-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QAb+RFVsaQJYKTl9VOVg6AM6pSpWGUk6YDfRHsTHY6DXsoZVeACgxG63wsnNFui2 612uh9Su1Z1HbAwOZtN21Q== 0000074818-00-000003.txt : 20000331 0000074818-00-000003.hdr.sgml : 20000331 ACCESSION NUMBER: 0000074818-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORBIT INTERNATIONAL CORP CENTRAL INDEX KEY: 0000074818 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 111826363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-03936 FILM NUMBER: 587223 BUSINESS ADDRESS: STREET 1: 80 CABOT CT CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164358300 MAIL ADDRESS: STREET 1: ORBIT INTERNETIONAL CORP STREET 2: 80 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: ORBIT INSTRUMENT CORP DATE OF NAME CHANGE: 19911015 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-3936 ORBIT INTERNATIONAL CORP. (Exact name of registrant as specified in its charter) DELAWARE 11-1826363 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 CABOT COURT, HAUPPAUGE, NEW YORK 11788 (Address of principal executive offices) (Zip Code) Registrant=s telephone number, including area code: (631) 435-8300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $.10 par value per share Nasdaq SmallCap Market Indicate by check mark whether the Registrant has (1) 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) been subject to such filing requirements for the past 90 days. Yes X No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Aggregate market value of Registrant's voting stock held by non-affiliates (based on shares held and the closing price quoted on the Nasdaq SmallCap Market on March 22, 2000): $4,494,886 Number of shares of common stock outstanding as of March 22, 2000: 2,025,864 Documents incorporated by reference: The Registrant's definitive proxy statement to be filed pursuant to regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Registrant's 2000 Annual Meeting of Stockholders. The Registrant's proxy statement filed on September 1, 1999 pursuant to regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with a Special Meeting of the Stockholders. PART I ITEM 1. BUSINESS GENERAL Orbit International Corp. (the "Company" or "Orbit") conducts its operations through its Orbit Instrument Division and its subsidiary, Behlman Electronics, Inc. Through its Orbit Instrument Division, which includes its wholly-owned subsidiary, Orbit Instrument of California, Inc., the Company is engaged in the design, manufacture and sale of customized electronic components and subsystems. Behlman Electronics, Inc. is engaged in the design and manufacture of distortion free commercial power units, power conversion devices and electronic devices for measurement and display. In August 1996, the Company announced that it was discontinuing operations of its apparel business. DISCONTINUED APPAREL OPERATIONS On August 6, 1996, the Board of Directors of the Company adopted a plan to sell and/or liquidate its remaining United States and Canadian apparel operations. The United States operations consisted of the design, importation and manufacture of women's active-wear and outer-wear, principally under the East/West label, through the Company's East/West Division and its subsidiary, East End Apparel Group Ltd. In the fourth quarter of 1996, the Company entered into a three-year license agreement (the "Athco License Agreement") with Athco, Inc. ("Athco"), an unaffiliated third party, pursuant to which Orbit granted to Athco the right to manufacture and sell ladies apparel under the "East/West" trademark in the United States and Canada. Under the terms of the Athco License Agreement, Orbit was entitled to a royalty equal to 3% of the first $5,000,000 of net sales of the articles licensed under such agreement during each year of the term and 2% of net sales in excess of $5,000,000 during each such year. Athco was also required to pay certain annual guaranteed minimum royalties. In May, 1999 the Athco License Agreement was amended whereby the minimum royalty for 1999 was reduced from $150,000 to $140,000 payable in sixteen equal installments. The Company has the right to terminate the Agreement upon 30 days written notice. The operations of the East/West division are limited to servicing such license. The Canadian apparel operations had been operated through three wholly-owned subsidiaries of the Company. In March 1997, Orbit commenced bankruptcy proceedings against two of the three subsidiaries, which proceedings are still pending, and sold substantially all of the assets of the third subsidiary. In March 1997, Orbit also appointed a receiver and manager for the purpose of liquidating the assets of the two subsidiaries in bankruptcy. All such assets were subsequently sold and the proceeds from such sale were used to pay down the outstanding obligations to the secured lender of the subsidiaries. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company currently operates in two industry segments. Its Orbit Instrument Division is engaged in the design and manufacture of electronic components and subsystems (the "Electronics Segment"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Units Segment"). The following sets forth certain selected historical financial information relating to the Company's business segments:
December 31, 1999 1998 1997 Net sales: Electronics $ 6,975,000 $10,250,000 $10,045,000 Power Units Domestic 4,438,000 817,000 (10,000) 5,245,000 5,245,000 6,397,000 1,200,000 (16,000) Foreign 7,581,000 Intercompany sales 935,000 Total Power Units (79,000) 6,101,000 Operating income (loss) (1): Electronics 615,000 2,412,000 2,457,000 Power Units (461,000) 634,000 (810,000) Assets: Electronics 6,156,000 7,863,000 8,033,000 Power Units 3,303,000 3,964,000 3,967,000
_______________ (1) Exclusive of corporate overhead expenses, interest expense and investment income which are not allocated to the business segments. Additional financial information relating to the business segments in which Orbit conducts its operations is set forth in Note 16 to the Consolidated Financial Statements appearing elsewhere in this report. GLOSSARY OF TECHNICAL TERMS "AC power sources" -- equipment that produces power that is the same as what would be received from a public utility. "BL series" -- Cold Cathode Fluorescent Tubes. "CRT terminals" -- Cathode Ray Tube terminals. "Commercial Off the Shelf" -- non-customized products produced in anticipation of customer orders. "computer controlled action entry panels (CCAEPS)"-- computer input devices. "data entry display devices" -- computer-based devices that increase the efficiency between the human operator and the computer system. "distortion free commercial power units" -- power that is free of disturbances such as "brown- outs". "Electro Luminescent (E.L.) power supplies" -- power supplies which power electro luminescent displays. "frequency converters" -- equipment which converts local power to equivalent foreign power. "full-mil keyboards" -- keyboards designed for use in a military environment. "liquid crystal display (LCD) panel/unit"-- a color flat panel-based display used in information systems. "NAVICP" -- Naval Inventory Control Point, providing program and supply support for the United States Navy in order to keep weapons systems mission-ready. "operator control trays" -- integrated panels used in conjunction with data display consoles. "plasma based telephonic intercommunication panels" -- programmable panels used to promote communication throughout various military communication centers. "(AC) plasma display panel/unit" -- technology utilizing neon gas illuminated between electrically charged fields. "power conversion devices" -- equipment that produces power that is the same as what would be received from a public utility. "P series" "ruggedized hardware" -- hardware designed to meet severe environmental conditions. "ruggedized market" -- the market for ruggedized hardware. "standard shipboard display console requirements" -- the standard tactical display used specifically by the United States Navy. "subsystems" -- units produced to be integrated into larger computer systems. "T&D" -- utility transmission and distribution. "telco-based designs" -- standard telephone interface designs. "telecommunication superconducting amplifiers" -- amplifiers used in cable television. "TFT" -- thin film transistor. "trackballs" -- cursor control devices used in conjunction with data display systems. "UPS market" -- the market for uninterruptable power supplies. "uninterruptable power supplies (UPS)" -- devices which allow a computer to operate while utility power is lost. "VGA"-- video graphics array. SURVEILLANCE AIRCRAFT PROGRAMS: E-2C J/STARS (Joint Surveillance Target Attack Radar Systems) AWACS (Lookdown Surveillance Aircraft) SHIPBOARD PROGRAMS: AEGIS (Guided Missile Cruisers and Destroyers) DDG'S (Guided Missile Destroyers) BFTT (Battle Force Tactical Training) LSD'S (Amphibious Warfare Ships) LHA'S (Amphibious Warfare Ships) DESCRIPTION OF BUSINESS GENERAL Orbit's Electronics Segment, which is operated through its Orbit Instrument Division, designs, manufactures and sells customized panels, components, and "subsystems" for contract program requirements to prime contractors, governmental procurement agencies and research and development ("R&D") laboratories. The Company primarily designs and manufactures in support of specific military programs. More recently, the Company has focused on providing commercial, non-military "ruggedized hardware" for prime contractor programs at cost competitive prices. Products include a variety of custom designed "plasma based telephonic intercommunication panels" for secure voice airborne and shipboard program requirements, "full-mil keyboards", "trackballs" and "data entry display devices". The Electronics Segment's products, which in all cases are designed for customer requirements on a firm fixed price contract basis, have been successfully incorporated on surveillance aircraft programs, including E-2C, J/STARS, AWACS and P-3 requirements and shipboard programs, including AEGIS, DDG'S, BFTT, LSD'S and LHA'S applications, as well as a variety of land-based guidance control programs. Orbit's Power Units Segment is operated through its Behlman subsidiary and is in the business of manufacturing and selling power supplies, AC power sources, "frequency converters", "uninterruptable power supplies ("UPS")", associated analytical equipment and other electronic equipment. The military division of Behlman designs and manufactures "power conversion devices" and electronic products for measurement and display. PRODUCTS Electronics Segment Intercommunication Panels The Orbit Instrument Division has designed and developed a complement of display panels for rugged mission critical applications. The display panels provide customers