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 March 31, 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 May 19, 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 March 31, 2000
(Unaudited) and September 30, 1999..................... 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 (Unaudited)....2
Consolidated Statements of Operations for the
Six Months Ended March 31, 2000 and 1999 (Unaudited)......3
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 2000 and 1999 (Unaudited)..... 4
Notes to Unaudited Interim Consolidated
Financial Statements....................................5-9
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations...........9-13
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............14
ITEM 6. Exhibits and Reports on Form 8-K...............................14
<PAGE>
<TABLE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND SEPTEMBER 30, 1999
<S> <C> <C>
(Unaudited)
March 31, September 30,
ASSETS 2000 1999
----------------- ----------------
Current Assets:
Cash and cash equivalents $ 2,299,200 $ 2,308,952
Restricted cash 510,445 -
Accounts receivable trade, net 176,321 209,554
Due from buyer of automotive subsidiary - 6,000,000
Inventories 1,520,511 1,935,832
Prepaid expenses 108,095 76,657
Other 170,159 103,994
----------------- ----------------
Total current assets 4,784,731 10,634,989
Property and equipment, net 2,048,340 1,533,117
Patents, net 131,601 143,881
Capitalized database, net 1,756,944 1,862,361
Preferred stock of buyer of automotive subsidiary 1,021,289 -
Due from buyer of automotive subsidiary - 1,500,000
----------------- ----------------
TOTAL ASSETS $ 9,742,905 $ 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 - 506,712
Accounts payable 188,743 302,553
Deferred revenue 835,867 98,675
Accrued liabilities 1,012,162 2,508,733
Payable to former buyer of automotive subsidiary 1,013,511 1,030,835
----------------- ----------------
Total current liabilities 3,757,283 7,068,494
Other liabilities - 89,799
----------------- ----------------
Total liabilities 3,757,283 7,158,293
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,500 shares issued and outstanding at 3,500,000 3,444,644
March 31, 2000 and September 30, 1999
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,799,281 shares issued and outstanding at
March 31, 2000 and September 30, 1999 29,799 29,799
Additional paid-in capital 31,478,004 31,208,571
Accumulated deficit (27,672,827) (24,817,605)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
----------------- ----------------
Total stockholders' equity 5,985,622 8,516,055
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,742,905 $ 15,674,348
================= ================
See accompanying notes to unautidted intermin consolidated financial statements.
1
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<TABLE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<S> <C> <C>
2000 1999
----------------- ----------------
Revenue:
Sales revenue $ 73,280 $ 370,599
Leasing revenue 225,223 97,733
----------------- ----------------
Total revenue 298,503 468,332
----------------- ----------------
Cost of sales and leasing
Cost of sales 40,677 145,545
Cost of leasing 381,679 208,760
----------------- ----------------
Total cost of sales and leasing 422,356 354,305
----------------- ----------------
Gross profit (loss) (123,853) 114,027
----------------- ----------------
Expenses:
General and administrative 884,718 786,122
Selling and marketing 271,247 127,450
Depreciation and amortization 94,385 95,796
Research and development 27,287 12,663
----------------- ----------------
Total expenses 1,277,637 1,022,031
----------------- ----------------
Loss from operations (1,401,490) (908,004)
Other income (expense):
Interest income 43,016 24,645
Interest expense (48,901) (109,673)
Other (expense) income, net 45,341 18,216
----------------- ----------------
Net other income (expense) 39,456 (66,812)
----------------- ----------------
Loss from continuing operations before
discontinued operations: (1,362,034) (974,816)
----------------- ----------------
Discontinued operations:
Income from discontinued operations,
net of income taxes - 375,585
----------------- ---------------
Discontinued operations - 375,585
----------------- ----------------
Net loss (1,362,034) (599,231)
Embedded dividend on preferred stock - (149,379)
Preferred dividends (78,750) (81,985)
----------------- ----------------
Net loss available to common stockholders ($1,440,784) ($830,595)
================= ================
Basic and Diluted Earnings (Loss) Per Share
Continuing Operations (0.05) (0.04)
Discontinued Operations - 0.01
----------------- ----------------
Net Loss (0.05) (0.03)
================= ================
Basic and diluted weighted average common shares outstanding 29,333,047 28,976,704
================= ================
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 CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
<S> <C> <C>
