-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ky1GlYRpboQEhoWdm+XiAzF6agS+bL46WAhdL9LNZVB+AQoS+3Om7um814rbg7j/ jn1EjSOVivYeroIxlaWLJw== 0000074818-95-000006.txt : 19950627 0000074818-95-000006.hdr.sgml : 19950627 ACCESSION NUMBER: 0000074818-95-000006 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950626 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORBIT INTERNATIONAL CORP CENTRAL INDEX KEY: 0000074818 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 111826363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-03936 FILM NUMBER: 95549106 BUSINESS ADDRESS: STREET 1: 80 CABOT CT CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164358300 MAIL ADDRESS: STREET 1: 80 CABOT COURT 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/A 1 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 PART II: REPORT OF INDEPENDENT AUDITORS CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1994 AND DECEMBER 31, 1993 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1994, FOR THE SIX MONTHS ENDED DECEMBER 31, 1993 AND FOR THE YEARS ENDED JUNE 30, 1993 AND JUNE 30, 1992 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994, FOR THE SIX MONTHS ENDED DECEMBER 31, 1993 AND FOR THE YEARS ENDED JUNE 30, 1993 AND JUNE 30, 1992 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994, FOR THE SIX MONTHS ENDED DECEMBER 31, 1993 AND FOR THE YEARS ENDED JUNE 30, 1993 AND JUNE 30, 1992 NOTES TO FINANCIAL STATEMENTS PART IV: SCHEDULE: REPORT OF INDEPENDENT AUDITORS ON SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Other Part IV schedules are omitted because the information is included elsewhere in the financial statements or the notes thereto, or the conditions requiring the filing of such schedules are not applicable. REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Orbit International Corp. Hauppauge, New York We have audited the accompanying consolidated balance sheets of Orbit International Corp. and subsidiaries as at December 31, 1994 and December 31, 1993 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1994, for the six months ended December 31, 1993 and each of the years in the two-year period ended June 30, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of Orbit International Corp. and subsidiaries at December 31, 1994 and December 31, 1993 and the results of their operations and their cash flows for the year ended December 31, 1994, the six-month period ended December 31, 1993 and each of the years in the two- year period ended June 30, 1993 in conformity with generally accepted accounting principles. Attention is directed to Note J[5] with respect to a class action complaint filed against an affiliate and the Company. Richard A. Eisner & Company, LLP New York, New York March 10, 1995 With respect to Note J[5] March 17, 1995 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, A S S E T S 1994 1993 (Note G) Current assets: Cash and cash equivalents (Note A[2]). . . . . . . . . $ 815,000 $ 5,447,000 Investments in marketable securities (Note A[6]) . . . 9,138,000 5,699,000 Accounts receivable (less estimated doubtful accounts of $769,000 at December 31, 1994, $882,000 at December 31, 1993. . . . . . . . . . . . . . . . . . 5,277,000 5,258,000 Inventories (Notes A[3] and D) . . . . . . . . . . . . 21,006,000 15,181,000 Prepaid and refundable taxes . . . . . . . . . . . . . 168,000 Other current assets . . . . . . . . . . . . . . . . . 1,191,000 1,184,000 Total current assets. . . . . . . . . . . . . . 37,427,000 32,937,000 Investment in and advances to affiliate (Note N). . . . . 11,517,000 Property, plant and equipment - at cost, less accumulated depreciation and amortization (Notes A[4] and E) . . . 3,279,000 3,690,000 Excess of cost over the fair value of assets acquired, less accumulated amortization of $1,093,000 at December 31, 1994, $464,000 at December 31, 1993 (Note A[5]). . . . . . . . . . . . . . . . . . . . . . 12,129,000 13,251,000 Restricted investments (Note A[6]). . . . . . . . . . . . 7,805,000 8,550,000 Other assets (Note A[7] and B). . . . . . . . . . . . . . 2,871,000 3,160,000 T O T A L . . . . . . . . . . . . . . . . . . . $63,511,000 $ 73,105,000 L I A B I L I T I E S Current liabilities: Notes payable (Note G[2]). . . . . . . . . . . . . . . $ 2,602,000 $ 1,984,000 Current portion of long-term obligations (Note G[1]) . 3,096,000 2,572,000 Accounts payable . . . . . . . . . . . . . . . . . . . 3,734,000 4,633,000 Accrued expenses . . . . . . . . . . . . . . . . . . . 2,367,000 1,302,000 Due to factor. . . . . . . . . . . . . . . . . . . . . 11,540,000 454,000 Total current liabilities . . . . . . . . . . . 23,339,000 10,945,000 Long-term obligations (less current portion) (Note G[1]). 8,909,000 10,419,000 Deferred taxes (Note K[4]). . . . . . . . . . . . . . . . 2,115,000 Total liabilities . . . . . . . . . . . . . . . 32,248,000 23,479,000 Commitments and contingencies (Notes B, F and J) STOCKHOLDERS' EQUITY (Notes G[3] and H) Capital stock - $.10 par value. . . . . . . . . . . . . . 877,000 1,172,000 Additional paid-in capital. . . . . . . . . . . . . . . . 23,170,000 32,710,000 Retained earnings . . . . . . . . . . . . . . . . . . . . 18,227,000 35,222,000 Less treasury stock, at cost. . . . . . . . . . . . . . . (9,520,000) (18,106,000) Less unearned portion of compensatory stock . . . . . . . (148,000) (442,000) Foreign currency translation adjustment . . . . . . . . . (1,343,000) (930,000) Total stockholders' equity. . . . . . . . . . . 31,263,000 49,626,000 T O T A L . . . . . . . . . . . . . . . . . . . $63,511,000 $ 73,105,000
