-----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, SAA5ZFZy+2ctGFzsBSK0kIjp4kWNwEWfw6ESjLe9QAOLU3ebXmGMS+wd9leoRVZr yCsv7wxROoEYpXgCKoh+nA== 0000074818-96-000002.txt : 19960402 0000074818-96-000002.hdr.sgml : 19960402 ACCESSION NUMBER: 0000074818-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-03936 FILM NUMBER: 96543387 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 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K XX Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 1995. [Fee Required] or Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 for transition period from to . [No Fee Required] 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) Registrant's telephone number, including area code: (516) 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 Common Stock, $.10 par value per share 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 capital stock held by non- affiliates (based on shares held and the closing price quoted by NASDAQ Small Cap Market on March 25, 1996): $3,920,000. Number of shares of common stock outstanding as of the close of the period covered by this report: 5,886,093. 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 1996 Annual Meeting of Stockholders. PART I Item 1. BUSINESS Orbit International Corp. (the "Company" or "Orbit") operates through three business segments: Electronics, United States Apparel and Canadian Apparel. Through its Orbit Instrument Division and through a wholly-owned subsidiary, Orbit Instrument of California, Inc. ("Orbit California"), the Company is engaged in the design, manufacture and sale of customized electronic components. The Company is engaged in the import and manufacture of men's and women's garments in the United States through an operating division known as the East/West Division ("East/West"). Through its three wholly-owned subsidiaries in Canada, Canada Classique Inc. ("Classique"), Winnipeg Leather (1991) Inc. ("Winnipeg Leather") and Symax Garment Co. (1993) Ltd. ("Symax"), the Company operates its Canadian Apparel Division. The Company's Electronics segment is involved in the manufacture of customized electronics components and subsystems for military and non-military government application. In February 1996, Cabot Court, Inc. ("Cabot Court"), a Delaware corporation and wholly-owned subsidiary of the Company, completed the acquisition of certain of the assets, subject to certain liabilities, of Astrosystems, Inc. a Delaware corporation ("Astrosystems"), and Behlman Electronics, Inc. ("Behlman Electronics"), a New York corporation. Each of Astrosystems and Behlman Electronics manufacture and sell power supplies, AC power sources, frequency converters, UPS and associated analytical equipment and other electronic equipment. The acquisition of each of Astrosystems and Behlman Electronics were partially financed pursuant to a bridge loan from BNY Financial Corporation ("BNY"), which loan was secured by a second mortgage on the Company's corporate facility at 80 Cabot Court, Hauppauge, New York. It is anticipated that such bridge loan will be replaced by a term loan and revolving credit facility with BNY, which has not been finalized. However, there is no assurance that such permanent financing will be successfully negotiated. Concurrently with the purchase of Astrosystems and Behlman Electronics, Cabot Court changed its name to Behlman Electronics, Inc. East/West designs, imports and sells women's active-wear and outer-wear, principally under the East/West label. East/West is based in New York City and commenced operations in July 1993 following its acquisition of the operating assets of The Panda Group, Inc. ("Panda"). In December 1995, the operations of East End Apparel Group, Ltd. ("East End") were merged into East/West. East End manufacturers and sells women's outer-wear and sportswear principally under the Campton Place label. East End is based in New York City and commenced operations in June 1994. Classique manufactures branded and private label men's, women's and children's outer-wear. Classique is based in Winnipeg, Manitoba, Canada, and commenced operations in December 1990 following its acquisition of the operating assets of Rice Sportswear Ltd. Winnipeg Leather manufactures and sells women's garments under private labels including Daniel Marcus. Winnipeg Leather is based in Winnipeg, Manitoba, Canada and commenced operations in May 1991 following its acquisition of the operating assets of the Winnipeg Leather division of the Sterling-Stall Group. Symax manufactures and sells private label men's outer-wear. Symax, based in Vancouver, British Columbia, Canada, commenced operations in February 1993 following its acquisition of the operating assets of Symax Garment Co. (1989) Ltd. In January 1995, the Company discontinued the manufacture and sale of women's sportswear previously conducted through its wholly-owned subsidiary, Ax Elle Fashions, Inc. In May 1994, USA Classic, Inc. ("USA Classic"), an approximately 43% owned subsidiary of the Company, filed a petition under Chapter 11 of the United States Bankruptcy Code. The following sets forth certain selected historical financial information relating to the Company's business segments:
12 Months Ended 12/31/95 12 Months Ended 12/31/94 6 Months Ended 12/31/93 12 Months Ended 6/30/93 Net Sales: Electronic Apparel-U.S. Apparel- Canadian $11,763,000 $35,152,000 $11,319,000 $58,234,000 $12,254,000 $28,543,000 $17,033,000 $57,830,000 $ 6,659,000 $19,821,000 16,339,000 $42,819,000 $14,191,000 35,973,000 23,381,000 $73,545,000 Operating income: Electronic Apparel-U.S. Apparel- Canadian $2,245,000 ($20,780,000) ($1,192,000) $(19,727,000) $2,625,000 ($3,217,000) ($1,628,000) ($2,220,000) $2,349,000 1,587,000 (59,000) $3,877,000 $2,875,000 3,797,000 (153,000) $6,519,000 Assets: Electronic Apparel-U.S. Apparel- Canadian Corporate $8,028,000 $6,942,000 $4,927,000 $18,131,000 $38,028,000 $9,522,000 $27,422,000 $8,879,000 $17,688,000 $63,511,000 $11,615,000 19,526,000 10,626,000 31,338,000 $73,105,000 $13,046,000 15,385,000 43,404,000 $71,835,000 Capital Expenditures: Electronic Apparel-U.S. Apparel- Canadian $ 97,000 $313,000 $- 0 - $410,000 $47,000 $373,000 $191,000 $611,000 $26,000 137,000 53,000 $216,000 $68,000 75,000 $143,000
Additional financial information relating to the industry segments in which Orbit conducts business is set forth in Footnote M to the consolidated financial statements appearing elsewhere in this report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors set forth in this Report. ELECTRONICS SEGMENT ORBIT INSTRUMENT DIVISION General The Orbit Instrument Division designs, manufactures and sells customized electronic components and subsystems for military, and to a lesser extent, non-military, governmental applications. Products include positional devices (ball trackers, force transducers and joysticks), data entry and display systems (computer controlled action entry panels, rear projection readout panels and manual entry displays), customized keyboards, plasma units and other specialized electronic systems. The Division also sells, on a repeat order basis, previously designed equipment, such as magnetic clutches, gearheads, indicators and differentials for console applications. The Division's products, which in most instances are designed to customer specifications on a firm order basis, are utilized in surveillance aircraft, missiles, torpedoes, nuclear subsystems, naval vessels, guidance control and ground console radar equipment. A substantial portion of the Division's net sales during the Company's fiscal years ended December 31, 1995 and December 31, 1994 were attributable to one customer in the Company's capacity as a defense subcontractor for the United States Government. See "Substantial Customers" below. The Division purchases its raw materials and parts in the open market primarily from a variety of local manufacturers, dealers or suppliers. Products Positional Devices The Division designs and manufactures ball trackers, joysticks and force transducers which are incorporated into radar and sonar display systems. These devices enable an operator to move a cursor across a screen for tracking missiles, ships, aircraft and other moving targets. Data Entry, Keyboards and Display Systems The Division manufactures a computer-controlled, action entry panel ("CCAEP") which provides a console operator with multiple displays of computer-generated data. The Segment's other data entry and display systems, digital data and manual entry units and panels are used in readout and switch panels located in fire control, sonar control and command communication consoles. The Division also manufactures a family of keyboards designed to military specifications and has added to this product group, keyboards which include backlit and multi-function panels. These new keyboards have been sold for use in ships and aircraft. The Division has designed, and is selling, a low-power, light-weight, minimum-depth display unit providing output similar to cathode ray tube displays by utilizing AC plasma technology, a flat panel display technology. This technology eliminates bulk and space requirement of cathode ray tube displays, and offers improved visual resolution and lower power requirements at environmental extremes. The Division is currently under contract to incorporate the plasma display panels in display consoles for Aegis class ships. Positional Readout Devices Nuclear rod position indicators manufactured by the Division control and measure the depth of rods going into the core of a nuclear reactor energy source. The Division's rear projection readout devices provide operators with multiple sources of film stored display information capable of storing up to 48 messages per unit. Graphic Display Terminals The Division's family of graphic display terminals enables the operator to monitor and control a ship's radar and sonar systems and subsystems through the ship's central computer. The terminals are used throughout a ship as adjuncts to larger display consoles. The modular design of these terminals facilitates applications on all size surface ships, submarines and aircraft. Operator Control Trays The variety of operator control trays engineered and manufactured by the Division help organize and present an influx of data created by interactive communications systems, making such data more manageable for operator consumption. The tray can be used for patrol and surveillance aircraft, standard shipboard display consoles, shore or mobile-based defense equipment and subsurface sonar displays. The Division's control trays are currently used in both naval service and operator simulators. Plasma Flat Panel Technology The Division has designed an intermediate sized display using AC gas discharge plasma technology. This touch sensitive unit allows interactive capability for communication between the operator and the host computer. Applications for this unit include weapons control, ships status, target recognition, air traffic control plus information exchange panels used in conjunction with image processing. Proposed Products Substantially all of the Division's efforts in the development of new products consist of design and engineering services associated with, and necessary for, the manufacture of new products. The Division generally begins development efforts after its customers have indicated that the proposed new products or improvements are desirable. The following is presently being developed by the Division; however, there can be no assurance that the Division's development efforts will result in any marketable products. The Division does not yet have any firm orders for products described below and there can be no assurance that any sales will be made. The Division is expanding its design and development of AC plasma display panels to include bit mapping and graphics technologies. These next generation panels are intended to be used in aircraft and naval applications. The graphics version of the AC plasma display panel was completed in mid 1995 and the Division received contracts for these units on two separate programs. The Division has also been contracted to deliver a more advanced version of its panel with embedded intercommunication capability. The Division has designed and developed a flat panel technology based communication panel. The Company has received prototype orders for these units for the LHA ship class. A flat panel development has been commenced for interactive color liquid crystal and Electroluminescent displays. Competition The Division's competitive position in the electronics industry is, in Management's view, predicated upon the Company'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 customer. There are numerous concerns (many of which are substantially larger than the Company) capable of producing substantially all of the Company's products. However, to the Company's knowledge, none of such competitors produce all of the products that the Division produces. Sales to one customer, General Motors Hughes Electronics Corporation, accounted for approximately 54% and 66% of the sales of the Division for the fiscal years ended December 31, 1995 and December 31, 1994, respectively. The loss of such customer would have a materially adverse effect on the Division's sales and earnings. BEHLMAN ELECTRONICS, INC. In February 1996, the Company, through its wholly-owned subsidiary, Cabot Court, completed the acquisition of certain of the assets, subject to certain liabilities, of Astrosystems and Behlman Electronics. Concurrently with the purchase, Cabot Court changed its name to Behlman Electronics, Inc. ("Behlman"). General The military division of Behlman designs and manufactures power conversion devices and electronic products for measurement and display. The commercial products division produces high quality, distortion free commercial power units and low noise uninterruptable power supplies (UPS). Sales and Marketing Products of the military division are marketed by Behlman's program managers and other management personnel. Commercial products are sold by Behlman's regional sales managers, manufacturer's representatives and non-exclusive distributors. Competition Competition in these fields depends on such factors as price, product reliability and performance, engineering and production. In particular, due primarily to budgetary restraints and program cutbacks, competition in the Company's government markets has been increasingly severe and price has become the major overriding factor in contract and subcontract awards. To the best of the Company's knowledge, some of its regular competitors are much larger companies with substantially greater capital resources and far larger engineering, administrative, sales and production staffs. US APPAREL SEGMENT EAST/WEST General In July 1993 Orbit acquired substantially all of the assets of Panda, a designer, importer and seller of women's active-wear and outer-wear. Orbit operates Panda as a separate division called the East/West Division. In December 1995, the Company merged the operations of East End into the East/West Division. Products East/West designs, imports and sells women's jogging suits and outer-wear under the private label East-West as well as women's sportswear and outer-wear under the Campton Place label. The product collections of East/West are designed and marketed to focus on quality and value to the consumer. A majority of the Division's products are sold at moderate price points. After the Fall 1995 season, East/West discontinued marketing men's outer- wear. Sales and Marketing East/West markets its various active-wear and outer-wear lines to major department stores and specialty stores throughout the United States and Canada through its direct sales force. Sales of East/West accounted for approximately 73% of the total net sales of the United States Apparel Segment during the fiscal year ended December 31, 1995. Under the Campton Place label, East/West sells and distributes its products to retailers throughout the United States and Canada. These collections retail between $59 and $99. East/West also aggressively promotes private label product development with major chains using its branded line fashion concepts to enhance and enrich store interest for their gross margin advantages. Sales of East End accounted for approximately 26% of the total net sales of the United States Apparel Segment during the fiscal year ended December 31, 1995. Importing East/West imports all of its garments from a large number of independent contract manufacturers located in several countries in the Far East. The Division utilizes four agents in the Far East to place orders with independent contractors and to monitor production. The Division also has placed some production and imported from the Caribbean basin. Competition The apparel industry is highly competitive. The competitors of East/West include many apparel manufacturers which have greater financial and manufacturing resources than the Division. East/West believes it can compete successfully in the market place by delivering a product of good quality at an affordable price to the consumer. CANADIAN APPAREL SEGMENT CLASSIQUE General In December 1990, Classique acquired the operating assets, subject to certain liabilities, of Rice Sportswear Ltd. ("Rice"), a manufacturer of branded and private label men's and women's outer-wear located in Winnipeg, Manitoba, Canada. Classique is continuing the operations of Rice under the Rice Sportswear name. Products Rice's products and collections, sold under both proprietary and private labels, are generally designed and marketed for sale at moderate and higher price points through retailers throughout Canada. Through its various domestic and import facilities, it markets and distributes outer-wear collections under the following proprietary labels: Mountaineer, men's and women's winter outer- wear; Hemingway, cloth and leather outer-wear; and Micro Tex, activewear fabric. These lines are an essential part of the Canadian retailing business, bringing value and fashion into an affordable collection with names that are associated with quality and style in over 750 customer accounts in Canada. Rice utilizes various fabrications, colors and insulations to produce specialized products that are identifiable to both retailers and consumers in specific markets. Rice is seeking to broaden its customer base and enhance its market share by diversifying its product offerings. In particular, Rice is expanding its offerings of more casual products, and less constructed garments, based on its recognition of changing consumer preferences towards such products. Rice also sells boys' and girls' outer-wear. During 1993, Rice formed a division called Apparel Image Marketing ("AIM") which manufactures and sells men's and women's outer-wear utilizing the corporate logo of its customers. During the fiscal year ended December 31, 1995, sales for the AIM division accounted for approximately 31% of the total net sales of the Canadian Apparel Segment. Sales and Marketing Rice markets its various mens' and ladies' cloth and leather outer-wear to major department store chains and specialty apparel retail stores throughout Canada through its direct sales force of 8 sales people and through 24 independent sales representatives. Sales of Rice accounted for approximately 68% of the total net sales of the Canadian Apparel Segment during the fiscal year ended December 31, 1995. Manufacturing Rice has one domestic manufacturing facility producing in excess of 170,000 units of product annually. These facilities are fully vertical in the manufacturing and assembly process. The facilities cut, sew and completely finish various products. Rice also imports products from many independent contract manufacturers located in the Far East and Europe. It furnishes its foreign contractors with design and manufacturing specifications for the products it imports. Rice's use of foreign sources varies from season to season based upon cost, quality and other factors determined by Rice's product requirements. Rice believes that having a domestic as well as a foreign basis for its manufacturing allows it to effectively combine price, performance and quality. Competition The apparel industry, in general, and the active-wear segment, in particular, are intensively competitive. The market is composed of both large manufacturers and small independent Companies. Many of the large manufacturers have substantially greater resources than the Company. The Company believes that competition is based upon design, price and customer support. WINNIPEG LEATHER General In May 1991, the Company, through a wholly-owned subsidiary, acquired the operating assets of the Winnipeg Leather division of the Sterling-Stall Group. Products Winnipeg Leather manufactures, sells and markets women's leather, suede and cloth garments under private labels, including Daniel Marcus. Winnipeg Leather's products are sold to major department store chains and specialty apparel retail stores throughout Canada and to several major department stores in the United States. Sales and Marketing Sales of Winnipeg Leather accounted for approximately 25% of the total net sales of the Canadian Apparel Segment during the fiscal year ended December 31, 1995. Winnipeg Leather will be broadening its importance as a major resource for outer-wear by taking on the design, manufacturing and marketing aspects of Rice's ladies cloth business. Winnipeg Leather has over 200 Customer accounts. A large portion of the business is done by private label developmental programs with regular as well as specialty size chain stores. Approximately one-third of Winnipeg Leather's sales are through sportswear items. It manufactures a complete line of sportswear that coordinates with the outer-wear portion of the business. SYMAX General In February 1993, the Company, through a wholly-owned subsidiary, acquired the operating assets of Symax Garment Co. (1989) Ltd. Products Symax manufactures, sells and markets men's outer-wear under private labels. It is a leading manufacturer in British Columbia of uniform jackets, serving some 40 public bodies as well as private clubs, associations and numerous retailers. Sales Approximately 32% of Symax's sales are for uniform jackets delivered to government agencies while the remainder of its sales are made to retailers. Sales for Symax accounted for approximately 7% of the total net sales of the Canadian Apparel Segment during the fiscal year ended December 31, 1995. USA CLASSIC In July 1988 Orbit, through a wholly-owned subsidiary USA Classic, acquired all of the outstanding stock of U.S. Apparel, Inc. In November 1992, USA Classic completed an initial public offering (the "Offering") of 3,105,000 shares of its common stock, thereby reducing Orbit's ownership to approximately 43%. USA Classic designed, manufactured and marketed men's, women's and children's active-wear, sportswear and outer-wear until it, and its subsidiaries, filed petitions under Chapter 11 of the United States Bankruptcy Code in 1994. The Company recorded a non cash charge related to such bankruptcy of $13,987,000, which includes its 43% equity interest in USA Classic, subordinated debt owing by USA Classic to the Company of approximately $2,400,000 and approximately $2,500,000 of related costs. CERTAIN INFORMATION RELATING TO THE COMPANY Substantial Customers General Motors Hughes Electronics Corporation ("GMHEC"), Fullerton, California accounted for approximately 11% of the Company's consolidated net sales during its fiscal year ended December 31, 1995. GMHEC, Northrup Grumman and various agencies of the United States government accounted for approximately 54%, 16% and 13% respectively, of net sales of the Electronics Segment for the fiscal year ended December 31, 1995. The loss of GMHEC as a customer would have a materially adverse effect on the Electronic Segment's sales and earnings. In the fiscal year ended December 31, 1995, Sears Canada and Polaris Industries (U.S. and Canada) accounted for approximately 18% and 16% of net sales of the Canadian Apparel Segment. The loss of Sears Canada and Polaris Industries would have a materially adverse effect on the Canadian Apparel Segment. Since substantially all of the products which the Electronics Segment 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, 1995 and December 31, 1994 the Company's consolidated backlog was as follows: December 31, 1995 December 31, 1994 Electronic* $13,000,000 $18,000,000 Apparel-U.S. Operations 2,000,000 3,000,000 Apparel-Canadian Operations 1,000,000 1,000,000 Total $16,000,000 $22,000,000 * Does not include backlog of Behlman acquired in February 1996. A majority of the business of the United States and Canadian Apparel Segments is associated with the sale of outer-wear. The first and second quarters are historically weak periods since its customers do not generally request shipment of merchandise at that time. Consequently, the backlog of these Segments at December 31, 1995 reflect the impending weak selling periods for 1996. The United States Apparel Segment reflects the backlog of East/West and East End at December 31, 1995 and at December 31, 1994. Of the Electronics Segment backlog during the fiscal year ended December 31, 1995, approximately $5,000,000 represents backlog under contracts which will not be shipped during the 1996 fiscal year. Additionally, substantially all of the Electronics Segment's contracts are subject to termination at the convenience of the United States Government. Special Features of Government Contracts Orders under government prime contracts or subcontracts are customarily subject to termination at the convenience of the government, in which event the contractor is normally entitled to reimbursement for allowable costs and for 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 for the convenience of the government occurred during the fiscal year ended December 31, 1995. In certain instances, the Electronics Segment ships products to its major customers prior to the issuance of final purchase orders. Therefore, certain of the prices may be subject to adjustment when the customer completes its review of all elements of the letter subcontract which is issued to the Company prior to the issuance of the purchase order. While these contracts are material to the Company's business, the Company does not believe that any material price adjustments will be made in these contracts. See Footnote J to the consolidated financial statements appearing elsewhere in this report. Substantially all of the Electronics Segment's revenues are subject to audit under the Vinson-Trammel Act of 1934 and other federal statutes. 