. This study has had wide distribution within the Department of Energy.
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
Orbit's 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 (LMITCO) to test and evaluate Orbit's material as a
stabilizing media for sodium and nitrate salts, which included 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. Conclusions from a report published in November 1997 by
Lockheed Martin indicated that Orbit's material appears to be suitable for the
stabilization of DOE complex salt wastes. The final waste form passed the TCLP
protocol and DOT oxidizer tests.
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. The proposal received wide dissemination within the
U.S. Department of Energy.
In March 1998, the Company was awarded a contract by Lockheed Martin Idaho
Technologies Company to evaluate encapsulation of both surrogate and actual WERF
(Waste Experimental Reduction Facility) low level waste with its Polymer
Encapsulation Technology (PET).
In July 1998, the Statement of Work was modified and redirected the Company to
focus on a low level calcine material. These new tests included mixing studies
and enhanced treatment methodologies. Test reports by Lockheed Martin indicated
that encapsulation of the low-level mixed waste fraction from INTEC calcined
waste has potential as an encapsulating media for final disposal and the report
recommended exploration of further treatment formulations.
In August 1998, a paper detailing the Company's mixed waste encapsulation
technology, entitled "Encapsulation of Nitrate Salt Waste Using Polysiloxane,"
was selected for presentation at the 216th Annual American Chemical Society
National Meeting. The paper examined the use of a new waste management solution
to encapsulate the U.S. Department of Energy's approximately 250 million-kg of
dry nitrate salt waste which is laden with heavy metals and radioactive
isotopes.
In October 1998, the Company filed a new patent application for its Polymer
Encapsulation Technology (PET). The new patent was the result of rigorous test
and evaluation over the last year and included the results of enhanced
formulations and improved process applications. The Company's system involves a
method for stabilizing granular salts generated by solidifying neutralized
acidic solutions used to recover and reformulate weapons material.
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In the last six months the Company has included new surfactant additives, or
binding agents, that enable the system to encapsulate and stabilize waste
material which may include soluble chromium compounds, sodium nitrate, potassium
nitrate, plutonium 238 and 239, uranium 238, and other harmful contaminants.
Orbit's encapsulation system is designed to form a cohesive material suitable
for transportation and final disposal, featuring a low leaching index as well as
the ability to perform at increased waste loading factors. The system has been
developed for the treatment of waste material to prevent environmental damage,
because certain wastes that cannot be easily or economically rendered
environmentally harmless still pose significant disposal problems.
In October 1998, Orbit's new and recently patented Polymer Encapsulation
technology (PET) was selected for presentation at the 19th U. S. Department of
Energy Low-Level Radioactive Waste Management Conference. The goal of the
conference was to provide an opportunity for information exchange between
representatives of the commercial and defense related low-level radioactive
waste management communities.
Financial Condition
For the fiscal years ended December 31, 1997 and 1998, the Company had no
revenues. General and administrative expenses decreased from $635,318 in 1997
to $484,711 in 1998. For the years ending December 31, 1998 and December 31,
1997, the Company incurred an operating loss of $877,054 and $882,223,
respectively. It is anticipated that net-operating losses will continue through
the next two years.
Liquidity and Capital Resources
On December 31, 1998, the Company had an accumulated deficit and a working
capital deficit of $14,895,616 and $3,477,841, respectively. The Company had a
ratio of liabilities to tangible assets of approximately 28.2 to 1 as of
December 31, 1998. The Company is also in default on a significant number of
notes that total approximately $1,600,000 in principal as of December 31, 1998.
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 an
individual shareholder for $300,000 payable in $100,000 installments on May 27,
1997, and September 5, 1997, and December 6, 1997. The installment loan bears
interest at 12% per annum. 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 its polymer technology collateralize the
installment note. The interest payments are currently in default. 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.
The Company will require additional financing to finance it proposed business
plan. No assurance can be given that additional financing can be obtained, or
if obtainable, that the terms will be satisfactory to the Company. 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
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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:
Name Age Title
- ---- --- -----
James B. Lahey 64 President, Chief Executive Officer, and Director
James A. Giansiracusa 50 Vice President - Operations, Secretary,
Chief Financial Officer and Director
Ian C. Gent 56 Director
Stephen V. Prewett 53 Director
William N. Whelen, Jr. 61 Director
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 Bachelors degree in Civil Engineering from Manhattan College.
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. 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 in the securities and banking industries, he has held
positions as Vice President, Merrill Lynch Royal Securities in Canada, Managing
11
<PAGE>
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 is
currently Chairman and a Director with S. A. Power Corporation USA. 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 Director with S. A. Power Corporation
USA. He is a registered representative of Simon Securities, New Jersey. Mr.
Whelen has an electrical engineering degree from Widener University of Chester,
Pennsylvania.
There are no family relationships 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, 1998, there
was compliance with all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial stockholders.
12
<PAGE>
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, 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
-------------------------------
Name and Long Term Compensation Awards
Principal Position Annual Compensation -------------------------------
- ------------------ ------------------------------------ Securities All Other
Year Salary Bonus Underlying Annual
------------------------------------ Options/SAR Compensation
----------- ------------
<S> <C> <C> <C> <C> <C>
James B. Lahey,
President 1998 $120,000(1) 0 0 0
1997 120,000(1) 0 0 0
1996 120,000(1) 0 0 0
James A. Giansiracusa, 1998 $132,000(1) 0 0 0
Vice President, 1997 $132,000(1) 0 0 0
Operations 1996 $132,000(1) 0 0 0
Stephen V. Prewett, 1998 $ 0 0 0 0
Vice President, 1997 $108,000(1) 0 0 0
Technology Development 1996 $108,000(1) 0 0 0
</TABLE>
(1) The amounts stated above have not been fully paid and Messrs. Lahey,
Giansiracusa, and Prewett have agreed to deferred compensation in the
amount totaling $823,100 from deferrals in the three fiscal years reflected
in the above table. (Also see Notes 6 and 11 to Consolidated Financial
Statements.)
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, 1996, 1997 and 1998, 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 1998,
although the Company's By-Laws provide that directors shall receive $500 for
each meeting. The compensation of officers and directors is subject to review
and adjustment from time to time by the Board of Directors.
13
<PAGE>
Stock Options
The following table presents information for the named officer in the Summary
Compensation Table with respect to options exercised during fiscal year ended
December 31, 1998 and unexercised options held as of the end of the fiscal year.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired on Value Options/SARs at FY-End (#) Options/SARs at FY-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ------------ ------------------------- --------------------------
<S> <C> <C> <C> <C>
James B. Lahey 0 0 300,000/0 $54,000/$0
James A. Giansiracusa 0 0 1,356,593/0 $244,186/$0
Stephen V. Prewett 0 0 594,783/0 $107,060/$0
</TABLE>
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.
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
The following table sets forth, as of December 31, 1998, 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:
14
<PAGE>
<TABLE>
<CAPTION> Amount and Nature Percent of
Name and Address of of Beneficial Outstanding
Beneficial Owner Shares Owned Ownership
- ------------------- ----------------- -----------
<S> <C> <C>
James B. Lahey (1,3,5) 900,000 3%
James A. Giansiracusa (2,3,5) 1,621,593 5%
Ian C. Gent (5) 100,000 *
Stephen V. Prewett (4,5) 594,783 2%
William N. Whelen, Jr. (5) ---- *
All Officers and Directors as a
group (5 persons) (6) 3,216,376 10%
Ruth P. Brittingham (7) 4,022,292 13%
S. A. Power Corporation (7) 2,000,000 6%
O. G. Sansone & Colleen Sansone (7) 6,303,606 20%
</TABLE>
- -----------------------------------
* Amount held represents less than 1%.
(1) Includes 500,000 shares of Common Stock as part of an employment
contract.
(2) Includes 1,356,593 shares of Common Stock subject to currently
exercisable options.
(3) Includes 100,000 shares of Common Stock awarded as Part of Incentive
Compensation Plan. (See Note 11 Management Compensation Plan, Financial
Report for the Years Ended December 31,1997 and 1996.)
