UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended December 31, 1999
Commission File Number 1-11046
GLOBAL TECHNOVATIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-1027821
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (561) 775-5756
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Class Outstanding at February 15, 2000
Common stock: $.001 par value 29,799,281 shares
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Consolidated Balance Sheets as of December 31, 1999
(Unaudited) and September 30, 1999..................... 1
Consolidated Statements of Operations for the
Three Months Ended December 31, 1999 and 1998 (Unaudited) 2
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1999 and 1998 (Unaudited) 3
Notes to Unaudited Interim Consolidated
Financial Statements....................................4-7
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations.........8-12
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............13
ITEM 6. Exhibits and Reports on Form 8-K...............................13
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
<S> <C> <C>
(Unaudited)
December 31, September 30,
ASSETS 1999 1999
----------------- ----------------
Current Assets:
Cash and cash equivalents $ 4,888,440 $ 2,308,952
Restricted cash 502,654 -
Accounts receivable trade, net 145,791 209,554
Due from buyer of automotive subsidiary - 6,000,000
Inventories 1,618,292 1,935,832
Prepaid expenses 69,856 76,657
Other 125,802 103,994
----------------- ----------------
Total current assets 7,350,835 10,634,989
Property and equipment, net 1,852,899 1,533,117
Patents, net 137,655 143,881
Capitalized database, net 1,809,652 1,862,361
Preferred stock of buyer of automotive subsidiary 1,008,767 -
Due from buyer of automotive subsidiary - 1,500,000
----------------- ----------------
TOTAL ASSETS $ 12,159,808 $ 15,674,348
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ - $ 1,913,986
Senior subordinated convertible notes 707,000 707,000
Loan payable 519,315 506,712
Accounts payable 297,897 302,553
Deferred revenue 884,785 98,675
Accrued liabilities 1,317,068 2,508,733
Payable to former buyer of automotive subsidiary 1,022,337 1,030,835
----------------- ----------------
Total current liabilities 4,748,402 7,068,494
Other liabilities - 89,799
----------------- ----------------
Total liabilities 4,748,402 7,158,293
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,500 shares issued and outstanding at 3,500,000 3,444,644
December 31, 1999 and September 30, 1999
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,799,281 shares issued and outstanding at
December 31, 1999 and September 30, 1999 29,799 29,799
Additional paid-in capital 31,463,004 31,208,571
Accumulated deficit (26,232,043) (24,817,605)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
----------------- ----------------
Total stockholders' equity 7,411,406 8,516,055
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,159,808 $ 15,674,348
================= ================
See accompanying notes to unaudited interim consolidated financial statements.
1
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
<S> <C> <C>
1999 1998
----------------- ----------------
Revenue:
Service revenue $ 185,050 $ 74,577
----------------- ----------------
Total revenue 185,050 74,577
----------------- ----------------
Cost of service 272,492 130,875
----------------- ----------------
Gross profit (loss) (87,442) (56,298)
----------------- ----------------
Expenses:
General and administrative 760,945 827,328
Selling and marketing 157,885 147,432
Depreciation and amortization 96,367 92,990
Research and development 11,672 76,168
----------------- ----------------
Total expenses 1,026,869 1,143,918
----------------- ----------------
Loss from operations (1,114,311) (1,200,216)
Other income (expense):
Interest income 100,315 32,453
Interest expense (45,177) (166,497)
Other (expense) income, net 31,021 (57,045)
----------------- ----------------
Net other income (expense) 86,159 (191,089)
----------------- ----------------
Loss from continuing operations before
discontinued operations and extraordinary item: (1,028,152) (1,391,305)
----------------- ----------------
Discontinued operations:
Income from discontinued operations,
net of income taxes - 432,882
Gain on disposal of discontinued operations,
net of income taxes - 1,662,870
----------------- ----------------
Discontinued operations - 2,095,752
----------------- ----------------
Income (loss) before extraordinary item (1,028,152) 704,447
Gain on extinguishment of debt - 158,745
----------------- ----------------
Net income (loss) (1,028,152) 863,192
Embedded dividend on preferred stock (55,356) (152,454)
Preferred dividends (78,750) (37,971)
Value of warrants issued with preferred stock (252,180) (187,549)
----------------- ----------------
Net income (loss) available to common stockholders ($1,414,438) $485,218
================= ================
Basic and Diluted Earnings (Loss) Per Share
Continuing Operations (0.05) (0.06)
Discontinued Operations - 0.07
Extraordinary item - 0.01
----------------- ----------------
Net Income (Loss) (0.05) 0.02
================= ================
Basic and diluted weighted average common shares outstanding 29,333,047 28,791,722
================= ================
See accompanying notes to unaudited interim consolidated financial statements.
