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 June 30, 2000
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 August 18, 2000
Common stock: $.001 par value 29,804,281 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 June 30, 2000
(Unaudited) and September 30, 1999.........................1
Consolidated Statements of Operations for the
Three Months Ended June 30, 2000 and 1999 (Unaudited).......2
Consolidated Statements of Operations for the
Nine Months Ended June 30, 2000 and 1999 (Unaudited)........3
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2000 and 1999 (Unaudited).. .....4
Notes to Unaudited Interim Consolidated
Financial Statements.....................................5-11
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations...........11-16
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..................................16
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
June 30, September 30,
ASSETS 2000 1999
----------------- ----------------
Current Assets:
Cash and cash equivalents $ 1,454,321 $ 2,308,952
Accounts receivable trade, net 195,941 209,554
Due from buyer of automotive subsidiary - 6,000,000
Inventories 1,313,237 1,935,832
Prepaid expenses 94,430 76,657
Other 275,111 103,994
----------------- ----------------
Total current assets 3,333,040 10,634,989
Property and equipment, net 2,252,012 1,533,117
Patents, net 128,189 143,881
Capitalized database, net 1,704,236 1,862,361
Preferred stock of buyer of automotive subsidiary 1,033,630 -
Due from buyer of automotive subsidiary - 1,500,000
----------------- ----------------
TOTAL ASSETS $ 8,451,107 $ 15,674,348
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ - $ 1,913,986
Senior subordinated convertible notes 603,000 707,000
Loan payable - 506,712
Accounts payable 235,778 302,553
Deferred revenue 1,161,604 98,675
Accrued liabilities 961,376 2,508,733
Payable to former buyer of automotive subsidiary 1,003,990 1,030,835
----------------- ----------------
Total current liabilities 3,965,748 7,068,494
Other liabilities - 89,799
----------------- ----------------
Total liabilities 3,965,748 7,158,293
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,500 shares issued and outstanding at 3,500,000 3,444,644
June 30, 2000 and September 30, 1999
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,799,281 shares issued and outstanding at
June 30, 2000 and September 30, 1999 29,799 29,799
Additional paid-in capital 31,487,419 31,208,571
Accumulated deficit (29,182,505) (24,817,605)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
----------------- ----------------
Total stockholders' equity 4,485,359 8,516,055
----------------- ----------------
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,451,107 $ 15,674,348
================= ================
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
---------------------------------------------------------------------------------------- ----------------
<S> <C> <C>
2000 1999
----------------- ----------------
Revenue:
Sales revenue $ 54,763 $ 508,950
Leasing revenue 256,334 176,166
----------------- ----------------
Total revenue 311,097 685,116
----------------- ----------------
Cost of sales and leasing
Cost of sales 35,727 187,530
Cost of leasing 426,409 234,509
----------------- ----------------
Total cost of sales and leasing 462,136 422,039
----------------- ----------------
Gross profit (loss) (151,039) 263,077
----------------- ----------------
Expenses:
General and administrative 858,202 799,160
Selling and marketing 288,370 120,887
Depreciation and amortization 95,274 94,505
Research and development 54,942 41,794
----------------- ----------------
Total expenses 1,296,788 1,056,346
----------------- ----------------
Loss from operations (1,447,827) (793,269)
Other income (expense):
Interest income 41,925 15,150
Interest expense (55,906) (100,232)
Other (expense) income, net 30,880 13,790
----------------- ----------------
Net other income (expense) 16,899 (71,292)
----------------- ----------------
Loss from continuing operations before
discontinued operations: (1,430,928) (864,561)
----------------- ----------------
Discontinued operations:
Income from discontinued operations,
net of income taxes - 698,734
Gain on disposal of discontinued operations,
net of income taxes - 664,384
----------------- ----------------
Discontinued operations - 1,363,118
----------------- ----------------
Net income (loss) (1,430,928) 498,557
Embedded dividend on preferred stock - (155,583)
Preferred dividends (78,750) (78,750)
Value of warrants issued with preferred stock - (27,048)
----------------- ----------------
Net income (loss) available to common stockholders ($1,509,678) $237,176
================= ================
Basic and Diluted Earnings (Loss) Per Share
Continuing Operations (0.05) (0.04)
Discontinued Operations - 0.05
----------------- ----------------
Net Income (Loss) (0.05) 0.01
================= ================
Basic and diluted weighted average common shares outstanding 29,333,047 29,332,915
================= ================
See accompanying notes to unaudited interim consolidated financial statements.