with potential program solutions that include Electro Luminescent (E.L.), AC Plasma and Liquid Crystal Display (LCD) technologies. Prime contractors which require command, combat communications or display systems have requested these panels to support a number of console applications. The Orbit Instrument Division has also completed land-based and shipboard secure voice "telco-based designs", and has been awarded a Basic Ordering Agreement from Naval Surface Warfare Center in Crane, Indiana. The Basic Ordering Agreement establishes firm fixed prices for six Orbit panel configurations. The Agreement enables the United States Government to procure each of the panel configurations in indefinite quantities, with the price therefore increasing by an agreed upon escalation for subsequent periods. Graphic Display Terminal The Orbit Instrument Division's family of graphic terminals enables the operator to monitor and control radar systems for shipboard and airborne applications. These terminals are used throughout a ship or surveillance plane as adjuncts to larger console displays. The modular design of the terminals facilitates applications for surface ship, submarine, aircraft and land-based requirements. Operator Control Trays The Orbit Instrument Division designs and manufactures a variety of "operator control trays" that help organize and process data created by interactive communications systems, making such data more manageable for operator consumption. These trays are presently used to support patrol and surveillance airborne aircraft programs, "standard shipboard display console requirements" and shore land-based defense systems applications. Data Entry, Keyboards, and Display Systems The Orbit Instrument Division has designed and manufactures a variety of "computer controlled action entry panels (CCAEPS)", which provide a console operator with multiple displays of computer generated data. The Orbit Instrument Division has designed a number of custom keyboards to meet full military specifications. These keyboards have been designed for shipboard, airborne, sub-surface and land-based program requirements. Color Liquid Crystal Displays (LCD's) The Orbit Instrument Division has developed a family of 18.1" and 20.1" color LCD display panels for military and rugged commercial opportunities. The display is manufactured using Super Fine TFT (thin film transistor) active matrix technology. The display is backlit with Cold Cathode Fluorescent Tubes (CCFT), and is driven by an integral inverter. The Company has adapted this technology for high brightness and full-color imaging requirements. The Company is positioning this technology for surface ship and trading floor opportunities. Color Liquid Crystal Display Computers The Orbit Instrument Division has completed a design configuration for a Thin Film Transistor (TFT) color LCD with an integral touch screen for input from the operator. The unit is powered by an ultra-compact high-performance 486 processor. The airborne and land-based display configurations also include up to 32 mega-bits of RAM, with wide angle (640x480) technology. The VGA single board computer includes a serial port (RS-232/422) and expansion capabilities through a PC/104 carrier module. Power Units Segment Power Sources Behlman's "AC power sources" are used in the production of various types of equipment such as ballasts for fluorescent lighting, "CRT terminals", hair dryers and hospital beds, electroluminescent panels, furnace igniters, vacuum cleaner motors, compressors and paint spray equipment and are used in test labs to meet European Community required testing, aircraft testing and simulators. Other uses include powering equipment for oil and gas exploration. Behlman's frequency converters are used to convert local power frequency (e.g., 60HZ in the United States) to local frequencies elsewhere (e.g., 50 HZ in Europe). Behlman's UPS products are used for backup power when local power is lost. Behlman only competes in the "ruggedized and industrial market" as opposed to the commercial "UPS market". Behlman is a manufacturer and value added reseller of these products and has recently added a new line of high power UPS systems. Behlman's military division has value-engineering personnel who are capable of reconfiguring obsolete or hard-to-maintain United States Government equipment. After the value-engineering is completed, in most instances, Behlman will be contracted to build the equipment, but in the event the component is contracted to be built elsewhere but is based upon the Behlman's engineering design, Behlman will receive a percentage of the United States Government's savings over the life of the program. Behlman also performs reverse engineering of analog systems for the United States Government or United States Government contractors to enable them to have a new contractor with high quality capabilities at a competitive price. Behlman is recognized by the Source Development Department of the NAVICP and has been given the opportunity to compete against prime contractors. Behlman has recently received an order for a set of power sources as a result of such competition program. Behlman's railroad signaling power supply has been sold to railway passenger lines in northeastern United States. The railroad industry buys frequency converters and inverters. Behlman has set up a representative organization and strategic advertising campaign along with training programs for representatives and has been meeting with different railroad organizations for the purpose of promoting its products and gaining an understanding of the needs of the industry. Behlman's Power Passport PS1350 is a low cost basic instrument for use in the import/export and aerospace markets. The P series has fewer features but is priced below Behlman's BL series. Another version, the P1351, was introduced in the second quarter of 1999 as an intermediary version between the P1350 and the BL1350 in terms of cost and function. Behlman also operates as a qualified repair depot for many United States Air Force and Navy programs. PROPOSED PRODUCTS Electronics Segment The Orbit Instrument Division is currently expanding its design and development resources to update hardware previously used for full military program requirements. The Orbit Instrument Division believes its wide variety of components, controls, subsystems and plasma secure voice and intercommunication panels that have supported the military for aircraft, shipboard, subsurface and land-based program requirements have alternative uses. It is the intent of the Company to update the electrical and mechanical functionality of these units and subsystems and provide ruggedized and commercial equivalent hardware at cost competitive prices. Orbit Instrument has recently received an order for prototype keyboards from one of its major customers to be used by air traffic controllers. These prototype keyboards will be delivered to various air traffic control centers for evaluation by air traffic controllers. The Orbit Instrument Division also has recently completed a prototype keyboard for "mission critical" cost sensitive trading floor and brokerage firm applications. The Orbit Instrument Division has recently completed a pre-production order for a new Electroluminescent (EL) Display Terminal. The Data Entry Display combines a high bright EL Display module with an ultra-compact single board computer. The unit was specifically designed as a high speed AT compatible computer which will mechanically fit into limited space applications. This EL technology based Data Entry Display Panel is being implemented on various army and marine programs such as the Fire Finder Program as well as several foreign military programs. Orbit has received pre-production orders for these units for four different programs. The Orbit Instrument Division has finalized a design for a shipboard console to be used primarily for foreign sales opportunities. The upgraded console incorporates a 20.1" color LCD display together with a package of man/machine-interface solutions. Initial prototype consoles have included newly designed trackballs, keyboards and data display devices, qualified to meet shipboard applications. Power Units Segment Behlman has developed a strategic relationship with a manufacturer of DC/DC converter modules. These modules will be sold under the Behlman name and will be used in value added equipment sales. Behlman is also looking at various ways to reconfigure its commercial hardware to meet military specifications so that its hardware may be considered "Commercial Off the Shelf" for military and aircraft manufacturers' requirements. Behlman is currently under order for several units of this hardware. Behlman has entered the Utility Transmission and Distribution ("T&D") industry. The utility industry is facing competition, resulting in pressure to cut costs in their substations through automation. In the event of a power outage, the computers and other critical equipment must be powered with AC power sources utilizing the substation batteries. Behlman has received orders for this equipment and has been advertising in industry periodicals. An offshoot of the T&D market is the telecommunications market where batteries are generally used to keep the system running. This market is being investigated and Behlman plans to enter it in much the same way as it entered the T&D market. Behlman has developed two new products to supply this market. They are a sine wave inverter and a modified version of the same unit. These have been introduced and will be in production in the first quarter of 2000. The products and programs described above are presently being developed by the Company. However, there can be no assurance that such development efforts will result in any marketable products. SALES AND MARKETING Products of the Electronics Segment are marketed by Orbit Instrument Division's sales personnel and management. Military products of the Power Units Segment are marketed by Behlman's program managers and other management personnel. Commercial products of the Power Units Segment are sold by regional sales managers, manufacturer's representatives and non-exclusive distributors. COMPETITION The Electronics Segment's competitive position within the electronics industry is, in management's view, predicated upon the Orbit Instrument Division's manufacturing techniques, its ability to design and manufacture products which will meet the specific needs of its customers and its long-standing successful relationship with its major customers. (See "- term contracts with either of the above-mentioned customers. The major customers of the Electronics Segment are Raytheon Company and various agencies of the United States Government, accounting for approximately 46% and 18%, respectively, of the net sales of the Electronics Segment for the year ended December 31, 1999. The loss of any of these customers would have a material adverse effect on the net sales and earnings of the Electronics Segment. The major customer of the Power Units Segment is the United States Government, accounting for approximately 28% of the net sales of the Power Units Segment for the year ended December 31, 1999. The loss of this customer would have a material adverse effect on the net sales and earnings of the Power Units Segment. Since a significant amount of all of the products which the Company manufactures are used in military applications, any substantial reduction in overall military spending by the United States Government could have a materially adverse effect on the Company's sales and earnings. BACKLOG As of December 31, 1999 and 1998 the Company's backlog was as follows:
1999 1998 Electronics $3,000,000 $7,000,000 Power Units 3,000,000 2,000,000 Total $6,000,000 $9,000,000