2
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
<S> <C> <C>
1999 1998
---------------- ----------------
OPERATING ACTIVITIES:
Net income (loss) $ (1,028,152) $ 863,192
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Income from discontinued operations - (432,882)
Gain on disposal of discontinued operations - (1,662,870)
Depreciation 121,871 56,589
Amortization 58,930 80,534
Gain on extinguishment of debt - (158,745)
Non cash value of services 18,000 -
Repayments from officers - 415
Decrease in accounts receivable, net 63,763 3,290
Decrease (increase) in inventories 317,540 (719,433)
Decrease in prepaid expenses 6,801 54,946
(Increase) decrease in other assets (22,183) 75,460
Increase in preferred stock of buyer of automotive subsidiary (8,767) -
Decrease in accounts payable (4,656) (245,995)
Increase in deferred revenue 786,110 136,967
Decrease in accrued liabilities (371,443) (174,582)
Decrease in payable to former buyer of automotive subsidiary (8,498) -
Decrease in other liabilities (89,799) (82,097)
---------------- ----------------
Net cash used in operating activities (160,483) (2,205,211)
---------------- ----------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (441,273) (301,726)
Additions to patent costs, net - (41,429)
---------------- ----------------
Net cash used in investing activities (441,273) (343,155)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants - 26,659
Preferred stock issuance, net (15,747) 3,411,461
Purchase of certificate of deposit - (250,000)
Redemption of preferred stock Series A - (500,000)
Repayments of Senior Convertible Notes - (2,064,617)
Payment of extinguishment of debt costs - (10,403)
Payment of preferred stock dividends (157,500) -
Repayment of borrowings (1,913,986) (174,605)
---------------- ----------------
Net cash (used in) provided by financing activities (2,087,233) 438,495
---------------- ----------------
NET CASH USED IN CONTINUING OPERATIONS: (2,688,989) (2,109,871)
---------------- ----------------
CASH PROVIDED BY DISCONTINUED OPERATIONS:
Operating Activities - 840,701
Investing Activities 5,268,477 2,027,022
---------------- ----------------
Net cash provided by discontinued operations 5,268,477 2,867,723
---------------- ----------------
Net increase in cash and cash equivalents 2,579,488 757,852
Cash and cash equivalents at beginning of period 2,308,952 488,899
---------------- ----------------
Cash and cash equivalents at end of period $4,888,440 $1,246,751
================ ================
See accompanying notes to unaudited interim consolidated financial statements.
3
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Global Technovations, Inc. (the
"Company" or "GTI") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
financial statements. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The results of operations of any interim
period are not necessarily indicative of the results of operations for the
fiscal year. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K, for the
year ended September 30, 1999. Certain fiscal year 1998 amounts have been
reclassified to conform to current year presentation.
Comprehensive Income
For the three months ended December 31, 1999 and 1998, there were no differences
between net income and comprehensive income.
2. INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" during the fiscal year
1998. SFAS No. 128 establishes standards for computing and presenting basic and
diluted earnings per share. Basic earnings per share is calculated by dividing
income (loss) available to common stockholders by the weighted average number of
shares of common stock outstanding during each period. Diluted earnings per
share is calculated by dividing income available to common stockholders by the
weighted average number of shares of common stock and dilutive common stock
equivalents outstanding. Convertible securities and common share equivalents
have not been included in the computation of diluted income (loss) per share in
the accompanying statements of operations for the three months ended December
31, 1999 and 1998, as their impact would have been anti-dilutive.
For the three months ended December 31, 1999 and 1998, the effect of equivalent
shares related to stock options, warrants and preferred stock were 3,843,030 and
5,269,829, respectively, and were not included in the dilutive average common
shares outstanding, as the effect would have been anti-dilutive.