2000 1999
---------------- ----------------
Revenue:
Sales revenue $ 73,280 $ 370,599
Leasing revenue 410,273 172,310
----------------- ---------------
Total revenue 483,553 542,909
----------------- ---------------
Cost of sales and leasing
Cost of sales 40,677 145,545
Cost of leasing 654,171 339,635
----------------- ---------------
Total cost of sales and leasing 694,848 485,180
----------------- ---------------
Gross profit (loss) (211,295) 57,729
----------------- ---------------
Expenses:
General and administrative 1,645,663 1,613,450
Selling and marketing 429,132 274,882
Depreciation and amortization 190,752 188,786
Research and development 38,959 88,831
----------------- ---------------
Total expenses 2,304,506 2,165,949
----------------- ---------------
Loss from operations (2,515,801) (2,108,220)
Other income (expense):
Interest income 143,331 57,098
Interest expense (94,078) (276,170)
Other (expense) income, net 76,362 (38,829)
----------------- ---------------
Net other income (expense) 125,615 (257,901)
----------------- ---------------
Loss from continuing operations before
discontinued operations and extraordinary item: (2,390,186) (2,366,121)
----------------- ---------------
Discontinued operations:
Income from discontinued operations,
net of income taxes - 808,467
Gain on disposal of discontinued operations,
net of income taxes - 1,662,870
----------------- ---------------
Discontinued operations - 2,471,337
----------------- ---------------
Income (loss) before extraordinary item (2,390,186) 105,216
Gain on extinguishment of debt - 158,745
----------------- ---------------
Net income (loss) (2,390,186) 263,961
Embedded dividend on preferred stock (55,356) (301,833)
Preferred dividends (157,500) (119,956)
Value of warrants issued with preferred stock (252,180) (187,549)
----------------- ---------------
Net loss available to common stockholders ($2,855,222) ($345,377)
================= ===============
Basic and Diluted Earnings (Loss) Per Share
Continuing Operations (0.10) (0.10)
Discontinued Operations - 0.08
Extraordinary Item - 0.01
----------------- ---------------
Net Loss (0.10) (0.01)
================= ===============
Basic and diluted weighted average common shares outstanding 29,333,047 28,883,197
================= ===============
See accompanying notes to unaudited interim consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
2000 1999
--------------- ---------------
OPERATING ACTIVITIES:
Net income (loss) $ (2,390,186) $ 263,961
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Income from discontinued operations - (808,467)
Gain on disposal of discontinued operations - (1,662,870)
Depreciation 259,359 124,152
Amortization 118,068 160,266
Gain on extinguishment of debt - (158,745)
Disposal of equipment - 3,100
Non cash value of services 36,000 -
Repayments from officers - 26,260
Decrease (increase) in accounts receivable, net 33,233 (40,982)
Decrease (increase) in inventories 415,321 (851,019)
(Increase) decrease in prepaid expenses (31,438) 32,867
(Increase) decrease in other assets (66,915) 43,937
Increase in preferred stock of buyer of automotive subsidiary (21,289) -
Decrease in accounts payable (120,522) (287,683)
Increase in deferred revenue 737,192 397,734
Decrease in accrued liabilities (610,568) (103,029)
Decrease in payable to former buyer of automotive subsidiary (17,324) -
Decrease in other liabilities (89,799) (166,055)
--------------- ---------------
Net cash used in operating activities (1,748,868) (3,026,573)
--------------- ---------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (774,203) (512,231)
Additions to patent costs, net - (42,198)
--------------- ---------------
Net cash used in investing activities (774,203) (554,429)
--------------- ---------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants - 26,659
Preferred stock issuance, net (18,747) 3,385,766
Purchase of certificate of deposit - (251,718)
Redemption of preferred stock Series A - (500,000)
Repayments of Senior Convertible Notes - (2,064,617)
Payment of extinguishment of debt costs - (10,403)
Repayment of loan payable (500,000) -
Payment of preferred stock dividends (236,250) -
Repayment of borrowings (1,913,986) (41,892)
--------------- ---------------
Net cash (used in) provided by financing activities (2,668,983) 543,795
--------------- ---------------
NET CASH USED IN CONTINUING OPERATIONS: (5,192,054) (3,037,207)
--------------- ---------------
CASH PROVIDED BY DISCONTINUED OPERATIONS:
Operating Activities - 1,390,688
Investing Activities 5,182,302 2,004,689
--------------- ---------------
Net cash provided by discontinued operations 5,182,302 3,395,377
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (9,752) 358,170
Cash and cash equivalents at beginning of period 2,308,952 488,899
--------------- ---------------
Cash and cash equivalents at end of period $2,299,200 $847,069
=============== ===============
See accompanying notes to unaudited interim consolidated financial statements.