Of the backlog at December 31, 1999, approximately $500,000 represents backlog under contracts which will not be shipped during 2000. A significant amount of the Company's contracts are subject to termination at the convenience of the United States Government. The backlog is not influenced by seasonality. SPECIAL FEATURES OF UNITED STATES GOVERNMENT CONTRACTS Orders under United States Government prime contracts or subcontracts are customarily subject to termination at the convenience of the United States Government, in which event the contractor is normally entitled to reimbursement for allowable costs and a reasonable allowance for profits, unless the termination of a contract was due to a default on the part of the contractor. No material terminations of contracts of either the Electronics Segment or the Power Units Segment at the convenience of the United States Government occurred during the year ended December 31, 1999. A significant portion of the Company's revenues are subject to audit under the Vinson- Trammel Act of 1934 and other federal statutes since they are derived from sales under United States Government contracts. The Company believes that adjustments to such revenues, if any, will not have a material effect on the Company's financial position. RESEARCH AND DEVELOPMENT The Company incurred approximately $731,000, $793,000 and $795,000 of research and development expenses during the years ended December 31, 1999, 1998 and 1997, respectively. PATENTS The Company does not own any patents which it believes are of material significance to its operations. EMPLOYEES As of March 23, 1999, the Company employed 92 persons on a full-time basis. Of these, the Electronics Segment employed 49 people, consisting of 10 in engineering and drafting, 5 in sales and marketing, 10 in direct and corporate administration and the balance in production. The Power Units Segment employed 43 people, consisting of 11 in engineering and drafting, 4 in sales, 2 in direct and corporate administration and the balance in production. ITEM 2. PROPERTIES The Company owns its plant and executive offices, located at 80 Cabot Court, Hauppauge, New York, which consists of 60,000 square feet (of which approximately 50,000 square feet are utilized for manufacturing operations) in a two-story, sprinklered, brick building which was completed in October 1982 and expanded in 1985. Behlman leases 1,700 square feet in Ventura, California which is used for sales. The lease expires in December 2000. As a residual of its discontinued apparel operations, the Company has leases for showroom and office space in New York, warehouse space in New Jersey and showroom, office and manufacturing space in Winnipeg, Manitoba, Canada. The Company has subleased its showroom and office space in New York and its warehouse space in New Jersey. The leases and subleases thereon expired in January, 2000 and June, 1999, respectively. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Company, other than routine litigation incidental to the Company's business, except as described below. Bankruptcy and Liquidation of Canadian Subsidiaries: On March 12, 1997, Orbit commenced bankruptcy proceedings against two of its subsidiaries, Canada Classique, Inc. and Winnipeg Leather (1991) Inc., which operated its Canadian apparel operation. Such bankruptcy proceedings are still pending. Orbit has appointed a receiver and manager who has liquidated all of the assets of these subsidiaries. The proceeds of such sales were used to pay down the outstanding obligations to the secured lender of the two subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Stockholders was held on October 1, 1999 to approve an amendment to the Company's Certificate of Incorporation to effect a one-for-three reverse stock split of the Company's outstanding stock. The approval of the reverse stock split was necessary to meet the requirements for listing on the Nasdaq SmallCap Market. See Item 4 of the Company's Report on Form 10-Q filed November 15, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 9, 2000, the Company had 322 shareholders of record. The Company's stock is traded on the Nasdaq SmallCap Market (Nasdaq symbol ORBT). The quarterly closing prices for the period January 1, 1998 through December 31, 1999, as reported by Nasdaq, were as follows. The prices set forth below have been adjusted to give effect to the one-for-three reverse stock split effective October 4, 1999. CLOSE
HIGH LOW 1998: First Quarter: 13.50 9.56 8.63 Second Quarter: 12.38 9.75 Third Quarter: 5.44 4.50 Fourth Quarter: 6.375 1999: 6.56 3.00 First Quarter: Second Quarter: 4.50 3.00 Third Quarter: 3.38 1.50 1.00 Fourth Quarter: 1.88
The Company has not declared any dividends during the aforesaid period. ITEM 6. SELECTED FINANCIAL DATA Year ended December 31,
1999 1998 1997 1996 1995 Net sales $12,220,000 $16,351,000 $16,971,000$11,763,000 $17,626,000 Income (1,375,000) 1,881,000 3,311,000 2,491,000 from continuingoperations 2,038,000 Income (loss) from -- discontinued -- -- (8,800,000)(24,744,000) operations Income per sharefrom continuingoperations: (a) Basic Diluted (.68) .90 1.02 1.68 1.26 .81 .90 1.59 1.26 (.68) Income (loss) per share ( 4.44) ( 12.60) from -- -- -- ( 4.26) ( 12.51) discontinued -- -- -- operations: (a) Basic Diluted Total assets 14,948,000 19,145,000 17,899,000 19,931,000 38,028,000 at year-end Long-term obligations3,666,0003,881,000 3,667,000 3,817,000 1,097,000 Total stockholders' Equity7,648,0009,059,000 7,287,000 5,146,000 9,318,000
After giving effect to the one-for-three reverse stock split effective October 4, 1999. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Year Ended December 31, 1999 v. Year Ended December 31, 1998 The Company currently operates in two industry segments. Its Orbit Instrument Division is engaged in the design and manufacture of electronic components and subsystems (the "Electronics Segment"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Units Segment"). Consolidated net sales for the year ended December 31, 1999 decreased to $12,220,000 from $16,351,000 for the prior year due to decreased sales from both the Electronics Segment and the Power Units Segment. Gross profit, as a percentage of sales, for the year ended December 31, 1999 decreased to 33.4% from 41.8% for the prior year due to lower gross profits realized by both the Electronics Segment and the Power Units Segment principally due to the reduction in sales and the write-down of certain inventory items due to the vast uncertainty facing the defense industry. Selling, general and administrative expenses for the year ended December 31, 1999 decreased to $4,952,000 from $5,719,000 for the year ended December 31, 1998 principally due to several cost cutting initiatives taken by the Company during the first quarter of 1999. Selling, general and administrative expenses, as a percentage of sales, for the year ended December 31, 1999 increased to 40.5% from 35.0% for the prior year principally due to decreased sales during the current year. In July 1998, the Company reached a settlement with respect to the USA Classic class action securities litigation pursuant to an executed "Stipulation of Settlement" by each of the parties and the approval of such by the court. The Company's portion of the Settlement was $1,000,000 of which $500,000 had been previously accrued. Accordingly, the Company recorded an additional charge of $500,000 during 1998. In January 1999, the Company paid $1,000,000 to the plaintiffs in complete satisfaction of its obligations under the settlement agreement. Interest expense for the year ended December 31, 1999 was $334,000 and did not materially change from $328,000 recorded for the year ended December 31, 1998. Investment and other income for the year ended December 31, 1999 decreased to $278,000 from $393,000 for the prior year principally due to a decrease in funds available for investment in the current period. In connection with related uncertainties surrounding the defense industry, pursuant to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes", the Company adjusted its valuation allowance against its deferred tax asset thereby taking a charge of $450,000 to income for the year ended December 31, 1999. In the prior year, in connection with the resolution of the USA Classic class action securities litigation, the Company reduced its valuation allowance against its existing deferred tax asset by $1,200,000 for the year ended December 31, 1998. For the year ended December 31, 1999, the Company recorded a net loss of $1,375,000 compared to net income of $1,881,000 for the year ended December 31, 1998. Excluding the charge for the settlement of the class action securities litigation in the prior year and the adjustments to the Company's deferred tax asset in both the current and prior year, the net loss for the year ended December 31, 1999 was $925,000 compared to net income of $1,181,000 for the year ended December 31, 1998. Year Ended December 31, 1998 v. Year Ended December 31, 1997 Consolidated net sales for the year ended December 31, 1998 decreased to $16,351,000 from $17,626,000 for the prior year, principally due to decreased sales of $1,480,000 in the Company's Power Units Segment which were partially offset by increased sales of $205,000 in the Company's Electronics Segment. Gross profit, as a percentage of net sales, for the year ended December 31, 1998 decreased to 41.8% from 43.1% for the prior year due to lower gross profits realized by the Company's Power Unit Segment primarily due to a reduction in the Segment's sales. Selling, general and administrative expenses for the year ended December 31, 1998 increased to $5,719,000 from $5,596,000 for the year ended December 31, 1997, principally due to a charge of $236,000 in 1998, resulting from the final determination of an inventory dispute related to