2
</TABLE>
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<TABLE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
2000 1999
----------------- ---------------
Revenue:
Sales revenue $ 128,043 $ 879,549
Leasing revenue 666,607 348,476
----------------- ---------------
Total revenue 794,650 1,228,025
----------------- ---------------
Cost of sales and leasing
Cost of sales 76,404 333,075
Cost of leasing 1,080,580 574,144
----------------- ---------------
Total cost of sales and leasing 1,156,984 907,219
----------------- ---------------
Gross profit (loss) (362,334) 320,806
----------------- ---------------
Expenses:
General and administrative 2,503,865 2,412,610
Selling and marketing 717,502 395,769
Depreciation and amortization 286,026 283,291
Research and development 93,901 130,625
----------------- ---------------
Total expenses 3,601,294 3,222,295
----------------- ---------------
Loss from operations (3,963,628) (2,901,489)
Other income (expense):
Interest income 185,256 72,248
Interest expense (149,984) (376,402)
Other (expense) income, net 107,242 (25,039)
----------------- ---------------
Net other income (expense) 142,514 (329,193)
----------------- ---------------
Loss from continuing operations before
discontinued operations and extraordinary item: (3,821,114) (3,230,682)
----------------- ---------------
Discontinued operations:
Income from discontinued operations,
net of income taxes - 1,507,201
Gain on disposal of discontinued operations,
net of income taxes - 2,327,254
----------------- ---------------
Discontinued operations - 3,834,455
----------------- ---------------
Income (loss) before extraordinary item (3,821,114) 603,773
Gain on extinguishment of debt - 158,745
----------------- ---------------
Net income (loss) (3,821,114) 762,518
Embedded dividend on preferred stock (55,356) (457,416)
Preferred dividends (236,250) (198,706)
Value of warrants issued with preferred stock (252,180) (214,597)
----------------- ---------------
Net loss available to common stockholders ($4,364,900) ($108,201)
================= ===============
Basic and Diluted Earnings (Loss) Per Share
Continuing Operations (0.15) (0.14)
Discontinued Operations - 0.13
Extraordinary Item - 0.01
----------------- ---------------
Net Loss (0.15) (0.00)
================= ===============
Basic and diluted weighted average common shares outstanding 29,333,047 29,033,103
================= ===============
See accompanying notes to unaudited interim consolidated financial statements.
3
</TABLE>
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<TABLE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
2000 1999
---------------- ----------------
OPERATING ACTIVITIES:
Net income (loss) $ (3,821,114) $ 762,518
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Income from discontinued operations - (1,507,201)
Gain on disposal of discontinued operations - (2,327,254)
Depreciation 416,939 207,131
Amortization 177,212 240,018
Gain on extinguishment of debt - (158,745)
Disposal of equipment - 3,100
Non cash value of services 54,000 -
Repayments from officers - 26,260
Decrease (increase) in accounts receivable, net 13,613 (188,700)
Decrease (increase) in inventories 622,595 (985,894)
(Increase) decrease in prepaid expenses (17,773) 30,956
(Increase) decrease in other assets (172,244) 24,334
Increase in preferred stock of buyer of automotive subsidiary (33,630) -
(Decrease) increase in accounts payable (73,488) 44,700
Increase (decrease) in deferred revenue 1,062,929 (32,500)
Decrease in accrued liabilities (559,872) (45,970)
Decrease in payable to former buyer of automotive subsidiary (26,845) -
Decrease in other liabilities (89,799) (251,917)
---------------- ----------------
Net cash used in operating activities (2,447,477) (4,159,164)
---------------- ----------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,135,834) (948,122)
Additions to patent costs, net (2,267) (52,948)
---------------- ----------------
Net cash used in investing activities (1,138,101) (1,001,070)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants - 26,878
Preferred stock issuance, net (27,332) 3,374,638
Redemption of preferred stock Series A - (500,000)
Repayments of Senior Convertible Notes (104,000) (2,064,617)
Payment of extinguishment of debt costs - (10,403)
Repayment of loan payable (500,000) -
Payment of preferred stock dividends (315,000) (107,827)