4
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consisted of the following:
December 31, September 30,
1999 1999
---- ----
Raw materials $832,292 $ 984,082
Finished goods 786,000 951,750
------- -------
$1,618,292 $1,935,832
========== ==========
4. CONVERTIBLE PREFERRED STOCK
On November 17, 1998, the Company sold $3,500,000 of its Series B Convertible
Preferred Stock ("Series B Preferred") to two trusts in which Mr. G. Jeff
Mennen, a director of the Company, is one of the co-trustees and sole trustee,
respectively, and the beneficiaries are members of Mr. Mennen's immediate family
(the "Mennen Trusts"). Under the original terms of the Series B Preferred, the
Company was allowed to redeem the Series B Preferred Stock at a 15% premium over
face value until October 27, 1999. If redemption did not occur by that date, the
Company would have been required to file a registration statement no later than
November 30, 1999. On October 21, 1999, the Mennen Trusts agreed to allow the
Company to delay filing a registration statement until January 1, 2001 to cover
the potential public sale of the shares of the Company's Common Stock issuable
upon conversion of the Preferred Stock and warrants. Additionally, the Company
maintained its 15% redemption rights until January 1, 2001. Under the terms of
the agreement, the Mennen Trusts received 250,000 warrants at a strike price of
$2.38. These warrants were valued at $252,180 utilizing the Black Scholes Option
Pricing Model in accordance with SFAS No. 123 and was deducted from amounts
available to common stockholders for the purpose of calculating income per share
for the first quarter of fiscal year 2000.
5. SALE OF TOP SOURCE AUTOMOTIVE, INC. ("TSA")
On September 30, 1999, the Company sold substantially all of the assets of its
85% owned subsidiary, TSA, and certain intellectual property assets of the
Company relating to TSA's OHSS business to Onkyo America, Inc. ("Onkyo") for
total consideration of $10,000,000 consisting of $2,500,000 cash, a $6,500,000
30-day note payable to TSA and a $1,000,000 30-day note payable to the Company
in either cash or convertible preferred stock of Onkyo. The $6,500,000 note and
accrued interest of $46,479 was paid on October 29, 1999, and the $1,000,000
note was paid through issuance of $1,000,000 of Onkyo 5% Series A Convertible
Preferred Stock ("Onkyo Preferred"). Of the $9,000,000 in cash received by the
Company, $500,000 is being held in escrow for a 12-month period until October
2000 in the event that undisclosed TSA liabilities in excess of $50,000 arise.
Upon conclusion of the one-year period, the funds plus interest will be paid to
TSA less any excess undisclosed liabilities, if any, in excess of $50,000. No
accrual has been recorded for claims against the escrowed funds because no
undisclosed liabilities have been communicated to the Company by Onkyo through
the period ended February 15, 2000, nor are any anticipated by the Company.
5
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. SALE OF TOP SOURCE AUTOMOTIVE, INC. ("TSA")(Continued)
The $1,000,000 Onkyo Preferred received by the Company has the
following attributes:
a. Conversion. In the event that Onkyo prior to redemption completes an
initial public offering for a minimum of $10,000,000 net of underwriting
discounts and commissions and the equity valuation of Onkyo is in excess of
$25,000,000, the Onkyo Preferred automatically converts into Onkyo Common
Stock, equal to approximately 2.5% of the number of common stock
outstanding prior to completion of the offering.
b. Redemption. After October 1, 2002, either the Company or Onkyo may redeem
the Series A Preferred Stock based upon a formula equal to (i) the product
of multiplying 4.3 times Onkyo's average, annualized net income before
interest, taxes, depreciation, and amortization for the period beginning on
September 1, 1999 (including TSA's operations for the period beginning on
September 1, 1999); times (ii) the fully-diluted percentage of Common Stock
into which the Series A Preferred Stock is convertible. The term
"fully-diluted" gives effect to exercise of all outstanding options and
warrants and conversion of all outstanding convertible securities;
c. Dividends. The Series A Preferred Stock has a cumulative dividend
preference of 5% per annum payable at the end of each year.
d. Liquidation Preference. Upon liquidation of Onkyo or sale of all or
substantially all of the assets of Onkyo or similar event, the Series A
Preferred Stock is entitled to a $1,000,000 liquidation preference in
addition to all cumulative and unpaid dividends; and
e. Non-Voting. The Series A Preferred Stock has no voting rights except those
required by law.