the 1996 Behlman acquisition. Excluding this charge, selling general and administrative expenses for the year ended December 31, 1998 decreased to $5,483,000 from $5,596,000 for the prior year. This decrease was principally due to a reduction in corporate expenses which were partially offset by higher selling, general and administrative costs incurred by the Electronics Segment resulting from increased selling and marketing efforts. Selling, general and administrative expenses, as a percentage of sales, for the year ended December 31, 1998 increased to 35.0% from 31.7% for the prior year due to higher selling, general and administrative costs incurred by the Electronics Segment and certain fixed costs of the Power Unit segment which did not decrease despite the reduction in the Segment's sales. In July 1998, the Company reached a settlement with respect to the USA Classic class action securities litigation pursuant to an executed "Stipulation of Settlement" by each of the parties and the approval of such by the court. The Company's portion of the settlement was $1,000,000 of which $500,000 had been previously accrued. Accordingly, the Company recorded an additional charge of $500,000 during 1998. Interest expense for the year ended December 31, 1998 increased to $328,000 from $253,000 for the prior year, principally due to interest recorded in the current period by the Company related to a debt obligation of the discontinued apparel operations. Such interest expense was recorded as part of the discontinued apparel operations for a portion of the prior period. Investment and other income for the year ended December 31, 1998 increased to $393,000 from $284,000 for the prior year, principally due to an increase in funds available for investment during 1998. In connection with the resolution of the USA Classic class action securities litigation and its related uncertainties and consistent with Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company recorded additional deferred tax assets and reduced its valuation allowance against its existing deferred tax assets by $1,200,000 during the year ended December 31, 1998. Net income for the year ended December 31, 1998 decreased to $1,881,000 from $2,038,000 for the prior year. Included in the current year's net income was the reduction of a valuation allowance against existing deferred tax assets of $1,200,000 and charges of $500,000, recorded in connection with the settlement of the class action securities litigation and $236,000 resulting from the final determination of an inventory valuation dispute related to the 1996 Behlman acquisition. Excluding the impact of the income tax benefit, the settlement of the class action litigation and the resolution of the dispute, net income for the year ended December 31, 1998 decreased to $1,417,000 from $2,038,000 from the prior year. This decrease was principally due to lower profits recorded by the Company's Power Units Segment resulting from a decrease in the Segment's sales. Liquidity, Capital Resources and Inflation Working capital decreased to $7,161,000 at December 31, 1999 compared to $7,941,000 at December 31, 1998. The ratio of current assets to current liabilities increased to 3.2 to 1 at December 31, 1999 from 2.4 to 1 at December 31, 1998. Net cash flows used in operations for the year ended December 31, 1999 was $1,102,000, primarily attributable to the net loss for the period, the payment related to the settlement of the class action litigation and a decrease in accrued expenses and customer advances that was partially offset by the non cash flow effect of the reduction of the deferred tax asset and a decrease in accounts receivable and inventories. Cash flows provided by investing activities for the year ended December 31, 1999 was $3,770,000, primarily attributable to the net sales of marketable securities. Cash flows used in financing activities for the year ended December 31, 1999 was $131,000, primarily attributable to repayments of long-term debt and the purchase of treasury stock partially offset by the proceeds of long term debt. All operations of the discontinued apparel companies have been terminated. All losses, and obligations of these apparel operations have been provided for, and accordingly, the Company does not anticipate using any significant portion of its resources towards these discontinued apparel operations. In August 1998, the Company closed on a new $4,000,000 credit facility with a new lender secured by real property and other assets of the Company. The Company used $3,500,000 of the proceeds to replace its existing asset based lending arrangement and the remaining $500,000 was borrowed in January 1999 to partially fund a class action securities litigation settlement of $1,000,000. The amount owed under this credit facility at December 31, 1999 was approximately $3,322,000 at an interest rate of 1.25 above the prime rate of interest. On September 1, 1999 the Board of Directors authorized a 1 for 3 reverse stock split thereby decreasing the number of issued and outstanding shares of the Company's stock. This reverse stock split was approved by the shareholders on October 1, 1999 and the effective date was October 4, 1999. All per share data and numbers of common shares have been retroactively restated to reflect this reverse stock split. The purpose of the reverse stock split was to put the Company into compliance with the requirements of a small cap listing in order to effectuate the transfer of the Company's listing from the Nasdaq National Market to the Small Cap Market. See the Company's Report on Form 8-K, filed October 6, 1999. In September 1998, the Company's Board of Directors authorized a stock repurchase program for the repurchase of up to 83,333 shares of its common stock in the open market or in privately negotiated transactions. The Company repurchased approximately 52,000 shares at an average price of $5.01 per share. The Company has not made any repurchases since the first quarter of 1999. The Company's existing capital resources, including its bank credit facilities, and its cash flow from operations are expected to be adequate to cover the Company's cash requirements for the foreseeable future. Inflation has not materially impacted the operations of the Company. Certain Material Trends The Company continues to face a very difficult business environment with continuing pressure on the Company's prices for its sole source sales and a general reduction in the level of funding for the defense sector. The Company continues to pursue many business opportunities, including programs in which it has long participated but, due to industry-wide funding and pricing pressures, the Company has encountered delays in the awards of these contracts. The delay in receiving these awards shifted a portion of shipments anticipated for 1999 into the year 2000. However, the Company continues to experience delays in contract awards and because of this uncertainty, does not see any improvement to revenue levels in the year 2000. The Company continues to seek new contracts which require incurring up-front design, engineering, prototype and preproduction costs. While the Company attempts to negotiate contract awards for reimbursement of product development, there is no assurance that sufficient monies will be set aside by its customers, including the United States Government, for such effort. In addition, even if the United States Government agrees to reimburse development costs, there is still a significant risk of cost overrun which may not be reimbursable. Furthermore, once the Company has completed the design and preproduction stage, there is no assurance that funding will be provided for future production. The Company is heavily dependent upon military spending, particularly the Department of the Navy, as a source of revenues and income. The U.S. Navy fleet has been significantly reduced in the past several years thereby impacting the procurement of equipment. Any further reductions in the level of military spending by the United States Government and/or further reductions to the U.S. fleet could have a negative impact on the Company's future revenues and earnings. In addition, due to major consolidations in the defense industry, it has become more difficult to avoid dependence on certain customers for revenue and income. Behlman's line of commercial products gives the Company some diversity and the Orbit Instrument Division is beginning to introduce certain of its products into commercial and foreign markets as well as to other Departments of Defense. Year 2000 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. There was concern that this could result in system failures or miscalculations leading to disruptions in the Company's activities and operations. In response to the Year 2000 issue, the Company developed a plan to modify its information technology systems to recognize the year 2000, including the purchase of a new manufacturing software package, and proceeded to convert its critical data processing systems. The Company spent approximately $125,000, funded by cash from operations, on its Year 2000 compliance. The expenses primarily included the price of new software as well as implementation of the new software package. The Company also spent resources to communicate with its significant suppliers, large customers and financial institutions to ensure that those parties had appropriate plans to remediate Year 2000 issues where their systems interface with Company systems or otherwise impact its operations, and to prepare contingency plans including manual workarounds, increase of inventories and protective cash management proceeds. As of March 2000, the Company has experienced no disruptions in operations as a result of the Year 2000 issue and does not anticipate additional material expenses related to the Year 2000 issue. Additionally, the Company has not been notified or become aware of any significant Year 2000 related incidents which would materially impact operations. However, the Company will continue to monitor the Year 2000 issue in the event such incidents become evident. Forward Looking Statements Statements in this Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document as well as statements made in press releases and oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf that are not statements of historical or current fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward- looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes", "belief", "expects", "intends", "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to market risk related to changes in interest rates. Most of the Company's debt is at a variable rate of interest and is not hedged by any derivative instruments. That debt which is subject to a variable rate of interest amounted to approximately $3,322,000 at December 31, 1999. If market interest rates increase by five percent from levels at December 31, 1999, the effect on the Company's results of operations would be approximately $165,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See index to financial statements, which is a part of the financial statements, and the financial statements and schedules included elsewhere in this Annual Report on Form 10-K. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Consolidated) Year Ended First Quarter Second QuarterThird QuarterFourth Quarter December 31, 1999 Net sales $3,409,000 $3,609,000 $2,773,000 $2,429,000 Gross profit 1,352,000 1,380,000 1,162,000 189,000 Net income (18,000) 204,000 8,000 (1,569,000) Basic income per $(.01) $.10 $.00 $(.77) common share (a) Diluted income per common share (a) $(.01) $.10 $.00 $(.77)