Repayment of borrowings (1,913,986) 255,614
---------------- ----------------
Net cash (used in) provided by financing activities (2,860,318) 974,283
---------------- ----------------
NET CASH USED IN CONTINUING OPERATIONS: (6,445,896) (4,185,951)
---------------- ----------------
CASH PROVIDED BY DISCONTINUED OPERATIONS:
Operating Activities - 2,229,444
Investing Activities 5,591,265 2,009,660
---------------- ----------------
Net cash provided by discontinued operations 5,591,265 4,239,104
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (854,631) 53,153
Cash and cash equivalents at beginning of period 2,308,952 488,899
---------------- ----------------
Cash and cash equivalents at end of period $1,454,321 $542,052
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $175,329 $262,242
Cash paid for income taxes $150,000 $58,000
See accompanying notes to unaudited interim consolidated financial statements.
4
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<PAGE>
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 1999 amounts have been
reclassified to conform to current year presentation.
Comprehensive Income
For the three and nine months ended June 30, 2000 and 1999, there were no
differences between net income and comprehensive income.
2. INCOME (LOSS) PER SHARE
Basic earnings (loss) 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 (loss) per share
is calculated by dividing (loss) 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 and nine months ended
June 30, 2000 and 1999, as their impact would have been anti-dilutive.
For the three months ended June 30, 2000 and 1999, the effect of equivalent
shares related to stock options, warrants and preferred stock were 3,989,550 and
3,688,666, respectively, and were not included in the dilutive average common
shares outstanding, as the effect would have been anti-dilutive.
For the nine months ended June 30, 2000 and 1999, the effect of equivalent
shares related to stock options, warrants and preferred stock were 3,820,751 and
4,213,998, respectively, and were not included in the dilutive average common
shares outstanding, as the effect would have been anti-dilutive.
5
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consisted of the following:
June 30, September 30,
2000 1999
---- ----
Raw materials $ 1,187,237 $ 984,082
Finished goods 126,000 951,750
------- -------
$1,313,237 $1,935,832
========== ==========
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2000 and September
30, 1999:
<TABLE>
<S> <C> <C> <C>
Useful Life
(Years)
Life (Years) 2000 1999
------------ ---- ----
Computer equipment 3-4 $1,023,425 $967,753
On-Site Analyzers 5 2,539,924 1,482,829
Tools 2 25,988 24,253
Furniture and fixtures 3-5 207,453 190,452
Leasehold improvements 2-5 29,173 26,555
--------- --------
3,825,963 2,691,842
--------- ---------
Less: accumulated depreciation (1,573,951) (1,158,725)
$2,252,012 $1,533,117
========= =========
</TABLE>
Depreciation of leased OSA-II machines in the amount of $121,073 and $306,998
for the three and nine months ended June 30, 2000, respectively, and $46,582 and
$97,878 for the three and nine months ended June 30, 1999, respectively, has
been allocated to cost of leasing.
5. 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,
6
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. CONVERTIBLE PREFERRED STOCK (Continued)
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 ("Black Scholes") 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.
6. 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 Overhead Sound Systems ("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 was to be held in escrow
for a 12-month period until October 2000 in the event that undisclosed TSA
liabilities in excess of $50,000 arose.
Due to the absence of any undisclosed liabilities at TSA, Onkyo and Company
agreed to modify the escrow agreement. On May 12, 2000, the escrow agent
released the $500,000 along with $13,316 in interest. In return for early
release of the escrow, the Company agreed to pledge its $1,000,000 of Onkyo
Preferred to Onkyo until October 1, 2000 to protect Onkyo in the event that any
undisclosed liabilities were discovered from the current date until October 1,
2000. The Company retained title to the Onkyo Preferred and the Onkyo Preferred
remained governed by the attributes described below:
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.