4
</TABLE>
<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 six months ended March 31, 2000 and 1999, 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 (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
six months ended March 31, 2000 and 1999, as their impact would have been
anti-dilutive.
For the three months ended March 31, 2000 and 1999, the effect of equivalent
shares related to stock options, warrants and preferred stock were 3,659,414 and
4,443,276, respectively, and were not included in the dilutive average common
shares outstanding, as the effect would have been anti-dilutive.
For the six months ended March 31, 2000 and 1999, the effect of equivalent
shares related to stock options, warrants and preferred stock were 3,746,861 and
4,595,976, 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:
March 31, September 30,
2000 1999
Raw materials $ 1,051,761 $ 984,082
Finished goods 468,750 951,750
$1,520,511 $1,935,832
<TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2000 and
September 30, 1999:
<S> <C> <C> <C>
Useful Life
(Years)
Life (Years) 2000 1999
Computer equipment 3-4 $1,013,285 $967,753
--------------------------------------- ------------- ----------------- ------------------
--------------------------------------- ------------- ----------------- ------------------
On-Site Analyzers 4-5 2,190,118 1,482,829
--------------------------------------- ------------- ----------------- ------------------
--------------------------------------- ------------- ----------------- ------------------
Tools 2 25,988 24,253
--------------------------------------- ------------- ----------------- ------------------
--------------------------------------- ------------- ----------------- ------------------
Furniture and fixtures 3-5 207,453 190,452
--------------------------------------- ------------- ----------------- ------------------
--------------------------------------- ------------- ----------------- ------------------
Leasehold improvements 2-5 28,879 26,555
--------------------------------------- ------------- ----------------- ------------------
--------------------------------------- ------------- ----------------- ------------------
3,465,723 2,691,842
--------------------------------------- ------------- ----------------- ------------------
--------------------------------------- ------------- ----------------- ------------------
Less: accumulated depreciation (1,417,383) (1,158,725)
--------------------------------------- ------------- ----------------- ------------------
--------------------------------------- ------------- ----------------- ------------------
$2,048,340 $1,533,117
========== ==========
</TABLE>
Depreciation of leased OSA-II machines in the amount of $101,866 and $185,925
for the three and six months ended March 31, 2000, respectively, and $21,441 and
$51,296 for the three and six months ended March 31, 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, 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.
6
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 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 attribute 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.
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).
7
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
7. 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
hereunder 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 May 19, 2000, NCT had not answered the Company's counterclaim. 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.
8. LETTER OF INTENT
On April 10, 2000, the Company announced that it had entered into a letter of
intent ("LOI") to purchase an automotive technology-based manufacturing and
distribution company. In calendar 1999, the target company recorded unaudited
pro forma revenues of approximately $84 million and had unaudited earnings
before interest, taxes, depreciation and amortization of approximately $7.3
million. The potential acquisition, which will not require a stockholder vote,
is contingent upon the Company obtaining financing and the execution of a
definitive agreement.
Under the terms of the LOI, the transaction must close no later than July 3,
2000. The Company does not expect to disclose the specific terms of the
potential acquisition or the identity of the target until the execution of a
definitive agreement, which is expected to occur on or before June 30, 2000.
The Company is currently in discussions with a number of alternative funding
sources to finance the transaction on acceptable terms. There can be no
assurances that these efforts will be successful.
8
<PAGE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
On April 10, 2000, the Company entered into a new three-year employment
agreement with William Willis, Jr, the Company's Chairman, President and Chief
Executive Officer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales revenue for the three and six months ended March 31, 2000 was $73,280
compared to $370,559 for the same periods in 1999. The decrease in sales revenue
of $297,319 or 80.2% is attributable the sale of fewer OSA-II machines during
the three and six months ended March 31, 2000 compared to during the same
periods in 1999. Lease revenue for the three and six months ended March 31, 2000
were $225,223 and $410,273 compared to $97,733 and $172,310 for the same periods
in 1999. The increase in lease revenue of $127,490 or 130.5% for the three month
period and $237,963 or 138.1% for the six 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 six months ended March 31, 2000 was -41.5%
and -43.7% compared to 24.4% and 10.6% 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.