The accompanying notes to financial statements are an integral part hereof. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Capital Stock 25,000,000 Shares Unearned Portion of Authorized Treasury Stock Compensatory Stock Foreign Number of Additional Number Number Currency Shares Paid-in Retained of of Translation Issued Amount Capital Earnings Shares Amount Shares Amount Adjustment Balance - July 1, 1991 . . . . . . . 10,882,000 $1,088,000 $28,934,000 $24,830,000 5,087,000 $16,977,000 184,000 $1,178,000 $ 99,000 Exercise of stock options . . . . . 832,000 83,000 2,831,000 Compensatory stock earned. . . . . . (46,000) (294,000) Compensation attributable to stock options . . . . . . . . . . . . . 231,000 Foreign currency translation adjustment. . . . . . . . . . . . (354,000) Tax benefit attributable to exercise of stock options. . . . . . . . . 327,000 Net earnings for the year. . . . . . 2,902,000 Balance - June 30, 1992. . . . . . . 11,714,000 1,171,000 32,323,000 27,732,000 5,087,000 16,977,000 138,000 884,000 (255,000) Exercise of stock options. . . . . . 9,000 1,000 41,000 Compensatory stock earned. . . . . . (46,000) (294,000) Compensation attributable to stock options . . . . . . . . . . . . . 231,000 Foreign currency translation adjustment. . . . . . . . . . . . (429,000) Net earnings for the year. . . . . . 11,235,000 Balance - June 30, 1993. . . . . . . 11,723,000 1,172,000 32,595,000 38,967,000 5,087,000 16,977,000 92,000 590,000 (684,000) Purchases of treasury stock. . . . . 229,000 1,129,000 Compensatory stock earned. . . . . . (23,000) (148,000) Compensation attributable to stock options . . . . . . . . . . . . . 115,000 Foreign currency translation adjustment. . . . . . . . . . . . (246,000) Net (loss) for the six months ended December 31, 1993 . . . . . (3,745,000) Balance - December 31, 1993. . . . . 11,723,000 1,172,000 32,710,000 35,222,000 5,316,000 18,106,000 69,000 442,000 (930,000) Purchases of treasury stock. . . . . 480,000 1,480,000 Compensatory stock earned. . . . . . (46,000) (294,000) Compensation attributable to stock options . . . . . . . . . . . . . 231,000 Foreign currency translation adjustment. . . . . . . . . . . . (413,000) Retirement of treasury shares. . . . (2,952,000) (295,000) (9,771,000) (2,952,000) (10,066,000) Net loss for the year ended December 31, 1994 . . . . . . . . (16,995,000) BALANCE - DECEMBER 31, 1994. . . . . 8,771,000 $ 877,000 $23,170,0000 $ 18,227,000 2,844,000 $ 9,520,000 23,000 $ 148,000 $(1,343,0000)0
The accompanying notes to financial statements are an integral part hereof. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 Net sales (Notes A[8] and C). . . . . . . . . . . . . . . $ 57,830,000 $42,819,000 $ 73,545,000 $95,906,000 Cost of sales . . . . . . . . . . . . . . . . . . . . . . 47,401,000 33,467,000 54,210,000 69,827,000 Gross profit. . . . . . . . . . . . . . . . . . . . . . . 10,429,000 9,352,000 19,335,000 26,079,000 Other (income), costs and expenses: Selling, general and administrative. . . . . . . . . . 15,911,000 7,391,000 16,908,000 21,054,000 Interest . . . . . . . . . . . . . . . . . . . . . . . 1,468,000 976,000 1,064,000 2,276,000 Investment and other income. . . . . . . . . . . . . . (2,015,000) (1,482,000) (1,312,000) (940,000) Gain arising from sale of stock by subsidiary (Note N) (13,738,000) Equity in (earnings) loss of and write-down/write-off of investment in affiliate (Notes A[1] and N). . . . 13,987,000 8,386,000 (73,000) 29,351,000 15,271,000 2,849,000 22,390,000 Earnings (loss) before taxes and cumulative effect of a change in accounting principle . . . . . . . . . . . (18,922,000) (5,919,000) 16,486,000 3,689,000 Taxes (benefit) on income (Notes A[9] and K). . . . . . . (1,927,000) (2,174,000) 5,894,000 787,000 Earnings (loss) before cumulative effect of a change in accounting principle. . . . . . . . . . . . . . . . (16,995,000) (3,745,000) 10,592,000 2,902,000 Cumulative effect of a change in accounting principle (Note O) . . . . . . . . . . . . . . . . . . . . . . . 643,000 NET EARNINGS (LOSS) . . . . . . . . . . . . . . . . . . . $(16,995,000) $(3,745,000) $ 11,235,000 $ 2,902,000 Earnings (loss) per share (Note L): Earnings (loss). . . . . . . . . . . . . . . . . . . . $(2.75) $(.57) $1.59 $.46 Cumulative effect of a change in accounting principle. .10 NET EARNINGS (LOSS). . . . . . . . . . . . . . . . . . $(2.75) $(.57) $1.69 $.46 Pro forma amounts assuming the new method of accounting was applied retroactively (Note O): Net earnings . . . . . . . . . . . . . . . . . . . . 3,250,000 Net earnings per share . . . . . . . . . . . . . . . $.52
The accompanying notes to financial statements are an integral part hereof. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 Cash flows from operating activities: Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(16,995,000) $ (3,745,000) $ 11,235,000 $ 2,902,000 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,000) 66,000 126,000 132,000 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521,000 262,000 457,000 937,000 Cumulative effect of a change in accounting principle . . . . . . . . . . . . . . . . . . . (643,000) Gain arising from sale of stock by subsidiary . . . . . . . . . . . . . . . . . . . . . . . (13,738,000)) Earnings of subsidiary prior to divestiture of controlling interest . . . . . . . . . . . . (1,622,000) Equity in earnings (loss) of and writedown of investment in affiliate . . . . . . . . . . . 13,987,000 8,386,000 (73,000) Charges to affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,704,000) Amortization and write-off of goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . 671,000 337,000 56,000 250,000 Deferred tax (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,115,000) (2,796,000) 5,179,000 (12,000) Compensatory issuance of stock and options. . . . . . . . . . . . . . . . . . . . . . . . . 525,000 262,000 525,000 525,000 Change in value of marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . (222,000) 25,000 (49,000) Imputed interest on acquisition note. . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,000 Purchases of marketable trading securities. . . . . . . . . . . . . . . . . . . . . . . . . (24,594,000) Proceeds of sales of marketable trading securities. . . . . . . . . . . . . . . . . . . . . 22,122,000 Changes in operating assets and liabilities, net of effects from acquisitions of businesses in 1993: (Increase) decrease in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . (192,000) (2,258,000) 412,000 (11,000) Decrease (increase) in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . (6,036,000) 7,475,000 2,497,000 (7,930,000) (Increase) decrease in prepaid and refundable taxes . . . . . . . . . . . . . . . . . . 