Year Ended First Quarter Second QuarterThird QuarterFourth Quarter December 31, 1998 Net sales $4,285,000 $4,235,000 $3,826,000 $4,005,000 Gross profit 1,776,000 1,863,000 1,490,000 1,706,000 Net income 471,000 1,110,000 293,000 7,000 Basic income per $.23 $.54 $.14 $.00 common share(a) Diluted income per $.21 $.48 $.12 $.00 common share (a)
(a) After giving effect to the one-for-three reverse stock split effective October 4, 1999. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On February 4, 2000, the Board of Directors of the Company approved the engagement of Goldstein Golub Kessler LLP as its independent auditors for the fiscal year ended December 31, 1999 to replace the firm of Ernst & Young LLP. The Company determined to change its independent auditors on the basis of the significant savings in the amount of fees paid and not as a result of a dispute or disagreement with Ernst & Young LLP. See the Company's Report on Form 8-K/A filed February 17, 2000. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the remaining members of the Board of Directors is incorporated by reference to the Company's definitive proxy statement to be filed pursuant to regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company's 2000 Annual Meeting of Stockholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 1.& 2. Financial Statements and Schedule: The index to the financial statements and schedule is incorporated by reference to the index to financial statements attached as an exhibit to this Annual Report on Form 10-K. 3. Exhibits: Exhibit No. Description of Exhibit 3 (a) Certification of Incorporation, as amended. Incorporated by reference to Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991. 3 (b) By-Laws, as amended. Incorporated by reference to Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988. 4 (a) Orbit International Corp. 1995 Employee Stock Option Plan. Incorporated by reference to Exhibit 4(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 4 (b) Orbit International Corp. 1995 Stock Option Plan for Non-Employee Directors. Incorporated by reference to Exhibit 4(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 10 (a) Amended and Restated Employment Agreement, dated as of February 15, 1999, between Registrant and Mitchell Binder. Incorporated by reference to Exhibit 10(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10 (b) Amended and Restated Employment Agreement, dated as of February 15, 1999, between Registrant and Bruce Reissman. Incorporated by reference to Exhibit 10(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10 (c) Amended and Restated Employment Agreement, dated as of February 15, 1999 between Registrant and Dennis Sunshine. Incorporated by reference to Exhibit 10(c) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10 (d) Form of Indemnification Agreement between the Company and each of its Directors. Incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988. 10 (e) Asset Purchase Agreement, dated July 12, 1993, among The Panda Group, Inc., Kenneth Freedman, Frederick Meyers and Registrant. Incorporated by reference to Exhibit 1 to Registrant's Current Report on Form 8-K dated July 12, 1993. 10 (f) Asset Purchase Agreement, dated as of January 11, 1996, by and among Astrosystems, Inc., and BEI Electronics, Inc., Orbit International Corp. and Cabot Court, Inc. Incorporated by reference to the Registrant's Current Report on Form 8-K dated February 7, 1996 10 (g) Form of Agreement among Kenneth Freedman, Frederick Meyers, The Panda Group, Inc. and Orbit International Corp. dated March 28, 1996; Form of Amendment Promissory Note dated March 28, 1996; and Form of Warrant to purchase 125,000 shares of Orbit International Corp. Common Stock. Incorporated by reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 10 (h) Credit Agreement between the Company and The Chase Manhattan Bank dated August 4, 1998 including exhibits thereto. Incorporated by reference to Exhibit 10(h) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 21 Subsidiaries of Registrant. Incorporated by reference to Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 23* Consent of Goldstein Golub Kessler LLP. 23.1* Consent of Ernst & Young LLP. 27* Financial Data Schedule (b) Reports on Form 8-K: A report on Form 8-K was filed on October 6, 1999. __________ * Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. ORBIT INTERNATIONAL CORP. Dated: March 30, 2000 By: /s/ Dennis Sunshine Dennis Sunshine, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Dennis Sunshine President, Chief ExecutiveOfficer and DirectorMarch 30, 2000 Dennis Sunshine /s/ Mitchell Binder Vice March 30, 2000 Mitchell Binder President-Finance, ChiefFinancial Officer and Director /s/ Bruce Reissman Executive Vice President,Chief Operating March 30, 2000 Bruce Reissman Officer and Director /s/ Harlan Sylvan Treasurer, March 30, 2000 Harlan Sylvan Secretary and Controller /s/ Marc Pfefferle Director March 30, 2000 Marc Pfefferle /s/ John Molloy Director March 30, 2000 John Molloy /s/ Stanley Morris Director March 30, 2000 Stanley Morris
Exhibit 23 INDEPENDENT AUDITOR'S CONSENT To the Board of Directors Orbit International Corp. We hereby consent to incorporation by reference in the Registration Statement on Form S-8 (Registration Number 333-25979) of our report dated February 25, 2000, except for Note 18, as to which the date is March 1, 2000, on the consolidated financial statements of Orbit International Corp. and Subsidiaries as of December 31, 1999, which appear in the Annual Report on Form 10- K of Orbit International Corp. for the year ended December 31, 1999. GOLDSTEIN GOLUB KESSLER LLP New York, New York March 30, 2000 Exhibit 23.1 We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-25979) pertaining to the Orbit International Corporation 1995 Employee Stock Option Plan and the Orbit International Corporation 1995 Stock Option Plan for Non- Employee Directors of our report dated March 5, 1999, except for the reverse stock split described in Note 3 as to which the date is October 4, 1999 with respect to the consolidated financial statements and schedule of Orbit International Corp. included in the Annual Report (Form 10- K) for the year ended December 31, 1998. /s/ Ernst & Young LLP New York, New York March 30, 2000 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES FORM 10K-ITEM 14(A)(1)&(2) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULE INDEPENDENT AUDITOR'S REPORT F-1 INDEPENDENT AUDITOR'S REPORT F-2 CONSOLIDATED FINANCIAL STATEMENTS: Balance Sheets as of December 31, 1999 and 1998 F-3 Statements of Operations for the Years ended December 31, 1999, 1998 and 1997 F-4 Statements of Stockholders' Equity for the Years ended December 31, 1999, 1998 and 1997 F-5 - F-6 Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997 F-7 Notes to Consolidated Financial Statements F-8 - F-20 The following financial statement schedule is included in Item 14(d): Schedule II-Valuation and Qualifying Accounts F-21 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Orbit International Corp. We have audited the accompanying consolidated balance sheet of Orbit International Corp. and Subsidiaries as of December 31, 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 14(d). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit. We conducted our audit 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 audit provides 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 INTERNATIONAL CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1999, AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR THE YEAR THEN ENDED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. ALSO, IN OUR OPINION, THE RELATED FINANCIAL STATEMENT SCHEDULE, WHEN CONSIDERED IN RELATION TO THE BASIC CONSOLIDATED FINANCIAL STATEMENTS TAKEN AS A WHOLE, PRESENTS FAIRLY IN ALL MATERIAL RESPECTS THE INFORMATION SET FORTH THEREIN. GOLDSTEIN GOLUB KESSLER LLP New York, New York February 25, 2000, except for Note 18, as to which the date is March 1, 2000 Report of Independent Auditors Stockholders and Board of Directors Orbit International Corp. We have audited the accompanying consolidated balance sheet of Orbit International Corp. and subsidiaries as of December 31, 1998 and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 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 of 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orbit International Corp. and subsidiaries at December 31, 1998, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/Ernst & Young LLP New York, New York March 5, 1999, except for the reverse stock split described in Note 3 as to which the date is October 4, 1999 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 1998 ASSETS Current Assets: Cash and cash equivalents $ 2,975,000 $ 438,000 Investments in marketable securities 3,000 3,230,000 Accounts receivable, less allowance for doubtful accounts of $166,000 in 1999 and $178,000 in 1998 1,391,000 2,345,000 Inventories 5,804,000 7,089,000 Restricted investments related to discontinued operations 26,000 Assets held for sale - discontinued operations41,000 80,000 Other current assets 136,000 140,000 Deferred tax assets 75,000 276,000 TOTAL CURRENT ASSETS 10,425,000 13,624,000 Property, plant and equipment, at cost, less accumulated depreciation and amortization 2,128,000 2,267,000 Excess of cost over the fair value of assets acquired, less accumulated amortization of $330,000 in 1999 and $234,000 in 1998 1,059,000 1,155,000 Investments in marketable securities - 517,000 Other assets 661,000 658,000 Deferred tax assets 675,000 924,000 TOTAL ASSETS $14,948,000 $19,145,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term obligations$ 738,000 $ 593,000 Accounts payable 1,143,000 1,189,000 Accrued expenses 884,000 2,432,000 Accounts payable, accrued expenses and reserves applicable to discontinued operations 499,000 669,000 Due to factor - 15,000 Customer advances - 785,000 TOTAL CURRENT LIABILITIES 3,264,000 