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 Electronics Segment incurred approximately $420,000 of research and development expenses during the fiscal year ended December 31, 1995, as compared with $381,000 of such expenses during the comparable period of the prior year. The Company did not incur any material research and development costs as defined in FASB Statement No. 2 (October 1974) during these two fiscal years. Patents The Company does not own any patents which it believes are of material significance to its operations. Employees As of March 15, 1996, the Company employed 395 persons. Of these, the Apparel Segments employed 276 people, 11 in design functions, 15 in sales, 34 in administration and the balance in production. The Electronics Segment employed 119 people consisting of 23 in engineering and drafting, 8 in sales and marketing, 20 in direct and corporate administration and the balance in production. Item 2. PROPERTIES The Company's plant and executive offices, located at 80 Cabot Court, Hauppauge, New York, consist 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 is renegotiating a new lease for its premises in Ventura, California consisting of 1700 square feet. The new lease is expected to be for a term of one year at an annual rental of approximately $13,000. East/West leases approximately 15,000 square feet of showroom and office space at 500 7th Avenue in New York City at an annual rental of $233,605 under a lease which expires in January 2000. East/West also leases 80,000 square feet of warehouse space at 2400 83rd Street in North Bergen, New Jersey, at an annual rent of $258,000 under a lease which expires January 2000. East End leases approximately 5,000 square feet of showroom and office space at 500 7th Avenue in New York City at an annual rental of $77,625 under a lease which expires in January 2000. The Company is currently seeking a third party to sublet this showroom and office space. Classique leases 82,000 square feet of space at 1270 Notre Dame Avenue in Winnipeg, Manitoba, Canada at an annual rent of C$182,000. This lease, which commenced November 30, 1990, expires in November 2000. This space is used for distribution and warehousing, design, production and executive offices. Classique also leases 48,000 square feet at 181 Bannatyne Avenue in Winnipeg for warehousing and distribution. Classique has assigned the leases for 20,000 square feet of production space in Steinbach, Manitoba and 20,000 square feet of production space in St. Malo, Manitoba. The Company remains as a secondary guarantor on such leases, which expire in November 2000. Winnipeg Leather leases 22,000 square feet at 1270 Notre Dame Avenue in Winnipeg at an annual rental of C$66,000 under a lease which expires in November 2000. The space is used for distribution and warehousing, design, production and executive offices. Symax leases 3,500 square feet of office and showroom space at 1654 Franklin Street in Vancouver, British Columbia, Canada at an annual rent of C$65,000 under a lease which expires in January 1997 with no renewal options. 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. In re USA Classic Securities Litigation: In September 1993, a class action (the "Class Action") was commenced by an alleged shareholder of USA Classic, 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 1Ob of the Securities Exchange Act of 1934. The plaintiffs are seeking compensatory damages as well as fees and expenses. In February 1994, a First Amended and Consolidated Complaint was filed in the Class Action. The First Amended and Consolidated Complaint added the Company as a defendant and alleged that the Company is a "controlling person" of USA Classic and an "aider and abetter" of the alleged violations of the securities laws. The Company answered the First Amended and Consolidated Complaint in March 1994. The Class Action has been stayed as against USA Classic as a result of USA Classic's filing of a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. In October 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. 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. In or about June 1995, the court denied the dismissal motion in its entirety. In March 1995, the plaintiffs' representatives filed a motion for class certification. Since that date, the parties have been conducting depositions and reviewing documents relevant to the class certification issue. The defendants' response to the class certification motion has been adjourned without date pending completion of discovery into that issue. In February 1996, the underwriter defendants moved the court to stay all substantive discovery until the court rules upon the class certification motion. The Company joined in this motion. On March 7, 1996, the court denied the motion to stay substantive discovery. The next deposition is scheduled for April 17, 1996. It is estimated that discovery in this matter will continue throughout 1996. The Company plans to continue to vigorously defend this action. Sandra Lakritz v. Orbit International Corp.: In July 1995, Sandra Lakritz, a former employee of East/West commenced an action in Supreme Court, New York County, claiming employment discrimination based upon age and disability. In December 1995, the Company answered the complaint and denied the allegations set forth therein. Simultaneously with its answer, the Company served upon plaintiff's counsel numerous discovery requests. To date, plaintiff has only partially responded to the discovery requests. In February 1996, plaintiffs' counsel filed a request for a preliminary conference. The court has yet to schedule such a conference. The Company intends to vigorously defend this action. Venture Garments, Ltd. v. East End Apparel Group, Ltd. and Orbit International Corp.: In December 1995, Venture Garments, Ltd., a supplier of East End commenced an action in Supreme Court, New York County for goods had and received and related equitable relief against both East End and the Company. In February 1996, the Company answered the complaint, asserted counterclaims against Venture and impleaded East End's former president, Gary Jacobs. While the Company contests the allegations set forth in the complaint, in an effort to avoid litigation costs, the Company is engaging in negotiations to resolve the dispute with the plaintiff. Presently, the Company has agreed to adjourn Venture's time to reply to the counterclaim, to provide discovery and Jacobs' time to answer the third-party complaint sine die. Should the settlement negotiations prove to be unsuccessful, the Company intends to vigorously defend this action and prosecute its counterclaims and third-party claims. Gary Jacobs v. East End Apparel Group, Ltd. and Orbit International Corp.: In December 1995, Gary Jacobs, former president of East End, commenced an action against the Company in connection with his termination. Jacobs' complaint alleges that he was wrongfully terminated in violation of his employment agreement with the Company. The complaint seeks damages in the amount of $2,000,000. In February 1996, the Company answered the complaint and asserted a counterclaim against Jacobs and his personal counsel, for breach of the contract, breach of fiduciary duty, tortious interference of the contract and other related relief seeking damages in the aggregate amount of $30,400,000. In February 1996, Jacob's counsel moved to dismiss the claims asserted against it and against one of its partners. That motion and Jacobs' time to reply to the counterclaims and provide discovery has been adjourned to April 4, 1996. It is possible that the settlement negotiations concerning the Venture v. East End litigation (see above) may resolve this action as well. Should such negotiations prove unsuccessful, the Company intends to vigorously defend Jacobs' claims and to vigorously prosecute the counterclaims set forth in this action. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS An Annual Meeting of Stockholders of the Company was held on December 18, 1995. The holders of 5,886,093 shares of Common Stock of the Company were entitled to vote at the meeting, the holders of 5,524,550 shares of Common Stock, or approximately 93.9% of shares entitled to vote at the meeting, were represented by proxy and the holders of 1,000 shares of Common Stock were present in person. The following actions took place: 1. The stockholders voted for the election of each of the following persons nominated to serve as a director of the Company until the next annual meeting and until his successor is elected and qualified: Dennis Sunshine by 4,640,270 votes for and 885,280 against, Bruce Reissman by 4,638,730 votes for and 886,820 against, Mitchell Binder by 4,632,730 votes for and 892,820 against, Nathan A. Greenberg by 4,632,330 votes for and 893,220 against, John Molloy by 4,638,530 votes for and 887,020 against and Stanley Morris by 4,638,517 votes for and 887,033 against. 2. The stockholders approved a proposal to adopt the Company's 1995 Employee Stock Option Plan. The holders of 2,395,267 shares voted for the proposal, the holders of 1,340,129 voted against the proposal and the holders of 19,954 shares abstained from voting. 3. The stockholders also approved a proposal to adopt the Company's 1995 Stock Option Plan for Non-Employee Directors. The holders of 2,701,153 shares voted for the proposal, the holders of 1,121,007 voted against the proposal and the holders of 41,758 shares abstained from voting. 4. The stockholders also ratified the appointment of Richard A. Eisner & Company, LLP as the independent accounts for the Company for the year ending December 31, 1995. The holders of 5,316,114 shares voted for the proposal, the holders of 141,407 voted against the proposal and the holders of 68,029 shares abstained from voting. 5. The stockholders rejected a proposal to amend the Company's Certificate of Incorporation to create a class of 1,000,000 shares of preferred stock which may be issued in one or more series and to authorize the Company's Board of Directors to determine the voting powers, designations, preferences and rights and the qualifications, limitations or restrictions thereof, of each such series. The holders of 2,175,078 shares voted for the proposal, the holders of 1,197,028 shares voted against the proposal and the holders of 35,471 shares abstained from voting. 6. Finally, the stockholders rejected a stockholder proposal to require that the majority of Company's Board of Directors be non-family members and individuals who do not currently work or consult with the Company, have been employed by the Company or have consulted with the Company in the past. The holders of 1,223,516 shares voted for the proposal, the holders of 2,134,658 shares voted against the proposal and the holders of 49,340 shares abstained from voting. PART II Item 5. MARKET FOR REGISTRANT'S CAPITAL STOCK AND RELATED SECURITY HOLDER MATTERS As of March 25, 1996 the Company had 754 shareholders of record. The Company's stock is traded in the over-the-counter market (Nasdaq symbol ORBT) and is quoted in the Nasdaq Small Cap Market. The quarterly closing prices for the period January 1, 1994 through December 31, 1995, as reported by Nasdaq, were as follows: CLOSE High Low 1994: First Quarter 5 3 7/8 Second Quarter 4 1/8 3 1/2 Third Quarter 3 3/8 2 7/8 Fourth Quarter 3 3/8 1 1/2 1995: First Quarter 2 1/2 1 5/8 Second Quarter 2 1/8 1 3/8 Third Quarter 1 5/8 1 3/16 Fourth Quarter 1 9/16 3/4 The Company has not declared any dividends during the aforesaid period. Item 6. SELECTED FINANCIAL DATA
Twelve Month period ended December 31 1995 1994 1993 (unaudited) Net sales $58,234,000 $57,830,000 $53,860,000 Net earnings (loss) from continuing operations ($22,480,000) (16,995,000) ($6,093,000) Earnings per share from continuing operations Primary and fully diluted ($3.81) ($2.75) ($.93) Total assets at year-end $38,028,000 $63,511,000 $73,105,000*** Long-term obligations $785,000 $8,909,000 $10,419,000*** Total stockholders' equity $9,123,000 $31,263,000 $49,626,000*** /TABLE Six Month Period Ended December 31 1993 1992 (unaudited) Net sales $42,819,000 $62,504,000 Net earnings (loss) from continuing operations $ (3,745,000) $10,793,000 Earnings per share from continuing operations Primary and fully diluted ($.57) $1.61 Total assets at year-end $73,105,000 $66,557,000 Long-term obligations $10,419,000 $ 2,633,000 Total stockholders' equity $49,626,000 $53,729,000
Twelve Month Period Ended June 30 1993 1992 1991* Net sales $73,545,000 $95,906,000 $47,746,000 Net earnings (loss) from continuing operations $10,592,000 $2,902,000 ($1,543,000) Earnings per share from continuing operations Primary and fully diluted $1.69** $.46 ($.20) Total assets at year- end $71,835,000 $71,730,000 $85,764,000 Long-term obligations $ 2,451,000 $ 6,757,000 $ 4,735,000 Total stockholders' equity $53,729,000 $43,110,000 $36,796,000 ______________ Pro-forma earnings from continuing operations assuming the new method of accounting was applied retroactively (see Note O to Consolidated Financial Statements): $3,250,000 $(1,179,000) Earnings (loss) $.52 $(.15) Earnings (loss) per share * Restated to reflect discontinued operation. ** Earnings before cumulative effect of a change in accounting principle $1.59 Cumulative effect of a change in accounting principle .10 Net earnings per share 1.69 *** While the Company's income statement for the twelve month period ended December 31, 1993 is unaudited, its balance sheet is audited. See "Item 7. Management's discussion and Analysis of financial Condition and Results of Operations." /TABLE Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity, Capital Resources and Inflation Working capital decreased by $14,208,000 to a deficit of $120,000 during the year ended December 31, 1995 principally due to (i) to a net loss of $12,473,000 (before write-off of excess of cost over the fair value of assets acquired and other intangible assets net of the purchase price adjustment of the East/West acquisition) incurred by the Company for the year ended December 31, 1995 and (ii) approximately $3,000,000 of marketable securities which was pledged to secure standby letters of credit issued to the Company's factor to its Canadian Apparel Segment as security for borrowings of the Segment under a new banking arrangement. The Company's working capital ratio at December 31, 1995 was 1.0 to 1 compared to 1.6 to 1 at December 31, 1994. In July 1993, East/West entered into a Restated and Amended Factoring Agreement with its primary lender. Advances by the factor prior to the maturity date of receivables sold bear interest at a rate of prime plus 1.50%. As security for its obligations under such amended facility, the Company has pledged approximately $6,150,000 of its marketable securities. In September 1994, East End entered into a Factoring Agreement with BNY under the same terms and conditions as East/West. The facility is guaranteed by the Company and as security for its obligations under such facility, the Company pledged approximately $2,500,000 of its marketable securities. In January and February 1996, the Company used approximately $1,700,000 of its marketable securities to reduce the amount owed under the facility. In August 1995, the Company's Canadian Apparel Segment entered into a new factoring arrangement with a subsidiary of BNY. The new arrangement provides the Segment with a C$7,000,000 line of credit and bears interest at prime plus .75%. As security for its obligations under this facility, the Company has provided the lender with a C$3,000,000 standby letter of credit. In February 1996, the Company, through a wholly owned subsidiary, purchased from Astrosystems substantially all of the assets of its wholly owned subsidiary, Behlman Electronics and substantially all of the assets of its Military Electronics Division. The purchase price of $3,706,700 was substantially funded by the Company's cash and a bridge loan from BNY. The Company is currently negotiating a $4,000,000 Term Loan and Revolving Credit Facility with BNY, which it expects to complete during the second quarter of 1996. The proceeds will be used to replace the bridge loan and to provide working capital for the Company's Electronics Segment. Between November 1993 and January 1995, the Company repurchased 750,700 shares of Common Stock in the open market at an average price of $3.57 per share. In October 1994, the Company announced that it planned to purchase up to an additional 300,000 shares of Common Stock in the open market or in privately negotiated or block transactions. The Company has purchased 166,200 shares under this program. In March 1996, the Company entered into an agreement with the sellers of East/West whereby the purchase price for the assets under the asset purchase agreement dated July 1993 (the "Asset Purchase Agreement") was reduced from $15,000,000 to $8,850,000 plus other consolidation. Accordingly, the $8,000,000 promissory note to the sellers was reduced to $1,850,000. The amended note is payable as follows: (i) $500,000 upon the execution of the agreement, (ii) two $250,000 installments due July 1, 1996 and January 1, 1997, respectively and (iii) $850,000 payable in quarterly installments over a five year period commencing March 31, 2002. Assuming the completion of the $4,000,000 Term Loan and Revolving Credit Agreement with BNY, 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. Results of Operations: Twelve Months Ended December 31, 1995 v. Twelve Months Ended December 31, 1994 Consolidated net sales for the twelve months ended December 31, 1995 slightly increased to $58,234,000 from $57,830,000 from the prior comparable period principally due to increased sales from the United States Apparel Segment and despite decreased sales from the Electronics and Canadian Apparel Segments. Consolidated net loss for the twelve months ended December 31, 1995 increased to $22,253,000 from $16,995,000 from the comparable period due principally to non cash charges in the current period of $9,780,000 reflecting the Company's write off of goodwill and other intangible costs related to the East/West Division net of the purchase price adjustment of the East/West acquisition, and to an operating loss of $12,192,000 from the Apparel Segments. Management, in its continuing review of operations, wrote off all of the goodwill upon determining that cash flows from future operations of the East/West Division would not be sufficient to support any carrying value of goodwill. In March 1996, the Company entered into an agreement with the sellers of East/West whereby the purchase price for the assets under the Asset Purchase Agreement was reduced from $15,000,000 to $8,850,000 plus other consideration. Two consecutive years of disappointing results during its primary selling season along with financial weakness and excess inventories throughout the apparel and retail sector leave management with great uncertainty as to when business conditions will improve. The loss in the prior period reflects the Company's write-off of its 43% equity interest in USA Classic, Inc., subordinated receivable approximating $2,400,000 and approximately $2,500,000 of related costs. Revenues for the United States Apparel Segment for the twelve months ended December 31, 1995 increased to $35,152,000 from $28,543,000 from the comparable period due to revenues recorded by East End. The operating loss for the year ended December 31, 1995 increased to $11,000,000 from $3,217,000 due to a significantly lower gross profit on sales resulting from significant inventory writedowns taken at year end reflecting a very weak retail environment. The segment recorded a negative gross profit of 5.8% compared to a gross profit of 11.3% in the prior year. Revenues for the Canadian Apparel Segment decreased to $11,319,000 from $17,033,000 due to a higher number of units shipped in the prior period at a lower gross profit. The gross profit increased to 17.4% in the current year from 11.9% in the prior comparable period. The operating loss for the year decreased to $1,203,000 from $1,628,000 from the prior year due to improved gross margin on sales and a reduction in selling, general and administrative costs. The results for the current period include $759,000 of one-time restructuring costs consisting of product line and personnel termination charges relating to the Segment. Revenues for the Electronics Segment decreased to $11,763,000 from $12,254,000 from the prior year due to a decreased in the number of units shipped. Operating income for the year decreased to $2,287,000 from $2,625,000 in the prior period due to a decrease in revenue and a provision taken in the current year of approximately $875,000 in anticipation of costs to be incurred to repair and/or refurbish certain units that have already been shipped to one of the Segment's customers. Management will continue to monitor these costs in subsequent periods. Consolidated gross profit as a percentage of sales for the current year decreased to 8.9% from 18.0% in the prior year due principally to a lower gross profit realized by the United States Apparel Segment. Selling, general and administrative expenses as a percentage of sales for the year ended December 31, 1995 increased to 34% from 27.5% in the prior year. Selling, general and administrative expenses increased to $19,807,000 for the current year compared to $15,911,000 in the prior year. These increases were due principally to selling, general and administrative costs incurred by East End and was partially offset by reduced selling, general and administrative costs at the Canadian Apparel Segment. Interest expense significantly increased to $3,008,000 in the current year from $1,468,000 in the prior year principally due to interest charges associated with the financing of the United States Apparel Segment's higher inventory levels during the current year. Investment and other income increased in the current year to $4,999,000 from $2,015,000 in the prior year due principally to (i) insurance proceeds received by the Company resulting from the death of the Company's former chief executive officer net of accrued costs due to the officer's estate, (ii) the partial realization of $1,000,000 of royalty income received from Orbit Semiconductor, Inc. pursuant to a Stock Purchase Agreement signed in November 1991, (iii) the reduction in the unrealized loss on marketable securities due to a decrease in interest rates and (iv) increased commission income earned by the United States Apparel Segment. The Company did not record any tax benefit on the current pre-tax loss because of the uncertainty of future realization. Twelve Months Ended December 31, 1994 v. Twelve Months Ended December 31, 1993 Consolidated net sales for the twelve months ended December 31, 1994 increased to $57,830,000 from $53,860,000 from the prior comparable period principally due to increased sales from the United States Apparel Segment resulting from (i) a full year of sales recorded by the Company's East/West Division compared to only six months of sales recorded in the prior period and (ii) sales recorded by East End, which commenced operations in May 1994. These increases were partially offset by decreased revenues from the Company's Electronics Segment and Canadian Apparel Segment. Net earnings for the twelve months ended December 31, 1994 decreased significantly to a loss of $16,995,000 compared to a loss of $6,093,000 for the prior period due primarily to a charge of $13,687,000 (exclusive of tax benefit) reflecting the Company's write off of its 43% equity interest in USA Classic and subordinated debt of approximately $2,400,000 owing from USA Classic to the Company, and approximately $2,500,000 of related costs. Such write offs resulted from the filing, on May 13, 1994 and May 16, 1994, by USA Classic and its wholly owned subsidiaries, of petitions under Chapter 11 of the United States Bankruptcy Code. The decrease in earnings is also due to (i) the inclusion of the entire year of East/West compared to the prior year which only included earnings from July 1, 1993, a part of its primary selling season, (ii) start up costs associated with the Company's new East End subsidiary which commenced operations in May 1994, (iii) inventory write downs taken by East/West and East End reflecting lower than anticipated sales which management believes was a direct result of unusually warm weather during the Fall selling season and (iv) a larger loss incurred by the Canadian Apparel Segment and reduced earnings from the Electronics Segment. The Company's United States Apparel Segment consists of the Company's new East/West Division which was acquired in July 1993 and East End which was merged into the operation of East/West in December 1995. Revenues for such segment for the year ended December 31, 1994 increased to $28,543,000 from $19,821,000 in the prior fiscal year due to the inclusion of the East/West Division for the entire year compared to the prior year which only included earnings from July 1, 1993 and to revenues recorded by the Company's East End subsidiary. Gross profit on sales decreased to 11.3% during the current year compared to 18.5% during the prior year due to inventory write downs taken by East/West and East End reflecting lower than anticipated sales which management believes was a direct result of unusually warm weather during the Fall selling season. Operating income for the year decreased significantly to a loss of $3,217,00 compared to operating income of $1,606,000 from the prior year due to the lower gross profit on sales and due to start up costs associated with East End. Revenues for the Canadian Apparel Segment decreased to $17,033,000 for the year ended December 31, 1994 from $20,851,000 in the prior year due principally to a decrease in the number of units shipped during the period and to a decline in the