General and administrative expenses increased to $884,718 and $1,645,663 for the
three and six months ended March 31, 2000 compared to $786,122 and $1,613,450
for the same periods in 1999. The increase of $98,596 or 12.5% for the
three-month period and $32,214 or 2.0% for the six-month period is primarily
attributable to an increase in personnel at OSA, Inc. ("OSA", formerly known as
Top Source Instruments, Inc.)
9
<PAGE>
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)
Selling and marketing expenses were $271,247 and $429,132 for the three and six
months ended March 31, 2000 compared to $127,450 and $274,882 the same periods
in 1999. The increase of $143,797 or 112.8% for the three month period and
$154,250 or 56.1% for the six 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 $94,385 and $190,752 for the three and six
months ended March 31, 2000 compared to $95,796 and $188,786 for the same
periods in 1999. This increase of $1,966 or 1.0% for the six month period is
primarily attributable to the increase in property and equipment from 1999 to
2000.
Research and development was $27,287 and $38,959 for the three and six months
ended March 31, 2000 compared to $12,663 and $88,831 for the same periods in
1999. This decrease of $49,872 or 56.1% for the six 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 $43,016 and $143,331 for the three and six months ended
March 31, 2000 compared to $24,645 and $57,098 for the same periods in 1999. The
increase of $18,371 or 74.5% for the three month period and $86,233 or 151.0%
for the six month period is primarily due to an increase in cash and cash
equivalents from the sale of TSA.
Interest expense was $48,901 and $94,078 for the three and six months ended
March 31, 2000 compared to $109,673 and $276,170 for the same periods in 1999.
The decrease of $60,772 or 55.4% for the three month period is primarily due to
the payoff of the credit facility on October 1, 1999. The decrease of $182,092
or 65.9% for the six-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.
Other income (expense) was $45,341 and $76,362 for the three and six months
ended March 31, 2000 compared to $18,216 and ($38,829) for the same periods in
1999. This increase of $115,191 or 296.7% for the six-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.
Income from discontinued operations was $0 for the three and six months ended
March 31, 2000 compared to $375,585 and $808,467 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 $1,662,870 for the six months
ended March 31, 1999 represents the sale of a 5.5% equity interest in TSA to NCT
in December 1998. (See Note 6. Sale of Top Source Automotive, Inc.)
Gain on extinguishment of debt of $158,745 for the six months ended March 31,
1999 represents the gain on the restructuring of a portion of the outstanding
$3,020,000 of Notes.
10
<PAGE>
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)
As previously disclosed, the Company had anticipated reaching an agreement with
Flying J or a third party to develop a self-service OSA II. Management has not
reached an agreement with Flying J or a third party during the quarter ended
March 31, 2000 regarding cost and the OSA-II/SS has been delayed to preserve
company cash resources.
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 38 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 15 more OSA-II units during the
calendar year 2000; however, there can be no assurances.
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 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 worldwide 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 February 2000, the Company began actively marketing MightyClean
2000(TM). In March 2000, the Company, began shipping the MighyClean 2000(TM) to
customers and generated nominal revenue.
11
<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 $1,748,868 for the six months ended
March 31, 2000. This usage of cash was primarily attributable to a net loss of
$2,012,759, which excludes depreciation and amortization, and a decrease in
accounts payable and accrued liabilities of $838,213 offset by a decrease in
inventories of $415,321 and an increase in deferred revenue of $737,192.
Net cash used in investing activities was $774,203 for the six months ended
March 31, 2000. This decrease in cash was attributable to expenditures by OSA
for capital assets.
Net cash used in financing activities was $2,668,983 for the six months ended
March 31, 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 and the payment
of $236,250 of Series B preferred stock dividends.
Net cash provided by discontinued operations was $5,182,302 for the six months
ended March 31, 2000, 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 six months ended March 31, 2000, the Company sold a number of its
long-term leases and received proceeds of approximately $809,000. In addition,
the Company sold an additional number of its long-term leases and received
proceeds of approximately $387,000 in May 2000. 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.
In June 2000, the $707,000 principal balance on the Senior Subordinated
convertible notes (the "Notes") with Mellon Private Asset Management ("Mellon")
will mature. The Company recently proposed extending the due date of the Notes.
If the Company does not reach an agreement with any or all of the noteholders,
the Company must pay the balance of the Notes using cash resources.