5,683,000 Long-term obligations 3,666,000 3,881,000 Accounts payable, accrued expenses and reserves applicable to discontinued operations, less current portion370,000 522,000 TOTAL LIABILITIES 7,300,000 10,086,000 Commitments and Contingencies Stockholders' Equity: Common stock - $.10 par value 304,000 304,000 Additional paid-in capital 24,165,000 24,163,000 Accumulated deficit (6,971,000) (5,596,000) Deferred compensation - (19,000) Accumulated other comprehensive income - 9,000 17,498,000 18,861,000 Treasury stock, at cost (9,850,000) (9,802,000) STOCKHOLDERS' EQUITY 7,648,000 9,059,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$14,948,000 $19,145,000 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 1998 1997 Net sales $12,220,000$16,351,000 $17,626,000 Cost of sales 8,137,000 9,516,000 10,023,000 Gross profit 4,083,000 6,835,000 7,603,000 Selling, general and administrative expenses 4,952,000 5,719,0005,596,000 Class action litigation settlement - 500,000 - Interest expense 334,000 328,000 253,000 Investment and other income, net (278,000) (393,000) (284,000) Total expenses 5,008,000 6,154,000 5,565,000 Income (loss) before income tax provision (benefit)(925,000)681,0002,038,000 Income tax provision (benefit) 450,000(1,200,000) - Net income (loss) $(1,375,000)$ 1,881,000 $ 2,038,000 Net income (loss) per common share: Basic $ (0.68)$ 0.91 $ 1.01 Diluted $ (0.68)$ 0.81$ 0.89 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ACCUMULATED COMMON STOCKOTHER 25,000,000 SHARESCOMPRE- AUTHORIZEDADDITIONALHENSIVE SHARES PAID-INACCUMULATED TREASURY STOCKDEFERREDINCOME ISSUED AMOUNT CAPITAL DEFICIT SHARES AMOUNTCOMPENSATION(LOSS) TOTAL Balance at December 31, 1996 3,023,000$ 302,000 $24,123,000 $(9,515,000)(961,000)$(9,588,000)$(174,000) $(2,000) $ 5,146,000 Deferred compensation earned- - - - - - 77,000 - 77,000 Exercises of stock options7,000 1,000 21,000 - - - - - - 22,000 Comprehensive income: Net income - - - 2,038,000 - - - - 2,038,000 Unrealized gain on marketable securities - - - - - - - 4,00 4,000 Comprehensive income- - - 2,038,000- - - 4,000 2,042,000 Balance at December 31, 19973,030,000303,00024,144,000(7,477,000)(961,000)(9,588,000) (97,000) 2,0007,287,000 (continued) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ACCUMULATED COMMON STOCKOTHER 25,000,000 SHARESCOMPRE- AUTHORIZEDADDITIONALHENSIVE SHARES PAID-INACCUMULATED TREASURY STOCKDEFERRED INCOME ISSUED AMOUNT CAPITAL DEFICIT SHARES AMOUNTCOMPENSATION(LOSS) TOTAL Balance at December 31, 19973,030,000$ 303,000$24,144,000$(7,477,000) (961,000)$(9,588,000 )$ (97,000) $ 2,000 $ 7,287,000 Deferred compensation earned- - - - - - 78,000 - 78,000 Exercises of stock options9,0001,000 19,000 - - - - - - 20,000 Purchase of treasury stock- - - - (42,000)(214,000) - - - (214,000) Comprehensive income: Net income - - - 1,881,000 - - - - 1,881,000 Unrealized gain on marketable securities - - - - - - - 7,000 7,000 Comprehensive income - - - 1,881,000 - - - - 7,000 1,888,000 Balance December 31, 19983,039,000304,00024,163,000(5,596,000)(1,003,000)(9,802,000)(19,000) 9,000 9,059,000 Deferred compensation earned- - - - - - 19,000 - 19,000 Exercise of stock options 1,000 - 2,000 - - - - - - 2,000 Purchase of treasury stock- - - - (11,000) (48,000) - - - (48,000) Comprehensive loss: Net loss - - - (1,375,000)- - - - (1,375,000) Adjustment for gain on marketable securities included in net income- - - - - - - - (9,000) (9,000) Comprehensive loss- - - (1,375,000)- - - (9,000)(1,384,000) Balance at December 31, 19993,040,000$ 304,000$24,165,000$(6,971,000)(1,014,000)$(9,850,000)$ - 0 -$ - 0 -$ 7,648,000 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1999 1998 1997 Cash flows from operating activities: Net income (loss) $(1,375,000) $ 1,881,000 $ 2,038,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision (credit) for doubtful accounts - (25,000) 53,000 Depreciation and amortization 156,000 139,000 143,000 Amortization of goodwill 96,000 96,000 72,000 Compensation related to issuance of stock and options 19,000 78,000 77,000 Deferred tax provision (benefit) 450,000 (1,200,000) - Loss on sale of fixed assets - 8,000 - Change in value of marketable securities (9,000) - - Changes in operating assets and liabilities, excluding effect of acquisition: Accounts receivable 954,000 725,000 16,000 Inventories 1,285,000 (770,000) 338,000 Other current assets 4,000 164,000 (58,000) Other assets (20,000) (62,000) (132,000) Accounts payable (46,000) 103,000 146,000 Accrued expenses (548,000) 318,000 (431,000) Customer advances (785,000) 785,000 - Assets held for sale, discontinued operations39,000 185,000 447,000 Accounts payable, accrued expenses and reserves applicable to discontinued operations (322,000) (573,000) (2,296,000) Payment for settlement of class action securities litigation (1,000,000) - - NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,102,000) 1,852,000 413,000 Cash flows from investing activities: Purchases of marketable securities (1,966,000) (5,876,000) (4,899,000) Proceeds from sales of marketable securities5,736,000 5,035,0006,363,000 Purchase of property, plant and equipment- (72,000)(51,000) Payment of deferred transaction costs - (78,000)- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,770,000 (991,000) 1,413,000 Cash flows from financing activities Repayments of long-term debt (570,000) (4,414,000)(1,203,000) Proceeds from long-term debt 500,000 3,500,000116,000 Deferred financing costs - (166,000)- Decrease in due to factor (15,000) (245,000)(592,000) Proceeds from exercise of stock options 2,000 20,00022,000 Purchase of treasury stock (48,000) (214,000)- NET CASH USED IN FINANCING ACTIVITIES(131,000) (1,519,000)(1,657,000) Net increase (decrease) in cash and cash equivalents2,537,000 (658,000)169,000 Cash and cash equivalents at beginning of year438,000 1,096,000927,000 Cash and cash equivalents at end of year$ 2,975,000$ 438,000 $ 1,096,000 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 334,000$ 328,000$ 497,000 THE COMPANY ACQUIRED PROPERTY, PLANT AND EQUIPMENT OF APPROXIMATELY $87,000 DURING THE YEAR ENDED DECEMBER 31, 1997 PURSUANT TO VARIOUS CAPITAL LEASES. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.ORGANIZATION The consolidated financial statements include AND BUSINESS: the accounts of Orbit International Corp. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany transactions have been eliminated in consolidation. The Company has two reportable segments: (a) the Orbit Instrument division (Electronics Segment) is engaged in the design, manufacture and sale of customized electronic components and subsystems, and (b) the Behlman Electronics subsidiary (Power Units Segment) is engaged in the design and manufacture of distortion-free commercial power units, power conversion devices and electronic devices for measurement and display. On August 6, 1996, the board of directors of the Company adopted a plan to dispose of its U.S. and Canadian apparel operations. At December 31, 1999 and 1998, the assets and liabilities of the discontinued operations consisted primarily of certain current assets, accrued expenses and other reserves. 2.SUMMARY OF The Company considers all highly liquid SIGNIFICANT investments with a maturity of three months ACCOUNTING or less when purchased to be cash equivalents. POLICIES: Inventories are priced at the lower of cost (first-in, first-out basis) or market. Property, plant and equipment is recorded at cost. Depreciation and amortization of the respective assets are computed using the straight-line method over their estimated useful lives ranging from 5 to 40 years. Leasehold improvements are amortized using the straight-line method over the remaining life of the lease or the life of the improvement, whichever is less. Excess of cost over the fair value of net assets acquired is being amortized on a straight-line basis over 15 years. The Company's investment in available-for-sale securities is stated at fair value with the unrealized gains and losses, net of tax, reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than- temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific-identification method. Interest and dividends on such securities are included in investment income. Substantially all of the Company's revenue is recognized from the sale of tangible products. The Company records sales upon delivery of the units under its manufacturing contracts. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. WHEN IMPAIRMENT INDICATORS ARE PRESENT, THE COMPANY REVIEWS THE CARRYING VALUE OF ITS LONG-LIVED ASSETS IN DETERMINING THE ULTIMATE RECOVERABILITY OF THEIR UNAMORTIZED VALUES USING FUTURE UNDISCOUNTED CASH FLOW ANALYSES. The Company measures stock-based compensation cost using APB Opinion No. 25 as is permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. The fair value of the Company's long-term obligations is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Using this method, the Company's fair value of long-term obligations was not significantly different than the stated value at December 31, 1999 and 1998. As of January 1, 1998, the SFAS No. 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption was reported separately in stockholders' equity, to be included in other comprehensive income. The related tax effect on comprehensive income is not material for the periods presented. Research and development costs are expensed when incurred. The Company expensed approximately $731,000, $793,000 and $795,000 for research and development during the years ended December 31, 1999, 1998 and 1997, respectively. Such expenses are included in selling, general and administrative expenses. 3.REVERSE On September 1, 1999, the board of directors STOCK SPLIT: authorized a 1-for-3 reverse stock split thereby decreasing the number of issued and outstanding shares of the Company's stock. This reverse split was approved by the stockholders on October 1, 1999 and the effective date was October 4, 1999. All per share data and numbers of common shares have been retroactively restated to reflect this reverse stock split. 4.INVENTORIES: Inventories consist of the following:
December 31,19991998 Raw materials $2,943,000 $2,609,000 Work-in-progress 2,861,000 4,480,000 $5,804,000 $7,089,000 1.PROPERTY, Property, plant and equipment consists of: PLANT AND EQUIPMENT: December 31,19991998
Land and building$2,688,000 $2,688,000 Building and leasehold improvements293,000 293,000 Machinery and equipment 1,113,000 1,113,000 Furniture and fixtures 543,000 543,000 4,637,0004,637,000 Accumulated depreciation and amortization 2,509,0002,370,000 $2,128,000 $2,267,000 6.AVAILABLE-FOR-SALE SECURITIES:The following is a summary of available-for- sale securities: At December 31, 1999, the Company had corporate debt securities with a cost and estimated fair value of approximately $3,000.