exchange rate used to convert such segment's sales into United States dollars. Gross profit on sales decreased to 11.9% during the year ended December 31, 1994 compared to 15.0% in the prior year due principally to a reduction in prices given to major retailers in an effort to maintain sales despite the lower demand that resulted from the unusually warm weather during its primary Fall selling season. The operating loss for the year ended December 31, 1994 increased to $1,628,000 from $940,000 from the prior year due principally to decreased revenues and gross profit which were offset by reduced overhead costs. Revenues for the Electronics Segment for the year ended December 31, 1994 decreased to $12,254,000 from $13,188,000 from the prior year due to a decrease in the number of units shipped resulting from a reduction in the general level of funding for the defense sector. Operating income for the year ended December 31, 1994 decreased to $2,625,000 from $3,959,000 in the prior year due to the approval, in the prior period, of certain billing of significant research and development costs which had been expensed in previous periods, and to reduced sales in the current period. Gross profit was lower in the year ended December 31, 1994 for the same reasons. Consolidated gross profit as a percentage of sales for the year ended December 31, 1994 decreased to 18.0% from 23.3% in the prior year due to lower gross profits realized by each of its business segments. Selling, general and administrative expenses, as a percentage of sales, for the year ended December 31, 1994 increased to 27.5% from 20.7% in the prior year. Selling, general and administrative expenses increased to $15,911,000 for the year ended December 31, 1994 compared to $11,164,000 in the prior year. These increases were due principally to costs incurred by the Company's East/West Division for the entire year compared to the prior year which only included costs incurred from July 1, 1993, a period of higher revenues from its primary selling season. The increase was also due to start-up costs associated with East End. Interest expense increased to $1,468,000 for the year ended December 31, 1994 from $1,174,000 in the prior year due principally to interest on the Acquisition Term Loan used to finance the cash portion of the down payment for the purchase of East/West as well as a rise in interest rates. Investment and other income decreased in the year ended December 31, 1994 to $2,015,000 from $2,480,000 in the prior year due principally to a decrease in cash balances available for investment and an increase in the unrealized loss on marketable securities due to a rise in interest rates. The effective tax benefit rate of 10.2% for the year ended December 31, 1994 is due to partial utilization in the current period of prior years, loss carryforwards and deferred tax benefits resulting from the write-down of the Company's investment in USA Classic and the current year's operating losses. Six Months Ended December 31, 1993 v. Six Months Ended December 31, 1992 Consolidated net sales for the six months ended December 31, 1993 decreased to $42,819,000 from $62,504,000 from the comparable six month period principally due to the elimination of all revenues attributable to USA Classic and to decreases in sales from the Canadian Apparel Segment and the Electronics Segment. These decreases were partially offset by sales from the Company's East/West Division which was acquired in July 1993. Net earnings for the six months ended December 31, 1993 decreased significantly to a loss of $3,745,000 from earnings of $11,198,000 in the prior six month period. The loss was principally due to non-cash charges of $3,721,000 representing the Company's 43% equity interest in the loss of USA Classic at November 30, 1993 and $4,665,000 representing a mark down of the Company's investment in USA Classic reflecting a decline in the market value of USA Classic's stock. Net earnings from the prior six month period were principally due to a non-cash gain of approximately $7,500,000 resulting from the Offering and significant earnings recorded by USA Classic during this period. The decrease in earnings was also attributable to decreased earnings from the Canadian Apparel Segment, all of which were partially offset from earnings from the East/West Division and improved earnings from the Electronics Segment. Revenues for the United States Apparel Segment (which included USA Classic during these periods) decreased to $19,821,000 in the six month period ended December 31, 1993 compared to $35,973,000 from the prior comparable six month period due to the loss of all revenues attributable to USA Classic which amounted to $35,973,000 during the prior six month period. Revenues for the six month period ended December 31, 1993 were all attributable to the Company's new East/West Division. Gross profit on sales decreased to 18.5% during the six month period ended December 31, 1993 compared to 29.5% during the prior comparable six month period. Operating income for the six month period ended December 31, 1993 decreased to $1,587,000 from $3,778,000 from the prior comparable six month period. Pre-tax income for the six month period ended December 31, 1993 includes $499,000 of charges associated with the acquisition of the East/West Division as a result of "push-down" accounting. Revenues for the Canadian Apparel Segment decreased to $16,339,000 for the six month period ended December 31, 1993 from $18,869,000 from the prior comparable six month period due principally to a decrease in the number of units shipped during the period of both its cloth and leather lines and to a decline in the exchange rate used to convert the Segment's sales into United States dollars. Gross profit for the six months ended December 31, 1993 was 16.0% compared to 17.9% from the prior comparable six month period. This decrease was due principally to credits and discounts given by newly formed Ax Elle in order to establish programs to gain market share for its products and to the write off of certain costs associated with the development of future seasons' products related to the Company's merchandising efforts. Aside from these two factors, gross profit for the period would have increased to approximately 19.0% for the six month period ended December 31, 1993. Operating income for the six months ended December 31, 1993 decreased to a loss of $59,000 from earnings of $1,012,000 from the prior comparable six month period due principally to (i) decreased revenues (ii) an increase in bad debt reserves reflecting a weak economy in Canada and (iii) start up costs related to the initial shipping season for Ax Elle. Revenues for the Electronics Segment for the six month period ended December 31, 1993 decreased to $6,659,000 from $7,662,000 from the prior comparable six month period due to a decrease in the number of units shipped resulting from a reduction in the general level of funding for the defense sector. Despite the decrease in sales, operating income significantly increased to $2,349,000 from $1,265,000 due to an increased gross profit in the current six month period compared to the prior comparable period. The improved gross margin was principally due to the current authorization for payment of significant research and development costs which had been expensed in prior periods. Consolidated gross profit, as a percentage of sales for the six month period ended December 31, 1993 decreased to 21.8% from 25.8% from the prior comparable six month period principally to lower gross margins in the Company's Apparel Segments and despite improved gross margins in the Company's Electronic Segment. Selling, general and administrative expenses, as a percentage of sales for the six month period ended December 31, 1993 decreased to 17.3% from 21.0% from the prior comparable six month period principally due to lower selling, general and administrative costs as a percentage of sales incurred by the Company's East/West Division compared to that which was incurred by USA Classic in the prior period. Selling, general and administrative costs for the six month period ended December 31, 1993 decreased to $7,391,000 from $13,141,000 from the prior comparable six month period for the same reason. Interest expense increased for the six month period ended December 31, 1993 to $976,000 from $866,000 from the prior comparable period due to interest on the Acquisition Term Loan used to finance the cash portion of the down payment for the purchase of East/West as well as the stated interest on the note to the sellers in such transaction. This amount is offset by the reduced borrowing cost of the East/West Division as compared to that of USA Classic in the prior six month period. Investment and other income significantly increased to $1,482,000 for the six months ended December 31, 1993 compared to $314,000 from the prior comparable period due principally to a significant increase in cash balances available for investment during the current fiscal period (despite lower interest rates) and to $894,000 commission income recorded by the Company's East/West Division. The effective tax rate of 36.7% for the six month period ended December 31, 1993 reflects the utilization of prior year's loss carry forwards and deferred tax benefits resulting from the mark down of the Company's investment in USA Classic and the Company's proportionate share of USA Classic's loss for the period ended November 30, 1993. The effective tax rate of 35.4% for the six month period ended December 31, 1992 is principally due to the full tax effect taken in the prior period on the gain resulting from the Offering. As at December 31, 1993, there were approximately $5,200,000 of unused loss carryforwards which expire in 2001 which can be used to offset future taxable income of the parent company only. Fiscal Year Ended June 30, 1993 v. Fiscal Year Ended June 30, 1992 Consolidated net sales decreased to $73,545,000 in the fiscal year ended June 30, 1993 from $95,906,000 in the prior year principally due to revenues of USA Classic which were only included in consolidated sales until the public offering in November 1992 and to a decrease in sales from the Canadian Apparel Segment. Net earnings for the fiscal year ended June 30, 1993 increased significantly to $ 11,235,000 from $ 2,902,000 in the prior year principally due to a noncash after tax gain of approximately $7,500,000, as a result of the USA Classic Offering. Increases in earnings were also attributable to increased earnings from USA Classic compared to its prior fiscal year earnings, increased earnings from the Company's Electronic Segment, all of which were partially offset by decreased earnings from the Canadian Apparel Segment. Earnings for fiscal 1993 were also affected by an after tax $643,000 gain, resulting from the cumulative affect of an accounting change for design costs at USA Classic. Revenues for the United States Apparel Segment decreased to $35,973,000 in the fiscal year ended June 30, 1993 from $54,977,000 in the prior year since the operations of USA Classic were not included for the period after November 1992. The amount of such revenues recorded by USA Classic in the prior comparable period amounted to approximately $32,470,000. Gross profit on sales slightly decreased to 29.5% in fiscal 1993 from 30.3% in fiscal 1992. Operating income increased to $3,797,000 in the fiscal year ended June 30, 1993 from $3,391,000 in the prior year principally due to significantly increased revenues during the portion of the fiscal year ended June 30, 1993 in which operations of USA Classic offset by the gain in corporate compensation costs. Revenues for the Canadian Apparel Segment decreased to $23,381,000 in fiscal year ended June 30, 1993 from $26,433,000 in the prior year principally due to a decrease in the number of units shipped during the period of both its cloth and leather lines and to the exchange rate used to convert the Segment's sales into United States dollars. Operating income decreased to a loss of $153,000 in the fiscal year ended June 30, 1993 from $1,726,000 in the prior year due principally to (i) decreased revenues, (ii) a reduced gross profit margin of 17.2% in fiscal 1993 as compared to 22.2% in the prior year (primarily due to reduced selling prices on certain product lines in order to either maintain or gain market share for these products) and (iii) an increase in bad debt reserves reflecting a weak economy in Canada. Revenues for the Electronics Segment slightly decreased to $14,191,000 in the fiscal year ended June 30, 1993 from $14,496,000 in the prior year due to a decrease in the number of units shipped resulting from a reduction in the general level of funding for the defense sector. Despite the slight decrease in sales, operating income increased to $2,875,000 in the fiscal year ended June 30, 1993 from $1,721,000 in the prior year due to an increased gross profit of 33.1% in the fiscal year ended June 30, 1993 compared to 24.5% in the prior year resulting from reduced overhead costs and the award and billing of certain research and development costs which has been expensed in prior periods. Consolidated gross profit, as a percentage of sales decreased to 26.3% in the fiscal year ended 1993 from 27.2% in the prior year due principally to lower gross margins in the Company's Apparel Segments and despite improved gross margins in the Company's Electronic Segment. Selling, general and administrative expenses, as a percentage of sales, increased to 23.0% in the fiscal year ended June 30, 1993 from 22.0% in the prior year due principally to fixed costs of the Canadian Apparel Segment which did not decrease in proportion to the decrease in the Segment's sales and to an increase in certain corporate compensation costs related principally to the gain arising from the Offering. Selling, general and administrative expenses decreased in the fiscal year ended June 30, 1993 to $16,908,000 from $21,054,000 in the prior year due principally to the inclusion in the entire prior period of the selling, general and administrative costs attributable to USA Classic offset by the gain in corporate compensation costs. Interest expense significantly decreased to $1,064,000 in the prior year from $2,276,000 in the prior year due principally to interest expense of USA Classic which was only included in the consolidated statement of operations through November 1992 and to lower borrowing rates. Investment and other income increased to $1,312,000 in the fiscal year ended June 30, 1993 from $940,000 in the prior year due principally to a significant increase in cash balances available for investment during the current fiscal year as a result of the Offering and despite lower interest rates. The effective tax rate of 35.8% in the fiscal year ended June 30, 1993 was due principally to the full tax effect taken on the gain resulting from the Offering and reduced somewhat by the operating income in the current fiscal year being offset by the utilization of prior years loss carry forwards. As at June 30, 1993, there were approximately $8,200,000 of unused loss carryforwards which expire in 2001 which can be used to offset future taxable income of the parent company only. The effective tax rate of 21.3% in fiscal 1992 was due principally to losses associated with the sale of the Company's semiconductor segment during the prior fiscal year which were not available for utilization until the current fiscal year, and the utilization of the carry forward of certain losses incurred by that segment in prior fiscal years. Certain Material Trends Despite continued profitability in 1995, the Company's Electronic Segment continues to face a difficult business by increasing 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's Electronic Segment is continuing to seek new contracts which require up-front design, engineering, prototype and preproduction costs. While the segment attempts to negotiate contract awards for reimbursement of product development, there is no assurance that sufficient monies will be set aside by the government for such effort. In addition, even if the 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 Electronics Segment is heavily dependent upon military spending as a source of revenues and income. World events have led the government of the United States to reevaluate the level of military spending necessary for national security. Any significant reductions in the level of military spending by the Federal Government could have a negative impact on the Electronics Segment's future revenues and earnings. In July 1993, the Company acquired the assets of Panda, an importer and distributor of women's activewear and outer-wear and in May 1994, started up the East End subsidiary, an importer of women's outer-wear and sportswear which operation was merged into the East/West Division in December 1995 and constitutes the Company's United States Apparel Segment. A majority of the business of both the United States and the Canadian Apparel Segment is associated with the sale of outer-wear. The third and fourth quarters are generally the primary selling seasons for outer-wear sales. Furthermore, where sale of outer-wear constitutes a significant percentage of such segment's business, the first and second quarters are historically weak periods since its customers do not generally request shipment of merchandise during this time. Despite the continued market acceptance of its established lines, a weakened economy in the United States and Canada could have an adverse impact on the Apparel Segments' revenues and earnings. The Apparel Segments' large customers include many of the major department stores which may be vulnerable in a weakened economy. In addition, the financial problems experienced by many retailers has impacted revenues due to credit concerns of the financial community. These factors have contributed to a very weak and uncertain apparel and retail sector. These present conditions, if they continue, could have a negative impact on the operations of the Apparel Segment in future quarters. 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. The following sets forth certain selected, unaudited quarterly financial data:
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Consolidated) Twelve Months Ended December 31, 1995 First Second Third Fourth Quarter Quarter Quarter Quarter Net Sales $10,888,000 $8,588,000 $21,355,000 $17,403,000 Gross Profit 2,877,000 1,586,000 2,512,000 (1,796,000) Earnings (loss) (313,000) (2,133,000) (15,288,000) (4,519,000) Earnings per share ($.05) ($.36) ($2.60) ($.77) Twelve Months Ended December 31, 1994 Net Sales $10,557,000 $5,691,000 $21,017,000 $20,565,000 Gross Profit 3,055,000 1,689,000 4,542,000 1,143,000 Earnings (loss) (11,184,000) (1,212,000) 636,000 (5,235,000) Earnings per share $(1.77) $(.19) $.11 $(.90)
Item 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has not had any disagreements with its accountants on accounting or financial disclosure. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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 1996 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 1996 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 1996 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 1996 Annual Meeting of Stockholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, 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, 1995. 1. Financial Statements and Schedules: The index to the financial statements and schedules is incorporated by reference to the index to financial statements attached as an exhibit to this Annual Report on Form 10-K. 2. Exhibits: Exhibit No. Description of Exhibit 3 (a) Certification of Incorporation, as amended. Incorporated by reference to Exhibit 3(a) to the Company'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 the Company'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 Annex B to the Company's definitive proxy statement dated November 17, 1995. 4(b) Orbit International Corp. 1995 Stock Option Plan for Non-Employee Directors. Incorporated by reference to Annex C to the Company's definitive proxy statement dated November 17, 1995. 10(a) Employment Agreement, dated July 1, 1992 between the Company and Mitchell Binder. Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. 10(b) Employment Agreement dated July 1, 1992 between the Company and Bruce Reissman. Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. 10(c) Employment Agreement dated July 1, 1992 between the Company and Dennis Sunshine. Incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. 10(d) Form of Indemnification Agreement between the Company and each of its Directors. Incorporated by reference to Exhibit 10(e) to the Company'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 the Company'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 Behlman electronics, Inc., Orbit International Corp. and Cabot Court, Inc.. Incorporated by reference to the Company's Current Report on Form 8-K dated February 6, 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 Amended Promissory Note dated March 28, 1996; and Form of Warrant to Purchase 125,000 shares of Orbit International Corp. Common Stock. 10(h) Form of Factoring Security and Loan Agreement, dated August 4, 1995 between BNY Financial Corporation - Canada, Canada Classique, Inc., Winnipeg Leather (1991), Inc. and Symax Garment Co. (1993) Ltd. 21 Subsidiaries of Registrant. (b) Reports on Form 8-K: No reports on Form 8-K have been filed during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirement 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, thereunder duly authorized. ORBIT INTERNATIONAL CORP. Dated: March 29, 1996 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 Dennis Sunshine President, Chief Executive Officer and Director March 29, 1996 /s/ Mitchell Binder Mitchell Binder Vice President- Finance, Chief Financial Officer and Director March 29, 1996 /s/ Bruce Reissman Bruce Reissman Executive Vice President, Chief Operating Officer and Director March 29, 1996 /s/ Harlan Sylvan Harlan Sylvan Treasurer, Secretary and Controller March 29, 1996 /s/ Nathan A. Greenberg Nathan A. Greenberg Director March 29, 1996 /s/ John Molloy John Molloy Director March 29, 1996 /s/ Stanley Morris Stanley Morris Director March 29, 1996 EXHIBT INDEX Exhibit No. Description of Exhibit 3 (a) Certification of Incorporation, as amended. Incorporated by reference to Exhibit 3(a) to the Company'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 the Company'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 Annex B to the Company's definitive proxy statement dated November 17, 1995. 4(b) Orbit International Corp. 1995 Stock Option Plan for Non-Employee Directors. Incorporated by reference to Annex C to the Company's definitive proxy statement dated November 17, 1995. 10(a) Employment Agreement, dated July 1, 1992 between the Company and Mitchell Binder. Incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. 10(b) Employment Agreement dated July 1, 1992 between the Company and Bruce Reissman. Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10- K for the fiscal year ended June 30, 1992. 10(c) Employment Agreement dated July 1, 1992 between the Company and Dennis Sunshine. Incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992. 10(d) Form of Indemnification Agreement between the Company and each of its Directors. Incorporated by reference to Exhibit 10(e) to the Company'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 the Company'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 Behlman electronics, Inc., Orbit International Corp. and Cabot Court, Inc.. Incorporated by reference to the Company's Current Report on Form 8-K dated February 6, 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 Amended Promissory Note dated March 28, 1996; and Form of Warrant to Purchase 125,000 shares of Orbit International Corp. Common Stock. 10(h) Form of Factoring Security and Loan Agreement, dated August 4, 1995 between BNY Financial Corporation - Canada, Canada Classique, Inc., Winnipeg Leather (1991), Inc. and Symax Garment Co. (1993) Ltd. 21 Subsidiaries of Registrant. EX-99 2 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, 1995 PART II: REPORT OF INDEPENDENT AUDITORS CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1995 AND DECEMBER 31, 1994 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994, FOR THE SIX MONTHS ENDED DECEMBER 31, 1993 AND FOR THE YEAR ENDED JUNE 30, 1993 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994, FOR THE SIX MONTHS ENDED DECEMBER 31, 1993 AND FOR THE YEAR ENDED JUNE 30, 1993 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994, FOR THE SIX MONTHS ENDED DECEMBER 31, 1993 AND FOR THE YEAR ENDED JUNE 30, 1993 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, 1995 and December 31, 1994 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1995 and December 31, 1994, for the six months ended December 31, 1993 and for the year 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 consolidated financial position of Orbit International Corp. and subsidiaries at December 31, 1995 and December 31, 1994 and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 1995 and December 31, 1994, for the six-month period ended December 31, 1993 and for the year ended June 30, 1993 in conformity with generally accepted accounting principles. New York, New York March 21, 1996 With respect to Note B paragraph (4) March 28, 1996 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, A S S E T S 1995 1994 (Note G) Current assets: Cash and cash equivalents (Note A[2]) . . . . . . . . . $ 2,274,000 $ 815,000 Investments in marketable securities (Notes A[6], G[4] and R). . 7,495,000 9,138,000 Accounts receivable (less estimated doubtful accounts of $1,576,000 at December 31, 1995 and $769,000 at December 31, 1994) . . . . . . . 854,000 5,277,000 Inventories (Notes A[3] and D). . . . . . . . . . . . . 13,124,000 21,006,000 Other current assets. . . . . 1,669,000 1,191,000 Total current assets . 25,416,000 37,427,000 Property, plant and equipment - at cost, less accumulated depreciation and amortization (Notes A[4] and E). . . . . . 3,069,000 3,279,000 Excess of cost over the fair value of assets acquired (less accumulated amortization of $252,000 at December 31, 1995 and $1,093,000 at December 31, 1994) (Note A[5]) . . . . . . . . . . 834,000 12,129,000 Restricted cash investments (Notes A[6], G[4] and R) . . . 7,567,000 7,805,000 Other assets (Notes A[7] and B). 347,000 2,871,000 Investments in marketable securities (Notes A[6], G[4] and R). . . 795,000 T O T A L. . . . . . . $38,028,000 $63,511,000 L I A B I L I T I E S Current liabilities: Notes payable (Note G[2]) . . $ 2,602,000 Current portion of long-term obligations (Notes B and G[1]). . . . . $ 2,292,000 3,096,000 Accounts payable. . . . . . . 3,860,000 3,734,000 Accrued expenses (Note B) . . 4,090,000 2,367,000 Due to factor . . . . . . . . 15,294,000 11,540,000 Total current liabilities. . . . . . . . . . . 25,536,000 23,339,000 Long-term obligations (less current portion) (Notes B and G[1]). . . . . . 1,097,000 8,909,000 Other liabilities (Note B) . . . 2,077,000 Total liabilities. . . 28,710,000 32,248,000 Commitments and contingencies (Notes B, F and J) STOCKHOLDERS' EQUITY (Notes G[3] and H) Common stock - $.10 par value. . 877,000 877,000 Additional paid-in capital . . . 23,285,000 23,170,000 Retained earnings (deficit). . . (4,026,000) 18,227,000 Less treasury stock, at cost . . (9,588,000) (9,520,000) Less unearned portion of compensatory stock. . . . . . . (148,000) Foreign currency translation adjustment. . . . . . . . . . . (1,230,000) (1,343,000) Total stockholders' equity . . . . . . . . . . . . . 9,318,000 31,263,000 T O T A L. . . . . . . $38,028,000 $63,511,000