12
<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 May 19, 2000, the Company had approximately $2,400,000 in cash including
amounts reserved for the potential liability to NCT for their 15% equity
ownership in TSA (see Note 7. Legal Proceedings.) The Company believes that
current cash on hand will be sufficient to fund its operations through September
30, 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 this report relate to the Company's
expectations that (1) it will complete the acquisition of the target company
described above, (2) leasing an additional 15 more OSA-II units to Speedco, (3)
increasing OSA-II revenues over historical levels, and (4) 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.
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) the ability
of the Company to obtain acceptable financing of the target company, (2) the
ability of the Company to reach a definitive agreement with the stockholders of
the target company, (3) 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,
(4) retailers and potential customers may be reluctant to purchase the Company's
new Retail MotorCheck(tm) Display Units, (5) the decision by a municipality
and/or potential other new or existing customers to place orders for the lease
or purchase of multiple OSA-II units despite successful trial evaluation
periods, (6) the continued reliability of the OSA technology over an extended
period of time, (7) the Company's ability to market OSA-IIs, (8) the acceptance
of the OSA-II technology by the marketplace, (9) the general tendency of large
corporations to slowly change from known technology to emerging new technology,
(10) 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, (11) the
Company's ability to attract strategic partners for the OSA-II, and (12) 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.
.
13
<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 April 3, 2000. The
stockholders voted to elect G. Jeff Mennen to serve as a director of the Company
until 2003. 25,625,579 votes were cast in favor of this proposal, 198,347 were
cast against it, and 0 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,
2000, 25,711,543 were cast in favor of this proposal, 58,855 were cast against
it and 53,528 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.9 Employment Agreement dated April 10, 2000 between Global
Technovations, Inc. and William Willis, Jr.
27.0 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
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: May 22, 2000
14
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<PERIOD-END> MAR-31-2000
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<RECEIVABLES> 176,321
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<COMMON> 29,799
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<INCOME-PRETAX> (2,390,186)
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</TABLE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 10th day of April, 2000,
regardless of the date signed, by and between Global Technovations, Inc.
("GTI"), a Delaware corporation (the "Company"), and William Willis, Jr. (the
"Executive").
W I T N E S S E T H T H A T
WHEREAS, the Company wishes to provide for the employment by
the Company of the Executive, and the Executive wishes to serve the Company, in
the capacities and on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the Executive
shall serve the Company, on the terms and conditions set forth in this
Agreement. The term of this Agreement shall commence on the date of this
Agreement and, unless earlier terminated in accordance with Section 5 hereof,
shall continue through the third anniversary of such date (such three-year term
shall be referred to herein as the "Employment Period").
2. POSITION AND DUTIES. (A) During the Employment Period, the Executive shall
serve as Chairman, President and Chief Executive Officer of the Company with
such duties and responsibilities as are customarily assigned to such positions,
and such other duties and responsibilities not inconsistent therewith as may
from time to time be assigned to him by the Board of Directors of the Company
(the "Board"). The Board shall propose the Executive for re-election and shall
use all reasonable efforts to have the Executive re-elected to the Board and for
positions specified above throughout the Employment Period.
(B) During the Employment Period, the Executive shall report directly
to the Board. All other executive officers of the company shall report to the
Executive.
(C) During the Employment Period, the Executive shall devote
substantially all of his time and attention to the business and affairs of the
Company and shall perform, faithfully and diligently his duties and
responsibilities hereunder. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic, social or
charitable boards or committees, so long as such activities do not interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
3. COMPENSATION.
(A) BASE SALARY. The Executive's compensation during the Employment
Period shall be determined by the Board upon the recommendation of the committee
of the Board having responsibility for approving the compensation of senior
executives (the "Compensation Committee"), subject to the next sentence and the
other provisions of this Section 3. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary") of $344,000. The
Annual Base Salary shall be payable on the first and fifteenth day of each
calendar month (or, if any such date is not a business day, on the next business
day following such date) during the Employment Period.
(B) PERFORMANCE BONUS. Executive also shall be eligible to receive a
cash bonus ("Performance Bonus") for each successive fiscal year (prorated for
any partial period) during the Employment Period in an amount of between zero
and 100% of the Annual Base Salary, to be determined on an annual basis in
accordance with the provisions of this Section 3(B). The Performance Bonus, if
any, for each successive fiscal year shall be paid within 60 days after the end
of such period.