7
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. SALE OF TOP SOURCE AUTOMOTIVE, INC. ("TSA") (Continued)
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 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 7. Legal Proceedings).
8
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
7. LEGAL PROCEEDINGS
NCT Audio Products, Inc. v. Top Source Technologies, Inc. et al. (Delaware
Chancery Court): As previously reported in the Company's Report on Form 10-K for
the fiscal year ending September 30, 1999 ("1999 Form 10-K") and its Reports on
Form 10-Q for the quarters ending December 31, 1999 and March 31, 2000 ("2000
Forms 10-Q"), GTI and TSA are defendants in a litigation pending in the Court of
Chancery for the State of Delaware. On May 5, 2000, the Delaware Court of
Chancery dismissed the action, with prejudice.
NCT Audio Products, Inc. v. Top Source Technologies, Inc. et al. (American
Arbitration Association): As previously reported in the Company's 1999 Form 10-K
and its 2000 Forms 10-Q, GTI and TSA are respondents in an arbitration
proceeding before the American Arbitration Association; GTI and TSA have
asserted counterclaims against NCT in the same proceeding.
On July 18, 2000, NCT served a revised Demand For Arbitration. NCT continues to
assert that, in connection with NCT's attempts to acquire substantially all of
the assets of TSA, GTI and TSA committed breach of contract, breach of fiduciary
duties and engaged in fraudulent inducement; NCT also asserts that GTI and TSA
made negligent misrepresentations. All claims asserted in the initial Demand
against GTI and TSA are reasserted in the revised Demand, except that NCT no
longer asserts a claim for fraud under Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. The revised Demand seeks rescission of
the Asset Purchase Agreement and compensatory damages in excess of $3.5 million.
The Company believes that NCT's claim for damages beyond its 15% equity
ownership of TSA, less certain adjustments and offsets which are subject to the
counterclaims, 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.
8. DEFINITIVE AGREEMENT
On April 10, 2000, the Company entered into a letter of intent ("LOI") to
purchase an automotive technology-based manufacturing and distribution company
("Target Company"). In calendar 1999, the Target Company recorded unaudited pro
forma revenues of approximately $84 million and had earnings before interest,
taxes, depreciation and amortization of approximately $7.3 million. The
potential acquisition, which would not require a stockholder vote, was
contingent upon the Company obtaining financing and the execution of a
definitive agreement.
9
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
8. DEFINITIVE AGREEMENT (Continued)
In June 2000, the Company entered into a definitive agreement, subject to
obtaining acceptable financing to purchase the Target Company. On August 3,
2000, the definitive agreement was amended by extending the closing date to
August 31, 2000.
On July 21, 2000, the John Henry Mennen Trust of which G. Jeff Mennen, a
director of the Company, is co-trustee, committed $12,000,000 in funding to help
finance the acquisition of the Target Company. Initially, this commitment was
expressly contingent upon the closing of the transaction. On August 18, 2000,
the Mennen Trust agreed to loan the Company $5,000,000 for corporate use not
contingent upon closing the acquisition. The remaining $7,000,000 of the Mennen
Trust commitment will only be funded if the acquisition is successfully closed
(see Note 9 below). Due to the Mennen Trusts commitment and the progress the
Company had made in identifying and negotiating with potential lending sources,
the seller agreed to extend the closing date until August 31, 2000.
The Company and its counsel are currently actively negotiating a credit
agreement and related loan documents with an institutional lender and its
counsel, which financing, together, with a substantial portion of the proceeds
from the Mennen Trust, will be used to complete the acquisition of the Target
Company. The Company expects to close the transaction by August 31, 2000,
although there can be no assurances that the acquisition will close. Specific
terms of the acquisition, including the identity of the Target Company will not
be disclosed until a closing occurs.