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 Net sales (Notes A[7] and C). . . . . . . . . . . . . . $ 58,234,000 $ 57,830,000 $42,819,000 $ 73,545,000 Cost of sales . . . . . . . . . . . . . . . . . . . . . 53,055,000 47,401,000 33,467,000 54,210,000 Gross profit. . . . . . . . . . . . . . . . . . . . . . 5,179,000 10,429,000 9,352,000 19,335,000 Other (income), costs and expenses: Selling, general and administrative. . . . . . . . . 19,807,000 15,911,000 7,391,000 16,908,000 Interest . . . . . . . . . 3,008,000 1,468,000 976,000 1,064,000 Investment and other income. . . . . . . . . . . . (4,999,000) (2,015,000) (1,482,000) (1,312,000) Write-off of excess of cost over fair value of assets acquired and other intangible assets (net of purchase price adjustment of $3,436,000) (Note B) . . . . . . . . 9,780,000 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) 27,596,000 29,351,000 15,271,000 2,849,000 Earnings (loss) before taxes and cumulative effect of a change in accounting principle . . . . . . . . . . (22,417,000) (18,922,000) (5,919,000) 16,486,000 Taxes (benefit) on income (Notes A[8] and K). . . . . . (164,000) (1,927,000) (2,174,000) 5,894,000 Earnings (loss) before cumulative effect of a change in accounting principle. . . . . . . . . . . . . . . (22,253,000) (16,995,000) (3,745,000) 10,592,000 Cumulative effect of a change in accounting principle (Note O) . . . . . . . . . . . . . . . . . . . . . . 643,000 NET EARNINGS (LOSS) . . . . . . . . . . . . . . . . . . $(22,253,000) $(16,995,000) $(3,745,000) $ 11,235,000 Earnings (loss) per share (Note L): Earnings (loss). . . . . . . . . . . . . . . . . . . $(3.78) $(2.75) $(.57) $1.59 Cumulative effect of a change in accounting principle (Note O) . . . . . . . . . . . . . . . . .10 NET EARNINGS (LOSS) . . . . . . . . . . . . . . . . . . $(3.78) $(2.75) $(.57) $1.69
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Capital Stock 25,000,000 Shares Authorized Number of Additional Retained Shares Paid-in Earnings Issued Amount Capital (Deficit) Balance - June 30, 1992. . . . . . . 11,714,000 $1,171,000 $32,323,000 $ 27,732,000 Exercise of stock options. . . . . . 9,000 1,000 41,000 Compensatory stock earned. . . . . . Compensation attributable to stock options . . . . . 231,000 Foreign currency translation adjustment. . . . Net earnings for the year. . . . . . 11,235,000 Balance - June 30, 1993. . . . . . . 11,723,000 1,172,000 32,595,000 38,967,000 Purchases of treasury stock. . . . . Compensatory stock earned. . . . . . Compensation attributable to stock options . . . . . 115,000 Foreign currency translation adjustment. . . . 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 Purchases of treasury stock. . . . . Compensatory stock earned. . . . . . Compensation attributable to stock options . . . . . 231,000 Foreign currency translation adjustment. . . . Retirement of treasury shares. . . (2,952,000) (295,000) (9,771,000) Net (loss) for the year ended December 31, 1994 (16,995,000) Balance - December 31, 1994. . . . . 8,771,000 877,000 23,170,000 18,227,000 Purchases of treasury stock. . . . . Compensatory stock earned. . . . . . Compensation attributable to stock options . . . . . 115,000 Foreign currency translation adjustment. . . . Net (loss) for the year ended December 31, 1995 (22,253,000) BALANCE - DECEMBER 31, 1995 8,771,000 $ 877,000 $23,285,000 $ (4,026,000)
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unearned Portion of Treasury Stock Compensatory Stock Foreign Number Number Currency of of Translation Shares Amount Shares Amount Adjustment Balance - June 30, 1992. . . . . . . 5,087,000 $ 16,977,000 138,000 $ 884,000 $ (255,000) Exercise of stock options. . . . . . Compensatory stock earned. . . . . . (46,000) (294000) Compensation attributable to stock options . . . . . . Foreign currency translation adjustment. . . . . (429,000) Net earnings for the year. . . . . . Balance - June 30, 1993. . . . . . . 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 . . . . . . Foreign currency translation adjustment. . . . . (246,000) Net (loss) for the six months ended December 31, 1993 . . . . . Balance - December 31, 1993. . . . . 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 . . . . . . Foreign currency translation adjustment. . . . . (413,000) Retirement of treasury shares. . . . (2,952,000) (10,066,000) Net (loss) for the year ended December 31, 1994 . Balance - December 31, 1994. . . . . 2,844,000 9,520,000 23,000 148,000 (1,343,000) Purchases of treasury stock. . . . . 41,000 68,000 Compensatory stock earned. . . . . . (23,000) (148,000) Compensation attributable to stock options . . . . . . Foreign currency translation adjustment. . . . . 113,000 Net (loss) for the year ended December 31, 1995 . BALANCE - DECEMBER 31, 1995 2,885,000 $ 9,588,000 - 0 - $ - 0 - $(1,230,000)
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 Cash flows from operating activities: Net earnings (loss) . . . $(22,253,000) $(16,995,000) $ (3,745,000) $ 11,235,000 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Inventory reserves. . 4,500,000 Deferred compensation 801,000 Provision for doubtful accounts . . . . . 798,000 (85,000) 66,000 126,000 Depreciation and amortization . . . . . . . . 398,000 521,000 262,000 457,000 Write-off intangible assets . . . . . . . . . . . 9,780,000 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. . . . 58,000 671,000 337,000 56,000 Deferred tax (benefit). . . . . . . . . . (2,115,000) (2,796,000) 5,179,000 Compensatory issuance of stock and options. . . . 262,000 525,000 262,000 525,000 Gain on Sale of marketable securities. . . . (173,000) Change in value of marketable securities. . . . (222,000) (222,000) 25,000 Imputed interest on acquisition note. . . . . . 213,000 274,000 Purchases of marketable securities. . . . (24,229,000) (24,594,000) Proceeds of sales of marketable securities. . . . 25,710,000 22,122,000 Gain on sale of fixed assets. . . . . . . . . . . (79,000) Write-off of fixed assets . . . . . . . . . . . 144,000 Changes in operating assets and liabilities, net of effects from acquisitions of businesses in 1993: (Increase) decrease in accounts receivable. . . . . . . . . 3,729,000 (192,000) (2,258,000) 412,000 Decrease (increase) in inventories. . 3,465,000 (6,036,000) 7,475,000 2,497,000 (Increase) decrease in prepaid and refundable taxes . . . . . . 168,000 (168,000) (432,000) (Increase) in other assets. . . . (4,000) 641,000 207,000 282,000 Increase (decrease) in accounts payable . . . . . . . . . . 165,000 (784,000) 482,000 (416,000) (Decrease) increase in accrued expenses 1,881,000 (1,597,000) (344,000) 88,000 (Decrease) increase in income taxes payable . . . . . . . . . . (245,000) 188,000 180,000 Net cash provided by (used in) operating activities . . . . 4,699,000 (13,523,000) 8,371,000 2,229,000 Cash flows from investing activities: Purchases of marketable securities. . . . . . . . . (17,930,000) (36,310,000) Proceeds of sales of marketable securities. . . . 15,901,000 26,030,000 Acquisitions of fixed assets. . . . . . . . . . . (455,000) (611,000) (96,000) (139,000) Purchase of net assets of acquired companies. . . . . (9,122,000) (615,000) Decrease in other assets. 0 0 0 0 Proceeds on sale of fixed assets. . . . . . . . . . . 216,000 479,000 Acquisition costs related to purchase of businesses . (27,000) (37,000) (198,000) Collections of affiliate advances . . . . . . . . . . 167,000 18,380,000 Proceeds from sales of affiliates stock . . . . . . 523,000 Net cash provided by (used in) investing activities . . . . (239,000) (159,000) (11,117,000) 7,671,000 Cash flows from financing activities: Repayments of debt. . . . (7,079,000) (5,746,000) (5,218,000) (1,817,000) Proceeds of debt. . . . . 395,000 5,214,000 5,000,000 Increase (decrease) in due to factor. . . . . . . . 3,754,000 11,086,000 (1,555,000) Proceeds from exercise of stock options . . . . . . . 42,000 Purchase of treasury stock. . . . . . . . . . . . (68,000) (1,480,000) (1,129,000) Net cash (used in) financing activities . . (2,998,000) 9,074,000 (2,902,000) (1,775,000) Effect of exchange rate changes on cash. . . . . . . (3,000) (24,000) 6,000 48,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . 1,459,000 (4,632,000) (5,642,000) 8,173,000 Cash and cash equivalents - beginning of period. . . . . 815,000 5,447,000 11,089,000 2,916,000 CASH AND CASH EQUIVALENTS - END OF PERIOD. . . . . . . . $ 2,274,000 $ 815,000 $ 5,447,000 $ 11,089,000 (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 Supplemental disclosures of cash flow information: Cash paid for: Interest. . . . . . . $2,994,000 $ 1,392,000 $ 708,000 $ 652,000 Income taxes (net of refunds of $115,000, $444,000, $24,000 and $594,000 received for the year ended December 31, 1995, December 31, 1994 and June 30, 1993, respectively). . . . . . (85,000) (268,000) 436,000 538,000 Supplemental schedule of noncash investing and financing activities: [1] 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 [2] 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
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. (NOTE A) - The Company and Summary of Significant Accounting Policies: [1] The consolidated financial statements include the accounts of Orbit International Corp. (the Parent ) and its subsidiaries (collectively, 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's fiscal year end for financial reporting purposes is December 31. The Company is 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 are stated at cost. Depreciation and amortization of the respective assets are 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 classified all (NOTE A) - The Company and Summary of Significant Accounting Policies: (continued) [6] (continued) of its securities as trading securities and were carried at fair value through December 30, 1995. At December 30, 1995, the Company transferred all of its securities from trading securities to available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of stockholders equity. The cost of securities sold is based on the specific identification method. The change in how the Company classifies its securities had no significant impact on the Company's financial statements. [7] 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. [8] During the six-month period ended December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ( SFAS 109 ). Under SFAS 109, deferred income taxes are accounted for based on temporary differences between amounts of assets and liabilities for financial accounting and income tax reporting. Adoption of this statement had no material effect on the Company's results of operations or financial position. [9] 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 A) - The Company and Summary of Significant Accounting Policies: (continued) [10] The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. [11] In 1995, the Corporation adopted Statement of Financial Accounting Standards ( SFAS ) 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ( SFAS 121"). This standard specifies when assets should be reviewed for impairment, how to determine if an asset is impaired, how to measure an impairment loss, and what disclosures are necessary in the financial statements. The effect of adopting SFAS 121 is not considered significant. [12] In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ( SFAS No. 123"). SFAS No. 123 is effective for financial statements for fiscal years beginning after December 15, 1995, and encourages all entities to adopt a fair value based method of accounting for stock-based compensation plans in which compensation cost is measured at the date the award is granted based on the value of the award and is recognized over the employee service period. However, SFAS No. 123 allows an entity to continue to use the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ( APB No. 25"). The Company has not yet determined what the effects of adopting SFAS No. 123 would be on its financial statements and, therefore, has not decided whether to adopt SFAS 123 or to continue to account for stock-based compensation in accordance with APB No. 25. [13] Except for the estimated fair value amounts presented in Note R, the Company considers the carrying amounts presented for financial instruments on the consolidated balance sheet to be the lower of cost or reasonable approximations of fair value. Considerable judgement is necessarily required in interpreting market date to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market transaction. (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." East/West is operated as a division of the Company (the "Division"). This acquisition was accounted for as a purchase. 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. 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. During the quarter ended September 30, 1995, the Company reevaluated this acquisition and wrote-off $13,216,000 representing the excess of the purchase price of Panda over the fair value of the assets acquired. On March 28, 1996, the Company entered into an agreement with the sellers of Panda whereby the purchase price for the assets under the original purchase agreement dated July 12, 1993 was reduced by $3,436,000. In connection with this agreement, a promissory note payable to the sellers in the amount of $7,088,000 was cancelled and replaced with a new promissory note with a net present value of $1,535,000 and certain other consideration amounting to $2,117,000. As a result, the prior write-off of $13,216,000 of excess of cost over the fair value of assets acquired and other intangible assets was reduced by $3,436,000. These financial statements give retroactive effect to this transaction. The purchase price adjustment and the cancellation of the noncompete agreement were the culmination of negotiations entered into during the year ended December 31, 1995. Therefore, the effects of the purchase price adjustment were recorded in the December 31, 1995 financial statements. 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 $615,000. The acquisition has been accounted for as a purchase. (NOTE B) - Acquisitions: (continued) Had the acquisitions of Symax and 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, respectively, for the year ended June 30, 1993. (NOTE C) - Major Customer: One major customer, which, in turn, sells its products to the United States government, accounted for approximately $6,353,000 (11%), $8,141,000 (14%), $4,504,000 (11%) and $7,846,000 (11%) of the net consolidated sales for the years ended December 31, 1995 and December 31, 1994, for the six months ended December 31, 1993 and for 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. (NOTE D) - Inventories: Inventories comprise the following: December 31, 1995 1994 Raw materials. . . . . . $ 1,594,000 $ 1,902,000 Work in process. . . . . 4,756,000 5,697,000 Finished goods . . . . . 6,774,000 13,407,000 T o t a l. . . $13,124,000 $21,006,000 (NOTE E) - Property, Plant and Equipment: Property, plant and equipment are summarized as follows: December 31, 1995 1994 Land and building . . . . . . . . . $2,688,000 $2,888,000 Building and leasehold improvements 599,000 494,000 Machinery and equipment . . . . . . 1,418,000 1,940,000 Furniture and fixtures. . . . . . . 937,000 477,000 T o t a l . . . . . . . . 5,642,000 5,799,000 Accumulated depreciation and amortization . . . . . . . . 2,573,000 2,520,000 B a l a n c e . . . . . . $3,069,000 $3,279,000 /TABLE (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. Future minimum lease payments as at December 31, 1995 under operating lease agreements that have initial or remaining noncancellable lease terms in excess of one year are as follows: Year Ending December 31, 1996. . . . . . . . . . . . . . . $1,002,000 1997. . . . . . . . . . . . . . . 953,000 1998. . . . . . . . . . . . . . . 894,000 1999. . . . . . . . . . . . . . . 622,000 Thereafter. . . . . . . . . . . . 213,000 Total minimum lease payments . . . . . . $3,684,000 Operating lease rent expense for the years ended December 31, 1995 and December 31, 1994, for the six months ended December 31, 1993 and for the year ended June 30, 1993 was $1,170,000, $1,100,000, $452,000 and $813,000, respectively. (NOTE G) - Debt: [1] Long-term obligations consist of the following:
December 31, 1995 1994 Term loan collateralized by $1,120,000 of treasury bills (1995), inventories, accounts receivable and general tangibles of the electronic subsystems division, bearing interest at LIBOR (5.875% at December 31, 1995) plus .75%, balance paid in January 1996. $1,000,000 $ 3,000,000 Promissory note to the sellers of Panda 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 deemed cancelled on December 31, 1995 pursuant to the purchase price adjustment (Note B paragraph 4) . . . . . . . . . . 6,875,000 Promissory note payable to the sellers of Panda in connection with purchase price adjustment (Note B paragraph 4) (face amount $1,850,000) - noninterest bearing, imputed interest at 6% payable in one installment of $500,000 on March 28, 1996, two installments of $250,000 on July 1, 1996 and January 1, 1997 and twenty quarterly installments of $42,500 commencing March 31, 2002 . . . . . . . . . . . . . . 1,535,000 Term loan collateralized by certain real estate of the electronic subsystems division, bearing interest at LIBOR (5.875% at December 31, 1995) plus .75% (floating), payable in $250,000 quarterly installments through April 1, 1996 . . . . 250,000 1,250,000 Amount due to the estate of the principal officer payable in monthly installments through February 1998. . . . . . . . . . . 604,000 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 T o t a l . . . . . . . . . . . . 3,389,000 12,005,000 Less current portion. . . . . . . . . . . . 2,292,000 3,096,000 Noncurrent portion. . . . . . . . . . . . . $1,097,000 $ 8,909,000 /TABLE (NOTE G) - Debt: (continued) [1] (continued) Payments due on the Company s long-term debt (Note B paragraph 4) at December 31, 1995 are as follows: Year Ending December 31, 1996 . . . . . . . . . . . $2,292,000 1997 . . . . . . . . . . . 517,000 1998 . . . . . . . . . . . 45,000 1999 . . . . . . . . . . . - 0 - 2000 . . . . . . . . . . . - 0 - Thereafter . . . . . . . . 535,000 T o t a l. . . . $3,389,000 [2] Short-term notes payable aggregated $2,602,000 at December 31, 1994. In August 1995 Canada Classique, Inc. ( CCI ), Winnipeg Leather ( Winnipeg ) and Symax, wholly owned subsidiaries, entered into a new factoring arrangement with a bank. The new arrangement provides for borrowings of up to C$7,000,000 (US$5,130,000) based on eligible accounts receivable. All receivables factored under this arrangement are sold with recourse. Advances received are payable with interest at the bank s prime rate (8.4% at December 31, 1995) plus .75%. During the year ended December 31, 1995 gross proceeds received from the sale of factored accounts receivable amounted to C$7,359,000. In addition, C$3,640,000 of accounts receivable sold with recourse remains uncollected. This facility is collateralized by the inventory and accounts receivable of the subsidiaries. As security for its obligations under this facility, the Company has provided the lender with a $3,000,000 standby letter of credit. CCI had a C$6,000,000 (US$4,276,000) revolving credit facility with a bank in Canada which provided for increases of up 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 was 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 was collateralized by substantially all the assets of CCI. (NOTE G) - Debt: (continued) [2] (continued) At December 31, 1994, Winnipeg Leather 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 through 1995. These facilities were repaid with funds received from the new factoring arrangement entered into August 1995. [3] Under the various debt agreements, the Company must comply with certain covenants which require them to maintain minimum balances of cash and cash equivalents and minimum levels of working capital, and tangible net worth at all times. The Company is also precluded from declaring and paying dividends without the consent of such lenders. The Company was in violation of certain covenants at December 31, 1995. However, subsequent to December 31, 1995, the Company repaid all existing debt subject to these financial covenants. [4] 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%. As security for its obligations under such amended facility, the Company has pledged approximately $6,150,000 of its marketable securities. In September 1994, East End (a wholly owned subsidiary) entered into a factoring agreement with the Company s primary lender under the same terms and conditions as East/West. The facility is guaranteed by the Company and as security for its obligations under such facility, the Company pledged approximately $2,500,000 of its marketable securities. In January and February 1996, the Company used approximately $1,700,000 of its marketable securities to reduce the amount owed under the facility. (NOTE H) - Capital Stock, Options and Warrants: 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 Options Price of Shares Shares Per Share Exercisable 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 - Granted . . . . . . . . 1,002,000 $1.25 Cancelled . . . . . . . (1,018,000) $1.25 - $3.125 Outstanding at December 31, 1995. . 949,000 $1.25 - 0 -
At December 31, 1995 options for the purchase of 551,000 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 $185,000, $312,000, $96,000 and $184,000, to the plans for the years ended December 31, 1995 and December 31, 1994, for the six months ended December 31, 1993 and for the year ended June 30, 1993, respectively. (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 $1,593,000. 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, 1995, the Company had letters of credit outstanding totalling approximately $1,169,000. [4] 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. [5] 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. (NOTE J) - Commitments and Contingencies: (continued) [5] (continued) 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 class action has been stayed against USA Classic as a result of its filing for protection for relief under Chapter 11 of the Bankruptcy Code. 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. On June 16, 1995, the motion for dismissal was denied in its entirety. On March 8, 1995, the plaintiff s representatives filed a motion for class certification. Since that date, the parties have been conducting depositions and reviewing documents relevant to issues of class certification. It is estimated that discovery in this matter will continue throughout 1996. The Company plans to continue to vigorously defend against this action. [6] In December 1995, a former officer of a subsidiary of the Company commenced an action against the Company in connection with his termination. The complaint alleges that he was wrongfully terminated in violation of his employment agreement with the Company. In February 1996, the Company answered the complaint and issued a counterclaim against the officer and his counsel. The Company intends to vigorously defend all claims and to prosecute the counterclaims. [7] In December 1995, a supplier of the Company s subsidiary commenced an action for goods received and related equitable relief against both the subsidiary and the Company. In March 1996, the Company answered the complaint asserting counterclaims against the supplier. While the Company contests the allegations set forth in the complaint, in an effort to avoid litigation costs, the Company is engaging in negotiations to resolve the dispute with the supplier. Should negotiations prove to be unsuccessful, the Company intends to vigorously defend this action and prosecute its counterclaims. (NOTE J) - Commitments and Contingencies: (continued) [8] The Company is partially self insured for its employee medical insurance for a maximum out-of-pocket cost of $67,000 per employee in each plan year. Actual claims paid by the Company amounted to approximately $300,000 and $400,000 in 1995 and 1994, respectively. Accrued expenses includes a reserve for health insurance claims of approximately $200,000 at December 31, 1995 and December 31, 1994. (NOTE K) - Income Taxes: [1] The provision (benefit) for income taxes is comprised of the following:
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 Current: Federal . . . . . . . $ - 0 - $ - 0 - $ 155,000 $ 573,000 Foreign and state . . (164,000) 188,000 467,000 142,000 Deferred: Federal . . . . . . . - 0 - (1,823,000) (2,956,000) 5,058,000 Foreign and state . . - 0 - (292,000) 160,000 121,000 T o t a l. . . . $(164,000) $(1,927,000) $(2,174,000) $5,894,000