(4) Includes 594,783 shares of Common Stock subject to currently exercisable
options.
(5) The address for these individuals is the address of the Company.
(6) Includes 2,251,376 shares of Common Stock subject to currently
exercisable options.
(7) Not Directors or Officers.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
(3) (i) Articles of Incorporation.(1)
(ii) Amended and Restated By-laws.(1)
(10) (i) Lockheed Martin Idaho Technologies Company (LMITCO) Purchase Order
No. F98-179335, Polysiloxane Encapsulation of Calcined Surrogate Material.
(ii) 1995 Stock Option Plan and Form S-8 Registration Statement. (1)
(iii) Employment Agreements dated April 1, 1995 of Messrs. Lahey,
Giansiracusa, and Prewett. (1)
(11) Form 10-KSB for the Period Ending December 31, 1997. (2)
(27) Financial Data Schedule.
(99) Risk Factors.
Note: Certain previously filed exhibits are no longer being incorporated by
reference (and therefore not numerically listed) as the underlying documents
15
<PAGE>
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 10KSB for the Period Ending December
31, 1997.
(b) Reports on Form 8-K
None.
16
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO FINANCIAL REPORT
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Page Nos.
-------------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEET
At December 31, 1998 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997 and 1998 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the Years Ended December 31, 1997 and 1998 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1998 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7 to F-31
</TABLE>
F-1
<PAGE>
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, 1998, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the years ended December 31, 1997 and 1998. 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, 1997 and 1998, and the results of its
operations and its cash flows for the years then ended, 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 $877,000
during the year ended December 31, 1998, and, as of that date, had a working
capital deficiency of approximately $3,589,000 and stockholders' deficiency of
approximately $3,447,000. As described more fully in Notes 1, 7 and 11 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
March 5, 1999
F-2
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1998
ASSETS
------
CURRENT ASSET:
Cash $ 20,367
PROPERTY AND EQUIPMENT - At cost, net of
accumulated depreciation and allowance against equipment
expenditures 39,735
INTANGIBLE ASSETS - Net of accumulated amortization 67,809
OTHER ASSETS 4,800
------------
TOTAL ASSETS $ 132,711
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,977,161
Notes payable 1,632,591
------------
TOTAL LIABILITIES 3,609,752
------------
COMMITMENTS, CONTINGENCIES AND OTHER
MATTERS (Notes 1, 2, 6, 7, 8, 11 and 13)
STOCKHOLDERS' DEFICIENCY:
Preferred stock - par value $.01 per share; shares
authorized 1,000,000; shares issued and outstanding -
none -
Common stock - par value $.01 per share; shares
authorized - 50,000,000; shares issued and outstanding -
32,484,716 324,848
Additional paid-in capital 11,093,727
Accumulated deficit (14,895,616)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (3,477,041)
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 132,711
============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
REVENUE $ - $ -
----------- -----------
COSTS AND EXPENSES:
Research and development 1,141 7,416
General and administrative 635,318 484,711
Compensatory element of common stock and options 140,000 83,334
Financing costs 12,469 36,281
Debt conversion expense - 59,000
Interest expense 178,618 198,762
Other (income) expense, net (Note 9) (85,323) 7,550
----------- -----------
TOTAL COSTS AND EXPENSES 882,223 877,054
----------- -----------
NET LOSS $ (882,223) $ (877,054)
=========== ===========
PER SHARE DATA:
- --------------
BASIC AND DILUTED LOSS PER SHARE $ (.03) $ (.03)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES USED IN
BASIC AND DILUTED LOSS PER SHARE (NOTE 2) 26,453,643 30,997,491
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Unearned Notes
Common Stock Compensation Receivable
------------------------ Additional Accumulated and Finance from
Shares Amount Paid-in Capital Deficit Charges Stockholders Total
----------- ---------- --------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 31,405,904 $ 314,060 $9,835,247 $(13,136,339) $ (90,000) $ (10,934) $(3,087,966)
Issuance of stock for conversion
of notes payable 1,036,694 10,366 143,067 - - - 153,433
Issuance of stock as additional
consideration for loan 300,000 3,000 39,750 - (42,750) - -
Issuance of stock in settlement
of litigation 40,000 400 18,400 - - - 18,800
Amortization of unearned
compensation costs - - - - 90,000 - 90,000
Issuance or stock for payment
of debt 200,000 2,000 48,000 - - - 50,000
Amortization of unearned
financing fees - - - - 12,469 - 12,469
Cancellation of shares per
litigation settlement (6,066,830) (60,668) 60,688 - - - -
Issuance of stock in connection with
management compensation plan 200,000 2,000 48,000 - - - 50,000
Net loss - - - (882,223) - - (882,223)
----------- --------- ----------- ------------ --------- ---------- -----------
Balances at December 31, 1997 27,115,768 271,158 10,193,132 (14,018,562) (30,281) (10,934) (3,595,487)
Issuance of stock for
conversion of notes payable 4,340,059 43,401 490,834 - - - 534,235
Issuance of stock in
settlement of litigation 40,000 400 7,150 - - - 7,550
Stock issued in connection
with compensatory
obligations 250,000 2,500 52,500 - - - 55,000
Stock option issued in
connection with consulting
agreement - - 20,000 - - - -
Cancellation of stock for
non-payment of note
receivable (260,000) (2,600) - - - 2,600 -
Satisfaction of notes
receivable in exchange for
services - - - - - 8,334 8,334
Issuance of stock 998,889 998,889 271,111 - - - 281,100
Amortization of unearned
financing fees - - - - 30,281 - 30,281
Debt conversion loss - - 59,000 - - - 59,000
Net loss - - - (877,054) - - (877,054)
----------- --------- ----------- ------------ --------- ---------- -----------
Balances at December 31, 1998 32,484,716 $ 324,848 $11,093,727 $(14,895,616) $ - $ - $(3,477,041)
=========== ========= =========== ============ ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(882,223) $(877,054)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 16,459 25,567
Amortization of unearned and deferred finance costs 12,469 30,281
Compensatory element of common stock and options 140,000 83,334
Debt conversion expense - 59,000
Loss on litigation settlements 18,800 7,550
Allowance for loss against equipment expenditures 223,064 -
Write-off of shareholder loans 200,466 -
Cash provided by (used in) the change in assets and
liabilities:
Decrease in prepaid expenses 10,353 -
Decrease in advances to officer 1,341 -
(Increase) decrease in deposits (10,000) 9,215
Increase in accounts payable and accrued liabilities 325,580 327,202
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (344,623) (334,905)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (43,734) -
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock - 281,100
Proceeds from loans 391,800 94,500
Repayment of officer loan payable - (23,959)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 391,800 351,641
--------- ---------
INCREASE IN CASH 3,443 16,736
CASH - BEGINNING 188 3,631
--------- ---------
CASH - ENDING $ 3,631 $ 20,367
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 third parties which would be 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 11).
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, 1998, the Company incurred a net loss of
approximately $877,000 and, as of that date, had a stockholders'
deficiency and a working capital deficiency of approximately
$3,447,000 and $3,589,000, respectively. The Company is also in
default on a significant number of loan agreements which total
approximately $2,045,000 in principal and interest as of December 31,
1998 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 1999. From
January 1, 1999 through March 12, 1999, the Company's proceeds from
all financing activities amounted to approximately $25,000 (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 the first quarter of 1999, the Company exchanged
$25,000 of principal on a promissory note outstanding at December 31,
1998 for shares of common stock (see Note 13).
F-7
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS (Continued)
To date, the Company has not completed its restructuring of the
remaining debt and the Company continues to be in default under such
agreements. On March 6, 1997, one group of note holders, representing
$600,000 of the promissory notes outstanding as of December 31, 1997,
has filed a lawsuit against the Company to recover loans and other
monies provided to the Company. During June 1998, the Company and the
note holders reached a tentative settlement, which is subject to the
approval of the majority of the shareholders and approval of the
residing court (see Note 11).
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries.
All material intercompany balances and transactions have been
eliminated in consolidation.