9. $5,000,000 SENIOR SECURED PROMISSORY NOTE
On August 18, 2000, the Mennen Trust agreed to loan the Company $5,000,000
pursuant to the terms of an eight year, 15% $5,000,000 Senior Secured Promissory
Note ("Senior Note") issued by the Company. The Company expects to receive these
funds no later than August 31, 2000.
Under the terms of the agreement, the Company agreed to pay 12-1/2% cash
interest per annum payable monthly. The remaining 2-1/2% per annum shall accrue
on the outstanding principal balance only and be paid on the due date of the
Senior Note, August 31, 2008.
Additionally, the Mennen Trust received warrants to purchase 770,833
unregistered common stock of the Company at a price of $1.00 per share. Subject
to vesting, these warrants shall be exercisable for 10 years commencing August
18, 2000 and expiring on August 18, 2010. These Warrants shall vest as follows:
(i) 520,833 are fully vested and not subject to forfeiture; and (ii) 250,000
shall only vest if by September 30, 2001, the Holder has not received full
payment including accrued interest of the Senior Note in the principal amount of
$5,000,000 issued by the Company to the Mennen Trust. The 520,833 warrants will
have an immediate profit and loss impact as determined by Black Scholes of
approximately $500,000. The Senior Note is secured by substantially all of the
Company's assets. This security interest will not extend to any of the assets of
the Target Company, if the acquisition is successfully completed.
10
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
9. $5,000,000 SENIOR SECURED PROMISSORY NOTE (Continued)
The Company expects to use a substantial portion of these funds to help finance
the acquisition of the Target Company. If the acquisition is not successfully
closed, the Company will retain all of these funds to use for general working
capital purposes.
The Company consummated this transaction after diligently and actively seeking
alternative financing sources and concluding that the proposal was superior to
competing offers available in strict arms-length transactions. The board of
directors, with Mr. Mennen abstaining, voted unanimously to approve the terms of
the $5,000,000, Senior Note.
10. COMMITMENTS AND CONTINGENCIES
On April 10, 2000, the Company entered into a new three-year employment agree-
ment with William C. Willis, Jr., the Company's Chairman, President and Chief
Executive Officer. Under the new terms of the agreement, Mr. Willis' salary was
increased from $327,600 to $344,000. All other terms were substantially
comparable to Mr. Willis' initial agreement entered into in May 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales revenue for the three and nine months ended June 30, 2000 was $54,763 and
$128,043 compared to $508,950 and $879,549 for the same periods in 1999. The
decrease in sales revenue of $454,187 or 89.2% for the three month period and
$751,506 or 85.4% for the nine month period is attributable to the outright sale
of fewer OSA-II machines. Lease revenue for the three and nine months ended June
30, 2000 were $256,334 and $666,607 compared to $176,166 and $348,476 for the
same periods in 1999. The increase in lease revenue of $80,168 or 45.5% for the
three month period and $318,131 or 91.3% for the nine month period 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 1999.
OSA gross profit margin for three and nine months ended June 30, 2000 was -48.6%
and -45.6% compared to 38.4% and 26.1% for the same periods in 1999. Cost of
service for both periods includes the full cost of manufacturing and service in
anticipation of higher sales levels.
11
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
General and administrative expenses increased to $858,202 and $2,503,865 for the
three and nine months ended June 30, 2000 compared to $799,160 and $2,412,610
for the same periods in 1999. The increase of $59,042 or 7.4% for the
three-month period ended June 30, 2000 is primarily the result of an increase in
professional fees. The increase of $91,255 or 3.8% for the nine-month period
ended June 30, 2000 is primarily attributable to an increase in personnel at
OSA, Inc. ("OSA", formerly known as Top Source Instruments, Inc.)
Selling and marketing expenses were $288,370 and $717,502 for the three and nine
months ended June 30, 2000 compared to $120,887 and $395,769 the same periods in
1999. The increase of $167,483 or 138.6% for the three month period and $321,733
or 81.3% for the nine month period is primarily attributable to an increase in
salaries and benefits as a result of an additions to the sales personnel and an
increase in promotion and advertising expenses at OSA.