The Performance Bonus shall consist of the following two
components:
(I) The first component of the Performance Bonus shall be an
amount of between zero and 50% of the Annual Base Salary based on the Company
achieving certain earnings per share targets tied to the forecasted projections
associated with the funding of the Onkyo acquisition. If the acquisition is not
consummated, the Compensation Committee will meet to establish new financial
goals for FY01 (Oct '00 -Sept.'01).
(II) The second component of the Performance Bonus shall be an
amount of between zero and 50% of the Annual Base Salary based on the Company
achieving approximately five targets for each period of the fiscal year during
the Employment Period. The targets for FY01 (Oct '00-Sept '01) shall be
established within 60 days after the date of the close of each fiscal year,
based on the mutual written agreement of the Executive and the Compensation
Committee (and with respect to which Executive and the Company agree to
negotiate in good faith and as expeditiously as possible) and the targets for
each succeeding fiscal year during the Employment Period shall be reset and
established annually by the Compensation Committee in its sole and absolute
discretion. Each target shall be given equal weight (so that, by way of
illustration, if the Executive and the Compensation Committee agree upon five
targets, the Executive shall be eligible to receive an amount of up to 10% of
the Annual Base Salary upon meeting each such target), and the Executive's
success in achieving each target shall be graded on a scale of 1-10 (so that, by
way of illustration, if the Executive achieves a score of 5 for a target
representing a maximum award of 10% of the Annual Base Salary, the Executive
would receive an amount equal to 5% of the Annual Base Salary with respect to
such target). The Compensation Committee, acting in its sole discretion, shall
evaluate and determine the degree and/or quality of the Executive's achievement
of the targets, and shall report its determinations to the Executive promptly in
writing.
(C) STOCK OPTIONS. The Compensation Committee shall consider making
further grants of options to the Executive on an annual basis during the
Employment Period, although the Committee shall be under no obligation to make
any such additional grants.
(D) AUTOMOBILE ALLOWANCE. During the Employment Period, the Company
shall either (x) make available to the Executive a Company-owned car, or (y) pay
the Executive $600 per month as an automobile allowance, and also shall
reimburse the Executive for up to $400 per month for expenses such as insurance
premiums, parking, fuel and similar expenses relating to the maintenance of an
automobile.
(E) REIMBURSEMENT OF EXPENSES AND ADMINISTRATIVE SUPPORT. The Company
shall pay or reimburse the Executive, upon the presentation of appropriate
documentation of such expenses, for all reasonable travel and other expenses
incurred by the Executive in accordance with the Company's expense policies in
performing his obligations under this Agreement. The Company further agrees to
furnish the Executive with office space and administrative support in existing
Company facilities whenever possible, and any other assistance and
accommodations as shall be reasonably required by the Executive in the
performance of his duties under this Agreement. The Executive shall review the
foregoing expenses and other matters with the Compensation Committee on a
quarterly basis.
(F) VACATION. Executive shall be entitled to four (4) weeks paid
vacation in each calendar year.
(G) DEDUCTIONS. All payments made under this Agreement shall be subject
to such deductions at the source as from time to time may be required to be made
pursuant to any law, rule, regulation or order.
<PAGE>
(H) CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" of the Company shall be deemed to have occurred upon any of the
following events:
(I) A person or entity or group of persons or entities, acting in concert,
shall become the direct or indirect beneficial owner (within the meaning of Rule
13d-3 of the Securities Exchange Act of 1934, as amended), of securities of the
Company representing more than fifty percent (50%) of the combined voting power
of the issued and outstanding common stock of the Company; or
(II) The majority of the Board is no longer comprised of the incumbent
directors who constitute such board on the date of this Agreement (Messrs.
Mennen, Vickar, Burd, Natan and Willis); or
(III) The Board shall approve a sale of all or substantially all of the
assets of the Company; or
(IV) The Board shall approve any merger, acquisition, consolidation, or
like business combination or reorganization of the Company, the consummation of
which would result in the occurrence of any event described in clause (I) or
(II) above, and such transaction shall have been consummated.