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.
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.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
F-8
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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:
Description Years
----------- -----
Furniture and fixtures 7
Computer hardware and software 5
Intangible Assets
-----------------
Patent costs which include legal costs and filing fees are being
amortized on the straight-line method over the shorter of the
estimated economic life of the patents or seventeen years.
Income Taxes
------------
The Company provides for deferred tax liabilities and assets 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.
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 the life of the related debt obligation.
Revenue Recognition
-------------------
Revenue from license fees will be recognized in the year received.
Revenue from the sale of technology will be recognized in the period
in which it is earned.
F-9
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred,
unless they are reimbursed under specific contracts. 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.
Stock-Based Compensation
------------------------
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for its stock-based compensation
arrangements pursuant to APB Opinion No. 25, "Accounting for Stock
Issued to Employees". In accordance with the provisions of SFAS No.
123, the Company discloses the proforma effects of accounting for
these arrangements using the minimum value method to determine fair
value.
Loss Per Share
--------------
Basic earnings per share ("Basic EPS") is computed by dividing net
loss available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per
share ("Diluted EPS") gives effect to all dilutive potential common
shares outstanding during a period. In computing Diluted EPS, the
treasury stock method is used in determining the number of shares
assumed to be purchased from the conversion of common stock
equivalents. Securities that could potentially dilute Basic EPS in
the future, that were not included in the computation of Diluted EPS
because to do so would have been anti-dilutive for the periods
presented, consist of options, warrants, convertible notes and
convertible accrued salaries discussed in Notes 7, 8 and 11 to the
accompanying financial statements.
Impairment of Long-Lived Assets
-------------------------------
During 1996, the Company adopted the Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". Under the
provisions of this statement, the Company has evaluated its long-lived
assets for financial impairment, and will continue to evaluate them as
events or changes in circumstances indicate that the carrying amount
of such assets may not be fully recoverable.
F-10
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of
certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, there were no adjustments to the carrying
value of long-lived assets in 1996. In December 1997, the Company
recorded a charge of $223,064 related to special use assets under
construction (Note 4).
Impact of Recently Issued Accounting Standards
----------------------------------------------
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting comprehensive income, defined as all changes
in equity from non-owner sources. Adoption of SFAS No. 130 did not
have a material effect on the Company's financial position or results
of operations.
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards for the way public
enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to stockholders. Adoption of SFAS No. 131 did not have a
material effect on the Company's financial position or results of
operations.
Effective December 29, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures
About Pensions and Postretirement Benefits", which standardizes the
disclosure requirements for pensions and other postretirement
benefits. The Statement addresses disclosure only. It does not
address liability measurement or expense recognition. There was no
effect on financial position or net income as a result of adopting
SFAS No. 132.
Effective January 1, 1998, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"). SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements,
such as software products, upgrades, enhancements, post-contract
customer support, installation and training to be allocated to each
element based on the relative fair values of the elements. The
adoption of SOP 97-2 did not have an effect on the Company's financial
position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which revises the accounting
for software development costs and will require the capitalization of
certain costs. The adoption of SOP 98-1 did not have an effect on the
Company's financial position or results of operations. The Company
recognizes the need to ensure its operations will not be adversely
impacted by Year
F-11
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2000 software failures. Software failures due to processing errors
potentially arising from calculations using the Year 2000 date are a
known risk. The Company is addressing this risk to the availability
and integrity of financial systems and the reliability of operational
systems. The Company has established processes for evaluating and
managing the risks and costs associated with this problem. The
computing portfolio was identified and an initial assessment has been
completed. The cost of achieving Year 2000 compliance will not have a
material impact on the accompanying financial statements.
NOTE 3- COLLABORATION AGREEMENTS
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 signed a contract with Lockheed Martin Idaho
Technologies Company (LMITCO) for investigating the use of the
Company's patent pending CSF polysiloxane grouting material for the
encapsulation and stabilization of certain Department of Energy
("DOE") surrogate waste materials in preparation for long-term
disposal. Total expenditures for this testing amounted to $106,300
and was funded entirely by LMITCO. The testing and analysis
determined that the Company's CSF produces a stable nonleachable
cohesive waste material suitable for long-term disposal.
In March 1998, the Company signed a contract with Lockheed Martin
Idaho Technologies Company (LMITCO) for evaluating Orbit's proprietary
polymer system, as an encapsulating agent for radioactive ash. In
July 1998, this contract was modified to test Orbit's polymer system
with a low level calcine waste surrogate material. The results
concluded that pre-treatment options be explored in more detail for
chromium and cadmium and, therefore, be recommended as a treatment
option leading to the disposal of the low level waste stream.
F-12
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT - NET
Property and equipment, net, consisted of the following at December
31, 1998:
Office furniture and fixtures $ 46,605
Research laboratory furniture and fixtures 65,087
In-process machinery 223,064
---------
Sub-total 334,756
Accumulated depreciation (71,957)
Valuation allowance for in-process machinery (223,064)
---------
$ 39,735
=========
As discussed further in Note 9, during the year ended December 31,
1997, the Company provided for a $223,064 valuation allowance for a
probable loss against two machines, which have not been placed in
service to date. The valuation allowance is equal to the aggregate
cost of the machines.
Depreciation expense for the years ended December 31, 1997 and 1998
was $11,327 and $20,437, respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998:
Patent costs $ 87,212
Less: Accumulated amortization (19,403)
--------
$ 67,809
========
Patent costs are being amortized over seventeen years on the straight-
line method.
Amortization expense for the years ended December 31, 1997 and 1998
was $5,132 and $5,130, respectively.
F-13
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
December 31, 1998:
Salary and related taxes (Note 11) $ 843,804
Professional fees 499,609
Interest 499,044
Consulting fees 25,505
Miscellaneous 109,199
----------
$1,977,161
==========
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 1998:
<TABLE>
<C> <S> <C>
a) Represents four promissory notes aggregating $170,000,
all of which are past due, with interest at 15%. $170,000
b) 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: 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
c) Represents $100,000 in a one-year promissory note
bearing interest at 10% per annum, due September 13,
1996. The note and related accrued interest is
convertible into common stock at $0.60 per share, with
automatic conversion upon the effectiveness of a
Registration Statement under the Securities Act of 1933.
The Company is in default under this note agreement
(see Note 13). 100,000
</TABLE>
F-14
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE (Continued)
<TABLE>
<C> <S> <C>
d) During the years ended December 31,1997 and 1996, the
Company borrowed $76,800 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 interest are convertible into
common stock at prices ranging from $0.10 and $0.22 per
share of debt. During the year ended December 31, 1998,
the Company repaid $23,959 in principal and $24,941 in
interest to an officer. The remaining notes are in default. $103,841
e) 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. In October of
1998, the note, with principal of $25,000 and related
accrued interest of $2,500, was converted at the above
rate into 137,500 shares of common stock. - 0 -
f) During the year ended December 31, 1998, the Company
borrowed $85,000 from three private investors and
issued convertible promissory notes that mature during
November 1999. The interest rate on these promissory
notes range between 8% and 10%. The notes principal
balance and accrued interest can be converted into the
Company's common stock at the market price discounted
by 20% of the average bid price for the period five days
prior to the date of conversion. 85,000
g) Represents one-year promissory notes due at various
dates during 1996 at interest rates ranging from 10% to
15% per annum. Notes with principal amounting to
$350,000 and related accrued interest are convertible into
common stock at prices ranging from $.10 - $.22 per
share.