Previously, the Company and TSA had entered into a TSA Asset Purchase Agreement
with NCT Audio Products, Inc. ("NCT") on August 14, 1998 for a minimum of
$10,000,000 in cash and up to $6,000,000 in a potential earn-out based upon the
future operating results of the TSA business being sold. TSA received $1,450,000
in June 1998 and an additional $2,050,000 on December 15, 1998 when the
Company's stockholders approved the sale to NCT. As a result of the approval by
the Company's stockholders on December 15, 1998, NCT became the owner of 20% of
TSA's Common Stock in exchange for the $3,500,000 it paid. During fiscal 1999,
the Company and TSA granted NCT two extensions to close the transaction with a
final deadline of July 15, 1999. As part of the consideration for these
extensions, the Company received back 5% of TSA's Common Stock, thereby reducing
NCT's ownership of TSA to 15%. NCT's parent company issued a press release on
July 16, 1999
6
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. SALE OF TOP SOURCE AUTOMOTIVE, INC. ("TSA")(Continued)
stating that it was unable to obtain the necessary financing to complete the
transaction and acknowledging that NCT thereby let its rights under the TSA
Asset Purchase Agreement, lapse. As a result, the Company and TSA proceeded to
negotiate a definitive agreement and ultimately close on the sale of the assets
to Onkyo on September 30, 1999. For information concerning legal proceedings
between the Company and NCT, (see Note 6. Legal Proceedings).
6. LEGAL PROCEEDINGS
On September 16, 1999, NCT commenced an action against GTI and TSA by filing a
motion for a temporary restraining order and a preliminary injunction in the
Delaware Court of Chancery. In its motion, NCT sought to enjoin GTI's sale of
TSA's assets to Onkyo on the ground that NCT was entitled to purchase TSA's
assets pursuant to the terms of an Asset Purchase Agreement. On October 6, 1999,
NCT withdrew its motion for a temporary restraining order and preliminary
injunction following the closing of a transaction pursuant to which Onkyo
purchased substantially all of TSA's assets.
Also on September 16, 1999, NCT commenced an arbitration proceeding before the
American Arbitration Association. NCT's Statement of Claim asserts that GTI
committed breach of contract and fraud, breached fiduciary duties, and violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder in connection with NCT's attempts to acquire substantially all of the
assets of TSA. Specific performance of the Asset Purchase Agreement and
compensatory damages in excess of $3.5 million are sought.
On December 8, 1999, GTI filed an answer to NCT's Statement of Claim in which it
sought a more specific statement of NCT's claims of wrongdoing, denied the
claims asserted in the Statement of Claim, and asserted counterclaims against
NCT. As of February 14, 2000, NCT had not answered the Company's counterclaim
against NCT's Statement of Claim. The Company believes that NCT's claims for
damages beyond their 15% equity ownership of TSA less certain adjustments and
offsets are without merit. The Company has recorded the amounts due to NCT as
"Payable to former buyer of automotive subsidiary" in the accompanying
consolidated balance sheets.
7
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations
Total revenue for the three months ended December 31, 1999 increased to $185,050
compared to $74,577 for the same period in 1998. The increase in service revenue
of $110,473 or 148.1% is primarily attributable to an increase in the number of
units leased and on trial generating various levels of revenue (some of which
were nominal) compared to the number of units leased and on trial for the same
period in 1998.
OSA gross profit margin for three months ended December 31, 1999 was -47.3%
compared to -75.5% for the same period in 1998. Cost of service for both periods
includes the full cost of manufacturing and service in anticipation of higher
sales levels.
General and administrative expenses decreased to $760,945 for the three months
ended December 31, 1999 compared to $827,328 for the same period in 1998. The
decrease of $66,383 or 8.0% is attributable to a reduction in expenses at OSA,
Inc. ("OSA", formerly known as Top Source Instruments, Inc.)
Selling and marketing expenses were $157,885 for the three months ended December
31, 1999 compared to $147,432 for the same period in 1998. The increase of
$10,453 or 7.1% is attributable to an increase in personnel expenses.
Depreciation and amortization was $96,367 for the three months ended December
31, 1999 compared to $92,990 for the same period in 1998. This increase of
$3,377 or 3.6% is primarily attributable to the increase in property and
equipment from 1998 to 1999.