4. PARTICIPATION IN BENEFIT PLANS. The Executive shall be entitled to
participate, during the term of this Agreement, in the Company's benefit
programs, including but not limited to the Company's 401K plan (with respect to
which the Company, shall make the maximum matching contribution (presently
$2,500 annually) permitted under the term of such plan and applicable law) and
any other qualified or non-qualified pension plans, supplemental pension plans,
group hospitalization, health, dental care, death benefit, post-retirement
welfare plans, or other present or future group employee benefit plans or
programs of the Company for which key executives are or shall become eligible
(collectively, the "Benefit Plans"), on the same terms as other key executives
of the Company. In addition to and without limiting the generality of the
foregoing, during the Employment Period, (x) the Company shall reimburse the
Executive for all medical expenses incurred by him and the members of his
immediately family in connection with reasonable medical care (not including
cosmetic surgery or procedures) to the extent not covered by the foregoing
insurance up to a maximum of $10,000 per year, and (y) the Company shall obtain
and maintain a term life insurance policy in the amount of $1,000,000, which
policy shall be owned by the Executive, from a nationally-recognized insurance
carrier reasonably acceptable to the Executive.
5. TERMINATION OF EMPLOYMENT.
(A) DEATH OR DISABILITY. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. The
Company shall be entitled to terminate the Executive's employment because of the
Executive's Disability during the Employment Period. "Disability" means that the
Executive has been unable, for a period of not less than (x) 90 consecutive
business days, or (y) 180 days within any 12 month period, to perform the
Executive's duties under this Agreement, as a result of physical or mental
illness or injury. A termination of the Executive's employment by the Company
for Disability shall be communicated to the Executive by written notice, and
shall be effective on the 30th day after receipt of such notice by the Executive
(the "Disability Effective Date"), unless the Executive returns to full-time
performance of the Executive's duties before the Disability Effective Date.
(B) BY THE COMPANY. (I) The Company may terminate the Executive's
employment during the Employment Period for Cause or without Cause. "Cause"
means (x) the conviction of the Executive for the commission of a felony related
to the Executive's performance of his duties with the Company, (y) gross
negligence or willful misconduct by the Executive that results in material and
demonstrable monetary damage to the Company, or (z) continued failure or refusal
by the Executive to substantially perform his duties hereunder (other than by
reason of death or disability) after written notification and a 30-day cure
period.
(II) A termination of the Executive's employment for Cause
shall be effected in accordance with the following procedures. The Company shall
give the Executive written notice ("Notice of Termination for Cause") of its
intention to terminate the Executive's employment for Cause, setting forth in
reasonable detail the specific conduct of the Executive that it considers to
constitute Cause and the specific provision(s) of this Agreement on which it
relies, and stating the date, time and place of the Special Board Meeting for
Cause. The "Special Board Meeting for Cause" means a meeting of the Board called
and held specifically for the purpose of considering the Executive's termination
for Cause, that takes place not less than ten and not more than twenty business
days after the Executive receives the Notice of Termination for Cause. The
Executive shall be given an opportunity, together with counsel, to be heard at
the Special Board Meeting for Cause. The Executive's termination for Cause shall
be effective when and if a resolution is duly adopted at the Special Board
Meeting for Cause.
(III) A termination of the Executive's employment without
Cause shall be effected by giving the Executive written notice of the
termination.
(C) GOOD REASON. (I) The Executive may terminate employment for Good Reason
or without Good Reason. "Good Reason" means:
a. Failure by the Company to re-elect the Executive as Chairman
of the Board of Directors and Chief Executive Officer, or the assignment to the
Executive of any duties or responsibilities materially inconsistent with those
customarily associated with the positions to be held by the Executive pursuant
to this Agreement, or any other action by the Company that results in a material
diminution in the Executive's position, authority, duties or responsibilities,
other than an isolated, insubstantial and inadvertent action that is not taken
in bad faith and is remedied by the Company promptly after receipt of notice
thereof from the Executive;
b. Any failure by the Company to comply with any provision of
Section 3 of this Agreement, other than an isolated, insubstantial and
inadvertent failure that is not taken in bad faith and is remedied by the
Company promptly after receipt of notice thereof from the Executive;
c. Any requirement by the Company not agreed to by the
Executive that the Executive's services be rendered primarily at a location or
locations more than 50 miles distant from the Company's present executive
offices in Palm Beach Gardens, Florida; or
d. Any other material breach of this Agreement by the Company that
either is not taken in good faith or is not remedied by the Company promptly
after receipt of notice thereof from the Executive.
(II) A termination of employment by the Executive for Good
Reason shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes Good Reason and the
specific provision(s) of this Agreement on which the Executive relies. A
termination of employment by the Executive for Good Reason shall be effective on
the fifth business day following the date when the Notice of Termination for
Good Reason is given, unless the notice sets forth a later date (which date
shall in no event be later than 30 days after the notice is given).