168,000 (168,000) (432,000) 547,000 (Increase) in other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . (53,000) (248,000) (56,000) (115,000) Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (784,000) 482,000 (416,000) 1,094,000 (Decrease) increase in accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . (1,597,000) (344,000) 88,000 1,818,000 Increase in income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,000 180,000 467,000 Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . (14,217,000) 7,916,000 1,891,000 555,000 Cash flows from investing activities: Purchases of marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,930,000) (36,310,000) (12,842,000) Proceeds of sales of marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,901,000 26,030,000 22,110,000 Acquisitions of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (611,000) (96,000) (139,000) (1,582,000) Purchase of net assets of acquired companies. . . . . . . . . . . . . . . . . . . . . . . . . . (9,122,000) (615,000) Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694,000 455,000 338,000 (816,000) Proceeds on sale of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,000 Acquisition costs related to purchase of businesses . . . . . . . . . . . . . . . . . . . . . . (27,000) (37,000) (198,000) (204,000) Proceeds from sale of business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,480,000 Repayments of affiliate advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,000 18,380,000 Proceeds from sales of affiliates stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523,000 Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . 535,000 (10,662,000) 8,009,000 8,146,000 Cash flows from financing activities: Repayments of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,746,000) (5,218,000) (1,817,000) (23,598,000) Proceeds of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,214,000 5,000,000 11,685,000 Net advances from (repayments to) factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,086,000 (1,555,000) Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000 2,914,000 Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,480,000) (1,129,000) Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . 9,074,000 (2,902,000) (1,775,000) (8,999,000) Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,000) 6,000 48,000 (9,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . (4,632,000) (5,642,000) 8,173,000 (307,000) Cash and cash equivalents - beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . 5,447,000 11,089,000 2,916,000 3,223,000 CASH AND CASH EQUIVALENTS - END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 815,000 $ 5,447,000 $ 11,089,000 $ 2,916,000 (continued) /TABLE ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 Supplemental disclosures of cash flow information: Cash paid for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,392,000 $ 708,000 $ 652,000 $ 1,906,000 Income taxes (net of refunds of $444,000, $24,000 and $594,000 received for the years ended December 31, 1994, June 30, 1993 and 1992, respectively). . . . . . . . . . . . . . . . . . (268,000) 436,000 538,000 (308,000) Supplemental schedule of noncash investing and financing activities: [1] The Company acquired fixed assets of $252,000 in the year ended June 30, 1992, pursuant to capital lease obligations. [2] In February 1993, the Company, through a wholly owned subsidiary, Symax Garment Co. (1993) Ltd., acquired the operating assets of Symax Garment Co. (1989) Ltd. The fair value of the net assets as of the date of acquisition is presented below: Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,000 Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,000 Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000 Excess of cost over the fair value of assets acquired. . . . . . . . . . . . . . . . . . 277,000 Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000) Net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 615,000 [3] In July 1993, the Company acquired substantially all of the assets and the business of The Panda Group, Inc. The fair value of their assets and liabilities as of the date of acquisition are presented below: Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,234,000 Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,000 Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,000 Excess of cost over the fair value of assets acquired. . . . . . . . . . . . . . . . . . 12,292,000 Noncompetition agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,306,000) Due to factor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,009,000) Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . (143,000) Note payable to sellers at acquisition . . . . . . . . . . . . . . . . . . . . . . . . . (6,408,000) Net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,122,000
The accompanying notes to financial statements are an integral part hereof. (NOTE A) - The Company and Summary of Significant Accounting Policies: [1] The consolidated financial statements include the accounts of Orbit International Corp. and its subsidiaries (the "Company"). All significant intercompany transactions have been eliminated in consolidation. Consolidated operations include the operations of USA Classic, Inc. ("Classic" or "affiliate") through November 1992, at which date Classic sold stock to the public, reducing the Company's equity interest in Classic to less than 50%. Thereafter the Company's investment in Classic is accounted for under the equity method (Note N). The Company changed its fiscal year-end for financial reporting purposes to December 31. The Company and its subsidiaries are engaged in the import and manufacture of men's and women's garments. It is also engaged in the design, manufacture and sale of customized electronic components (see Note M). [2] For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. [3] Inventories are valued at the lower of cost (first-in, first-out) or market price. Cost of inventory represents the aggregate cost of direct materials, direct labor and manufacturing overhead. The manufacturing overhead included in the inventories is based on the ratio of manufacturing expenses to direct labor for each period. [4] Property, plant and equipment is stated at cost. Depreciation and amortization of the respective assets is computed using the straight-line method over their estimated useful lives. Leasehold improvements are amortized using the straight-line method over the remaining life of the lease. [5] Excess of cost over the fair value of net assets of businesses acquired is being amortized on a straight-line basis over twenty years. [6] In January 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). This standard requires the Company to classify its investments as held-to- maturity, available for sale, or trading. The Company classifies all of its securities as trading securities and are carried at fair value. The