Depreciation and amortization was $95,274 and $286,026 for the three and nine
months ended June 30, 2000 compared to $94,505 and $283,291 for the same periods
in 1999. This increase for both periods of 1.0% is primarily attributable to the
increase in property and equipment from 1999 to 2000.
Research and development was $54,942 and $93,901 for the three and nine months
ended June 30, 2000 compared to $41,794 and $130,625 for the same periods in
1999. The increase of $13,148 or 31.5% for the three-month period is primarily
attributable to recent development costs associated with the enhancements to the
OSA-II machine. The decrease of $36,724 or 28.1% for the nine-month period 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 $41,925 and $185,256 for the three and nine months ended
June 30, 2000 compared to $15,150 and $72,248 for the same periods in 1999. The
increase of $26,775 or 176.7% for the three-month period and $113,008 or 156.4%
for the nine-month period is primarily due to an increase in cash and cash
equivalents from the sale of TSA.
Interest expense was $55,906 and $149,984 for the three and nine months ended
June 30, 2000 compared to $100,232 and $376,402 for the same periods in 1999.
The decrease of $44,326 or 44.2% for the three-month period is primarily due to
the payoff of the credit facility on October 1, 1999 partially offset by
interest expense on the long term lease financing. The decrease of $226,418 or
60.2% for the nine-month period 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 partially offset by interest expense on the long term lease financing.
Other income (expense) was $30,880 and $107,242 for the three and nine months
ended June 30, 2000 compared to $13,790 and ($25,039) for the same periods in
1999. This increase of $132,281 or 528.3% for the nine-month period 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.
12
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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 (Continued)
Income from discontinued operations was $0 for the three and nine months ended
June 30, 2000 compared to $698,734 and $1,507,201 for the same periods in 1999.
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 6. Sale of Top Source Automotive, Inc.)
Gain on disposal of discontinued operations of $664,384 and $2,327,254 for the
three and nine months ended June 30, 1999 represents extension fees and the sale
of an additional 5% equity interest in TSA to NCT in fiscal year 1999. (See Note
6. Sale of Top Source Automotive, Inc.)
Gain on extinguishment of debt of $158,745 for the nine months ended June 30,
1999 represents the gain on the restructuring of a portion of the outstanding
$3,020,000 of Notes.
On August 19, 1999, the Company entered into a four year OSA-II lease agreement
with Speedco, Inc. ("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 40 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 13 more OSA-II units during the
calendar year 2000; however, there can be no assurances.
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.
13
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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
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 its marketing efforts will improve OSA-II visibility in
the marketplace and 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 $2,447,477 for the nine months ended
June 30, 2000. This usage of cash was primarily attributable to a net loss of
$3,226,963, which excludes depreciation and amortization, and a decrease in
accounts payable and accrued liabilities of $723,159 offset by a decrease in
inventories of $622,595 and an increase in deferred revenue of $1,062,929.
Net cash used in investing activities was $1,138,101 for the nine months ended
June 30, 2000. This decrease in cash was attributable to expenditures by OSA for
capital assets.
Net cash used in financing activities was $2,860,318 for the nine months ended
June 30, 2000, which consisted primarily of the payoff of the Company's credit
facility ("Credit Facility") with NationsCredit Commercial Corporation
("Nations") $1,913,986, repayment of the Mennen Loan of $500,000, the payment of
$315,000 of Series B preferred stock dividends and the repayment of $104,000 on
the Senior Subordinated convertible notes.
Net cash provided by discontinued operations was $5,591,265 for the nine months
ended June 30, 2000, which represents the receipt of $6,500,000 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 nine months ended June 30, 2000, the Company sold a number of its
long-term leases and received proceeds of approximately $1,196,000. 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.