Research and development was $11,672 for the three months ended December 31,
1999 compared to $76,168 for the same period in 1998. This decrease of $64,496
or 84.7% is primarily attributable to the initial costs incurred in the
development of the OSA-II machine in fiscal year 1998 and 1999.
Interest income was $100,315 for the three months ended December 31, 1999
compared to $32,453 for the same period in 1998. The increase of $67,862 or
209.1% is primarily due to an increase in cash and cash equivalents from the
sale of TSA.
Interest expense was $45,177 for the three months ended December 31, 1999
compared to $166,497 for the same period in 1998. The decrease of $121,320 or
72.8% is primarily due to a decrease in interest as a result of the
restructuring of the senior subordinated convertible notes in November and
December 1998 and the payoff of the credit facility on October 1, 1999.
Other income (expense) was $31,021 for the three months ended December 31, 1999
compared to ($57,045) for the same period in 1998. This increase of $88,066 or
154.4% is primarily attributable to the $100,000 redemption premium incurred in
connection with the redemption of 50% of the Series A Preferred Stock in
November 1998.
Income from discontinued operations was $0 for the three months ended December
31, 1999 compared to $432,882 for the same period in 1998. On September 30,
1999, the Company sold substantially all of the assets of its 85% owned
subsidiary, TSA, and certain intellectual property assets of the Company
relating to TSA's OHSS business to Onkyo. Accordingly, the operations and
financial activity associated with this business have been reclassified as
discontinued operations. (See Note 5. Sale of TSA)
8
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Gain on disposal of discontinued operations of $1,662,870 for the three months
ended December 31, 1998 represents the sale of a 5.5% equity interest in TSA to
NCT in December 1998. (See Note 5. Sale of Top Source Automotive, Inc.)
Gain on extinguishment of debt of $158,745 for the three months ended December
31, 1998 represents the gain on the restructuring of a portion of the
outstanding $3,020,000 of Notes.
During fiscal 1999, the Company entered in two significant agreements regarding
the leasing and sales of the OSA-II units. On November 13, 1998, the Company
entered into a strategic alliance with Flying J, Inc. ("Flying J"), a company
engaged in various facets of highway-related products and services including the
operation of large truck stops. Flying J agreed to purchase and market OSA-IIs
in up to 100 of their truck stop service centers. The initial purchase order
placed by Flying J was for the outright purchase of 10 OSA-II units for
approximately $700,000, which represented the largest single OSA-II order since
the inception of the technology.
The agreement covered a potential purchase of up to 100 OSA-IIs and joint
development and marketing of product enhancements to assist in the further
commercialization of the OSA-IIs within the truck stop industry. After receipt
of the initial 10 OSA-IIs, Flying J could terminate the agreement without any
liability. In addition to the purchase price of the OSA-II units, Flying J is
obligated to pay the Company a per sample licensing fee which is reduced at such
time as Flying J has 36 OSA-II units operating.
Because of the nature of Flying J's business, its management determined that a
self-service OSA-II unit was more appropriate for the large majority of its
service plazas. As a result, Flying J has not ordered any additional units from
the Company. The Company's management has been in regular communication with
Flying J's management concerning development of a self-service OSA-II,
("OSA-II/SS"). Additionally, the Company's technical staff has commenced initial
development of the instrument and expended funds during fiscal 1999. The primary
issue for resolution concerns the sharing of the cost of approximately $500,000
needed to complete the OSA-II/SS. Management believes that it will reach an
agreement with Flying J during the quarter ended March 31, 2000, although no
assurances can be given that an agreement can be reached on sharing of the
funding, or that if funding is obtained, that the Company can successfully
produce a working OSA-II/SS unit.
On August 19, 1999, the Company entered into a four year OSA-II lease agreement
with Speedco. Previously, the Company had leased OSA-II units to Speedco
pursuant to the terms of a short-term lease. Under the terms of the four-year
lease agreement, Speedco agreed to pay the Company a fixed minimum monthly
rental fee and per usage fees above certain thresholds at each Speedco location
using the Company's OSA-II unit. Additionally, the agreement requires the
Company to provide ongoing service and marketing assistance to help Speedco
locations increase their retail usage of the OSA-II. Based upon the 28 OSA-II
units currently leased (one at each Speedco location), the Company estimates
that this lease will generate a minimum of $2,500,000 in OSA-II revenue during
the four-year term of the lease; however, there can be no assurances. The
Company anticipates that Speedco will lease 24 more OSA-II units during the
calendar year 2000; however, there can be no assurances.