adoption of SFAS 115 had no significant impact on the Company's financial statements at December 31, 1994 and December 31, 1993. At December 31, 1994 and December 31, 1993 marketable securities aggregated $16,943,000 and $14,249,000, respectively. (NOTE A) - The Company and Summary of Significant Accounting Policies: (continued) [7] Covenant not to compete, included in other assets ($2,000,000) will be amortized over a five-year period commencing in 1996 (Note B). [8] The Company records sales upon delivery for manufacturing contracts and upon completion of work for engineering contracts; however, in certain instances, the Company ships products to its major customer prior to the issuance of final purchase orders. Therefore, certain of the prices may be subject to adjustment when the customer has completed its review of all elements of the letter subcontract which is issued to the Company prior to the issuance of the purchase order. The Company provides for such adjustments, where appropriate. [9] In the (six-month) fiscal year ended December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." Deferred income taxes are provided for temporary differences between financial accounting and tax reporting. Adoption of this statement had no material effect on the Company's results of operations or financial position. [10] The Company accounts for its foreign operations in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Assets and liabilities are translated at period-end exchange rates. Income and expense items are translated using average exchange rates during the period. Foreign currency translation adjustments are not included in determining net income but are reported as a separate component of stockholders' equity. (NOTE B) - Acquisitions: On July 12, 1993 the Company completed the acquisition of substantially all of the assets and the business of The Panda Group, Inc. ("Panda" or "East/West") which is engaged in the design, importation and sale of women's activewear and outerwear, principally under the label "East/West." The Company operates the acquired business as a division of the Company (the "Division"). This acquisition has been accounted for as a purchase. (NOTE B) - Acquisitions: (continued) Pursuant to an asset purchase agreement (the "Purchase Agreement"), dated July 12, 1993, among the Company, Panda and the selling shareholders, the Company acquired substantially all of the assets of Panda for (i) $7,000,000 in cash, (ii) a secured promissory note to the sellers in the face amount of $8,000,000, (Note G[1]), and (iii) the assumption of certain liabilities of Panda by the Company. A portion of the purchase price for the acquisition ($5,000,000) was financed with an acquisition term loan from the Company's primary lender (Note G[1]). Substantially all of the assets of the Panda division collateralize this note. The selling shareholders also entered into a Noncompetition Agreement for consideration of an aggregate of $2,000,000 in cash and the Company's offer of employment under the Employment Agreements. On February 23, 1993, the Company acquired, through a wholly owned subsidiary Symax Garment Co. (1993) Ltd. ("Symax"), the operating assets of Symax Garment Co. (1989) Ltd., a manufacturer of private label men's outerwear located in Vancouver, British Columbia, Canada. The purchase price for the assets consisted of a cash payment of approximately US$615,000. The acquisition has been accounted for as a purchase. Had the acquisition of Symax been made on July 1, 1991 and the acquisition of Panda been made on July 1, 1992 (unaudited) pro forma sales, earnings and earnings per share from continuing operations would have been $113,105,000, $11,583,000 and $1.74 per share for the year ended June 30, 1993 and $96,917,000, $3,042,000 and $.48 per share for the year ended June 30, 1992. (NOTE C) - Major Customer: One major customer, which, in turn, sells its products to the United States government, accounted for approximately $8,141,000 (14%), $4,504,000 (11%) and $7,846,000 (11%) of the net consolidated sales for the year ended December 31, 1994 and the six months ended December 31, 1993 and the year ended June 30, 1993, respectively. Another customer accounted for $4,245,000 (10%) of the net consolidated sales for the six months ended December 31, 1993. No customer accounted for more than 10% of sales for the year ended June 30, 1992. (NOTE D) - Inventory: Inventories comprise the following:
December 31, 1994 1993 Raw materials. . . . . . $ 1,902,000 $ 2,173,000 Work-in-process. . . . . 5,697,000 6,956,000 Finished goods . . . . . 13,407,000 6,052,000 T o t a l. . . $21,006,000 $15,181,000
(NOTE E) - Property, Plant and Equipment: Property, plant and equipment is summarized as follows:
December 31, 1994 1993 Land and building . . . . . . . . . $2,888,000 $2,727,000 Building and leasehold improvements 494,000 447,000 Machinery and equipment . . . . . . 1,940,000 2,673,000 Furniture and fixtures. . . . . . . 477,000 575,000 T o t a l . . . . . . . . 5,799,000 6,422,000 Accumulated depreciation and amortization . . . . . . . . 2,520,000 2,732,000 B a l a n c e . . . . . . $3,279,000 $3,690,000
(NOTE F) - Leasing Arrangements: Operating leases are for office, showroom, warehouse and manufacturing facilities and are subject to annual increases based on changes in the Consumer Price Index and increases in real estate taxes and certain operating expenses. (NOTE F) - Leasing Arrangements: (continued) Future minimum lease payments as at December 31, 1994 under operating lease agreements that have initial or remaining noncancellable lease terms in excess of one year are as follows: Year Ending Operating December 31, Leases 1995. . . . . . . . . . . . . . . $1,009,000 1996. . . . . . . . . . . . . . . 954,000 1997. . . . . . . . . . . . . . . 944,000 1998. . . . . . . . . . . . . . . 933,000 1999. . . . . . . . . . . . . . . 780,000 Thereafter. . . . . . . . . . . . 322,000 Total minimum lease payments . . . . . . $4,942,000
Operating lease rent expense for the year ended December 31, 1994 and for the six months ended December 31, 1993 and for the years ended June 30, 1993 and June 30, 1992 was $1,100,000, $452,000, $813,000 and $1,144,000, respectively. (NOTE G) - Debt: [1] Long-term obligations consist of the following:
December 31, 1994 1993 Term loan collateralized by $3,500,000 of treasury bills, inventories, accounts receivable and general tangibles of the electronic subsystems division, bearing interest at LIBOR (5.44% at December 31, 1994) plus .75%, repayable in annual installments of $1,000,000 from January 1, 1995 through January 1, 1997. . . $ 3,000,000 $ 3,475,000 Promissory note to the sellers of the Panda Group collateralized by the operating assets of the Company's East/West division (face amount $8,000,000) - effective interest at 4.15% at December 31, 1994 and 6% at December 31, 1993, due on December 31, 1998, must be prepaid to the extent of 50% of the "net profits" (as defined) generated by the division in each calendar year commencing with the year ending December 31, 1994 (Note B). . . . . . . . . . . . . . . . . . . . . . . 6,875,000 6,601,000 Term loan collateralized by certain real estate of the electronic subsystems division, bearing interest at LIBOR (6.13% at December 31, 1994) plus .75% (floating), payable in $250,000 quarterly installments through April 1, 1996. . . . . . . . . . 1,250,000 2,250,000 Term loan collateralized by certain treasury bills held by the Company bearing interest at LIBOR (6.13% at December 31 1994) plus .75%, payable in $232,500 quarterly installments through November 1, 1995 . . . . . . . . . . . . . . . . . . 650,000 Subordinated debt (face amount $239,000 and $716,000) - imputed interest at 15%. . . . 230,000 665,000 T o t a l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,005,000 12,991,000 Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,096,000 2,572,000 Noncurrent portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,909,000 $10,419,000
(NOTE G) - Debt: (continued) [1] (continued) The long-term portion of the Company's debt at December 31, 1994 is payable as follows:
Year Ending December 31, 1996 . . . . . . . . . . . $ 1,500,000 1997 . . . . . . . . . . . 1,000,000 1998 . . . . . . . . . . . 6,409,000 T o t a l. . . . $ 8,909,000
[2] Short-term notes payable aggregated $2,602,000 at December 31, 1994 and $1,984,000 at December 31, 1993. Canada Classique, Inc. ("CCI"), a subsidiary, had a C$6,000,000 (US$4,276,000) revolving credit facility with a bank in Canada which increases to C$12,000,000 (US$8,552,000) during peak periods of production during the year (as defined). The interest rate on the primary facility is at the bank's prime lending rate (8% at December 31, 1994) plus .25% and during peak production, the prime rate plus .50% on the first C$5,000,000 of borrowings and prime rate plus .75% on any amounts borrowed above C$5,000,000. Borrowings under this facility amounted to C$3,146,000 (US$2,242,000) at December 31, 1994. The facility is collateralized by substantially all the assets of CCI. At December 31, 1994, Winnipeg Leather, Inc. ("Winnipeg Leather"), a subsidiary, had a C$1,600,000 (US$1,140,000) revolving credit facility with a bank in Canada bearing interest at the bank's prime rate (8% at December 31, 1994) plus .75% collateralized by substantially all the assets of Winnipeg Leather. Borrowings under this facility amounted to C$506,000 (US$360,000) at December 31, 1994. Both of the lending facilities of CCI and Winnipeg Leather expired on December 31, 1993. The bank continued to lend to the companies under the same terms as the expired facilities during 1994. The Company continues to negotiate with the bank to reach a final agreement; the loans are due on demand. (NOTE G) - Debt: (continued) [3] Under the various debt agreements, the Company and its subsidiaries are required to comply with certain covenants which specify minimum cash and cash equivalents to be on its balance sheet at all times, minimum working capital, and tangible net worth requirements and are precluded from declaring and paying any dividends without the consent of such lenders. The Company was in default on certain covenants which have been waived by the lender. Certain covenants have been amended by the lender for further compliance. [4] In February 1992, Classic entered into certain factoring and credit arrangements. Prior to the public offering (Note N), the Company had guaranteed Classic's obligations under these arrangements and had pledged certain cash collateral as security for the guaranty. As a result of the public offering, these arrangements were modified so that all cash collateral was released and the agreement was amended to provide a $3,000,000 limited guaranty from the Company. On July 12, 1993, the Company was released from such guarantee relating to transactions subsequent thereto but not from any obligations which arose prior to July 12, 1993. [5] In July 1993 East/West entered into a Restated and Amended Factoring Agreement with the Company's primary lender. Advances by the factor prior to the maturity date of receivables sold bear interest at prime plus 1.50%. In connection with the amended facility, the Company pledged $4,890,000 of its marketable securities. [6] The Company is guarantor on an installment obligation of Classic aggregating approximately $360,000 at December 31, 1994. (NOTE H) - Capital Stock, Options and Warrants: [1] In consideration of the principal officer's entry into an employment agreement in a prior year, the Company sold to the officer 460,000 shares of its capital stock at $.10 per share. The unearned shares are subject to repurchase by the Company, at the same price, in the event of resignation or discharge for cause of the principal officer. The differences between the fair value of the shares at the dates options are granted or extended, or shares issued, and the exercise price of the options, or issue price, are charged to operations over the term of the officer's employment agreement terminating in 1995. (NOTE H) - Capital Stock, Options and Warrants: (continued) [2] Under the Company's stock option plans, options for the purchase of the Company's common stock may be issued to officers, directors and key employees at prices and terms determined by the Board of Directors. The exercise price of certain options held by officers and employees may be paid in full or in part by shares of stock of the Company. Certain options may be exercised with a ten- year unsecured note and others may be exercised in part with one-year notes. A summary of activity related to the Company's stock option plans is as follows:
Number Number of Option Price of Shares Shares Per Share Exercisable Outstanding at July 1, 1991 . . . . . . . . 1,731,000 $3.50 - $5.50 1,731,000 Exercised . . . . . . . (832,000) $3.50 Cancelled . . . . . . . (3,000) $3.50 Outstanding at June 30, 1992 . . . . . . . . 896,000 $4.50 - $5.50 896,000 Exercised . . . . . . . (9,000) $4.50 - $5.50 Cancelled . . . . . . . (6,000) $4.50 Outstanding at June 30, 1993 . . . . . . . . 881,000 $4.50 - $5.50 881,000 Granted . . . . . . . . 50,000 $5.125 Cancelled . . . . . . . (31,000) $4.50 - $4.875 Outstanding at December 31, 1993. . 900,000 $4.75 - $5.50 850,000 Granted . . . . . . . . 965,000 $3.125 Cancelled . . . . . . . (900,000) $4.75 - $5.50 Outstanding at December 31, 1994. . 965,000 $3.125 - 0 -
At December 31, 1994 options for the purchase of 535,000 shares were available for future grant. (NOTE I) - Employee Benefit Plans: A profit-sharing and incentive-savings plan 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. (NOTE I) - Employee Benefit Plans: (continued) The Company contributed $312,000, $96,000, $184,000 and $218,000, to the plans for the year ended December 31, 1994 and for the six months ended December 31, 1993 and for the years ended June 30, 1993 and June 30, 1992. (NOTE J) - Commitments and Contingencies: [1] Employment contracts, certain of which may be terminated by the Company on not less than three years prior notice and others expiring in 1996 with certain officers of the Company and its subsidiaries provide for minimum annual compensation of $2,299,000. In addition, certain key officers of one of the Company's divisions are entitled to bonuses aggregating $300,000 per year based on the division's profitability (Note B). Other key officers are entitled to bonuses aggregating 5% of consolidated earnings before taxes, as defined, up to $5,000,000 and 7.5% thereafter. In the event of a change in control of the Company, certain officers have the right to elect a lump sum payment representing future compensation due them over the remaining years of their contracts. [2] A substantial portion of the revenues of the electronic subsystems division is subject to audit by U.S. government agencies. In the opinion of management, adjustments to such revenues, if any, will not have a material effect on the Company's financial position. [3] At December 31, 1994, the Company had letters of credit outstanding totalling approximately $5,537,000. [4] Concentration of credit risk: The Company sells the majority of its apparel products to department stores, mass merchandisers and specialty stores. A major customer of its electronic subsystems division sells the Company's products to the United States Government (See Note C). The Company maintains its cash and money market accounts principally at two banks. The majority of the Company's investments are in United States Treasury bills, and various municipal and corporate bonds. (NOTE J) - Commitments and Contingencies: (continued) [5] Litigation: On September 23, 1993, a class action was commenced by an alleged shareholder of USA Classic (formerly a subsidiary of the Company), against USA Classic and certain of its directors in the United States District Court for the Southern District of New York. The action was commenced on behalf of shareholders, other than the defendants, who acquired their shares from November 20, 1992, the date of the initial offering, through September 22, 1993, and alleges violations of the Securities Act of 1933 in connection with the offering as well as violations of Section 10b of the Securities Exchange Act of 1934. The plaintiffs are seeking compensatory damages as well as fees and expenses. On February 1, 1994, a Consolidated Amended Complaint was filed in the class action. The amended Complaint adds the Company as a defendant and alleges that the Company is a "controlling person" of USA Classic and an "aider and abetter" of the alleged violations of the securities laws. The Amended Complaint was answered on March 21, 1994. The Company plans to vigorously defend the action. On October 4, 1994, a Second Amended and Consolidated Complaint was filed in the Class Action. The Second Amended and Consolidated Complaint restated the allegations against the Company and added Paine Webber Incorporated and Ladenburg Thalmann & Co. Inc., the lead underwriters in the Offering, as additional defendants. On November 15, 1994, the Company and such underwriters moved to dismiss certain of the allegations in the Second Amended and Consolidated Complaint. Such motion was argued on March 17, 1995 and the parties are awaiting the court's decision. While the dismissal motion, if granted, will not dispose of all the claims asserted in the Second Amended and Consolidated Complaint, the Company intends to vigorously defend against any remaining claims. (NOTE K) - Income Taxes: [1] The provision (benefit) for income taxes is comprised of the following:
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 Current: Federal . . . . . . . $ - 0 - $ 155,000 $ 573,000 $390,000 Foreign and state . . 188,000 467,000 142,000 409,000 Deferred: Federal . . . . . . . (1,823,000) (2,956,000) 5,058,000 (12,000) Foreign and state . . (292,000) 160,000 121,000 T o t a l. . . $(1,927,000) $(2,174,000) $5,894,000 $787,000
(NOTE K) - Income Taxes: (continued) [2] Expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense for continuing operations as follows:
Percent of Pre-Tax Earnings (Loss) From Continuing Operations Six Months For the Years Year Ended Ended Ended December 31, December 31, June 30, 1994 1993 1993 1992 "Expected" tax expense (benefit) . (34.0)% (34.0)% 34.0 % 34.0 % Increase (reduction) in taxes resulting from: Foreign and state income tax, net of federal income tax benefit . . . . . . . . (.3) 8.7 1.4 8.0 Nondeductible items . . . . . 1.3 1.8 .7 7.2 Tax exempt interest and dividend income . . . . . . (.7) (.1) (2.6) Utilization of net operating losses. . . . . . . . . . . (14.4) (25.7) Nonutilization of net operating and capital loss carryforwards and carrybacks (Note K[4]). . . 22.1 1.5 Utilization of tax credits. . (.2) (3.3) (1.8) Utilization of capital loss carryforward. . . . . . . . (.4) (.2) Other . . . . . . . . . . . . .7 2.5 1.8 2.2 (10.2)% (36.7)% 35.8 % 21.3 %
[3] Deferred tax (benefit) is comprised of the following:
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 State deferred tax expense net of federal deferred tax. . . . . . . . . . . $ (192,000) $ 160,000 $ 52,000 Utilization of the percentage of completion method of revenue recognition for tax purposes . . . . . . . . 66,000 $ (88,000) Provision for doubtful accounts and certain expenses attributable to inventory under the Tax Reform Act of 1986 . 88,000 57,000 (153,000) 94,000 Utilization of accelerated methods of depreciation for tax purposes . . . . (236,000) 224,000 (340,000) 174,000 Compensation attributable to stock options . . . . (79,000) (39,000) (79,000) (79,000) (carried forward) . . . . . (419,000) 402,000 (454,000) 101,000
(NOTE K) - Income Taxes: (continued) [3] (continued)
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 (brought forward) . . . . . $ (419,000) $ 402,000 $ (454,000) $ 101,000 Reversal of provision for loss on disposal of operations . . . . . . . 850,000 Utilization of net operating loss carryforward . . . . . . (164,000) (860,000) Interest not currently deductible for tax . . . (92,000) (269,000) (Utilization of and increase in) tax credits (502,000) (76,000) Restoration of deferred tax liability eliminated by utilization of prior year tax credit. . . . . 158,000 Decrease (increase) in availability of net operating loss and capital losses carryforwards. . . . . . (2,708,000) 1,132,000 Inventory (writedowns) recovery . . . . . . . . (535,000) 68,000 (136,000) (196,000) Rate differential due to surtax exemptions. . . . 61,000 61,000 (Decrease) in gain arising from sale of stock by subsidiary . . . . . . . (1,832,000) (2,975,000) 4,807,000 Increase in valuation reserve on deferred tax asset. . . . . . . . . . 3,955,000 Other . . . . . . . . . . . 18,000 (77,000) (94,000) 32,000 $(2,115,000) $(2,796,000) $5,179,000 $ (12,000)
(NOTE K) - Income Taxes: (continued) [4] The deferred tax asset (liability) is as follows:
December 31, 1994 1993 Deferred tax liability: Gain from sale of stock of subsidiary . $(2,124,000) Other - various temporary differences . $ (314,000) (340,000) (314,000) (2,464,000) Deferred tax asset: Alternative minimum tax credit carryforward. . . . . . . . . . . . . 561,000 Net operating loss and capital loss carryforwards (including pre- acquisition net operating loss carryforwards . . . . . . . . . . . . 4,287,000 1,752,000 Other - various temporary differences . 1,846,000 1,022,000 6,694,000 2,774,000 Valuation allowance on deferred asset. . . (6,380,000) (2,425,000) Net deferred tax liability . . . . . . . . $ - 0 - $(2,115,000)
A valuation allowance against deferred tax assets has been established since there is no assurance that the tax benefits will be realized in the future. [5] A subsidiary whose operations were disposed of in 1991 has a tax net operating loss carryforward approximating $5,700,000 (approximately $5,042,000 for alternative minimum tax) available to offset future taxable income of the parent company only, through June 30, 2001, and investment tax credits and research and development credits aggregating approximately $603,000 to offset taxes payable of the parent company only, through 2001. All such carryforwards arose prior to acquisition. The aforementioned loss carryforwards and tax credits have remained with the Company subsequent to disposal of the operations. As at December 31, 1994, the Company has alternative minimum tax credits of approximately $561,000 which have no limitation on the carryforward period, net operating losses of $4,334,000 which expire in 2009 and capital loss carryforwards of $2,079,000 which expire in 1999. (NOTE L) - Earnings Per Share: Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during each period, utilizing the treasury stock method or modified treasury stock method where applicable. The average number of shares and equivalent shares outstanding for the years ended June 30, 1993 and June 30, 1992 were 6,667,000 and 6,287,000, respectively. The average number of shares for the year ended December 31, 1994 and for the six-month period ended December 31, 1993 were 6,169,000 and 6,520,000, respectively; common share equivalents were not considered since their effect would be antidilutive. (NOTE M) - Business Segments: The Company's business segments are electronic subsystems, apparel - U.S. operations and apparel - Canadian operations. Corporate assets are principally cash, cash equivalents and marketable securities and in 1993 investment in and advances to affiliate. The following is business segment data for the Company as at and for the year ended December 31, 1994, the six months ended December 31, 1993 and the years ended June 30, 1993 and June 30, 1992:
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 Net sales: Electronic subsystems. . $ 12,254,000 $ 6,659,000 $14,191,000 $14,496,000 Apparel - U.S. operations . . . . . . 28,543,000 19,821,000 35,973,000 54,977,000 Apparel - Canadian operations . . . . . . 17,033,000 16,339,000 23,381,000 26,433,000 T o t a l . . . . $ 57,830,000 $42,819,000 $73,545,000 $95,906,000 /TABLE (NOTE M) - Business Segments: (continued)
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, 1994 1993 1993 1992 Operating income (loss): Electronic subsystems. . $ 2,625,000 $ 2,349,000 $ 2,875,000 $ 1,721,000 Apparel - U.S. operations . . . . . (3,217,000) 1,587,000 3,797,000 3,391,000 Apparel - Canadian operations . . . . . (1,628,000) (59,000) (153,000) 1,726,000 Operating income (loss) . . . . . . . (2,220,000) 3,877,000 6,519,000 6,838,000 General corporate (expense) (1,981,000) (1,007,000) (4,092,000) (1,813,000) Interest (expense). . . . . (1,468,000) (976,000) (1,064,000) (2,276,000) Gain arising from sale of stock by subsidiary. . . 13,738,000 Equity in earnings (loss) of and writedown/ write-off of investment in affiliate . . . . . . (13,987,000) (8,386,000) 73,000 Investment and other income 734,000 573,000 1,312,000 940,000 Earnings (loss) before taxes on income and cumulative effect of a change in accounting principle. . . . . . . . $(18,922,000) $(5,919,000) $16,486,000 $ 3,689,000 Assets: Electronic subsystems. . $ 9,522,000 $11,615,000 $13,046,000 $18,228,000 Apparel - U.S. operations . . . . . . 27,422,000 19,526,000 34,967,000 Apparel - Canadian operations . . . . . . 8,879,000 10,626,000 15,385,000 13,698,000 Corporate assets . . . . 17,688,000 31,338,000 43,404,000 4,837,000 T o t a l . . . . $ 63,511,000 $73,105,000 $71,835,000 $71,730,000 Capital expenditures: Electronic subsystems. . $ 47,000 $ 26,000 $ 68,000 $ 13,000 Apparel - U.S. operations . . . . . . 373,000 137,000 1,754,000 Apparel - Canadian operations . . . . . . 191,000 53,000 75,000 53,000 T o t a l . . . . $ 611,000 $ 216,000 $ 143,000 $ 1,820,000 Depreciation and amortization: Electronic subsystems. $ 343,000 $ 190,000 $ 391,000 $ 167,000 Apparel - U.S. operations . . . . . 55,000 24,000 660,000 Apparel - Canadian operations . . . . . 111,000 48,000 66,000 110,000 T o t a l . . . . $ 509,000 $ 262,000 $ 457,000 $ 937,000