14
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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
Liquidity and Capital Resources - Continued
In June 2000, the $707,000 principal balance on the Senior Subordinated
convertible notes (the "Notes") with Mellon Private Asset Management ("Mellon")
matured. Prior to the maturity date, the Company offered all Noteholders the
opportunity to extend their maturity date of their Note until June 9, 2001, on
modified terms. The Company offered to increase the rate to 10% from the
existing 5%, and offered to reduce the convert provision of their Note from the
current $2.00 per share to $1.50 per share. The Company paid off $104,000 in
face value of the Notes in June 2000. Subsequent to June 30, 2000, the Company
paid off an additional $210,000 in Notes. To date Noteholders representing
$273,000 of face value in Notes have accepted the Company's offer and have
agreed to extend the maturity of the Notes. The remaining Noteholders with a
cumulative balance $120,000 have not responded to the Company's offer and their
Notes remain outstanding as of August 16, 2000.
As of August 18, 2000, the Company had approximately $400,000 in cash.
Additionally, the Company received a binding commitment relating to the
$5,000,000 Note from the Mennen Trust (see Note 9). The Company intends to use a
substantial portion of its on-hand cash after receiving the Mennen loan proceeds
to fund the acquisition of the Target Company. The precise amount of cash
required is currently indeterminable.
In the event the transaction does not close, the Company will use its cash for
general working capital purposes. If this occurs, the Company believes that
current cash on hand will be sufficient to fund its operations for the
foreseeable future.
In the event the transaction to purchase the Target Company occurs by August 31,
2000, the Company believes that the amount of cash it will be left with after
the acquisition, and the cash generated from the Target Company after factoring
in new acquisition interest, will be sufficient to fund consolidated Company
operations for the foreseeable future. There can be no assurances, however, that
the remaining cash on hand, and the performance of the Target Company after
acquisition will be sufficient to offset the Company's current operating losses.
In the event that the Company is unable to reduce its current operating
losses, or the Target Company's performance, if acquired, doesn't meet historic
levels, the Company will be required to seek new sources of capital to fund its
operations. There can be no assurance that the operating losses of the Company
will be reduced or that new financing will be available.
Forward-Looking Statements
The forward-looking statements discussed in this report relating to the
Company's expectations (1) it will complete the acquisition of the Target
Company described above by August 31, 2000, (2) it will lease an additional 13
more OSA-II units to Speedco and generate $2,500,000 from the Speedco lease over
a four-year period, and (3) relating to the adequacy of the Company's working
capital and liquidity, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
15
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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
Forward-Looking Statements (Continued)
The results anticipated by these forward-looking statements may not occur. These
statements are subject to risks and uncertainties that could cause results to
differ materially from those contemplated in the above forward-looking
statements. Such risks and uncertainties include the following: (1) Receipt of a
commitment letter from the institutional lender on acceptable terms to provide
funding to the Company to purchase the Target Company, (2) the operating
performance of the Target Company post acquisition, if the acquisition is
successfully consummated, (3) the Company managements' ability to integrate the
activities of the potential Target Company into current Company operations, (4)
Speedco may decide not to expand to new locations during calendar 2000, or not
to use the OSA-II units at new locations if they do open, (5) retailers and
potential customers may be reluctant to purchase the Company's new Retail
MotorCheck(TM) Display Units, (6) the decision by new or existing customers not
to place orders for the lease or purchase of multiple OSA-II units despite
successful trial evaluation periods, (7) the continued reliability of the OSA
technology over an extended period of time, (8) the Company's ability to market
OSA-IIs, (9) the acceptance of the OSA-II technology by the marketplace, (10)
the general tendency of large corporations to slowly change from known
technology to emerging new technology, (11) 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, (12) the Company's ability to attract strategic
partners for the OSA-II, and (13) the Company's ability to resolve contractual
issues with potential strategic partners. Investors should also consider
information contained in documents filed by the Company with the Securities and
Exchange Commission.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Senior Secured Promissory Note*
10.2 Security Agreement*
10.3 Warrants
27.0 Financial Data Schedule
99.0 Audit Committee Charter
* Confidential Treatment Requested.
b. Reports on Form 8-K
A Form 8-K was filed on April 26, 2000 during the quarter ended
June 30, 2000.
16
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GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
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: August 21, 2000
17