9
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Management believes that the enhanced OSA-II is more commercially viable than
the OSA-I. During fiscal 1997 and 1998, the Company generated $403,853 and
$392,653 in OSA-I revenue, respectively. During fiscal 1999, the Company
generated $1,389,678 in revenues from the sale, lease and trials of the OSA
units. The Company continues to pursue its strategy of placing OSA units at
leading companies in target industries with the expectation that this activity
will lead to order for the sale or lease of significant numbers of OSA units.
Additionally, the Company is working on enhancing and modifying the base OSA-II
technology to address the needs of potential OSA users in various markets.
Management believes during fiscal 2000 that it can significantly increase OSA-II
revenues over historical levels although there can be no assurances.
BioTek Agreement
In late November 1999, the Company entered into an agreement with BioTek, which
gave the Company the exclusive world-wide rights to market and sell BioTek's
proprietary, hydrocarbon eating microbes in certain defined markets. BioTek has
developed and "grows" the fast-eating oil and grease microbes.
Under the terms of the agreement, the Company received the exclusive world-wide
rights to market and sell the proprietary microbe biotechnology under the
trademark MightyClean 2000(TM) brand name in the automotive, trucking and food
service businesses. Because many of the existing OSA-II customers are within the
exclusive market segments, the Company intends to leverage its relationships
with these customers to sell MightyClean 2000(TM) to them. In order to maintain
its exclusive rights, the Company must generate $1,000,000 in sales by May 31,
2001. In December 1999, the Company began actively marketing MightyClean
2000(TM) and expects to begin shipping it and generating revenue during the
first calendar quarter of 2000, although there can be no assurances.
Hairtek Prototype Development
Additionally, the Company has commenced developing the HairTek(TM) hair care
system based upon an instrument that would be similar to the OSA-II. With
HairTek(TM), a strand of hair would be chemically and physically analyzed, and
the HairTek(TM) hair care system would prescribe a shampoo and conditioner
formula designed to remedy dryness, oiliness, frizziness, lack of body or
volume, and/or other shortcomings unique to the hair sample. The products would
be mixed and dispensed on the spot. Once a prototype has been developed, the
Company expects to launch it if it is able to secure a strategic partner with
the needed capital and distribution capability in the hair care business. There
can be no assurances that the Company will be successful in completing
development of the instrument or securing a strategic partner to finance the
research, development and marketing of the technology.
10
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Net Loss Analysis
In order to avoid current, material and ongoing operating losses, the Company
must generate new, material ongoing OSA-II or other revenues in future months.
Management believes that the recent OSA-II activity described in this report
will improve OSA-II visibility in the marketplace that which will lead to
significant increases in future OSA-II revenues. However, there can be no
assurances.
Liquidity and Capital Resources
Net cash used in operating activities was $160,483 for the three months ended
December 31, 1999. This usage of cash was primarily attributable to a net loss
of $847,351, which excludes depreciation and amortization, and a decrease in
accounts payable and accrued liabilities of $465,898 offset by a decrease in
inventories of $317,540 and an increase in deferred revenue of $786,110.
Net cash used in investing activities was $441,273 for the three months ended
December 31, 1999. This decrease in cash was attributable to expenditures by OSA
for capital assets.
Net cash used in financing activities was $2,087,233 for the three months ended
December 31, 1999, which consisted primarily of the payoff of the Company's
credit facility ("Credit Facility") with NationsCredit Commercial Corporation
("Nations") $1,913,986 and the payment of $157,500 of Series B preferred stock
dividends.
Net cash provided by discontinued operations was $5,268,477 for the three months
ended December 31, 1999, which represents the receipt of $6,500,000, less
$500,000 held in escrow, on the secured note in connection with the sale of TSA
offset by expenses associated with the sale.