The Company is in default under these obligations. In
June of 1998, a tentative settlement was reached, which
is subject to shareholder and court approvals (see Note
11 - Benveniste Litigation). 600,000
</TABLE>
F-15
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE (Continued)
<TABLE>
<C> <S> <C>
h) 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. As of December 31, 1998, the shareholder has
advanced the Company $299,500 against the $300,000
loan agreement. 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,
which was paid in January 1998. The Company has
defaulted on the remaining semi-annual payments. The
installment note is collateralized by the Company's
rights, titles and patents, technology known as "Ceramic
Silicone Foam." $ 299,500
i) 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%. 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. On November 5, 1997, the Company
converted $50,000 of principal into 294,118 shares of the
Company's common stock. On November 1, 1998, the
Company converted the remaining principal of $165,332
and accrued interest of $58,071 into 869,242 shares of
the Company's common stock. The November 1, 1998
conversion agreement includes the issuance of
unrestricted shares of common stock at market discount
of 20%. The value of the market discount of $59,000
has been charged to operations during 1998. - 0 -
j) The Company entered into a settlement agreement on
December 27, 1996. Pursuant to the agreement the
Company issued a $250,000 secured convertible
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. In April of 1998, the note, with principal of
$250,000 and accrued interest of $33,332 was converted
into 3,333,317 shares of the Company's common stock. - 0 -
----------
Total Notes Payable $1,632,591
==========
</TABLE>
F-16
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - 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. 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) Preferred Stock
---------------
The Company has authorized 1,000,000 shares of preferred 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
-------------------------
1998:
----
During the year ended December 31, 1998, the Company sold 998,889
shares of common stock for $281,100.
During the year ended December 31, 1998, the Company and certain
of its debt holders agreed to convert $440,332 of principal and
$93,903 of accrued interest into 4,340,059 shares of common
stock.
As discussed further in Note 9, the Company entered into a
settlement agreement during 1998. Pursuant to the agreement, the
Company was required to issue an additional 40,000 shares of
common stock, valued at $7,550, which was deemed the fair market
value at the settlement date.
During the year ended December 31, 1998, the Company awarded
250,000 shares of common stock to a former employee, who
performed consulting services during 1998. The Company has
valued these shares at $55,000.
During the year ended December 31, 1998, the Company cancelled
260,000 shares of common stock for non-payment of a note
receivable originating from a stock option that was exercised
during 1995.
F-17
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
c) Common Stock Transactions (Continued)
-------------------------
1997:
----
During November 1997, the Company issued 200,000 shares of common
stock in settlement of $50,000 of accrued liabilities.
As discussed further in Note 7(f)(ii), the Company entered into
an installment loan agreement with an individual shareholder to
borrow $300,000. As additional consideration for this loan, the
Company agreed to issue 300,000 shares of the Company's
restricted common stock to the noteholder. The Company has
recorded the additional consideration as unearned financing costs
valued at $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. Unearned financing costs
were initially being amortized over two years, which amounted to
$12,469 for the year ended December 31, 1997. For the year ended
December 31, 1998, the Company amortized the remaining balance of
$30,281, resulting from the Company's default on the semi-annual
interest payments.
As discussed further in Note 9, the Company entered into a
settlement agreement during 1997. Pursuant to the agreement the
Company was required to make a payment of 5,000 shares of
unrestricted common stock and 35,000 shares of restricted common
stock, which was valued by the Company at $18,800. In 1998, the
Company fulfilled its obligations.
During November of 1997, the Company and certain of its debt
holders agreed to convert principal of $142,250 and related
accrued interest of $11,184 into 1,036,694 shares of common
stock.
During December 1997, the Company's Board of Directors authorized
the issuance of 200,000 shares of restrictive common stock under
the management compensation plan discussed in Note 11. The
Company has valued the common stock at $50,000, which
approximated fifty percent (50%) of the fair value at the date of
issuance.
As discussed further in Note 11c), the Company has cancelled
6,066,830 shares of common stock in connection with a litigation
judgement.
F-18
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
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. The Option Plan provides for a limit of up to
500,000 options per person.
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.
F-19
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
d) Stock Options (Continued)
-------------
(1) 1995 Stock Option Plan (Continued)
----------------------
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 August of 1995, in connection with the
employment agreements described in Note 11, 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, 1997 and 1998
was $90,000 and $-0-, respectively.
(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 the year ended December 31, 1997, the Company granted
a noteholder the right to purchase 150,000 shares of
restricted common stock for a period of 180 days, commencing
May 27, 1997, at a 25% discount to the quoted trading prices
at the time of exercise. As of December 31, 1997, the
noteholder did not exercise this option and, accordingly,
such options have expired.
The Company entered into a consulting agreement with a
scientist on February 1, 1998. Pursuant to the terms of the
agreement, the Company granted the consultant two options to
purchase 100,000 shares each of restricted common stock.
Each stock option provides for an exercise price of $.01 per
share and expires on March 31, 2000. The February 1, 1998
agreement provides for an additional option to purchase
100,000 shares at the above price if the consultant
completes a phase of the project by a date to be determined
by the Company and the consultant. The options for 200,000
shares of common stock were valued at $20,000 and were
charged to operations during 1998.
F-20
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
d) Stock Options (Continued)
-------------
(3) Shares Under Option
-------------------
There were no options exercised during the years ended
December 31, 1997 and 1998. 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 years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Incentive Weighted Average Non-Qualified Weighted Average
Stock Options Exercise Price Stock Options Exercise Price
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Outstanding - 12/31/96 1,016,400 $ .79 4,880,672 $ .28
--------- ----- --------- --------
Options granted - 1997:
Outside the option plan -
stockholder loan - 150,000 .35
Options exercised - -
Options expired/cancelled:
Options cancelled (500,000) .80 -
Outside the option plan -
financing agreements
($.30-$2.00) - (200,000) .40
--------- ----- --------- --------
Outstanding - 12/31/97 516,400 .79 4,830,672 .27
========= ===== ========= ========
Options granted - 1998:
Outside the option plan -
consultants - - 200,000 .01
Options expired:
Outside the option plan -
financing agreements
($.88) - - (890,000) .88
--------- ----- --------- --------
Outstanding - 12/31/98 516,400 $ .79 4,140,672 $ .08
========= ===== ========= ========
Composition at 12/31/98:
- -----------------------
1995 stock option plan
($.50-$.87/share) 516,400 $ .79
1995 stock option plan
($.01/share) - 2,344,976 $ .01
Outside the option plan -
consultants - 1,795,696 .17
($.01-$1.06/share)
Outside the option plan -
financing agreements
($.30-$2.00) - - -
--------- ----- --------- --------
Outstanding - 12/31/98 516,400 $ .79 4,140,672 $ .08
========= ===== ========= ========
Total Value at Option Price $ 406,200 $ 328,718
========= =========
</TABLE>
F-21
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - 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, 1997
and 1998.
NOTE 9 - OTHER (INCOME) EXPENSE
Other (income) expense, net, consists of the following for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -------
<C> <S> <C> <C>
a) Write-off of prior liabilities $(277,187) $ -
b) Allowance against capital expenditures 223,064 -
c) Loss from litigation settlement 28,800 -
d) Gain from litigation settlement (60,000) -
e) Loss from litigation settlement - 7,550
--------- ------
Total $ (85,323) $7,550
========= ======
</TABLE>
a) On December 29, 1997, the Company's Board of Directors
unanimously passed a resolution to write-off debt of $200,466
that was allegedly incurred principally for consulting services
and was determined by the current Board of Directors to be
without demand or substantive evidence. Furthermore, the Company
management wrote-off $76,721 of prior liabilities that was
determined to be without demand or substantive evidence.
b) On May 18, 1995, the Company engaged a machine fabricator to
build two machines to be used as part of an electrode coating
system. Project costs paid and accrued by the Company through
December 31, 1997 amounted to $223,064. The Company has not been
able to satisfy the estimated remaining $45,000 of progress
billings related to this project because of the Company's current
financial condition. Accordingly, the Company has provided for a
full allowance against its expenditures.
F-22
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OTHER (INCOME) EXPENSE (Continued)
c) During 1997, 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 pay $10,000 cash and a payment of 35,000 shares of the
Company's restricted common stock and 5,000 shares of the
Company's unrestricted common stock. The shares were valued at
$18,800, which was the fair market value at the date of
settlement. Aggregate loss from this settlement amounted to
$28,800. In 1998, the Company fulfilled its obligations.
d) During 1997, the Company received notice of a settlement of debt
between a noteholder and the former officers of Orbit
Technologies. The settlement agreement provided for the relief
of a $50,000 note obligation and related accrued interest of
$10,000 that was recorded as a liability by the Company.