December 31, 1998 Estimated Cost Fair Value U.S. Treasury bills $2,883,000 $2,883,000 Corporate debt securities 881,000 890,000 3,764,000 3,773,000 Restricted value of portfolio used to collateralize credit facility 26,000 26,000 Balance of securities portfolio$3,738,000 $3,747,000 Under the terms of a credit facility, the Company's investment portfolio and certain cash balances must be maintained at a minimum collateral value. At December 31, 1998, such collateral requirement amounted to approximately $26,000. The credit facility was fully paid in March 1999. The corporate debt securities owned by the Company at December 31, 1999 have a contractual maturity greater than three years. The amortized cost and estimated fair value of marketable debt securities at December 31, 1998 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties. December 31, 1998 Estimated Cost Fair Value Due in one year or less $3,255,000 $3,256,000 Due after one year through three years204,000 208,000 Due after three years 305,000 309,000 3,764,0003,773,000 Restricted value of portfolio used to collateralize credit facility 26,000 26,000 $3,738,000 $3,747,000 7.DEBT: On August 4, 1998, the Company entered into an agreement with a bank that provided for a $950,000 term loan, a $2,550,000 mortgage and a $500,000 settlement loan, (collectively, the "Agreement"). The Company received the proceeds under the term loan and mortgage during the year ended December 31, 1998 and used such proceeds to repay amounts outstanding under its previous credit agreements. The Company received the proceeds under the settlement loan during the year ended December 31, 1999 and used such proceeds to partially fund the class action securities litigation settlement of $1,000,000 (see Note 14). The Company's long-term debt obligations are as follows:
December 31, 1999 1998 Mortgage note collateralized by certain real estate of the Company, interest at prime (8.5% at December 31, 1999) plus 1.25%, payable in monthly installments of $14,167 with a final payment of $850,000 in September 2008 $2,323,000$2,493,000 Term loan collateralized by accounts receivable, inventories and machinery and equipment, interest at prime (8.5% at December 31, 1999) plus 1.25%, payable in 20 quarterly installments of $47,500 through June 2003665,000855,000 (continued) December 31, 1999 1998 Promissory note payable to the sellers of a discontinued apparel division, noninterest-bearing, imputed interest at 6%, payable in 20 quarterly installments of $42,500, including interest, commencing March 31, 2002 (see Note 17)$ 850,000$ 850,000 Note due to the estate of the former principal officer, noninterest-bearing, payable in monthly installments of through 2000189,000212,000 Capitalized lease obligation collateralized by certain computer software, interest at 10%, payable in monthly installments of $1,80443,00064,000 Settlement loan collateralized by accounts receivable, inventories and machinery and equipment, interest at prime (8.5% at December 31, 1999) plus 1.25%, payable in quarterly installments of $41,667 through December 2001 334,000 - 4,404,000 4,474,000 Less current portion 738,000 593,000 $3,666,000 $3,881,000 Payments due on the Company's long-term debt are as follows:
Year ending December 31, 2000 $ 738,000 2001 548,000 2002 530,000 2003 435,000 2004 170,000 Thereafter 1,983,000 $4,404,000 Pursuant to the terms of the Agreement, the Company must comply with, among other matters, certain financial covenants which include minimum levels of working capital, debt-to-equity ratios, debt service coverage and tangible net worth, all as defined. The Company is also precluded from declaring and paying dividends without the consent of the lender. At December 31, 1999, the Company was in default of two financial covenants which were waived by the bank. 8.ACQUISITION: On February 6, 1996, the Company acquired certain assets subject to certain liabilities of Astrosystems, Inc. and Behlman Electronics, Inc. (collectively, "Behlman"). The assets are primarily used in the business of manufacturing and selling various power supply and power source products. The operations of Behlman have been included in the consolidated financial statements from the date of acquisition. During 1998, the final determination of an inventory valuation dispute resulted in a charge to the Company's operations of approximately $236,000. 9.COMMON STOCK In September 1998, the Company's board of REPURCHASE directors authorized a stock repurchase PROGRAM: program for the repurchase of up to 83,333 shares of its common stock in the open market or in privately negotiated transactions. During the year ended December 31, 1998 , the Company repurchased 41,600 shares for approximately $214,000. During the quarter ended March 31, 1999 , the Company repurchased 10,733 shares for approximately $48,000.The Company has not made any repurchases since the first quarter of 1999. 10.STOCK-BASED The Company has stock option plans which COMPENSATION provide for the granting of nonqualified PLANS: or incentive stock options to officers, key employees and nonemployee directors. The plans authorize the granting to officers and key employees options to acquire up to 500,000 common shares. Additionally, the plans authorize the granting to nonemployee directors of the Company options to acquire up to 50,000 common shares. Both plans grant options at the market value of the Company's stock on the date of such grant. All options are exercisable at times as determined by the board of directors, not to exceed 10 years from the date of grant. Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its stock options granted using the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1999, 1998 and 1997: risk-free interest rates of 6%; no dividend yield; volatility factors of the expected market price of the Company's common stock of 100.2%, 47.4% and 59.4% and a weighted-average expected life of the options of 3.0 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: December 31, 1999 1998 1997 Net income (loss): As reported $(1,375,000) $1,881,000 $2,038,000 Pro forma (1,442,000) 1,711,000 1,971,000 Basic EPS: As reported$ (.68)$ .91$ 1.01 Pro forma$ (.71)$ .81$ .96 Diluted EPS: As reported$ (.68)$ .81$ .89 Pro forma$ (.71)$ .75$ .87 The following table summarizes activity in stock options:
December 31,199919981997 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise OptionsPrice OptionsPriceOptions Price Outstanding at beginning of year 375,000 $3.68419,000$4.02426,000 $2.76 Granted 28,000 2.7930,000 6.4260,000 7.30 Forfeited (8,000) 4.09(66,000)7.26(60,000) 3.63 Exercised (1,000) 3.24 (8,000) 2.44 (7,000) 3.03 Outstanding at end of year 394,000 3.62375,000 3.68419,000 4.02 Exercisable at end of year 367,000 352,000 360,000 Weighted-average fair value of options granted during the year $2.43 $4.02 $3.27 The weighted-average remaining contractual life of the options outstanding is approximately six years. At December 31, 1999, 140,000 shares of common stock were reserved for future issuance of stock options. In consideration of an executive officer's entry into an employment agreement during the year ended December 31, 1996, the Company sold to the officer 100,000 shares of its common stock at the par value of $.10 per share. The stock is subject to repurchase by the Company, at the same price, in the event of resignation or discharge for cause of the officer. The difference between the fair value of the shares and its issuance price was charged to operations over a three-year period. 11.EMPLOYEE A profit-sharing and incentive-savings plan BENEFIT PLANS: provides benefits to certain employees who meet specified minimum service and age requirements. The plan provides for contributions by the Company equal to one-half of employee contributions (but not more than 2% of eligible compensation) and the Company may make additional contributions out of current or accumulated net earnings at the sole discretion of the Company's board of directors. The Company contributed approximately $142,000, $208,000 and $178,000 to the plan during the years ended December 31, 1999, 1998 and 1997, respectively. 12.INCOME TAXES: During the year ended December 31, 1999, the Company adjusted the valuation allowance against its deferred tax asset, resulting in a deferred tax asset of $750,000, of which $75,000 is classified as current. During the year ended December 31, 1998, the Company recorded a current year deferred tax asset and reduced the valuation allowance against its deferred tax assets by $1,200,000 based on its actual and projected operating results, of which $276,000 is classified as current. During the year ended December 31, 1997, the Company had cumulative taxable losses and there was no assurance of future taxable income, therefore, a valuation allowance had been established to offset the full amount of net deferred tax assets. FOR THE YEAR ENDED DECEMBER 31, 1997, THE COMPANY RECORDED NO NET INCOME TAX PROVISION. AT DECEMBER 31, 1999, THE COMPANY HAS AN ALTERNATIVE MINIMUM TAX CREDIT OF APPROXIMATELY $564,000 WITH NO LIMITATION ON THE CARRYFORWARD PERIOD AND NET OPERATING LOSS CARRYFORWARDS OF APPROXIMATELY $26,005,000 WHICH EXPIRE THROUGH 2019.