On September 30, 1999, the Company completed the sale to Onkyo America of
substantially all of the assets of TSA. At the closing, the Company and TSA
received $2,000,000 in cash, a $6,500,000 9% secured note, which was paid to TSA
on October 29, 1999, and a $1,000,000 note which was paid to the Company on
October 29, 1999 in Onkyo Series A 5% Convertible Preferred Stock. Due to the
sale of the assets, the Company was required to simultaneously pay off in full
its Credit Facility with Nations. The balance paid off at closing was
approximately $1,914,000, which included a prepayment penalty of $100,000. As a
result of the payoff of Nations, all liens on the Company's assets were released
and the Company no longer had any credit lines.
In the quarter ended December 31, 1999, the Company sold a number of its
long-term leases and received proceeds of approximately $809,000. These units
remain on the Company's balance sheet in property and equipment and the related
liability is classified as deferred revenue. The deferred revenue is being
amortized and recorded as lease revenue over the lease term of 48 months.
11
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - Continued
As of February 15, 2000, the Company had approximately $3,300,000 in
cash including amounts reserved for the potential liability to NCT for their 15%
equity ownership in TSA (see Note 6. Legal Proceedings.) The Company believes
that current cash on hand will be sufficient to fund its operations through the
end of calendar year 2000. In the event that the Company is unable to reduce its
current operating losses, it will be required to seek new sources of capital to
fund its operations. There can be no assurances that the operating losses will
be reduced or that new financing will be available on acceptable terms.
Forward-Looking Statements
The forward looking statements discussed in the Report include those
relating to the Company's expectations about (1) generating significantly
increased revenue from OSA-II units above historic levels during fiscal year
2000, (2) leasing additional OSA-II units to Speedco (3) the Company's ability
to begin generating revenue from the MightyClean 2000(TM) product, (4) the
development of a successful HairTek(TM) prototype, (5) the adequacy of the
Company's working capital and liquidity, (6) generating $2,500,000 in OSA lease
revenue over a four year period from the 28 OSA-IIs currently under lease at
Speedco, (7) Speedco opening 24 new locations during the calendar year 2000, and
leasing an OSA-II at each location, (8) management's belief that it will reach
an agreement with Flying J regarding the sharing of the $500,000 in costs
necessary to develop an OSA-II/SS unit, and (9) reducing net operating losses,
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
Some or all of these forward-looking statements may not occur. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Such risks and uncertainties include the following: (1) the
continued reliability of the OSA technology over an extended period of time, (2)
the Company's ability to market OSA-IIs, (3) the acceptance of the OSA
technology by the marketplace, (4) the general tendency of large corporations to
slowly change from known technology to emerging new technology, (5) potential
future competition from third parties that may develop proprietary technology,
which either does not violate the Company's proprietary rights or is claimed not
to violate the Company's proprietary rights, (6) the Company ability to complete
the HairTek(TM) prototype, (7) the Company's ability to consummate strategic
partnerships for the HairTek(TM) project, (8) unforeseen technical problems or
patent issues with any of the Company's potential new products, (9) the
Company's ability to market the MightyClean 2000(TM) product, (10) Flying J's
decision not to share in the cost of the OSA-II/SS unit, and (11) Speedco's
decision not to open any new locations during the calendar year 2000 or lease
OSA-IIs at those locations if they do open .
12
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on December 14, 1999. The
stockholders voted to elect David Natan and Ronald Burd to serve as directors of
the Company until 2002. 25,366,331 votes were cast in favor of this proposal,
626,909 were cast against it, and 59,700 abstained.
The stockholders also voted to approve the selection of Arthur Andersen LLP as
the independent auditors of the Company for the fiscal year ending September 30,
1999, 25,748,260 were cast in favor of this proposal, 249,710 were cast against
it and 54,970 abstained.
The stockholders voted to approve the amendment to the 1993 Stock Option Plan
increasing the shares available by 500,000 shares. 23,760,505 votes in favor,
2,127,160 votes against and 165,275 votes abstained.
The fourth proposal to approve the amendment of the certificate of
incorporation changing the Company's name was voted as follows: 25,260,747 votes
in favor, 624,073 votes against and 168,120 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.0 Financial Data Schedule
b. Reports on Form 8-K
A Form 8-K was filed on October 14, 1999 and amended
on December 13, 1999 during the quarter ended
December 31, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GLOBAL TECHNOVATIONS, INC.
By: /s/ DAVID NATAN
David Natan
Vice President and Chief Financial Officer
Dated: February 18, 2000
13
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