Accordingly, the Company has written-off the note and related
interest, aggregating $60,000, as a gain from litigation
settlement.
e) During November 1998, the Company entered into a settlement
agreement with a shareholder in connection with prior purchases
of the Company's common stock. The settlement agreement provided
for the Company to issue additional 40,000 shares of the
Company's common stock, valued at $7,550, which was deemed the
fair market value at the settlement date.
NOTE 10 - INCOME TAXES
The Company was not required to provide for a provision for income
taxes for the years ended December 31, 1997 and 1998 as a result of
net operating losses incurred during those years.
The components of deferred tax assets and liabilities at December 31,
1998 consist of the following:
Deferred Tax Assets:
Net operating loss carryforwards $3,960,000
Tax effects of temporary differences (*) 1,344,000
Start-up costs 186,000
----------
Total Gross Deferred Tax Assets 5,490,000
Less: Valuation allowance 5,490,000
----------
Net Deferred Tax Assets $ -
==========
(*) Temporary differences that give rise to the deferred tax asset at
December 31, 1998 are primarily: compensatory element of grants
of stock options, awards of common stock, allowance against
equipment expenditures, and deferred officers' compensation.
F-23
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (Continued)
The net change in the valuation allowance for deferred tax assets was
an increase of $349,000.
As of December 31, 1998, the Company had available approximately
$9,897,000 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:
Year of Expiration:
------------------
2000 $ 557,000
2001 726,000
2002 43,000
2003 2,000
2004 2,000
2005 1,000
2006 1,000
2007 937,000
2008 1,937,000
2009 932,000
2010 1,814,000
2011 1,611,000
2012 561,000
2018 773,000
----------
$9,897,000
==========
A reconciliation between the statutory federal income tax rate (34%)
and the Company's effective rate is as follows:
Years Ended December 31,
--------------------------
1997 1996
----------- ----------
Federal statutory rate (34.0)% (34.0)%
Non-deductible expenses .1 .4
Unutilized net operating loss 33.9 33.6
------ ------
Effective rate
-0- % -0- %
====== ======
F-24
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Lease Obligation
----------------
The Company has relocated and has signed a new operating lease for
office space effective July 1, 1998. Monthly payments under this
lease amount to: $1,450 per month from July 1, 1998 to June 30, 1999;
$1,510 per month from July 1, 1999 to June 30, 2000; and $1,570 per
month from July 1, 2000 to June 30, 2001.
Rental expense for the years ended December 31, 1997 and 1998 was
$34,743 and $27,723, respectively.
Employment and Consulting Agreements
------------------------------------
On April 1, 1995, the Company entered into three employment agreements
with its then current officers. The agreements provide for monthly
salaries aggregating $30,000 over an initial two-year period ending
March 31, 1997, and provide for automatic annual renewals. 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.
Effective January 1, 1997, one of the three officers elected to
terminate their contract, which was mutually agreed to by the Company.
For each of the years ended December 31, 1997 and 1998, the expense
recorded under the remaining agreements amounted to $252,000. At
December 31, 1998, unpaid obligations under these agreements amounted
to $823,100 and are convertible into common stock at $.22 per share.
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.
F-25
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Potential Liability for Over-issuances
--------------------------------------
Between December 16, 1992 and February 17, 1994, the Company issued
approximately 15 million more shares of its common stock than it had
authorized by its Certificate of Incorporation. As a result of
cancellations during 1997 and a tentative settlement discussed in Note
11e, the remaining amount has been reduced to approximately 2 million
shares.
It is conceivable that some shareholders will try to hold the Company
responsible for the acts of its former officers and directors with
respect to the issuance of such stock in excess of the Company's
authorized shares. The potential liability is unknown, but could be
significant. It could also interfere with the settlement of the
Benveniste litigation (Note 11e). Orbit anticipates pursuing an
action in Delaware to resolve this matter.
Management Compensation Plan
----------------------------
On January 3, 1997, the Board of Directors instituted an incentive
compensation plan for two of the Company's key personnel. The plan
provides that each executive would be issued 100,000 shares of common
stock for the achievement of each of the five events described as
follows:
1. An increase in the common stock price to $1.00 per share.
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.
For the years ended December 31, 1997 and 1998, the Company has
accrued 200,000 shares valued at $50,000 and $-0- shares,
respectively, under this management compensation plan.
F-26
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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"). Chrysler Corporation has
integrated the TiTRODE type electrodes 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 Canadian corporation has not acknowledged the
validity of such agreement, and to-date, no monies or any
financial information have been received by the Company. The
Company intends to retain legal counsel to enforce its agreement.
No action was taken during 1998.
b) Emerson v. Orbit Technologies, Inc. et al. In 1997, the Company
------------------------------------------
settled the Emerson litigation for $10,000, plus 5,000 shares of
unrestricted stock, plus 35,000 shares of restricted stock.
c) Joseph v. Orbit Technologies, Inc. In June 1996, Adrian Joseph,
----------------------------------
the Company's 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
issuances of stock to former officers and related entities, which
the Company believed were without consideration.
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 adjusted
its outstanding shares by cancelling the shares held by the
former officers and related entities at December 31, 1997. It
was determined that the number of shares held by the plaintiff
amounted to 6,066,830.
F-27
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Litigation/Disputes (Continued)
-------------------
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.
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. Prior to Orbit becoming a client, Mr.
Joseph was a personal client of Jeffer, Mangels, Butler & Marmaro.
The retainer agreement signed by Joseph has barred Orbit from
filing a legal malpractice action.
e) 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 1992 totalling $197,000 and additional
loans made during 1995 totalling $600,000.
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 December 31, 1997. 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-28
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Litigation/Disputes (Continued)
-------------------
e) Benveniste, et. al. vs. Orbit and Its Officers. (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.
In June of 1998, a tentative comprehensive settlement was reached
by all parties. The financial terms of the tentative settlement
include the conversion of all the Benveniste's debt to 5,745,000
shares of common stock. Because the accord requires the surrender
and cancellation of approximately 5 million shares of Orbit common
stock issued by past officers and directors that Orbit contends
are invalid, the net effect will be to essentially maintain the
existing equity structure. The agreement also grants to the
Benvenistes the option to purchase up to 1,100,000 shares at a
price ranging from $0.23 to $0.75 per share, which depend on the
period of time from the option grant date that the options are
exercised. The settlement has several contingencies, which need to
be resolved before the settlement is final.
f) 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 for: (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 complying with the Court's
requirements.
g) 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. In April of 1998, the
parties to the above action have entered into a mutual release
agreement, whereby Jacobs will relinquish 1,000 shares of Orbit
stock.
F-29
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Litigation/Disputes (Continued)
-------------------
h) Wilson vs. Orbit. This action was filed on September 15, 1997 in
----------------
the Superior Court of California, County of Los Angeles. The
plaintiff seeks money damages allegedly attributable to his
inability to sell restricted stock. This action was settled in
1998, resulting in the issuance of 75,000 shares of common stock
in exchange for cancellation of his 30,000 shares.
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, 1997 and 1998, the Company paid
$-0- and $30,941 for interest, respectively.
Non-Cash Transactions
---------------------
During the year ended December 31, 1997:
a) The Company issued 300,000 shares of common stock as additional
consideration for a $300,000 loan obligation, which has been
valued at $42,750.
b) Convertible promissory notes and related accrued interest
aggregating $153,434 were converted to 1,036,694 shares of common
stock.
c) In connection with a legal settlement agreement, the Company
issued 5,000 shares of its unrestricted common stock and 35,000
shares of restricted common stock valued at $18,800.
d) The Company issued 200,000 shares of common stock as consideration
for accrued expenses valued at $50,000.
e) The Company reduced notes payable of $50,000 and related accrued
interest of $10,000 as a result of a favorable outcome in a legal
settlement.
f) During the year, the Company wrote-off old liabilities relating
to the former Board of Directors valued at $76,721.