[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 Year Ended Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 "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 . . 3.2 (.3) 8.7 1.4 Nondeductible items . . 1.3 1.3 1.8 .7 Tax exempt interest and dividend income . . . (.7) (.1) Nontaxable life insurance proceeds. . . . . . . . (6.7) Utilization of net operating losses. . . . (14.4) Nonutilization of net operating and capital loss carryforwards and carrybacks (Note K[4]). 35.0 22.1 1.5 Utilization of tax credits . . . . . . . . (.2) (3.3) Utilization of capital loss carryforward . . . (.4) (.2) Other. . . . . . . . . . .5 .7 2.5 1.8 (.7)% (10.2)% (36.7)% 35.8 % /TABLE (NOTE K) - Income Taxes: (continued) [3] Deferred tax (benefit) is comprised of the following:
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 State deferred tax expense net of federal deferred tax. . . . . . . $ (720,000) $ (192,000) $ 160,000 $ 52,000 Utilization of the percentage of completion method of revenue recognition for tax purposes. . . 66,000 Provision for doubtful accounts and certain expenses attributable to inventory under the Tax Reform Act of 1986 . . . (270,000) 88,000 57,000 (153,000) Utilization of accelerated methods of depreciation for tax purposes. . . (275,000) (236,000) 224,000 (340,000) Compensation attributable to stock options . . (39,000) (79,000) (39,000) (79,000) Warranty and marketable security reserves (256,000) Utilization of net operating loss carryforward . . (164,000) Deferred royalty income . . . . . 340,000 Write-down of intangible asset (2,482,000) Interest not currently deductible for tax . . . . . . (107,000) (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 (Increase) decrease in availability of net operating loss and capital losses carryforwards. . (2,720,000) (2,708,000) 1,132,000 Inventory ( write -downs ) recovery . . . . (1,187,000) (535,000) 68,000 (136,000) Rate differential due to surtax exemptions. . . 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. . . . . . 7,840,000 3,955,000 Other . . . . . . (124,000) 18,000 (77,000) (94,000) $ - 0 - $(2,115,000) $(2,796,000) $5,179,000 /TABLE (NOTE K) - Income Taxes: (continued) [4] The deferred tax asset (liability) is as follows:
December 31, 1995 1994 Deferred tax liability: Other - various temporary differences. . $ (314,000) Deferred tax asset: Alternative minimum tax credit carryforward . . . . . . . . . . . . . $ 561,000 561,000 Net operating loss and capital loss carryforwards (including pre- acquisition net operating loss carryforwards. . . . . . . . . . . . . 7,100,000 4,287,000 Other - various temporary differences. . 6,559,000 1,846,000 14,220,000 6,694,000 Valuation allowance on deferred asset . . . (14,220,000) (6,380,000) Net deferred tax liability. . . . . . . . . $ - 0 - $ - 0 -
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 various income tax benefits which are available to offset future taxable income of the parent only. These benefits consist of a net operating loss carryforward of approximately $5,700,000 ($5,042,000 for alternative minimum tax) and certain tax credits which amount to approximately $603,000 all of which are available through 2001. All such carryforwards arose prior to acquisition, and have remained with the Company subsequent to disposal of the operations. At December 31, 1995, the Company has an alternative minimum tax credit of $561,000 with no limitation on the carryforward period, net operating loss carryforward of $13,300,000 which expire in 2009 and a capital loss carryforward of $2,079,000 which expires in 1999. (NOTE L) - Earnings (Loss) Per Share: Earnings (loss) 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 year ended June 30, 1993 was 6,667,000. The average number of shares for the years ended December 31, 1995 and December 31, 1994 and for the six months ended December 31, 1993 were 5,668,000, 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 years ended December 31, 1995 and December 31, 1994, the six months ended December 31, 1993 and the year ended June 30, 1993:
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 Net sales: Electronic subsystems. . $11,763,000 $12,254,000 $ 6,659,000 $14,191,000 Apparel - U.S. operations. . 35,152,000 28,543,000 19,821,000 35,973,000 Apparel - Canadian operations. . 11,319,000 17,033,000 16,339,000 23,381,000 T o t a l . $58,234,000 $57,830,000 $42,819,000 $73,545,000 /TABLE (NOTE M) - Business Segments: (continued)
Six Months Ended Year Ended Year Ended December 31, December 31, June 30, 1995 1994 1993 1993 Operating income (loss): Electronic subsystems. $ 2,287,000 $ 2,625,000 $ 2,349,000 $ 2,875,000 Apparel - U.S. operations. (20,780,000) (3,217,000) 1,587,000 3,797,000 Apparel - Canadian operations. (1,203,000) (1,628,000) (59,000) (153,000) Operating income (loss). . . (19,696,000) (2,220,000) 3,877,000 6,519,000 General corporate (expense). . . (2,327,000) (1,981,000) (1,007,000) (4,092,000) Interest (expense). . . (3,008,000) (1,468,000) (976,000) (1,064,000) Gain arising from sale of stock by subsidiary. . . 13,738,000 Equity in earnings (loss) of and write- down/write-off of investment in affiliate. . (13,987,000) (8,386,000) 73,000 Investment and other income 2,614,000 734,000 573,000 1,312,000 Earnings (loss) before taxes on income and cumulative effect of a change in accounting principle. . . $(22,417,000) $(18,922,000) $(5,919,000) $16,486,000 Assets: Electronic subsystems . $ 8,028,000 $ 9,522,000 $11,615,000 $13,046,000 Apparel - U.S. operations. . 6,942,000 27,422,000 19,526,000 Apparel - Canadian operations. . 4,927,000 8,879,000 10,626,000 15,385,000 Corporate assets. . . . 18,131,000 17,688,000 31,338,000 43,404,000 T o t a l $ 38,028,000 $ 63,511,000 $73,105,000 $71,835,000 Capital expenditures: Electronic subsystems. .$ 97,000 $ 47,000 $ 26,000 $ 68,000 Apparel - U.S. operations. 358,000 373,000 137,000 Apparel - Canadian operations 191,000 53,000 75,000 T o t a l $ 455,000 $ 611,000 $ 216,000 $ 143,000 Depreciation and amortization: Electronic subsystems.$ 116,000 $ 343,000 $ 190,000 $ 391,000 Apparel - U.S. operations. 163,000 55,000 24,000 Apparel - Canadian operations. 119,000 111,000 48,000 66,000 T o t a l $ 398,000 $ 509,000 $ 262,000 $ 457,000 /TABLE (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 /TABLE (NOTE O) - Change of Accounting Principle and Fourth Quarter Adjustments: [1] In December 1995 and December 31, 1994, the Company and certain subsidiaries recorded inventory write-downs of approximately $4,500,000 and $2,400,000, respectively. [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: On February 6, 1996, the Company, through a wholly-owned subsidiary acquired certain assets subject to certain liabilities of Astrosystems, Inc. and Behlman Electronics, Inc. The assets are primarily used in the business of manufacturing and selling various power supply and power source products. The purchase price for the assets, which includes inventory, equipment and other physical property, was approximately $3,700,000, subject to a final valuation of said assets as of the closing date. The transaction was partially financed pursuant to a bridge loan in the amount of $500,000 from the Company's primary lender in anticipation of a term loan and revolving credit facility which will replace the bridge loan. The bridge loan is secured with a second mortgage on the Company's corporate facility. (NOTE Q) - Death of Principal Officer: On February 24, 1995, the Company's principal officer died. Pursuant to his employment contract, the Company will pay approximately $800,000 to the principal officer's estate in monthly installments over the next three years. The Company received insurance proceeds aggregating $1,500,000 on keyman policies on the life of the principal officer. Such amounts reflected above have been recorded in the accompanying financial statements. (NOTE R) - Available-For-Sale Securities: The following is a summary of available-for-sale securities as of December 31, 1995:
Current Noncurrent U.S. Treasury bills . . . . . . . . $10,400,000 Equity securities . . . . . . . . . 12,000 Debt securities issued by other government agencies. . . . . . . 2,919,000 Corporate debt securities . . . . . 1,731,000 $795,000 15,062,000 795,000 Restricted value of portfolio used to collateralize credit facilities . . . . . . . . . . . 7,567,000 Balance of securities portfolio (including $3,540,000 of marketable securities used to satisfy outstanding debt classified as a current obligation). . . . . . . . . . . $ 7,495,000 $795,000
On December 31, 1995 the Company transferred its marketable securities to the available for sale category of investments (Note A[6]). On the date of the transfer all debt securities were being carried at their amortized cost which approximated fair market value. Under the terms of certain credit facilities the Company s investment portfolio and certain cash balances must be maintained at a minimum collateral value. On December 31, 1995, this collateral requirement amounted to approximately $11,647,000 of which $540,000 represents the balance in cash accounts, $3,540,000 represents available-for-sale securities classified as current assets and the remainder was shown as restricted investments. 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 21, 1996, included Schedule II as at December 31, 1995 and December 31, 1994, and for the years ended December 31, 1995 and December 31, 1994, for the six months ended December 31, 1993 and for the year 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 21, 1996 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, 1995: Reserve for estimated doubtful accounts and allowance. $ 769,000 $ 887,000 $ 80,000 ** $ 1,576,000 Valuation allowance on deferred $14,220,000 tax asset. $6,380,000 $7,840,000 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
* Reserve of acquired division at date of acquisition. ** Amount represents write-offs. *** Reduction from deconsolidated operations. The accompanying notes to financial statements are an integral part hereof. EXHIBIT 22 ORBIT INTERNATIONAL CORP. SUBSIDIARIES OF REGISTRANT State of Name Incorporation Canada Classique Inc. New Jersey Orbit International of California, Inc. California Symax Garment Co. (1993) Ltd. Delaware Winnipeg Leather (1991) Inc. Delaware Ax Elle Fashions, Inc. Delaware The East End Apparel Group, Ltd. Delaware Rice Apparel International, Inc. Delaware EX-99 3 EXHIBIT 10(G) AGREEMENT AGREEMENT made this 28th day of March, 1996, among Kenneth Freedman, ("Freedman"), residing at 4 Delafield Way, Riverdale, New York 10471, Frederick Meyers ("Meyers"), residing at 21 Park Drive, Lido Beach, New York 11561, The Panda Group, Inc. ("Seller"), a New York corporation, with offices at 500 Seventh Avenue, 18th Floor, New York, New York 10018, and Orbit International Corp. ("Orbit"), a Delaware corporation with its principal office at 80 Cabot Court, Hauppauge, New York 11788. W I T N E S S E T H: WHEREAS, Freedman, Meyers, Seller and Orbit are parties to an Asset Purchase Agreement (the "Asset Purchase Agreement") dated July 12, 1993, pursuant to which, among other things, Orbit purchased substantially all of the assets (the "Assets") of Seller; and WHEREAS, the parties to the Asset Purchase Agreement desire by the within Agreement to (a) reduce the purchase price for the Assets and, in connection with such reduction, to amend the Secured Promissory Note dated July 12, 1993 executed by Orbit in favor of Seller (the "Note") so as to reduce the $8,000,000 principal amount thereof, and to reflect certain other changes in the Note desired by the parties, (b) amend certain other arrangements pursuant to the Asset Purchase Agreement and documents executed in connection therewith, and (c) set forth certain other understandings. NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements set forth herein, the parties hereto hereby agree as follows: i. Reduction of Purchase Price, etc. (i) The purchase price for the Assets under the Asset Purchase Agreement shall be reduced from $15,000,000 to $8,850,000. The parties hereby acknowledge that at the closing pursuant to the Asset Purchase Agreement, $7,000,000 of the purchase price was paid to Seller so that $1,850,000 of the reduced purchase price remains to be paid. Orbit hereby agrees to pay the $1,850,000 outstanding balance of the reduced purchase price as follows: (i) $500,000 shall be payable by certified check upon the execution of this Agreement, and (ii) $1,350,000 shall be payable pursuant to the Note as amended pursuant to this Agreement by the payment of $250,000 on July 1, 1996, the payment of $250,000 on January 1, 1997 and the payment in consecutive equal quarterly installments of $42,500 on March 31, 2002 and on the last day of each June, September, December and March thereafter up to and including December 31, 2006. In order to reflect the fact that the portion of the purchase price remaining to be paid by Orbit pursuant to the Note will be reduced to $1,350,000 and the manner in which such $1,350,000 will be paid by Orbit and to reflect the new maturity date of the Note and other changes to the Note desired by the parties, the Note is concurrently herewith being amended by Orbit and shall be known as the Amended Promissory Note (the "Amended Note"), a copy of which is attached hereto as Exhibit A. Any amendment in the Amended Note which is applicable to the Asset Purchase Agreement shall also be deemed to be an amendment to the Asset Purchase Agreement. (ii) The parties also acknowledge that, at the closing pursuant to the Asset Purchase Agreement, $2,000,000 was paid to Freedman and Meyers under a Non-Competition Agreement dated July 12, 1993 among Seller, Freedman, Meyers and Orbit (the "Non-Competition Agreement"), which amount is in addition to the purchase price for the Assets under the Asset Purchase Agreement. The Non-Competition Agreement is hereby cancelled. ii. Cancellation of Security Agreement. In order to secure the obligations of Orbit pursuant to the Note, Freedman, Meyers, Seller and Orbit entered into a Security Agreement (the "Security Agreement") dated July 12, 1993. The parties agree (a) to cancel the Security Agreement and (b) to the termination of the security interests of Seller, Freedman and Meyers granted thereunder in the Assets of Orbit relating to the East/West division by the filing of UCC-3 termination statements in all jurisdictions in which UCC-1 financing statements were filed pursuant to the Security Agreement. iii. Medical Insurance. For a period of three (3) years following the expiration of their respective Employment Agreements with Orbit dated June 1, 1993 (as extended pursuant to the terms of Paragraph 6(a) below), Orbit shall, at no cost to Freedman and Meyers, provide to each of Freedman and Meyers and their immediate families medical insurance coverage comparable to the insurance coverage provided by Orbit to them and their immediate families under the existing insurance policy currently offered to all employees of the East/West division of Orbit, or, at the option of Orbit, Orbit shall reimburse Freedman and Meyers for their cost of obtaining such medical insurance for such three-year period. iv. Automobile. For a period of three (3) years following the expiration of their respective Employment Agreements with Orbit dated June 1, 1993 (as extended pursuant to the terms of Paragraph 6(a) below), Orbit shall provide to each of Freedman and Meyers substantially the same benefits as to a car and car insurance as is currently being provided by Orbit to each of Freedman and Meyers pursuant to their employment arrangements with Orbit (which benefits include payment by Orbit of the lease payments for such cars and the cost of car insurance). Freedman and Meyers each acknowledge that Orbit has entered, or will enter, into new three-year leases (the "New Leases") for such cars. When the New Leases expire, Freedman and Meyers may enter into new leases for such cars (or comparable cars) in their own names, and Orbit will reimburse each of them for the lease payments and the cost of insurance until the expiration of the three-year period referred to in the first sentence of this Paragraph 4. The parties further agree that, during the three-year period referred to in the first sentence of this Paragraph 4, Orbit shall pay the premiums for insurance on such cars, except that if the car insurance premiums on such cars are increased after the first year of such three-year period because of a bad driving record of either Freedman or Meyers or because of any accidents in which the leased cars are involved, then any such increase in insurance premiums over and above the first year resulting from such bad driving records or accidents shall be paid by Freedman or Meyers, as the case may be. v. Warrants; Stock Options. Upon the execution hereof, the options to purchase 50,000 shares of Common Stock of Orbit previously granted to each of Freedman and Meyers under Orbit's 1995 Stock Option Plan shall be terminated by action of the Stock Option Committee of Orbit's Board of Directors, and Orbit shall issue to each of Freedman and Meyers a 10-year warrant (each, a "Warrant" and collectively, the "Warrants") to purchase 125,000 shares of Common Stock of Orbit. The Warrants shall not be exercisable until the second anniversary of the date of issuance. The exercise price (the "Exercise Price") of the Warrants shall be $0.875. The Warrants shall contain cashless exercise provisions and antidilution provisions. The Warrants shall also provide that during the period between the fifth anniversary and the tenth anniversary of the date of issuance of the Warrants, the holder of the Warrant may require Orbit, upon notice, to redeem the Warrant at a price of $1.50 per Warrant Share (as defined in the Warrants) if the Current Market Price (as defined in the Warrants) of the Common Stock of Orbit at the time of the notice is equal to or less than the Exercise Price, and if the Current Market Price upon exercise of the Warrant is more than the Exercise Price but less than $2.375, Orbit shall pay to the holder of the Warrant, upon exercise, that amount which equals the difference between (A) the number of Warrant Shares issuable upon exercise times $2.375, and (B) the number of Warrant Shares issuable upon exercise times the Current Market Price on the date of exercise. The form of Warrant is attached hereto as Exhibit B. vi. Winding-Down Period. For such time as is necessary to wind-down the East/West division of Orbit, which is currently operating that portion of the business of Orbit with respect to the Assets, following the execution of this Agreement (the "Winding-Down Period") but in any event no later than December 31, 1996, Orbit desires that Freedman and Meyers assist in such winding-down by continuing to operate the East/West division in accordance with the terms of their respective Employment Agreements with Orbit. In order to accomplish such objective, the parties agree that the respective Employment Agreements between Orbit and Freedman and Meyers, each dated July 12, 1993, which otherwise would expire on June 30, 1996, shall be extended until December 31, 1996. Upon expiration of such Employment Agreements on December 31, 1996, all the provisions of the Employment Agreements (including, without limitation, the provisions of Section 7 thereof entitled "Non-Competition; Confidentiality") shall be cancelled. (i) Following execution of the within Agreement, Orbit shall transfer the assets and liabilities of the East/West division into a separate subsidiary owned by Orbit. During the remainder of the terms of their respective Employment Agreements (as extended by Paragraph 6(a) above), Freedman and Meyers shall use their respective best efforts to continue to operate the East/West division in their current capacities pursuant to the Employment Agreements, and to use their best efforts to sell the existing East/West inventory at the highest prices which, in the reasonable judgment of Freedman, Meyers and Orbit, can be obtained for such inventory, it being understood that it may be difficult to sell such inventory at attractive prices. With regard to the operation of the East/West division during the Winding-Down Period, Freedman and Meyers agree that (x) they will only purchase additional inventory for the purpose of filling pre-existing orders, and (y) they will fully cooperate with Orbit and any third party which has been engaged by Orbit during the Winding-Down Period for the purpose of advising Orbit as to the winding- down of the East/West division and the sale of the inventory. (ii) The proceeds from the sale of such inventory shall be used to pay down the outstanding balances currently owed by Orbit to its factor, BNY Financial Corporation ("BNY") pursuant to the Restated and Amended Factoring Agreement effective July 1, 1991 between BNY and Orbit, as successor-in-interest to Seller, as amended by the amendments dated July 12, 1993 and September 26, 1995, and, in connection with such paying down of those outstanding balances with such proceeds, Orbit shall use its best efforts to negotiate with BNY to provide for the release by BNY of the collateral which secures the factoring arrangement. Orbit shall keep Freedman and Meyers fully advised as to those negotiations with BNY. As such outstanding balances currently owing by Orbit to BNY are paid and such collateral releases are made by BNY, all such collateral shall be released by BNY to an independent escrow agent (the "Escrow Agent"), which shall be a bank or other financial institution in New York, New York chosen by Orbit. Pursuant to an agreement to be entered into by Orbit with the Escrow Agent (which must be in form and content satisfactory to counsel for Seller, Freedman and Meyers), the Escrow Agent shall disburse such collateral, promptly upon receipt of such collateral, in the following manner: the first $1,000,000 of such collateral shall be disbursed to Seller or its designee(s), the next $2,000,000 of such collateral shall be disbursed 75% to Orbit and 25% to Seller or its designee(s), and any collateral in excess of $3,000,000 shall be disbursed 50% to Orbit and 50% to Seller or its designee(s). In the event that BNY refuses to release the collateral or any part thereof or delays the release of such collateral or any part thereof, the amount of collateral to which Seller or its designee(s) would have been entitled pursuant to the preceding sentence if BNY had released such collateral on the basis of the release of $1.00 of collateral for each $1.00 paid by Orbit to BNY from the proceeds of the sale of such inventory shall be added to the outstanding principal amount of the Amended Note (the "Additional Principal") and shall be payable in consecutive equal quarterly installments over the then remaining term of the Amended Note on the last day of each March, June, September and December; provided, however, that upon any subsequent release or releases of any such collateral by BNY, the portion of each such release or releases of collateral to which Seller or its designee(s) is entitled pursuant to this subparagraph (c) shall be used to prepay the Additional Principal of the Amended Note in inverse order of maturity in an amount equal to such released portion of the collateral to which Seller or its designee(s) is entitled. (iii) During the Winding-Down Period, the parties shall use their best efforts to mutually agree on a severance package for the current employees (other than Freedman and Meyers) of the East/West division of Orbit in exchange for the receipt by Orbit of releases from liability executed by such employees. Repayment Waiver and Audit. Orbit hereby irrevocably waives repayment of any and all amounts which may be currently due from Seller, Freedman and/or Meyers to the East/West division and Orbit agrees to bear and pay any sales taxes which may become due in connection with the current sales tax audit of the East/West division of Orbit; provided, however, that Seller, Freedman and Meyers agree to be jointly and severally liable to Orbit for any personal expenses related to the East/West division following the date of execution of this Agreement. vii. East/West Name. Following the execution of this Agreement, Orbit shall, subject to the provisions of Paragraph 9 below, retain the use of the name "East/West". However, Orbit may not sell such name to a third party or parties without the prior written consent of Freedman and Meyers, and in the event of a sale of the name to a third party, the proceeds of any such sale shall be shared equally by each of Seller and Orbit. viii. Return to Business. In the event that following the later of the expiration of the Winding-Down Period or the expiration of their respective Employment Agreements (as extended by Paragraph 6(a) above), Freedman and Meyers elect to return to a business which is the same as the business of East/West, Freedman and Meyers shall send written notice to Orbit setting forth their intention to start such business (the "Starting Notice"). Subject to the provisions of the next two sentences, within ten (10) business days following the receipt of the Starting Notice by Orbit, Orbit shall sell to Freedman and Meyers or their designee(s) the name "East/West" for the sum of $1.00. However, in the event Orbit desires to participate in such business, Orbit shall so notify Freedman and Meyers within ten (10) days following the receipt of the Starting Notice, and Freedman and Meyers on the one hand and Orbit on the other hand shall negotiate in good faith to attempt to reach an agreement as to the capitalization and ownership structure of such business prior to the sale by Orbit of the name "East/West" (it being understood, however, that there is no obligation on the part of the parties to reach any such agreement). If by the thirtieth (30th) day following the receipt by Orbit of the Starting Notice, Orbit decides not to participate in such business or if the parties are unable to reach an agreement as to the capitalization and ownership structure of such business, then the sale of such name by Orbit to Freedman and Meyers for $1.00 shall take place on or about the thirtieth (30th) day following the receipt by Orbit of the Starting Notice, and in such event for a period of five (5) years after the