(NOTE N) - Investment in and Advances to Affiliate: Classic was a wholly owned subsidiary of the Company until it consummated a public offering of its common stock in November 1992, reducing the Company's equity interest to 43%. As a result of the offering, the Company recognized a gain of $13,738,000 in that year, representing the Company's proportionate share of the increase in the underlying equity of Classic. Approximately $18,200,000 of the net proceeds to Classic was used to repay subordinated indebtedness owed to the Company. The Company accounted for its 43% ownership of the common stock of Classic using the equity method. During the six months ended December 31, 1993 the Company wrote- down its investment in Classic by $8,386,000. For the three-month period ended February 28, 1994, Classic recorded a net loss of $3,453,000 and on May 13, 1994 and May 16, 1994, Classic and its wholly owned subsidiaries filed petitions under Chapter 11 of the United States Bankruptcy Code. Consequently, the Company recorded a charge of $13,987,000 which includes its 43% equity interest in Classic and subordinated debt approximating $2,400,000 and a cash charge of approximately $2,500,000 of related costs. See Note J[5] with respect to related litigation. The following represents condensed financial information of Classic as of and for the five-month period ended November 30, 1993 and as of and for the year ended June 30, 1993:
November 30, June 30, 1993 1993 (In Thousands) Current assets . . . . . . . . . . . $35,185 $41,001 Noncurrent assets. . . . . . . . . . 14,777 14,604 Total assets . . . . . . . $49,962 $55,605 Current liabilities. . . . . . . . . $11,551 $ 7,784 Noncurrent liabilities . . . . . . . 5,599 6,527 Total liabilities. . . . . 17,150 14,311 Stockholders' equity . . . . . . . . 32,812 41,294 Total liabilities and stockholders' equity . . $49,962 $55,605 Net sales. . . . . . . . . . . . . . $32,634 $79,115 Gross profit . . . . . . . . . . . . $ 596 $20,447 Income before cumulative effect of a change in accounting principle. . $ 1,808 Net income (loss). . . . . . . . . . $(8,654) $ 2,451
(NOTE O) - Change of Accounting Principle and Fourth Quarter Adjustments: [1] In December 1994, the Company and certain subsidiaries recorded inventory writedowns of approximately $2,400,000. [2] The Company recorded tax expense of approximately $1,200,000 for the fourth quarter resulting from the lack of assurance of realizing an anticipated tax benefit from future earnings. [3] In June 1993, the Company's 43% owned affiliate, Classic, adopted the accounting policy of deferring design costs that relate to goods to be sold in future selling seasons retroactive to the beginning of the fiscal year. In prior years, it was Classic's policy to include design costs in overhead in the year incurred. Such change resulted in a cumulative effect of a change in accounting principle of $643,000 (net of taxes of $386,000) being recorded by the Company in the fourth quarter of the fiscal year ended June 30, 1993 with a reduction to the amount of gain recognized from the sale of stock by Classic. Earnings before cumulative effect of the change in accounting principle for the year ended June 30, 1993 was increased by approximately $180,000 as a result of the change. (NOTE P) - Subsequent Events: [1] On February 24, 1995, the Company's principal officer died. Pursuant to his employment contract, the Company will pay approximately $500,000 to the principal officer's estate in monthly installments over the next three years. The Company is a beneficiary of a $1,500,000 key-man policy on the life of the principal officer. [2] Between January and March 1995, the Company opened up standby letters of credit totaling $2,800,000 for the beneficiary of the primary lender to its Canadian subsidiaries to secure a certain level of borrowings of such subsidiaries until a new lending arrangement is finalized. [3] In March 1995, the Company pledged $1,700,000 of its marketable securities as security for the Factoring Agreement between East End, a wholly owned subsidiary, and its primary lender. REPORT OF INDEPENDENT AUDITORS ON SCHEDULE Board of Directors and Stockholders Orbit International Corp. Hauppauge, New York The audits referred to in our report dated March 10, 1995, included Schedule II as at December 31, 1994, for the year ended December 31, 1994, for the six months ended December 31, 1993 and for each of the years in the two-year period ended June 30, 1993. In our opinion, such schedules present fairly the information set forth therein in compliance with the applicable accounting regulation of the Securities and Exchange Commission. Richard A. Eisner & Company, LLP New York, New York March 10, 1995 SCHEDULE II ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Additions (1) (2) Balance at Charged to Charged to Balance at beginning cost and other accounts - Deductions - end of of period expenses describe describe period Year ended December 31, 1994: Reserve for estimated doubtful accounts and allowance. . . . . . . . . . . . . $ 882,000 $ 226,000 $339,000 ** $ 769,000 Valuation allowance on deferred tax asset. . . . . . . . . . . $2,425,000 $3,955,000 $6,380,000 Six-month year ended December 31, 1993: Reserve for estimated doubtful accounts and allowance. . . . . . . . . . . . . $ 676,000 $ 171,000 $263,000 * $228,000 ** $ 882,000 Valuation allowance on deferred tax asset . . . . . . . . . . . $ - 0 - $2,425,000 $2,425,000 Year ended June 30, 1993: Reserve for estimated doubtful accounts. $ 655,000 $ 563,000 $467,000 ** 75,000 *** T O T A L . . . . . . . . . . . . $ 655,000 $ 563,000 $542,000 $ 676,000 Year ended June 30, 1992: Reserve for estimated doubtful accounts. $ 523,000 $ 660,000 $429,000 ** 99,000 **** T O T A L . . . . . . . . . . . . $ 523,000 $ 660,000 $528,000 $ 655,000
* Reserve of acquired division at date of acquisition. ** Amount represents write-offs. *** Reduction from deconsolidated operations. **** Discontinued operations. The accompanying notes to financial statements are an integral part hereof. -----END PRIVACY-ENHANCED MESSAGE-----