F-30
<PAGE>
ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions (Continued)
---------------------
During the year ended December 31, 1998:
a) The Company issued 250,000 shares of common stock as
consideration for current compensatory obligation
amounting to $55,000.
b) Convertible promissory notes and related accrued interest
aggregating $310,833 were converted to 3,470,817 shares of its
common stock.
c) In connection with a legal settlement agreement, the Company
issued 40,000 shares of its common stock valued at $7,450.
d) As an inducement for a noteholder to convert, a debt conversion
expense of $59,000 was incurred. The noteholder converted
$223,402 of principal and accrued interest into 869,242 shares.
e) Notes receivable of $8,334 from a shareholder, relating to an
exercise of prior stock options, were satisfied through services
rendered.
f) Pursuant to a consulting agreement, the Company issued two (2)
stock options that had an aggregate value of $20,000.
NOTE 13 - SUBSEQUENT EVENTS
Notes Payable
-------------
a) During the first quarter of 1999, the Company converted $25,000
of principal and $362 of accrued interest, relating to a note
payable outstanding at December 31, 1998, into 120,771 shares of
the Company's common stock.
b) As part of a settlement agreement with a noteholder, during the
first quarter of 1999, the Company agreed to convert principal of
$50,000 and accrued interest of $18,281, relating to a note
payable outstanding at December 31, 1998, into 273,123 shares of
the Company's common stock.
c) During the first quarter of 1999, the Company received the
proceeds of a $25,000 loan from an unrelated individual. The loan
is due in one year, bears interest at 8% per annum, and is
convertible into common stock at a 20% discount to the average 5-
day market price at the conversion date.
F-31
<PAGE>
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: April 30, 1999
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.
NAME TITLE DATE
- ---- ----- ----
/s/ JAMES B. LAHEY Chief Executive Officer and April 30, 1999
- ---------------------------- Chairman of the Board (Chief
James B. Lahey Executive Officer)
/s/JAMES A. GIANSIRACUSA Vice President - Operations, April 30, 1999
- ---------------------------- Chief Financial Officer
James A. Giansiracusa (Chief Financial and
Accounting Officer),
Secretary, and Director
/s/ IAN C. GENT Director April 30, 1999
- ----------------------------
Ian C. Gent
/s/ STEPHEN V. PREWETT Director April 30, 1999
- ----------------------------
Stephen V. Prewett
/s/ WILLIAM N. WHELEN Director April 30, 1999
- ----------------------------
William N. Whelen, Jr.
<PAGE>
EXHIBIT 10
LOCKHEED MARTIN IDAHO TECHNOLOGIES COMPANY (LMITCO)
2525 Fremont Avenue
P. O. Box 1625, Idaho Falls, ID 83415-3521
Operating under U. S. Government Contract NO. DE-AC07-94ID13223
To: Orbit Technologies, Inc.
2011 Palomar Airport Road, Suite 100 Carlsbad, CA 92009
Confirming to: James A. Giansiracusa
1. STATEMENT OF WORK
a. The Subcontractor shall furnish the following services, in accordance with
the requirements, terms and conditions specified or referenced in this Purchase
Order:
Maximum of 15O hours of services in accordance with die Statement of Work
entitled, "Encapsulation of Idaho National Engineering and Environmental
Laboratory Waste Experimental Reduction Facility Fly Ash by Mixing with
Polysiloxane", dated March 15, 1998.
b. This is a fixed-rate, ceiling priced, level-of-effort Purchase Order for
the period of March 26, 1998, through August 10, 1998.
The quantity of hours shown is an estimated amount to be used during the
specified period of this Purchase Order.
Procurement Agent: C. F. Cloud, Telephone: (208) 526-55996.
Ceiling Price: $20,175.00
The estimated quantity does not obligate, guarantee or imply that this quantity
will be purchased. Payment will be made for services rendered and accepted by
LMITCO. Pricing (i.e., fixed labor rates) is firm for the specified period of
this Purchase Order.
2. RESOURCES
The Subcontractor shall provide all resources, e.g., materials, labor, tooling,
equipment, and facilities, necessary to fulfill the requirements of this
Purchase Order, except as otherwise specified.
3. APPLICABLE DOCUMENTS
The following document is incorporated into and becomes a part of this Purchase
Order:
Statement of Work entitled, "Encapsulation of Idaho National Engineering and
Environmental Laboratory Waste Experimental Reduction Facility Fly Ash by Mixing
with Polysiloxane", dated March 15, 1998.
4. TERMS AND CONDITIONS
a. The following document is incorporated by reference and hereby forms a part
of this action: Lockheed Martin Idaho Technologies Company General Provisions
for Non-Construction Subcontracts and Purchase Orders, PROC183, Rev.
<PAGE>
August 1996. This and other documents are available at the following Internet
address: http://www.inel.gov/procurement/litco/bu.
Certification of Eligibility
Subcontractor, by entering into this Purchase Order, certifies that it is not
debarred, suspended or has not otherwise been declared ineligible from receiving
Federal contracts. Disclosure that Subcontractor was ineligible for Federal
contracts on or before the effective date of this Purchase Order shall
constitute an additional basis for termination under the "Default" Article of
the General Provisions.
Sales Tax
LMITCO has been granted Direct Pay Authority for the Idaho Sales tax by the
Idaho Tax Commission.
d. Responsibility of Subcontractor
Subcontractor shall be responsible for the professional quality and technical
accuracy of services provided under this Purchase Order. Subcontractor shall
perform all rework required due to errors and/or omissions by Subcontractor's
personnel at no charge to LMITCO. Neither LMITCO's review, approval, or
acceptance of, nor payment for, the services required under this Purchase Order
shall be construed to operate as a waiver of any rights under this Purchase
Order or of any cause of action arising out of the performance of this Purchase
Order, and Subcontractor shall be and remain liable to LMITCO in accordance with
applicable law for all performance of services caused by Subcontractor's own
negligent performance of any of the services furnished under this Purchase Order
or any errors, omissions, or deficiencies. The rights and remedies of LMITCO
provided for under this Purchase Order are in addition to any other rights and
remedies provided by law. If Subcontractor is comprised of more than one legal
entity, each such entity shall be jointly and severally liable hereunder. This
paragraph takes precedence over all other clauses, provisions or articles in
this Purchase Order or applicable General Provisions.
e. Utilization of Former Employees
Except as approved by LMITCO in advance, Subcontractor shall not utilize former
LMITCO or Coleman employees, who participated in the early retirement program of
1995 or voluntary separation programs of 1995 and 1996. This restriction also
applies to any lower-tier Order(s) awarded by the Subcontractor. However, former
LMITCO or Coleman employees who participated in the aforementioned voluntary
separation programs can be utilized three years after their respective
termination date.
f. By acceptance of this Purchase Order, Subcontractor certifies that it
has not and shall not make or solicit kickbacks in violation of the Anti-
Kickback Act of 1986.
PRICE
a. The ceiling price of this Order is $20,175.00.
LMITCO shall not be obligated to pay the Subcontractor any amount in excess of
the price ceiling established in the Order, and the Subcontractor shall not be
<PAGE>
obligated to continue performance, if to do so, would exceed that price ceiling,
unless and until, LMITCO shall have notified the Subcontractor, in writing,
that such price ceiling has been increased and shall have specified in such
notice a revised price ceiling, which shall thereupon constitute the price
ceiling for performance under this Order.
Labor
The Subcontractor shall be paid at the hourly labor rates established herein for
services rendered in performing the statement of work. The hourly labor rates
are fully burdened, i.e., they include all elements of direct cost, indirect
cost, and profit.
Name James A. Giansiracusa Stephen V. Prewett, Ph.D. Christopher M. Miller,
Ph.D.
Labor Category Student
Hourly Rate $125.00 $125.00 $ 70.00
Hourly Rate $30.00
The Subcontractor shall maintain suitable records showing time actually expended
by employees by name and labor category, if applicable; these records must be
furnished to LMITCO, upon LMITCO's request.
d. Materials
The Subcontractor shall support all material costs claimed by submitting paid
invoices or storeroom requisitions. Except as otherwise provided in the
schedule, materials as referenced by this clause are defined as those materials
which enter directly into the work product or which are used or consumed
directly in connection with the work. The Subcontractor shall not be paid any
profit in connection with direct materials.