date of the sale of the name East/West to Freedman and Meyers (or if Freedman and Meyers discontinue the use of the name East/West in such business within such five (5) year period, then until the date of discontinuance) Orbit shall be entitled to receive from such business for the use of the name East/West an annual royalty payment equal to ten percent (10%) of the income before taxes on income of such business as determined by the independent certified public accountant of such business in accordance with generally accepted accounting principles consistently applied. ix. Acknowledgement of No Default, Etc. Orbit hereby acknowledges and agrees that Seller, Freedman and Meyers (a) are now and have at all times been in full compliance with the Asset Purchase Agreement, the Non-Competition Agreement and the Note (collectively, the "Purchase Documents"), (b) have at no time breached, violated, defaulted under or failed to fulfill any covenant or agreement in any of the Purchase Documents, and (c) have not made any inaccurate or incorrect representation or warranty in any of the Purchase Documents. Accordingly, Orbit hereby acknowledges and agrees that it has no claims of any kind against Seller, Freedman and/or Meyers under or in connection with any of the Purchase Documents. x. Indemnification. (i) By Orbit. Orbit shall indemnify each of Freedman and Meyers and hold each of them harmless at all times from and after the date hereof against and in respect of any and all actions, suits, proceedings, claims, demands, judgments, costs, damages, losses and liabilities, including reasonable attorneys' fees and expenses (collectively "Losses") incurred by either Freedman or Meyers resulting from the operation of the East/West division prior to or after the date hereof pursuant to their respective Employment Agreements with Orbit dated June 1, 1993 (as extended pursuant to the terms of Paragraph 6(a) above), other than any Losses which result from the respective gross negligence or fraud (including, without limitation, tax fraud) of either Freedman or Meyers in connection with the operation of the East/West division prior to or after the date hereof pursuant to their respective Employment Agreements with Orbit dated June 1, 1993 (as extended pursuant to the terms of Paragraph 6(a) above) or relate to claims by employees or agents of the East/West division or third parties of sexual harassment or discrimination of any sort against either Freedman or Meyers. If any such action, suit or proceeding is commenced against Freedman and/or Meyers, then Orbit will, at Orbit's own cost and expense, assume the defense of such action, suit or proceeding, but if it is ultimately determined by the final judgment of any court of competent jurisdiction as to which all appeals have been taken and decided or as to which the time for appeals has expired that any Losses which are the subject of such action, suit or proceeding resulted from the respective gross negligence or fraud (including, without limitation, tax fraud) of either Freedman or Meyers in connection with the operation of the East/West division prior to or after the date hereof pursuant to their respective Employment Agreements with Orbit dated June 1, 1993 (as extended pursuant to the terms of Paragraph 6(a) above) or because of sexual harassment or discrimination of any sort by either Freedman or Meyers, then Freedman and/or Meyers, as the case may be, shall reimburse Orbit for any such Losses. (ii) By Freedman or Meyers. Each of Freedman and Meyers, severally and not jointly, shall indemnify Orbit and hold it harmless at all times from and after the date hereof against and in respect of any and all Losses incurred by Orbit resulting from their respective gross negligence or fraud (including tax fraud) in connection with the operation of the East/West division prior to or after the date hereof pursuant to their respective Employment Agreements with Orbit dated June 1, 1993 (as extended pursuant to the terms of Paragraph 6(a) above)or claims by employees or agents of the East/West division or third parties of sexual harassment or discrimination of any sort against either Freedman or Meyers; xi. Agreement, Amended Note and Warrants Duly Approved. Orbit represents, warrants and agrees that it has full power and authority to execute, deliver and perform this Agreement, the Amended Note and the Warrants, the execution, delivery and performance of this Agreement, the Amended Note and the Warrants by Orbit have been duly and validly authorized by all necessary corporate action on the part of Orbit, this Agreement, the Amended Note and the Warrants constitute valid and binding obligations of Orbit enforceable in accordance with their terms. (i) Concurrently with the execution of this Agreement, Orbit is delivering to Seller, Freedman and Meyers certified corporate resolutions of Orbit's Board of Directors approving the execution, delivery and performance of this Agreement, the Amended Note and the Warrants by Orbit, and a legal opinion of its counsel as to the matters set forth in Paragraph 12(a) above. xii. Cooperation. Each of Seller, Freedman and Meyers shall use their respective best efforts to cooperate with, and provide all necessary information to, Orbit in order to enable Orbit to defend any lawsuits related to the East/West division and/or the East End Apparel Group Ltd., a subsidiary of Orbit, which are initiated prior to, during, or following the Winding-Down Period. Orbit shall reimburse Seller, Freedman or Meyers, as the case may be, for any reasonable travel and other out-of-pocket expenses incurred by them in connection with the foregoing. Following the execution of this Agreement, each of the parties to this Agreement agrees to execute and deliver such further documents and instruments and to do such other acts and things as may reasonably be requested in order to effectuate the transactions contemplated by this Agreement. xiii. Press Releases. Each of Seller, Freedman, Meyers and Orbit agree that none of them will issue any press release or make any public statement regarding this Agreement or the transactions contemplated hereby without the prior approval of the other parties, except to the extent any such disclosure is required by law, and then only after consultation with the other parties. xiv. Expenses; Other. Orbit shall bear its own expenses and the expenses incurred by Seller, Freedman and Meyers in connection herewith. (i) This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective legal representatives, successors and assigns. The termination of this Agreement as to a party shall not serve to terminate any obligations of such party, or any remedies of any person or entity against such party, for any act or failure to act of such party occurring prior to such termination. xv. Notices. Any notice to be given by any party hereunder to any other party shall be in writing, delivered personally against written receipt therefor, or mailed by prepaid, documented air courier, certified or registered mail, return receipt requested, addressed to the other parties at the addresses hereinabove stated or to such other address as may have been furnished by any party to the other parties pursuant to this Paragraph 16, with copies to Squadron, Ellenoff, Plesent and Sheinfeld, LLP, 551 Fifth Avenue, New York, New York 10176, attention: Michael R. Kleinerman, Esq. and Frankenthaler Kohn Schneider & Katz, 26 Broadway, Suite 700, New York, New York 10004, attention: Herbert A. Schneider, Esq. All such notices shall be deemed to be given and received on the date of delivery or mailing thereof. xvi. Amendments. No modification, amendment or waiver of any of the provisions of the Agreement shall be effective unless in writing and signed by all the parties hereto. xvii. No Waivers. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by any other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provision, nor in any way to effect the validity of this Agreement or any part hereof, or the right of any party thereafter to enforce each and every such provision in accordance herewith. xviii. Severability. In the event that any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. xix. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. xx. Entire Agreement. This Agreement supersedes any and all prior oral or written agreements between Seller, Freedman and/or Meyers on the one hand and Orbit on the other hand, with respect to the subject hereof and sets forth the final and entire agreement of the parties hereto with respect to the subject matter hereof; except that (a) the Employment Agreements between Freedman and Meyers and Orbit dated June 1, 1993 shall, as set forth in Paragraph 6(a) of this Agreement, remain in force and effect until December 31, 1996, (b) the Amended Note shall remain in force and effect, and (c) the Asset Purchase Agreement as amended by the within Agreement shall remain in force and effect. xxi. Headings. The headings in this Agreement are for convenience only, and shall not affect the meaning of the terms hereof. xxii. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and each party may become a party hereto by executing a counterpart hereof. This Agreement and any counterpart so executed shall be deemed to be one and the same instrument. [Remainder of this page intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. ORBIT INTERNATIONAL CORP. By: THE PANDA GROUP, INC. By: KENNETH FREEDMAN FREDERICK MEYERS AMENDED PROMISSORY NOTE $1,350,000 New York, New York March 28, 1996 FOR VALUE RECEIVED, Orbit International Corp., a Delaware corporation ("Payor"), promises to pay to The Panda Group, Inc., a New York corporation ("Payee"), the sum of One Million Three Hundred Fifty Thousand Dollars ($1,350,000). No interest shall be payable on or with respect to this Note; provided, however, that to the extent required by any applicable original discount provisions of the Internal Revenue Code of 1986, as amended (the ("Code"), the face amount of this Note shall be deemed to include interest at the rate of six percent (6%) per annum compounded annually and which interest shall, to the extent required by the Code, be reportable in accordance with the original issue discount provisions of the Code, and provided further that during the continuance of an Event of Default (as hereinafter defined), the principal balance hereof shall bear actual interest at the rate of three percent (3%) over the prime rate as announced from time to time by The Bank of New York. This Note is issued pursuant to and subject to the terms and conditions of an agreement (the "Asset Purchase Agreement"), dated July 12, 1993, among Payor, Payee, Kenneth Freedman ("Freedman") and Frederick Meyers ("Meyers") relating to the purchase by Payor from Payee of the business and substantially all of the assets of Payee, as such Asset Purchase Agreement was amended by the Agreement dated March 28, 1996 among Freedman, Meyers, Payee and Payor (the "1996 Agreement"). This Note constitutes an amendment of the Secured Promissory Note dated July 12, 1993 issued by Payor to Payee. This Note shall be payable (to the extent not prepaid as provided herein) on December 31, 2006. Payment of this Note shall be made in the following manner in lawful money of the United States at such place in New York, New York as Payee shall designate in writing to Payor pursuant to the notice provisions of the Asset Purchase Agreement: (1) Two Hundred Fifty Thousand Dollars ($250,000) shall be paid on July 1, 1996. (2) Two Hundred Fifty Thousand Dollars ($250,000) shall be paid on January 1, 1997. (3) The remaining balance of Eight Hundred Fifty Thousand Dollars ($850,000) shall be paid in equal quarterly installments of Forty Two Thousand Five Hundred Dollars ($42,500) on March 31, 2002 and on the last day of each June, September, December and March thereafter up to and including December 31, 2006. (4) Pursuant to Section 6(c) of the 1996 Agreement, in the event that BNY Financial Corporation ("BNY") refuses to release the collateral or any part thereof referred to in said Section 6(c) or delays the release of such collateral or any part thereof, then the amount of collateral to which Payee or its designee(s) would have been entitled pursuant to Section 6(c) if BNY had released such collateral on the basis of the release of $1.00 of collateral for each $1.00 paid by Payor to BNY from the proceeds of the sale of the inventory referred to in said Section 6(c) shall be added to the outstanding principal amount of this Note (the "Additional Principal") and shall be payable in consecutive equal quarterly installments over the then remaining term of this Note on the last day of each March, June, September and December; provided, however, that upon any subsequent release or releases of any such collateral by BNY, the portion of each such release or releases of collateral to which Payee or its designee(s) is entitled pursuant to said Section 6(c) shall be used to prepay the Additional Principal of this Note in inverse order of maturity in an amount equal to such released portion of the collateral to which Payee or its designee(s) is entitled. In addition to the prepayments provided for in this Note, this Note may be prepaid in whole or in part without premium or penalty. This Note shall immediately become due and payable upon the occurrence of any of the following events (each, an "Event of Default"): (a) Payor's failure to pay any amount due under this Note when due and such default shall have continued unremedied for a period of five (5) business days after written notice thereof to Payor; (b) Payor's failure to perform or observe, in any material respect, any covenant or agreement of Payor under the Asset Purchase Agreement or the 1996 Agreement, and the same is not remedied within ten (10) business days after written notice thereof to Payor; (c) Payor (i) commences any proceeding under any bankruptcy, insolvency or similar law or seeks other judicial relief in respect to its debts, or (ii) is the debtor named in any bankruptcy, insolvency or similar debtor and creditor proceeding which remains undismissed, undischarged or undefended for a period of sixty (60) days after it is commenced. Payor hereby waives demand, presentment for payment, protest, notice of protest, notice of intention to accelerate the maturity of this Note, the bringing of any suit against any party, and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any trustee or any holder hereof, whether before or after maturity. If this Note is placed in the hands of an attorney for collection, by suit or otherwise, or to enforce its collection, or to protect any security for its payment, Payor immediately and without demand will pay all costs of collection and litigation together with a reasonable fee of such attorneys. Payee shall not by any act be deemed to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by Payee, and then only to the extent set forth therein. A waiver as to any one event shall in no way be construed as continuing or as preventing waiver of such rights or remedies on a subsequent event. Upon receipt of any prepayment, Payee shall make a notation on this Note of such payment received, and shall provide Payor with evidence acceptable to Payor that the payment has been received by Payee and so noted. The timely tender of any payment on this Note shall be deemed to have been made if such payment is mailed by certified mail on or before the day such payment is due. Any payment date occurring on a weekend, federal or New York state holiday or any other day on which banking institutions in the state of New York are closed shall be deemed to be the next succeeding business day. If any provision hereof shall be deemed or held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. This Note shall be construed, governed and enforced in accordance with the laws of the State of New York. ORBIT INTERNATIONAL CORP. By: Warrant No. 1 THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED,OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS. VOID BEFORE MARCH 28, 1998 AND AFTER 5:00 P.M. NEW YORK TIME, ON MARCH 28, 2006 ORBIT INTERNATIONAL CORP. Warrant to Purchase Shares of Common Stock 125,000 Shares THIS CERTIFIES that, for good and valuable consideration received, KENNETH FREEDMAN (the "Holder"), is entitled to subscribe for and purchase from Orbit International Corp., a Delaware corporation (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time after March 28, 1998 and before 5:00 P.M. New York City time on March 28, 2006 (the "Exercise Period"), all or any portion of 125,000 shares of common stock of the Company, par value $0.10 per share ("Common Stock"), subject to adjustment as provided herein (the "Warrant Shares"), at a price of $0.875 per share, subject to adjustment as provided herein (the "Exercise Price"). 1. Method of Exercise. (a) This Warrant may be exercised at any time during the Exercise Period, as to the whole or any lesser number of Warrant Shares, by the surrender of this Warrant (with the election at the end hereof duly executed) to the Company at its office at 80 Cabot Court, Hauppauge, New York 11788 or at such other place as may be designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the Exercise Price multiplied by the number of Warrant Shares for which this Warrant is being exercised. (b) In lieu of the payment of the Exercise Price, the Holder shall have the right (but not the obligation), during the Exercise Period, to require the Company to convert this Warrant, in whole or in part, into the Warrant Shares as provided for in this Section (the "Conversion Right") by delivering to the Company the Conversion Notice attached hereto. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of the Exercise Price) that number of shares of Common Stock equal to (i) the number of Warrant Shares issuable upon exercise of the Warrant or the portion of the Warrant being converted, multiplied by (ii) the quotient obtained by dividing (x) the value of the Warrant (on a per Warrant Share basis) at the time the Conversion Right is exercised (determined by subtracting the Exercise Price from the Current Market Price (as determined pursuant to Section 5(e) below), for the shares of Common Stock issuable upon exercise of the Warrant immediately prior to the exercise of the Conversion Right) by (y) the Current Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. The Conversion Rights provided under this Section may be exercised in whole or in part and at any time and from time to time while any Warrants remain outstanding. In order to exercise the Conversion Right, the Holder shall surrender to the Company, at its offices, this Warrant accompanied by a form of Subscription Agreement duly filled in and signed and a duly completed Conversion Notice in the form attached hereto. The presentation and surrender shall be deemed a waiver of the Holder's obligation to pay all or any portion of the aggregate purchase price payable for the Warrant Shares being issued upon such exercise of this Warrant. This Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of this Warrant for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver to the Holder (i) a certificate or certificates representing the largest number of whole Warrant Shares which the Holder shall be entitled as a result of the conversion, and (ii) if such Warrant is being converted in part only, a new Warrant exercisable for the number of Warrant Shares equal to the unconverted portion of the Warrant. (c) Upon any exercise (which term, as used herein, shall include any exercise of the Conversion Right) of this Warrant, in lieu of any fractional Warrant Shares to which the Holder shall be entitled, the Company shall pay to the Holder cash in accordance with the provisions of Section 5(d) hereof. 2. Issuance of Certificates. Upon each exercise of the Holder's rights to purchase Warrant Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Warrant Shares shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise of this Warrant, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, upon surrender of this Warrant for cancellation, the Company shall execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares (or portions thereof) subject to purchase hereunder. 3. Recording of Transfer. Any warrants issued upon the transfer or exercise in part of this Warrant shall be numbered and shall be registered in a Warrant Register as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. This Warrant shall be transferable only on the books of the Company upon delivery thereof duly endorsed by the Holder or by his or its duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian or other legal representative, duly authenticated evidence of his or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new warrant or warrants to the person entitled thereto. This Warrant may be exchanged, at the option of the Holder hereof, for another warrant, or other warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause this Warrant to be transferred on its books to any person if, in the written opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations thereunder. 4. Reservation of Shares of Common Stock. The Company shall at all times reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of providing for the exercise of the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all shares of Common Stock issuable upon exercise of this Warrant, upon receipt by the Company of the full payment therefor, shall be validly issued, fully paid, nonassessable and free of preemptive rights. 5. Exercise Price Adjustments. Subject to the provisions of this Section 5, the Exercise Price in effect from time to time shall be subject to adjustment, as follows: (a) In case the Company shall at any time after the date hereof (i) declare a dividend or make a distribution on the outstanding shares of Common Stock payable in shares of its capital stock, (ii) subdivide the outstanding shares of Common Stock, (iii) combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of Common Stock by reclassification of shares of Common Stock, other than a change in par value, or from par value to no par value, or from no par value to par value, but including any such reclassification in connection with the consolidation or merger of the Company with or into another corporation (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price in effect at the time of the record date of such dividend or distribution or of the effective date of such subdivision, combination, or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall distribute to all holders of shares of Common Stock (including any such distribution made to the stockholders of the Company in connection with a consolidation or merger in which the Company is the surviving or continuing corporation) evidences of its indebtedness, cash, or assets (other than distributions and dividends payable in shares of Common Stock), or rights, options, or warrants to subscribe for or purchase shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock, then, in each case, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such distribution by a fraction, the numerator of which shall be the Current Market Price (as determined pursuant to Section 5(e) hereof) per share of Common Stock on such record date, less the fair market value (as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such rights, options, or warrants or convertible or exchangeable securities, or the amount of such cash, applicable to one share of Common Stock, and the denominator of which shall be such Current Market Price per share of Common Stock. Such adjustment shall become effective at the close of business on such record date. (c) Whenever there shall be an adjustment as provided in this Section 5, the Company shall, within 15 days thereafter, cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares issuable hereunder and the Exercise Price thereof after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. (d) The Company shall not be required to issue fractions of shares of Common Stock or other shares of the Company upon the exercise of this Warrant. If any fraction of a share of Common Stock would be issuable upon the exercise of this Warrant (or specified portions thereof), the Company may issue a whole share in lieu of such fraction or the Company may purchase such fraction for an amount in cash equal to the same fraction of the Current Market Price of such shares of Common Stock on the date of exercise of this Warrant. (e) For the purposes of the various provisions of this Warrant, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the thirty (30) consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the highest reported bid price for the Common Stock as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information. If on any such date the Common Stock is not listed or admitted to trading on any national securities exchange and is not quoted by NASDAQ or any similar organization, the fair value of a share of Common Stock on such date, as determined in good faith by the Board of Directors of the Company, whose determination shall be conclusive absent manifest error, shall be used. (f) No adjustment in the Exercise Price shall be required if such adjustment is less than $0.05; provided, however, that any adjustments which by reason of this Section 5 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest cent or to the nearest thousandth of a share, as the case may be. (g) Upon each adjustment of the Exercise Price as a result of the calculations made in this Section 5, the Warrants shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares of Common Stock (calculated to the nearest hundredth) obtained by dividing (i) the product obtained by multiplying the number of shares of Common Stock purchasable upon exercise of the Warrants prior to adjustment of the number of shares of Common Stock by the Exercise Price in effect prior to adjustment of the Exercise Price by (ii) the Exercise Price in effect after such adjustment of the Exercise Price. (h) Whenever the Exercise Price is adjusted as provided in this Section 5, the Company will promptly obtain a certificate of a firm of independent public accountants of recognized standing selected by the board of directors of the Company (which may be the regular auditors of the Company) setting forth the Exercise Price as so adjusted and a brief statement of the facts accounting for such adjustment, and will make available a brief summary thereof to the holder of this Warrant, at its address listed on the register maintained for that purpose (which summary may be included in any notice of adjustment required by Section 5(c) hereof). 