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense is as follows: Tax (benefit) at U.S. statutory rates (34.0)% 34.0 % 34.0 % Foreign and state income taxes, net of federal tax benefit-7.07.0 Deferred tax asset - (176.2) - Increase in valuation allowance 82.6 - - Net operating and capital loss carryforwards and carrybacks - (41.0) (41.0) 48.6 %(176.2)%- 0 - % Deferred tax assets are comprised of the following: December 31, 1999 1998 Deferred tax assets: Alternative minimum tax credit carryforward$ 564,000$ 564,000 Net operating loss and capital loss carryforwards (including pre-acquisition net operating loss carryforwards) 9,564,000 9,917,000 Various temporary differences 884,000 979,000 Total deferred tax assets11,012,000 11,460,000 Valuation allowances(10,262,000) (10,260,000) Net deferred tax assets $ 750,000 $ 1,200,000 13.SIGNIFICANT Sales to significant customers accounted for CUSTOMERS AND approximately 49% (27% and 22%), CONCENTRATIONS 48% (21% and 27%) and 50% (17% and 33%) of the OF CREDIT RISK: Company's net sales for the years ended December 31, 1999, 1998 and 1997, respectively. Significant customers of the Company's Electronics Segment accounted for approximately 64% (46%, and 18%), 80% (32%, 34% and 14%) and 84% (29%, 38% and 17%) of the Electronics Segment's net sales for the years ended December 31, 1999, 1998 and 1997, respectively. Significant customers of the Company's Power Units Segment accounted for approximately 28% (28%), 29% (16% and 13%) and 44% (27% and 17%) of the Power Units Segment's net sales for the years ended December 31, 1999, 1998 and 1997, respectively. Certain significant customers of the Company sell the Company's products to the U.S. government. Accordingly, a substantial portion of the net sales is subject to audit by agencies of the U.S. government. In the opinion of management, adjustments to such net sales, if any, will not have a material effect on the Company's financial position or results of operations. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade receivables from its customers. The Company performs credit evaluations on its customers and collateral is generally not required. Credit losses are provided for in the consolidated financial statements during the period in which an impairment has been determined. At times, cash at financial institutions may be in excess of FDIC insurance limits. 14.LEASING Operating leases are for a sales office and ARRANGEMENTS: certain equipment and vehicles for continuing operations and office, showroom and manufacturing facilities for discontinued operations, and are subject to annual increases based on changes in the Consumer Price Index and increases in real estate taxes and certain operating expenses. Future minimum lease payments as of December 31, 1999 under operating lease agreements that have initial or remaining noncancelable lease terms in excess of one year are as follows:
Year ended December 31, Total 2000$ 65,000 2001 38,000 2002 24,000 2003 6,000 Total future minimum lease payments$133,000 Rent expense for operating leases was approximately $14,000, $14,000 and $13,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Lease commitments attributed to the discontinued operations amounted to approximately $448,000, prior to sublease agreements of approximately $22,000. 15.COMMITMENTS (a)The Company has employment agreements with AND its three executive officers which CONTINGENCIES: may be terminated by the Company with not less than three years prior notice and with two other principal officers, for aggregate annual compensation of $1,023,000. In the event of a change in control of the Company, the executive officers have the right to elect a lump sum payment representing future compensation due them over the remaining years of their agreements. In addition, the five officers are entitled to bonuses based on a percentage of earnings before taxes, as defined. Total bonus compensation expense was approximately $53,000 and $202,000 during the years ended December 31, 1998 and 1997, respectively. There was no bonus compensation for the year ended December 31, 1999. (b)In September 1993, a class action securities litigation was commenced by an alleged stockholder of USA Classic (formerly a subsidiary of the Company), against USA Classic and certain of its directors in the U.S. District Court for the Southern District of New York. In August 1998, the Company and the Defendants entered into a Stipulation and Agreement of Settlement (the "Settlement Agreement") of the class action. Pursuant to the terms of the Settlement Agreement and in complete satisfaction of its obligations thereunder, the Company paid $1,000,000 in January 1999 as its portion to settle the Class Action, of which $500,000 was accrued for at December 31, 1997 and $500,000 was charged to the Company's operations during the year ended December 31, 1998. (c)In the ordinary course of business, the Company is a party to various lawsuits the outcome of which, in the opinion of management, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. 16. BUSINESS The Company operates through two business SEGMENTS: segments. Its Electronics Segment, through the Orbit Instrument Division, is engaged in the design, manufacture and sale of customized electronic components and subsystems. Its Power Units Segment, through the Behlman Electronics, Inc. subsidiary, is engaged in the design, manufacture and sale of distortion free commercial power units, power conversion devices and electronic devices for measurement and display. The Company's reportable segments are business units that offer different products. The Company's reportable segments are each managed separately as they manufacture and distribute distinct products with different production processes.
The following is the Company's business segment information as of and for the years ended December 31, 1999, 1998 and 1997: December 31, 1999 1998 1997 Net sales: Electronics $ 6,975,000$10,250,000 $10,045,000 Power Units: Domestic 4,438,000 5,245,000 6,397,000 Foreign 817,000 935,000 1,200,000 Intercompany sales (10,000) (79,000) (16,000) Total Power Units 5,245,000 6,101,000 7,581,000 Total net sales12,220,00016,351,00017,626,000 Income (loss) from continuing operations: Electronics 615,000 2,412,000 2,457,000 Power Units (810,000) (461,000) 634,000 General corporate expenses not allocated (674,000)(1,335,000) (a)(1,083,000) Interest expense (334,000) (328,000) (253,000) Investment and other income, net278,000 393,000283,000 Income (loss) from continuing operations before income taxes (benefit) $ (925,000)$ 681,000 $ 2,038,000 Assets: Electronics $ 6,156,000$ 7,863,000 Power Units 3,303,000 3,964,000 General corporate assets not allocated 5,448,000 7,238,000 Assets held for sale - discontinued operations 41,000 80,000 Total assets $14,948,000$19,145,000 (a) Includes $500,000 charge for the class action securities litigation settlement (see Note 14). 17.INCOME The following table sets forth the computation (LOSS) of basic and diluted income (loss) per PER COMMON SHARE:common share: December 31,199919981997
Denominator: Denominator for basic income (loss) per share - weighted-average common shares 2,026,0002,061,000 2,023,000 Effect of dilutive securities: Employee and director stock options (a) 206,000186,000 Warrants (a) 57,000 52,000 Unearned stock award (a) 6,000 27,000 Dilutive potential common shares 269,000265,000 Denominator for diluted income (loss) per share - weighted-average common shares and assumed conversions 2,026,0002,330,000 2,288,000 The numerator for basic and diluted income (loss) per share for the years ended December 31, 1999, 1998 and 1997 is the net income (loss) for all such years. (a) There is no effect of common stock equivalents as such effect would be antidilutive. 18.SUBSEQUENT In March 2000, the Company reached an agreement EVENTS: with the sellers of a discontinued apparel division whereby the Company would commence making payments on the promissory note payable to such sellers in 2000 rather than in 2002, as scheduled in consideration for a reduction in the promissory note from $850,000 to $660,000.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS CHARGED TO CHARGED TO BALANCE AT COSTS OTHER BALANCE AT BEGINNING AND COSTS ACCOUNTS-DEDUCTIONS- END OF of Period Expenses Describe Describe Period Year ended December 31, 1999: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts and allowance$ 178,000 - - $ 12,000 (a) $ 166,000 Valuation allowance on deferred tax asset10,260,000$ 2,000 - - 10,262,000 Year ended December 31, 1998: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts and allowance203,000- - 25,000 (a) 178,000 Valuation allowance on deferred tax asset10,977,000- - 717,000 (c) 10,260,000 Year ended December 31, 1997: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts and allowance150,00053,000 - - 203,000 Valuation allowance on deferred tax asset10,249,000- $728,000 (b) - 10,977,000 (a) Reduction in allowances (b) Increase to allowance (c) Reduction in valuation allowance for deferred tax assets EX-27 2
5 12-MOS DEC-31-1999 DEC-31-1999 2,975,000 3,000 1,391,000 (166,000) 5,804,000 10,425,000 4,636,000 (2,509,000) 14,948,000 3,264,000 3,666,000 0 0 304,000 7,344,000 14,948,000 12,220,000 12,220,000 8,137,000 8,137,000 4,952,000 0 334,000 (925,000) 450,000 (1,375,000) 0 0 0 (1,375,000) (.68) (.68)
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