The Subcontractor shall, to the extent of its ability, procure materials at the
most advantageous prices available, with due regard to securing prompt delivery
of compliant materials, taking all cash and trade discounts, rebates,
allowances, credits, salvage, commissions, and bonifications, and, when unable
to take advantage of such benefits, notifying LMITCO promptly to that effect and
the reason therefore. Credit shall be given LMITCO for the aforementioned
allowances et al, and the value of resulting scrap accrued to the benefit of the
Subcontractor or would have accrued except for the fault or neglect of the
Subcontractor. Such benefits lost through no fault or neglect of the
Subcontractor shall not be deducted from gross costs.
e. Most Favored Customer
By entering into this Purchase Order, Subcontractor warrants that the pricing
stated herein is not greater than that charged Subcontractor's most favored
customer for like quantities of the same or similar services under like
conditions of sale. LMITCO and/or the U.S. Government shall have the right to
examine Subcontractor's records to ensure compliance with this warranty.
Subcontractor agrees to refund any amount paid by LMITCO which exceeds the price
charged any of Subcontractor's customers for like quantities of the same or
similar services under like conditions of sale one year from the date of this
Purchase Order.
<PAGE>
f. Billing and Payment
Subcontractor shall be paid upon the submission of itemized monthly invoices for
materials, and services rendered during the preceding calendar month, less
deductions, if any, as herein provided. Invoices must be substantiated by daily
time sheet records and a breakdown or list of personnel, labor category, hourly
rate and dates of service covered by the invoice. Labor costs will be computed
by multiplying the appropriate hourly rate set forth above by the number of
direct labor hours actually expended in performance of work. Fractional parts of
an hour shall be payable to the nearest half hour. Subcontractor personnel will
be paid for travel time when travel is required during the normal working day
(8:00 a.m. to 5:00 p.m. weekdays, excluding holidays and weekend travel). The
hourly rates shown are applicable to all services, regardless of whether they
were performed at straight time or overtime.
g. Invoices shall be mailed to the following address:
Accounts Payable Lockheed Martin Idaho Technologies Company Mailstop 3117 P. O.
Box 1625 Idaho Falls, ID 83415-3117 Procurement Agent: C. F. Cloud
DELIVERY/COMPLETION DATE
This Purchase Order shall be in effect through August 30, 1998.
INSPECTION/ACCEPTANCE
Final inspection of material, equipment or services under this Purchase Order
will be performed at the INEEL and is subject to the following "final
acceptance" paragraph:
Acceptance under this Purchase Order occurs at the time LMITCO authorizes final
payment.
ADMINISTRATION
a. The Subcontractor's responsibilities shall be administered by James A.
Giansiracusa. Subcontractor agrees that Stephen V. Prewett, Ph.D. will have
overall technical direction of the work to be performed by Subcontractor and
shall be available at all reasonable times in connection therewith.
Administrative and Legal Jurisdiction
Unless the Subcontractor is otherwise notified in writing, LMITCO's
responsibilities under this action shall be administered by C. F. Cloud or an
authorized Procurement Agent/Subcontract Administrator (terms considered
interchangeable), Procurement Supervisor, or Procurement Manager.
Technical Jurisdiction and Occurrence Reporting: Representative
All work performed under this Purchase Order shall be under the technical
jurisdiction of Guy Loomis. Such jurisdiction is to extend only to the
assignment and coordination of work under this Purchase Order.
<PAGE>
d. Notices
Any notice provided for this action shall be considered as having been given: To
LMITCO, if delivered personally to C. F. Cloud, or if mailed by
U. S. Mail addressed to the Procurement Agent, Procurement, LMITCO, Mailstop
3521, P.O. Box 1625, Idaho Falls, Idaho 834153521; or To the Subcontractor, if
delivered personally to its duly authorized representative at the site of work
or if mailed by U. S. Mail addressed to the Subcontractor at 2011 Palomar
Airport Road, Suite 100, Carlsbad, CA 92009.
Statement of Work Encapsulation of Idaho National Engineering and Environmental
Laboratory Waste Experimental Reduction Facility Fly Ash by Mixing with
Polysiloxane March 15, 1998
Background
The Idaho National Engineering and Environmental Laboratory has accumulated
approximately 100 55-gal drums of baghouse filter fly ash as part of
incineration of mixed low level waste in the Waste Experimental Reduction
Facility (WERF). This ash has a multitude of radionuclides (at very low levels)
and several heavy metals including lead, cadmium, and antimony. The ash is
physically a finely divided powder with about 30% ignitables comprised of
carbonous materials. Table 1 gives an assay of the radionuclide content and
chemical composition of one incineration campaign called RUN 87. In addition,
Table 2 attached gives an approximate chemical breakdown including chloride,
sulfate, and oxide contents of the material. One of the materials present in all
the ash is a relatively high Zinc content (approximately 17%). Currently, WERF
is examining methods other than using Portland cement stabilization for
encapsulation and eventual disposal. WERF's criteria for successful
encapsulation is to meet at least 60 psi compressive strength and pass Toxicity
Characteristic Leach Procedure O~CLP) for the heavy metals in the final waste
form.
Scope
The scope of this statement of work is to evaluate, in laboratory scale,
encapsulation of both surrogate materials and actual WERF ash with the
Subcontractor's proprietarv polysiloxane. The scope includes specific testing by
the Subcontractor and an outside private/certified laboratory with the
proprietary patent pending polysiloxane. Approximately 4548 of the material
shall be supplied by INEEL to the Subcontractor. The Subcontractor shall first
develop a surrogate material and perform mixing studies of the polysiloxane and
surrogate as4 compressive strength testing of the resultant waste forms and in
addition shall coordinate independent private laboratory testing for Toxicity
Characteristic Leach Procedure (TCLP) on the mixture of surrogate ash and
polysiloxane. Next, the Subcontractor shall perform a hot study with the 454g of
ash in which the most promising mixing parameters from the surrogate testing
shall be used to formulate 2" diameter by 4" long cylinders of waste form. These
cylinders shall be tested for compressive strength and samples shall be prepared
and shipped to an outside laboratory (with the proper certification to handle
this material). In addition, the Subcontractor shall fllpplyy a plan with cost
estimate for implementing this technology at the INEEL for application to the
approximately 100 drums of WERF ash.
Technical Tasks
The Subcontractor shall formulate a version of their patent pending polysiloxane
encapsulation material for use in encapsulating the WERF ash. The material
<PAGE>
should be of a viscosity that lends itself to mixing of the ash and
encapsulating agent with minimum energy input such that it can easily be formed
into monoliths by extruding the material or simply pouring the material. The
final matrix must be able to pass Toxicity Characteristic Leach Procedure
(TCLP). In addition, the ~ product must have at least 60 psi unconfined
compressive strength such that the monoliths can easily be used in shallow land
burial for final disposal. The material shall be nominally planned to be mixed
at 40% by mass ash but higher waste loadings are desirable. As part of the
mixing studies, the heat generation during curing shall be determined.
2. The Subcontractor shall take possession at testing headquarters located at
the University of Akron of approximately 4548 of the WERF ash currently stored
at the INEEL. Only those laboratory spaces examined by the INEEL Environmental
Audit of 1997 can be utilized. It is the responsibility of the Subcontractor to
ensure that the current Nuclear Regulatory License for the University of Akron
is compatible with the radionuclides listed on the attached tables. Once the ash
has been received and tested by the Subcontractor, all material shall be shipped
at the Subcontractor's expense back to the INEEL for final disposal.
3. The Subcontractor shall create from the final polysiloxane formulation 6
examples of a non radioactive non hazardous sample (2" cylinders are adequate)
of the proprietary polysiloxane and surrogate ash mixtures for display purposes.
These samples shall be shipped to the INEEL according to the schedule below.