6. Consolidations and Mergers. (a) In case of any consolidation with or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the surviving or continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock or the conversion of such outstanding shares of Common Stock into shares of other stock or other securities or property), or in case of any sale, lease or conveyance to another corporation of the property and assets of any nature of the Company as an entirety or substantially as an entirety (such actions being hereinafter collectively referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of this Warrant (in lieu of the number of shares of Common Stock theretofore deliverable) the kind and amount of shares of stock or other securities, cash or other property which would otherwise have been deliverable to a holder of the number of shares of Common Stock upon the exercise of this Warrant upon such Reorganization if this Warrant had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, appropriate adjustment, as determined in good faith by the Board of Directors of the Company, shall be made in the application of the provisions herein set forth with respect to the rights and interests of the Holder so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of this Warrant. Any such adjustment shall be made by and set forth in a supplemental agreement between the Company, or any successor thereto, and the Holder and shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. The Company shall not effect any such Reorganization unless upon or prior to the consummation thereof the successor corporation, or if the Company shall be the surviving corporation in any such Reorganization and is not the issuer of the shares of stock or other securities or property to be delivered to holders of shares of Common Stock outstanding at the effective time thereof, then such issuer, shall assume by written instrument the obligation to deliver to the Holder such shares of stock, securities, cash or other property as the Holder shall be entitled to purchase in accordance with the foregoing provisions. (b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise of this Warrant (other than a change in par value or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder shall have the right thereafter to receive upon exercise of this Warrant solely the kind and amount of shares of stock and other securities, property, cash or any combination thereof receivable upon such reclassification, change, consolidation or merger by a holder of the number of shares of Common Stock for which this Warrant might have been exercised immediately prior to such reclassification, change, consolidation or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 5. (c) The above provisions of this Section 6 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 7. Notice of Certain Events. In case at any time any of the following occur: (a) The Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) The Company shall offer to all the holders of its shares of Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) The Company shall take any action to effect any reclassification or change of outstanding shares of Common Stock or any consolidation, merger, sale, lease or conveyance of property, described in Section 6; or (d) The Company shall take any action to effect any liquidation, dissolution or winding-up of the Company or a sale of all or substantially all of its property, assets and business; then, and in any one or more of such cases, the Company shall give written notice thereof, by registered mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least fifteen (15) days prior to (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants or other securities are to be determined, (ii) the date on which any such offer to holders of shares of Common Stock is made, or (iii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution or winding-up is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution or winding-up. 8. Provisions Concerning Redemption. (a) At any time after March 28, 2001 and before March 28, 2006 (the "Redemption Period"), on not less than thirty (30) days notice (the "Redemption Notice") given to the Company, the Holder, without being required to pay any amount to the Company, may cause the Company to redeem all or a part of this Warrant at a redemption price of $1.50 per Warrant Share (the "Redemption Price") for the number of Warrant Shares underlying all or a portion of this Warrant being redeemed, provided that the Current Market Price of the Common Stock at the time of such notice shall be less than or equal to the Exercise Price. (b) The Company shall, upon presentation and surrender to the Company by or on behalf of the Holder thereof of one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum by certified check equal to the Redemption Price times the number of Warrant Shares underlying the Warrant or Warrants being redeemed. Upon such redemption, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the redemption price, shall cease. 9. Guaranteed Proceeds. During the Redemption Period, upon exercise by the Holder of all or a portion of this Warrant on a date on which the Current Market Price is more than the Exercise Price but less than $2.375 per Warrant Share, the Company shall pay to the Holder that amount (the "Difference") which equals the difference between (a) the number of Warrant Shares issuable upon exercise times $2.375 and (b) the number of Warrant Shares issuable upon exercise times the Current Market Price on the date of exercise. The Difference shall be paid by certified check to the Holder within 10 business days following the date of exercise. Even if the Holder shall avail himself of the provisions of paragraph 1(b) of this Warrant, in making the calculation pursuant to clauses (a) and (b) of this paragraph 9 of the number of Warrant Shares issuable upon exercise of this Warrant, such number shall be calculated as if the Holder had not availed himself of the provisions of paragraph 1(b) of this Warrant. 10. Legend. The certificate or certificates evidencing the Warrant Shares shall bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS. 11. Replacement of Warrants. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon reimbursement of the Company's reasonable incidental expenses, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor and denomination. 12. No Rights as Stockholder. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holder of this Warrant, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth on the first page of this Warrant or to such other address as the Company may designate by notice to the Holder. 14. Successors. All the covenants, agreements, representations and warranties contained in this Warrant shall bind the parties hereto and their respective heirs, executors, administrators, distributees, successors and assigns. 15. Headings. The Article and Section headings in this Warrant are inserted for purposes of convenience only and shall have no substantive effect. 16. Governing Law. This Warrant shall be construed in accordance with the laws of the State of New York applicable to contracts made and performed within such State, without regard to principles of conflicts of law. 17. Modification of Agreement. This Warrant shall not otherwise be modified, supplemented or amended in any respect unless such modification, supplement or amendment is in writing and signed by the Company and the Holder of this Warrant and Holders of any portion of the Warrant subsequently assigned or transferred in accordance with the terms of this Warrant. 18. Consent to Jurisdiction. The Company and the Holder irrevocably consent to the jurisdiction of the courts of the State of New York and of any federal court located in such State in connection with any action or proceeding arising out of or relating to this Warrant, any document or instrument delivered pursuant to, in connection with or simultaneously with this Warrant, or a breach of this Warrant or any such document or instrument. IN WITNESS WHEREOF, the undersigned has executed this instrument as of the date set forth below. Dated: March 28, 1996 ORBIT INTERNATIONAL CORP. By: Name: ________________ Title: _______________ FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, _______________________ hereby sells, assigns, and transfers unto _________________, having an address at ______________________________ _______________________, the attached Warrant to the extent of the right to purchase ____________ shares of Common Stock of $0.10 par value per share, of Orbit International Corp. (the "Company"), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint _________________ as attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: _______________, 199_ _____________________________ Print name of holder of Warrant By: Name: Title: NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. To: The undersigned hereby exercises its rights to purchase _________ Warrant Shares covered by the within Warrant and tenders payment herewith in the amount of $_____________ in accordance with the terms thereof, and requests that certificates for such securities be issued in the name of, and delivered to: (Print Name, Address and Social Security or Tax Identification Number) and, if such number of Warrant Shares shall not be all the Warrant Shares covered by the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below. Dated:__________________ Name: (Print) (Signature) (Signature must conform to the name of the Warrant Holder specified on the face of the Warrant) Address: CONVERSION NOTICE (To be executed upon exercise of Warrant pursuant to Section 1) The undersigned hereby irrevocably elects to surrender its Warrant for such shares of Common Stock pursuant to the cashless exercise provisions of the within Warrant, as provided for in Section 1 of such Warrant. Please issue a certificate or certificates for such Stock in the name of, ____________________. Name___________________ (Please Print Name, Address and Social Security No.) Address________________ _______________________ Social_________________ Security No. Signature______________ NOTE: The above signature should correspond exactly with the name on the first page of this Warrant or with the name of the assignee appearing in the assignment form below If said number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder. EX-99 4 FACTORING SECURITY AND LOAN AGREEMENT TO: CANADA CLASSIQUE, INC. WINNIPEG LEATHER (1991), INC. SYMAX GARMENT CO. (1993) LTD. Dear Sirs: The following confirms the terms and conditions of and constitutes a Factoring, Security and Loan Agreement between us: 1.00 DEFINITIONS In this agreement: (a) "ACCOUNTS RECEIVABLE" means all of your accounts receivable, present and future, resulting from SALES; (b) "ADVANCES" means payments made by us to you in advance of the SETTLEMENT DATE for the purchase of ACCOUNTS RECEIVABLE as set forth in Section 4.01; (c) "CONTRACT DATA SHEET" means the schedule bearing that title, which refers to this agreement and contains special provisions relating hereto. The CONTRACT DATA SHEET forms an integral part hereof; (d) "CREDIT FACILITY LIMIT" means the credit facility limit set forth in the CONTRACT DATA SHEET; (e) "DISPUTE" means any cause asserted for non-payment of an ACCOUNT RECEIVABLE including, without limitation, any dispute, claim, complaint, off-set, defense, contra-account or counter-claim, (real or merely asserted), lawful or unlawful, whether arising from or relating to a SALE or any other transaction or occurrence; (f) "EFFECTIVE DATE" means the effective date set forth in the CONTRACT DATA SHEET; (g) "ELIGIBLE ACCOUNTS RECEIVABLE" means those of your ACCOUNTS RECEIVABLE which we, in our sole discretion, determine to be acceptable for purposes of advances and, without in any way limiting our discretion, excludes (i) any ACCOUNTS RECEIVABLE in respect of which the customer has not accepted delivery of the goods or performance of the services without DISPUTE or which arises from a SALE to a RELATED PERSON; (ii) any ACCOUNT RECEIVABLE which is more than 60 days past due; and (iii) all ACCOUNTS RECEIVABLE owing by a customer if at any time more than 25% of the gross amount of outstanding ACCOUNTS RECEIVABLE of such customer are more than 60 days past due; (h) "ELIGIBLE INVENTORY" means landed, duty paid, finished goods and raw material inventory located in Canada and in your possession, which is unencumbered (except for encumbrances in our favour), is in good condition and readily saleable at prices not less than cost and which we, in our sole discretion, determine to be acceptable for purposes of advances; (i) "ELIGIBLE LETTER OF CREDIT INVENTORY" means finished goods which are to be imported under outstanding LETTERS OF CREDIT and which are unencumbered (except for encumbrances in our favour), in good condition and readily saleable at prices not less than cost and which we, in our sole discretion, determine to be acceptable for purposes of advances; (j) An "EVENT OF DEFAULT" occurs by the mere lapse of time for performance if: (i) You fail to make payment of any of the OBLIGATIONS or any part thereof when due; (ii) You fail to observe any covenant or otherwise default under the terms of this agreement; (iii) Anyone gives notice to your customers generally to make payment to anyone other than us; (iv) A default occurs under any other contract or agreement between us or under any instrument creating security in our favour or for our benefit; (v) Any representation or warranty made by you in connection with this agreement is materially false or misleading; (vi) You sell, transfer or dispose of or purport to sell, transfer or dispose of all or a significant portion of your assets; (vii) You make an assignment for the benefit of your creditors, become insolvent, commit an act of bankruptcy, cease or threaten to cease to do business as a going concern or seek any arrangement or composition with your creditors or invoke, threaten to invoke or indicate your intention to invoke the benefit of any legislation governing insolvent debtors; (viii) If any proceeding in bankruptcy, receivership, liquidation or insolvency is commenced in respect of you or in respect of any of your property or if any receiver or receiver manager takes possession of your undertaking or any substantial portion of your property or if any creditor enforces or gives notice of its intention to enforce or gives prior notice with respect to the exercise of any of its rights under any security granted to it by you; (ix) Any guarantee for any of the OBLIGATIONS terminates or any guarantor withdraws or purports to withdraw, without our consent, any guarantee or any security given in connection therewith or should a guarantor default under the terms of any such security or guarantee; (x) You make a payment to any creditor in respect of any indebtedness which has been subordinated to payment of the OBLIGATIONS or any of them; or (xi) After the EFFECTIVE DATE, ownership or control of twenty percent (20%) or more of your aggregate outstanding shares, share equivalents or any other equity changes or there occurs any other significant change in the identity of those in control of you (whether or not qualifying under the preceding "20%" provision) or any significant change occurs in your management; (k) "INVENTORY LOAN LIMIT" means the inventory loan limit set forth in the CONTRACT DATA SHEET; (l) "LETTERS OF CREDIT" means any and all letters of credit and/or letters of guarantee or portions thereof which we either issue at your request or guarantee for you at your request; (m) "LETTER OF CREDIT LIMIT" means the letter of credit limit set forth in the CONTRACT DATA SHEET; (n) "NET FACE AMOUNT" means the gross amount of any ACCOUNT RECEIVABLE less all discounts (which shall be determined by us where optional terms are given), returns, allowances, credits and/or reductions at any time applicable, taken or allowed and shall in no circumstances exceed the amount actually owing by the customer thereunder; (o) "OBLIGATIONS" means all your indebtedness and obligations to us or any parent, subsidiary or affiliate of ours of any nature whatsoever, present or future, direct or indirect, absolute or contingent, matured or not, including, without limiting the generality of the foregoing, all ADVANCES and loans made by us pursuant to this agreement, all interest and charges pursuant to this agreement and all indebtedness arising from agreements or dealings with any third party by which we may be or become in any manner whatsoever a creditor of yours and all ACCOUNTS RECEIVABLE charged or chargeable to your account hereunder; (p) "OTHER INDEBTEDNESS" means any indebtedness or liabilities of yours to third parties where such third parties are financed or factored by us or where we have assumed the risk of credit loss in favour of such third parties or where we are or may become otherwise liable, including contingently, to such third parties for your indebtedness; (q) "PERMITTED ENCUMBRANCES" means the following: Security granted by Canada Classique, Inc. in favour of National Equipment Leasing Ltd., registered in Manitoba on March 22, 1995 under number 950322-104535 limited to one (1) modular co-line card, one (1) modular station module EX16, 6M7208 sets, six (6) sets-run, installation; General Security by Canada Classique, Inc. in favour of Orbit International Corp., registered in Manitoba on April 27, 1995 under the number 950427-109575; General Security by Winnipeg Leather (1991), Inc. in favour of Canada Classique, Inc., registered in Manitoba on June 9, 1995 under the number 950609-101103; General security by Symax Garment Co. (1993) Ltd. in favour of orbit International Corp., registered in British Columbia on May 3, 1995 under the number 5762300; General security by Winnipeg Leather (1991), Inc. in favour of Orbit International Corp., registered in Manitoba on April 27 1995 under the number 950427-109567; (r) "PRIME RATE" means the interest rate per annum from time to time publicized by The Toronto-Dominion Bank as its prime rate; (s) "RELATED PERSON" means any person who is a "related person" to you, your shareholders, officers and/or directors as set forth and defined in Section 4 of the Bankruptcy and Insolvency Act (R.S.C., Chapter B-3) (or any successor legislation) and, without limiting the generality of the foregoing, any entity in which you or any of your shareholders, directors and/or officers have any direct or indirect equity interest [other than by way of a passive investment in shares traded on a recognized stock exchange representing less than a ONE PERCENT (1%) equity interest] shall also be a RELATED PERSON; (t) "RESERVES" means, at any time, the aggregate amount of OBLIGATIONS which are then chargeable to your account and any OBLIGATIONS which, in our sole judgment, may become chargeable to your account thereafter; (u) "SALES" means your sales of merchandise and/or services to customers; (v) "SECURITY" means all deeds, documents, instruments and agreements (and all amendments, modifications, replacements and substitutions) entered in our favour by you or any guarantor of the OBLIGATIONS including, without limiting the generality of the foregoing, the SECURITY referred to in Section 8.00; (w) "SETTLEMENT DATE" means the number of business days indicated in the CONTRACT DATA SHEET after the day on which an ACCOUNT RECEIVABLE is actually collected by us. 2.00 PURCHASE OF ACCOUNTS RECEIVABLE 2.01 You hereby sell and assign to us, as absolute owner, and we hereby purchase from you, all ACCOUNTS RECEIVABLE created on or after the EFFECTIVE DATE. 2.02 The purchase price of each ACCOUNT RECEIVABLE shall be the NET FACE AMOUNT thereof less our commission described in Section 5.00. The purchase price will be credited to your account and remitted to you on the SETTLEMENT DATE, subject to our right to deduct RESERVES from the amount payable to you on any SETTLEMENT DATE. 2.03 We shall not assume the credit risk on any of the ACCOUNTS RECEIVABLE and, accordingly, all ACCOUNTS RECEIVABLE shall be purchased by us with full recourse to you in the event of non- payment thereof for any reason whatsoever. 2.04 The originals and all copies of invoices will, in form acceptable to us, state plainly that the ACCOUNTS RECEIVABLE represented thereby are owned by us and are payable to us only. Concurrently with the delivery of merchandise or performance of services, you will deliver to us: (a) A duplicate original of the invoice relating to the SALE, accompanied by a confirmatory assignment of the ACCOUNT RECEIVABLE. Your failure to furnish such a specific assignment shall not diminish our rights with respect to the ACCOUNT RECEIVABLE; (b) Evidence satisfactory to us of each shipment and delivery of merchandise or performance of services. 2.05 We shall have the right, irrevocable during the currency of this agreement, and thereafter for so long as any of the OBLIGATIONS remain outstanding, to communicate with and instruct the account debtors of the ACCOUNTS RECEIVABLE to make payments in respect thereof directly to us and to endorse your name on payment instruments and to institute proceedings in your name or ours as we may deem necessary to enforce payment from customers. 2.06 If you receive any cash payments, cheques or other instruments of payment for or on account of any ACCOUNTS RECEIVABLE, you will forthwith remit them to us on the same day as received and in identical form as received. 2.07 You shall promptly provide us with a duplicate original of any credit issued by you in respect of any ACCOUNT RECEIVABLE. We may, at any time, in our discretion, withdraw your authority to issue credits without our prior written consent. 2.08 We shall not be liable for any selling expenses, orders, purchases, contracts or taxes of any kind resulting from your SALES and you will indemnify us and hold us harmless with respect thereto, which indemnity shall survive termination of this agreement. 3.00 DISPUTES, RETURNS, CHARGEBACKS 3.01 You will notify us immediately if a customer rejects, returns or desires to return merchandise or alleges a DISPUTE. You will, with all due diligence, attempt to resolve every DISPUTE and will, subject to our consent, issue any appropriate credit note. 3.02 We may accept payments on account from customers, deposit remittances as received (irrespective of any deductions or notations shown) and we may settle or litigate, at your expense, any DISPUTE directly with the customer or other complainant as we deem advisable. 3.03 Any returned or recovered merchandise in your possession or under your control will be held in trust for our account and will be subject to the SECURITY and will be dealt with in accordance with our instructions. 3.04 We may charge to your account at any time the gross face amount of any ACCOUNT RECEIVABLE purchased hereunder which is not paid on its due date, together with interest thereon from the due date to the date of chargeback. Any chargeback of an ACCOUNT RECEIVABLE shall not be deemed a reassignment thereof and will not impair our rights thereto or our security thereon, which will continue to be effective until the OBLIGATIONS have been fully satisfied. 4.00 CREDIT FACILITY 4.01 Subject to the terms and conditions of this agreement, we may, at our sole discretion, make payments to you of the purchase price of the ACCOUNTS RECEIVABLE in advance of the SETTLEMENT DATE ("ADVANCES"), subject to our right to withhold RESERVES, and make additional loans to you and, issue or arrange for the issuance of LETTERS OF CREDIT in amounts which will not in the aggregate at any time exceed the lesser of: (a) The CREDIT FACILITY LIMIT; or (b) The aggregate of: (i) Up to the percentage referred to on the CONTRACT DATA SHEET of your ELIGIBLE ACCOUNTS RECEIVABLE; and (ii) Up to the lesser of (a) the percentage referred to on the CONTRACT DATA SHEET of the cost of your ELIGIBLE INVENTORY; or (b) the INVENTORY LOAN LIMIT; or (c) the projected inventory loan set forth in the business plan submitted to us and not disapproved by us; and (iii) Up to the percentage referred to on the CONTRACT DATA SHEET of the first cost of your ELIGIBLE LETTER OF CREDIT INVENTORY; minus the aggregate of: (iv) The face amount of LETTERS OF CREDIT outstanding (which shall not at any time exceed the LETTER OF CREDIT LIMIT); and (v) Such reserves as we may, in our discretion, deem proper or necessary from time to time including, without limiting the generality of the foregoing and without limiting our discretion, all ineligible ACCOUNTS RECEIVABLE, disputed items, deductions, allowances, credits, "bill and hold" and consignment sales, steamship guarantees, airway releases and any other offsets or compensations asserted or granted. Any amounts advanced to you in excess of the purchase price of the ACCOUNTS RECEIVABLE will constitute loans to you. 4.02 Without limiting our discretion referred to above, your right to utilize the credit facilities herein provided for is subject to and conditional upon the satisfaction of each of the following terms and conditions on the date of such utilization: (a) The representations and warranties set forth in this agreement and in any SECURITY will be complete and accurate; (b) You will be in compliance with all of the terms and conditions of this agreement, the SECURITY and all agreements and documents contemplated hereby and there will not have occurred an EVENT OF DEFAULT or any event which, with the giving of notice, lapse of time and/or other condition might constitute an EVENT OF DEFAULT; (c) The SECURITY will have been duly executed, delivered and registered in all places where, in the opinion of our counsel, such registration is required and we will have received such legal opinions as we may require with respect to the execution, validity and enforceability of the present agreement, the SECURITY and any document executed in connection herewith or therewith; (d) You will be in compliance with any condition precedent to closing set forth in the CONTRACT DATA SHEET; (e) We will have received such other documents and information relating to you, your assets, your business and financial affairs or relating to any guarantor of the OBLIGATIONS as we may reasonably require. 4.03 In addition, we may, at our sole discretion: (a) Make loans to you in excess of the amount to which you are entitled under Section 4.01; (b) Pay the whole or any portion of the OTHER INDEBTEDNESS; and (c) Make and charge to your account any disbursement for any other purpose which we, in our discretion, deem advisable to protect our rights hereunder or under any SECURITY. 4.04 All ADVANCES and loans and other amounts which we remit, lend or advance or which we undertake to remit, lend or advance to you or for your account or benefit, all sums paid or disbursed or which we undertake to pay or disburse to third parties in connection with any LETTERS OF CREDIT or otherwise and all other amounts properly chargeable by us to you, whether or not hereunder, will form part of the OBLIGATIONS and may be charged to your account. 5.00 CHARGES 5.01 You will pay us, without the necessity of demand, and we may charge to your account, the following: (a) INTEREST: On the last day of each month, interest payable in arrears, on the average daily balance of all loans and ADVANCES owing by you to us and all other amounts charged to your account, at the rates set forth on the CONTRACT DATA SHEET, with interest on overdue interest at the same rate provided, however, that if an EVENT OF DEFAULT occurs such rates shall be automatically increased by two percentage points (2%) effective as of the occurrence of the EVENT OF DEFAULT and continuing as long as the EVENT OF DEFAULT is outstanding. Interest will be calculated at such rates based upon the weighted average of the PRIME RATE for the month in question and shall be payable at the same rate(s) and on the same basis both before and after our demand for payment from you of the OBLIGATIONS. The interest rate referred to herein, which is computed on the basis of a year of three hundred and sixty (360) days, constitutes a rate of interest on a yearly basis equivalent to a said rate divided by three hundred and sixty (360) and multiplied by the number of days in any given year (.01389 times greater than the said rate in any ordinary year and .01667 times greater than the said rate in any leap year). (b) COMMISSION: on a monthly basis, a commission on the gross amount of your SALES (including taxes and other charges invoiced), as soon as they are made, at the rate set forth on the CONTRACT DATA SHEET, subject to the minimum hereinafter referred to. The aggregate amount of SALES with respect to which you are obligated to pay the commission ("VOLUME") shall not be less than the minimum sales set forth in the CONTRACT DATA SHEET ("MINIMUM") in each calendar year (the twelve month period starting January 1st of each year) during which this agreement is in effect, or the part of the last calendar year during which this agreement is in effect if it is terminated before the end of a calendar year ("PARTIAL LAST YEAR"); provided, however, that the VOLUME for the part of the first calendar year during which this agreement is in effect if the EFFECTIVE DATE is after January 1 of such calendar year ("PARTIAL FIRST YEAR"), shall not be less than the amount equal to the MINIMUM multiplied by a fraction, the numerator of which is the number of months (a month shall mean any calendar month or portion thereof) between the EFFECTIVE DATE and December 31 of such calendar year and the denominator of which is 12 ("REDUCED MINIMUM"). If the VOLUME in any calendar year or PARTIAL LAST YEAR (if any) is less than the MINIMUM, or in the PARTIAL FIRST YEAR (if any) is less than the REDUCED MINIMUM, we shall charge to your account the difference ("MINIMUM VOLUME CHARGE") between the commission on the MINIMUM or REDUCED MINIMUM, as the case may be, and the commission on the VOLUME for the calendar year or PARTIAL LAST YEAR, or the PARTIAL FIRST YEAR, respectively. We shall compute the MINIMUM VOLUME CHARGE, if any, on a calendar quarterly basis and charge your account therefor for each calendar quarter in the month following the end of such calendar quarter, or in the month following the effective date of termination of this agreement in the case of a PARTIAL LAST YEAR. However, if an EVENT OF DEFAULT occurs, and if we so elect, and whether or not we then or thereafter exercise any of our rights of termination hereunder, we may on or at any time after the occurrence of such EVENT OF DEFAULT compute and charge your account f or the MINIMUM VOLUME CHARGE for the period starting on such occurrence and ending on December 31 of the calendar year in which this agreement may be terminated by you pursuant to the Section titled "Duration of Agreement", and for the purpose only of computing such MINIMUM VOLUME CHARGE, we may assume that your VOLUME for the period will be zero, subject to subsequent adjustment if such VOLUME in fact is more than zero; (c) LETTER OF CREDIT CHARGES: A fee at the rates set forth on the CONTRACT DATA SHEET based on the face amount of outstanding LETTERS OF CREDIT, calculated from issuance until cancellation, expiry or payment, plus any bank charges incurred in respect thereof; and (d) OTHER CHARGES: All bank, exchange, wire and cable charges and any other charges set forth on the CONTRACT DATA SHEET. 5.02 In the event that, at any time, the aggregate of the charges referred to above exceed the maximum amount permitted by applicable law, you will only be required to pay the maximum amount permitted by applicable law. 6.00 STATEMENTS OF ACCOUNT 6.01 We will provide you with periodic reports summarizing the collection of ACCOUNTS RECEIVABLE. We shall not be liable to you by reason of any delays in providing reports or inadvertent errors or omissions. You acknowledge that we may use the services of any other organizations in connection with the processing of your data, and in such case we shall not be liable to you by reason of acts or omissions of such organizations. 6.02 Each month, we shall send or deliver to you statements of your accounts with us and you agree to verify the correctness of our statements and to notify us in writing of any errors, irregularities or omissions within thirty (30) days of the statement date. Such statements will be finally and conclusively binding upon you and will constitute proof of the status of the accounts reflected therein. 7.00 OBLIGATIONS 7.01 The OBLIGATIONS and all components thereof from time to time shall be deemed to constitute a single indebtedness, payable upon demand by set-off (compensation) in our favour thereagainst without necessity of demand and notwithstanding lack of demand. We may charge to your account all OBLIGATIONS. We shall have the right to impute or appropriate any and all amounts received by us from any source in any manner and against any portion of your OBLIGATIONS as we, in our discretion, may determine and we may, from time to time, vary such imputation or appropriation. 7.02 All of your OBLIGATIONS shall be and become fully due, exigible and payable by you to us without the necessity of termination of this agreement by us and without any set-off or compensation in your favour either: (a) Upon our simple demand to you therefor; or (b) Immediately, without necessity of demand therefor or notice, upon the occurrence of an EVENT OF DEFAULT, whereupon we shall be entitled to, immediately and without any further notice or formality whatsoever (except as required by law), enforce and realize upon the SECURITY. 8.00 SECURITY 8.01 As general and continuing security for the fulfilment and payment of the OBLIGATIONS, you shall provide or cause to be provided to us the SECURITY specified in the CONTRACT DATA SHEET in form and substance satisfactory to us. 8.02 You authorize us, as your mandatory and attorney, to execute in your name, to register and to file any documents necessary or desirable in order to protect the SECURITY and our rights and recourses thereunder. At our discretion, we shall have the right to receive and open all mail addressed to you and to notify any post office authorities to change the address for delivery of mail addressed to you to any address designated by us. 9.00 REPRESENTATIONS, WARRANTIES AND COVENANTS 9.01 You represent, warrant and covenant to us that at the present time and throughout the period during which the present agreement is in effect, and so long thereafter as there exist any OBLIGATIONS: (a) You are not and will not be insolvent within the meaning of the Bankruptcy and Insolvency Act (Canada), or any successor legislation or any other legislation relating to bankruptcy or insolvency to which you are subject; (b) You will not, without our prior written consent, hypothecate, assign or pledge any of your interest or rights hereunder, nor any credits or sums of money which from time to time may be due to you; (c) Except for the PERMITTED ENCUMBRANCES, none of your ACCOUNTS RECEIVABLE has been or will be sold, hypothecated or assigned, except to us and we shall have absolute and unencumbered title to your ACCOUNTS RECEIVABLE; and no other party has or will have any claims thereto as proceeds of goods or otherwise; (d) Except for the PERMITTED ENCUMBRANCES and security in our favour, you shall have absolute and unencumbered title to all inventory located in your premises or imported by you; and no other party has or will have any claims thereto; (e) Except for the PERMITTED ENCUMBRANCES, none of your assets are or will be hypothecated, pledged or given as security to any third party, other than a third party holding them for our benefit; (f) Each ACCOUNT RECEIVABLE will arise from a bona fide, final and absolute sale and delivery of merchandise or services, unencumbered title to which (in the case of merchandise) was yours at the time of the SALE (except as regards security existing in our favour or for our benefit), made in the ordinary course of business; all SALES will be SALES with respect to which you reasonably believe that the customer will receive and accept the merchandise and/or services as invoiced without DISPUTE; and none of the SALES will be made subject to any special arrangements such as consignment, "bill and hold" or guaranteed resale arrangements; (g) All excise, sales and other taxes, all deductions at source and all other obligations which rank in priority to our rights under the SECURITY will be fully paid or remitted by you when due; (h) There are no legal actions, proceedings or unexecuted judgments presently pending against you or any guarantor of the OBLIGATIONS of which you have not advised us in writing and you will advise us of the institution of any legal actions, proceedings or judgments against you or any guarantor within ten (10) days thereof, and will satisfy and will cause any guarantor to satisfy any judgments which may be rendered before they become executory; (i) All statements and documents delivered to us relating to your SALES, ACCOUNTS RECEIVABLE, inventory and financial affairs or relating to any guarantor of the OBLIGATIONS are and will be complete and accurate; (j) You will deliver or cause to be delivered to us the financial and other reports specified in the CONTRACT DATA SHEET at the intervals specified therein, all of which will be in form and substance satisfactory to us. Any such report which is to be audited will be accompanied by the unqualified opinion of your auditors who shall be chartered accountants acceptable to us. We may have access to and inspect, audit and make extracts from your records, files and books of account during normal business hours and we may charge your account with the costs, fees and expenses incurred in connection therewith; (k) All foreign exchange transactions required by you in connection with your business will be arranged through us at rates competitive to those offered by similar institutions for similar transactions; (l) You will observe the FINANCIAL COVENANTS referred to on the CONTRACT DATA SHEET. 10.00 EXPENSES 10.01 You will pay or reimburse us and we may charge to your account, the amount of legal fees (including fees, expenses and costs payable to attorneys retained or employed by us) and other costs, fees and expenses relating to any due diligence examinations or audits by us (including, but not limited to, a per them charge for our internal audit staff at our then standard rate and amounts charged to us by other parties retained by us) and in connection with negotiating or preparing this agreement and any legal documentation required by us or requested by you in connection with this agreement, as well as all amendments and supplements thereof, or in enforcing our rights hereunder or in evaluating, monitoring, preserving, insuring, safeguarding or realizing upon the SECURITY or in connection with the litigation of any controversy arising out of this agreement, or in protecting, preserving or perfecting our interest under the SECURITY, including without limitation all taxes assessed or payable with respect to any property subject to the SECURITY and the costs of all public record filings, appraisals and searches relating to any SECURITY. You will also pay us and we may charge to your account our then standard price for furnishing to you or your designees copies of any statements, records, files or other data requested by you or them other than those of the kind furnished to you and our other clients on a regular, periodic basis in the ordinary course of our business. All amounts referred to herein will form part of the OBLIGATIONS. 11.00 DURATION OF AGREEMENT 11.01 This agreement shall remain in full force and effect until terminated as follows: (a) Either of us may terminate this agreement by written notice of termination (by certified mail, return receipt requested) no less than sixty (60) days prior to and effective as of the anniversary of the EFFECTIVE DATE in any year, provided however, that no notice of termination given by either party pursuant to this paragraph will be effective until expiry of the period indicated as the minimum duration of this agreement in the CONTRACT DATA SHEET; or (b) We may terminate this agreement at any time upon six (6) months prior written notice to you; or (c) We may terminate this agreement at any time without notice upon the occurrence of an EVENT OF DEFAULT. 12.00 TERMINATION 12.01 Except as herein otherwise provided, rights and obligations arising out of transactions having their inception prior to the termination will not be affected by termination. 12.02 Upon termination: (a) You will fulfil and pay all your OBLIGATIONS without the necessity of demand, and will obtain and furnish us with a written release and discharge from any and all guarantees, undertakings and obligations of ours to third parties contracted, undertaken or existing in favour of third parties in respect of transactions between you and such third parties, or otherwise relating to you, failing which, we shall be entitled, without any notice or formality whatsoever, to immediately enforce and realize upon the SECURITY. (b) Without prejudice to all our rights in respect of the OBLIGATIONS and under the SECURITY, we shall have the right at any time to cease to ledger and collect your ACCOUNTS RECEIVABLE. 13.00 MULTIPLE PARTIES 13.01 In the event that this agreement is addressed to and accepted by more than one (1) person, then, for all purposes hereof: (a) Such persons shall be considered as one (1) single person for the purposes of calculating SALES, ACCOUNTS RECEIVABLE, ELIGIBLE ACCOUNTS RECEIVABLE, ELIGIBLE INVENTORY and loans or ADVANCES (and limits thereon) made or to be made pursuant hereto; (b) Such persons shall be and remain solidarily bound, obliged and liable to us for the performance, fulfilment and payment of all debts, obligations, representations, warranties and duties (including, without limitation, the OBLIGATIONS) hereunder and any and all references herein to the words "you" or "yours" or similar references shall be deemed to be references to such persons solidarily; (c) All loans and LETTERS OF CREDIT will be deemed to be loans to or LETTERS OF CREDIT for all such persons. However, we may, in our discretion, from time to time, keep separate accounts for each person and any loans made or to be made, may be made by us, at our discretion, to any one or more of such persons or to all such persons and any LETTERS OF CREDIT issued or guaranteed by us may be for any one or more or all such persons. Notwithstanding any keeping of separate accounts or making or issuing of separate loans or LETTERS OF CREDIT, we may deal with such persons and with their accounts as if such persons and the accounts were one, and without limiting the generality of the foregoing, we are authorized to apply debits and/or credits to the accounts kept in the name of any one or more of such persons or all of such persons collectively and to transfer debits and/or credits as between such persons, the whole as we, in our sole discretion, from time to time, see fit. 14.00 GENERAL 14.01 Currency and Payments Any reference herein to monies hereunder or in any document related hereto or dealings between you and us shall, unless expressly stated otherwise, constitute Canadian Dollars and, if in a currency other than Canadian dollars, shall be converted from such foreign currency to Canadian dollars at the prevailing selling rate at the time of such conversion. All OBLIGATIONS shall be paid at our office in the City of Montreal, Province of Quebec. 14.02 Waivers, Remedies, Amendments Our failure to insist upon strict performance of any provision hereof or any obligation of yours will not be deemed to be a waiver of our right to strict performance and any waiver by us must be in writing and will then be for the particular instance only. All rights conferred upon us hereunder or by law will be cumulative and not alternative. This agreement may not be modified, altered or amended except by an agreement in writing signed by the parties hereto. 14.03 Successors and Assigns You will not be permitted to assign any of your rights under this agreement. Without prejudice to the foregoing, this agreement will enure to and be binding upon the parties hereto, their successors, assigns, trustees and legal representatives. 14.04 Previous Commitments The present agreement supersedes and replaces any previous commitments given or financing proposals made by us to you and all inconsistent agreements and communications, written or verbal, between your and our officers, employees, agents and other representatives. 14.05 Headings The headings herein contained are for the purpose of convenience only, and will not be deemed to form part of this agreement nor to affect the interpretation or construction hereof. 14.06 Notices Any notice to be given pursuant hereto will be in writing and may be delivered or sent by prepaid registered or certified mail or hand delivered to either party at the address where mailings are customarily addressed to that party by the other. 14.07 Governing Law & Jurisdiction The interpretation, validity and enforcement of the present agreement shall be subject to and governed by the laws of the Province of Manitoba. You expressly submit and consent to the exclusive jurisdiction of the courts of Manitoba with respect to any controversy arising out of or relating to this agreement or any supplement hereto or to any transaction in connection therewith. 14.08 Severability This agreement shall not be considered as an indivisible whole and every provision of this agreement is and shall be independent of the other. In the event that any part of this agreement is declared invalid, illegal or unenforceable, then the remaining terms, clauses and provisions of this agreement shall not be affected by such declaration and all of the remaining clauses of this agreement shall remain valid, binding and enforceable. 14.09 Counterparts This agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same agreement. 14.10 Further Assurances You shall enter into all documents and perform all acts requested by us in order to give full force and effect to the terms and provisions of this agreement and the SECURITY and to facilitate the collection of the ACCOUNTS RECEIVABLE. 14.11 Limitation of Liability Our liability for any alleged failure on our part to provide adequate record keeping or other services hereunder shall be expressly limited to a refund to you of any commission paid by you during the period of such alleged failure and we shall have no liability for any consequential or other damages or penalties. 14.12 Binding Effect This agreement shall not be effective unless and until signed by you and by us as indicated below. 14.13 Formal Date This agreement may be referred to as bearing formal date of July 15, 1995, notwithstanding the date of actual signature hereof or the EFFECTIVE DATE hereof. 14.14 Language The parties acknowledge that they have required that this agreement and all related documents be drawn up in English. Les parties reconnaissent avoir exige que la presente convention et tous les documents connexes soient rediges en anglais. DATED THE ____ DAY OF AUGUST 1995. BNY FINANCIAL CORPORATION - CANADA PER: . . . . . . . . . . . . . . . . PER: . . . . . . . . . . . . . . . . We hereby agree to and accept the foregoing agreement and all of the foregoing provisions, terms and conditions thereof. DATED THE ____ DAY OF AUGUST 1995. CANADA CLASSIQUE, INC. WINNIPEG LEATHER (1991), INC. PER:___________________________ PER:. . . . . . . . . . . . . SYMAX GARMENT CO. (1993) LTD. PER:___________________________ GUARANTOR: ORBIT INTERNATIONAL CORP. PER:___________________________ CONTRACT DATA SHEET TO FACTORING, SECURITY AND LOAN AGREEMENT NAME OF CLIENT(S): canada classique, inc. winnipeg leather (1991), inc. symax garment co. (1993) ltd. SETTLEMENT DATE: 3 business days. CREDIT FACILITY: credit facility limit: $7,000,000.00 eligible accounts receivable 50% eligible inventory: 25% inventory loan limit: $1,500,000.00 eligible letter of credit inventory: 25% . . . letter of credit limit: $2,000,000.00 CHARGES: 1. INTEREST: PRIME RATE + 3/4% per annum 2. COMMISSION: 1% of SALES (Plus 1/4 of 1% for each additional 30 days (or portion thereof) of selling terms (including those resulting from dating of invoices in excess of 60 days. The minimum commission is $5.00 per invoice. Minimum sales: $12,000,000.00 per calendar year or portion thereof. 3. LETTER OF CREDIT CHARGES .25 % per month on the average daily balance of LETTERS OF CREDIT outstanding during such month. 4. OTHER CHARGES: The following charges (in addition to those provided in the other provisions of this CONTRACT DATA SHEET and the agreement): (a) A fee of $50,000.00 payable on closing of the financing; (b) A fee of $50,000.00 payable on the earlier of (i) the first anniversary of the EFFECTIVE DATE; or (ii) any sale of assets or shares, dissolution or liquidation of any of the Clients; or (iii) termination of the agreement. SECURITY: (a) A general security agreement creating a first charge on all assets of the Clients, now owned and hereafter acquired. (b) Unlimited guarantee and postponement of indebtedness from Orbit International Corp. (c) A pledge of cash collateral or a letter of credit satisfactory to BNY - CANADA in an amount of not less than $4,000,000.00. FINANCIAL REPORTS: The following financial reports will be delivered by each of the Clients and will be certified by the Chief Financial Officer of the Clients: (a) Monthly internally prepared financial statements, within 30 days following each month end; (b) Quarterly internally prepared financial statements within 30 days following the end of each quarter; (c) Semi-annual financial statements reviewed by auditors acceptable to BNY - CANADA within 60 days following the end of each half year; (d) Audited year end financial statement certified by auditors acceptable to BNY- CANADA, within 90 days following the end of each fiscal year; (e) A schedule of inventory within 10 days following each month end; (f) An aged listing of ACCOUNTS RECEIVABLE within 10 days following each month end; (g) A month by month projected operating budget and cash flow in form and substance and at intervals satisfactory to BNY - CANADA; (h) Financial statements of guarantors in form and substance and at intervals satisfactory to BNY - CANADA. FINANCIAL COVENANTS: N/A All accounting terms not specifically defined or described herein shall be construed in accordance with generally accepted accounting principles in Canada. CONDITIONS PRECEDENT TO CLOSING: (a) The indebtedness of the Clients to Orbit International Corp. which is subordinated to the indebtedness of the Clients to BNY - CANADA, on terms and conditions satisfactory to BNY - CANADA, will be in an amount of at least $9,000,000.00. (b) The PERMITTED ENCUMBRANCES in favour of Canada Classique, Inc. and Orbit International Corp. will have been subordinated to the security of BNY - CANADA, on terms and conditions satisfactory to BNY- CANADA. MINIMUM DURATION OF AGREEMENT: 2 years EFFECTIVE DATE: August 24, 1995 THIS IS THE CONTRACT DATA SHEET REFERRED TO IN THE FACTORING, SECURITY AND LOAN AGREEMENT ENTERED INTO BY THE UNDERSIGNED DATED THE ____ DAY OF AUGUST 1995 and forms part thereof. BNY FINANCIAL CORPORATION - CANADA PER: . . . . . . . . . . . . . . . . PER: . . . . . . . . . . . . . . . . CANADA CLASSIQUE, INC. WINNIPEG LEATHER (1991), INC. PER:___________________________ PER:. . . . . . . . . . . . . SYMAX GARMENT CO. (1993) LTD. PER:___________________________ GUARANTOR: ORBIT INTERNATIONAL CORP. PER:___________________________ EX-27 5
5 12-MOS DEC-31-1995 DEC-31-1995 2,274,000 7,495,000 2,342,000 1,488,000 13,124,000 1,669,000 5,642,000 2,573,000 38,028,000 25,731,000 3,174,000 0 0 877,000 8,246,000 38,028,000 58,234,000 58,234,000 53,055,000 53,055,000 25,857,000 0 3,008,000 (22,417,000) (164,000) (22,253,000) 0 0 0 (22,253,000) (3.78) (3.78)
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