4. The Subcontractor shall formulate sufficient samples to give to an
independent EPA certified laboratory to perform Toxicity Characteristic Leach
Procedure testing for heavy metals. The Subcontractor and the independent
laboratory are responsible for disposal of the material.
5. The Subcontractor shall provide a cost estimate to process the
approximately 100 55 gal. Drums of WERF ash. Only the equipment, engineering,
and encapsulant costs should be included.
6. The Subcontractor shall provide a letter progress report every three weeks
defining progress on the various phases of the project.
7. The Subcontractor shall provide input to a test plan that shall be
published by INEEL. The input shall include testing procedures, list of
equipment, quality control, safety, and a discussion of analytical methods. A
hard copy and Word disc shall be supplied.
8. The Subcontractor shall document the results of all testing in a final
letter report with a clearly stated conclusions section. A hardcopy and Word
disc copy shall be supplied.
INEEL Supplied Items:
1. INEEL shall supply the Subcontractor with nominally 454g. of WERF ash
packaged in a DOT approved container.
2. INEEL shall use the Subcontractor input and publish the test plan.
3. INEEL shall coordinate with the Subcontractor to observe and review key
testing.
4. INEEL shall use the Subcontractor letter report and write an overall
evaluation report to be published at the end of the fiscal year.
<PAGE>
Technical Requirements
Satisfactory completion of the tasks shall be receipt of the test plan input,
progress reports that show routine progress toward completion of testing, and
receipt of the final analysis report. Details of these items are in this
Statement of Work.
Deliverables
Waste Management Plan for TCLP testing - Due Date: April 15, 1998.
WERF ash Received by the Subcontractor-no sooner than 20 days after LMITCO
approval of Waste Management Plan Test Plan.
Input to INEEL - Due Date: April 15, 1998.
Surrogate Test Results Interim Report - Due Date: April 27, 1998.
Final Report Delivered to INEEL-August 30, 1998.
Special Considerations
The Subcontractor shall maintain an exact inventory of both the surrogate waste
(hazardous but no radionuclides) and the WERF ash. For the WERF ash, all
material shall be returned to the INEEL except that which is used for TCLP
testing.
Revised Statement of Work-Orbit Technologies Polysiloxane
Encapsulation of Calcined Surrogate Material
The current statement of work for Orbit Technologies involves encapsulation of
WERF ash. As an adder, additional work was given to perform encapsulation of a
calcine waste surrogate material. This revised statement of work redirects the
effort to eliminate any further work on the WERF fly ash and to focus the
remaining effort on the low-level waste Calcine surrogate material.
Scope:
The scope of this statement of work is to perform an encapsulation study on the
low-level waste fraction of the calcine waste surrogate material. The first step
will be to obtain necessary materials to formulate the calcine surrogate
material. Once the chemicals are obtained, the surrogate material will be
formulated as specified in the attachment. The need for a pretreatment
methodology will be assessed and developed if needed. Next, the study will
involve a laboratory mixing evaluation in which at least three waste forms will
be mixed at between 35% and 60% by mass of the calcined surrogate and Orbit
Technologies' proprietary polysiloxane material. For these materials,
compressive strength of the resultant waste form and "in house" leachability
evaluations will. be accomplished. An in-house leach index will be established
for the major contaminants in the waste form. Based on the mixing study and the
"in-house" leaching new waste forms will be mixed for outside laboratory testing
for Toxicity Characteristic Leach Procedure (TCLP) protocol for the contaminants
in the surrogate material. At least two different waste loadings at as high
waste loading as possible will be given to the outside independent laboratory
for evaluation.
Specific Items to be either supplied by Orbit or coordinated by Orbit
Technologies:
1. Orbit will formulate the polysiloxane mixture including any pretreatment
materials deemed necessary. The viscosity should be such that lends to
application in a standard paddle wheel mixing system. It is desirable to
maximize the waste loadings during the mixing study with 35% waste by mass being
the lowest acceptable waste loading with 60% being a desirable target value.
<PAGE>
The final waste forms at the highest loadings will be tested for both
compressive strength and leachability in house and for at least two of the
samples; the waste forms will undergo TCLP testing at an independent laboratory.
2. Orbit Technologies will be completely responsible for the surrogate waste
materials and any disposal required.
3. Orbit Technologies will formulate 6 samples of the calcined surrogate
without the contaminants of concern. The samples will be approximately 2'' in
diameter and 4" long and will be shipped to the project engineer, GUY LOOMIS at
LMITCO, 2525 Freemont, Idaho Falls Idaho 8J415MS 3710.
4. Orbit Technologies will evaluate the heat generation (if anv~ during the
mixing and cwing process.
5. Orbit will provide a cost estimate per cu. ft. to process and encapsulate
the low-level waste fraction.
6. Orbit will provide a letter report showing expected methodology. The test
plan should be written in WORD and a disc supplied. In addition, Orbit should
provide verbal or written updates on progress every two weeks after acceptance
of the contract.
7. Orbit will document all results in a final fetter report with clearly
stated conclusion~-~-hardcopy and disc on WORD should be supplied.
INEEL Supplied Items
I. INEEL will use the Orbit letter report and write an overall evaluation
report to be published at the end of the fiscal year.
Technical Requirements
Satisfactory completion of the work will be the receipt of the test plan letter
Deliverables Test Plan Letter Report-2-weeks after contract acceptance Bi-
monthly communication with project engineer (GUY LOOMIS-(208)526-9208, fax-(208)
526-6802.
Final Report Delivered to INEEL-Aug 30, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORBIT
TECHNOLOGIES, INC. BALANCE SHEET AS OF DECEMBER 31, 1998 AND STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20
<PP&E> 335
<DEPRECIATION> 295
<TOTAL-ASSETS> 133
<CURRENT-LIABILITIES> 3,610
<BONDS> 0
0
0
<COMMON> 325
<OTHER-SE> (3,802)
<TOTAL-LIABILITY-AND-EQUITY> 133
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> (877)
<INCOME-TAX> 0
<INCOME-CONTINUING> (877)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (877)
<EPS-PRIMARY> $(0.03)
<EPS-DILUTED> $(0.03)
</TABLE>
<PAGE>
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 significantly. Between December 16, 1992 and
February 17, 1994, the Company may have issued more shares of Common Stock than
it had authorized under its Certificate of Incorporation.
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
<PAGE>
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, 1997, the Company incurred an aggregate operating loss of $877,054.
At December 31, 1997, the Company had an accumulated deficit of $14,895,616
-----------
and a working capital deficit of $3,477,041. The Company has a ratio of
liabilities to tangible assets of 28.2 to 1 as of December 31, 1997. 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.
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 system, the original Metafusion Process, and a
patent pending for the Polymer Encapsulation System (PET). 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 and Dr. Christopher
M. Miller, both consultants and advisors with the company. The loss of the
services of Dr. Prewett and/or Dr. Miller for any reason could have a material
adverse effect of the prospects of the Company.
<PAGE>
Transactions with Prior Management. During the period prior to January 1996
there had been substantial transactions between the Company and members of
management, including Adrian Joseph, Tatum C. Singletary and Richard A. 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.)
Year 2000 Issues. The Year 2000 issue is the result of computer programs
using two digits rather than four to define the applicable year. Such software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in the
Company's activities and operations (the "Year 2000" or "Y2K" issue).
The Company's information systems currently are made up of networked computers
which are used internally and are not linked to any outside sources other than
the browser used by the Company. The Company's future information system will
cover a spectrum of software applications for its operations, certain of these
may be custom designed.
The Company has initiated formal communication with all of its significant
suppliers to determine the extent to which the Company is vulnerable to the
failure of such suppliers to resolve their own Year 2000 problems.
After an analysis of the Company's exposure to the impact of "year 2000 issues"
(i.e. issues that may arise resulting from computer programs that use only the
last two, rather than all four, digits of the year), the Company believes that
such commercial software is already substantially year 2000 compliant, and that
completion of year 2000 compliance should not have a material impact on the
Company's business, operations or financial condition.