(III) A termination of the Executive's employment by the
Executive without Good Reason shall be effected by giving the Company written
notice of the termination.
(D) NO WAIVER. The failure to set forth any fact or circumstance in a
Notice of Termination for Cause or a Notice of Termination for Good Reason shall
not constitute a waiver of the right to assert, and shall not preclude the party
giving notice from asserting, such fact or circumstance in an attempt to enforce
any right under or provision of this Agreement.
(E) DATE OF TERMINATION. The "Date of Termination" means the date of
the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or without
Cause or by the Executive for Good Reason is effective, or the date on which the
Executive gives the Company notice of a termination of employment without Good
Reason, as the case may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(A) DEATH. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, the Company shall continue to
pay to the Executive's designated beneficiaries (or, if there is no such
beneficiary, to the Executive's estate or legal representative), the Annual Base
Salary provided for in Section 3(A) as in effect on the Date of Termination
through the end of the month in which the Executive's death occurs. The Company
also shall pay to the Executive's designated beneficiaries (or, if there is no
such beneficiary, to the Executive's estate or legal representative), in a lump
sum in cash within 30 days of the Date of Termination (or, in the case of the
amount referred to in clause (I) below, as soon as practicable after the
calculation period in which the Date of Termination occurs), the sum of the
following amounts (the "Accrued Obligations"): (I) any accrued but unpaid
Performance Bonus, vacation pay or other monetary payments to which Executive
was entitled on the Date of Termination, and (II) a pro rata portion of the
Performance Bonus for the year in which the Date of Termination occurs, based on
the number of days of such year prior to the Date of Termination. With respect
to medical insurance coverage, the Company shall continue to provide the spouse
and dependents of the Executive, at the expense of the Company, with the medical
insurance then provided generally to dependents of employees of the Company, for
a period of one year following the termination of the employment of the
Executive, which medical insurance coverage shall be included as part of any
required continuation of coverage under Part 6, Subtitle B of Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any
similar state or local law ("COBRA Coverage"); provided, however, that the COBRA
Coverage shall terminate with respect to such spouse and/or dependents as of the
date that the spouse and/or dependents receive equivalent coverage and benefits
under any plans, programs and/or arrangements of a subsequent employer. The
rights and benefits of the estate or other legal representative of the Executive
under the benefit plans and programs of the Company shall be determined in
accordance with the provisions of such plans and programs. The rights and
benefits of the estate or other legal representative of the Executive with
respect to the options referred to in Section 3(C) shall be determined in
accordance with the provisions of the plans and grant agreements governing such
options. Except as otherwise specified in this Agreement, neither the estate or
other legal representative of the Executive nor the Company shall have any
further rights or obligations under this Agreement.
(B) DISABILITY. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, the Company shall
pay to the Executive, in a lump sum in cash within 30 days of the Date of
Termination (or, in the case of any Performance Bonus, as soon as practicable
after the end of the calculation period in which the Date of Termination
occurs), the Accrued Obligations. The Company shall continue to provide the
Executive and the spouse and dependents of the Executive, at the expense of the
Company, with the medical insurance then provided generally to dependents of
employees of the Company, for a period of one year following the termination of
the employment of the Executive, which medical insurance coverage shall be
included as part of any required COBRA Coverage; provided, however, that the
COBRA Coverage shall terminate with respect to the Executive, the spouse and/or
dependents of the Executive as of the date that any such individual receives
equivalent coverage and benefits under any plans, programs and/or arrangements
of a subsequent employer. The rights and benefits of the Executive under the
benefit plans and programs of the Company shall be determined in accordance with
the provisions of such plans and programs. The rights and benefits of the
Executive with respect to the options referred to in Section 3(C) shall be
determined in accordance with the provisions of the plans and grant agreements
governing such options. Except as otherwise specified in this Agreement, neither
the Executive nor the Company shall have any further rights or obligations under
this Agreement.
(C) BY THE COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY, OR BY THE
EXECUTIVE FOR GOOD REASON. If, during the Employment Period, the Company
terminates the Executive's employment, other than for Cause, death or
Disability, or the Executive terminates employment for Good Reason, the Company
shall, continue to pay to the Executive, until the expiration of 12 months after
the Date of Termination, the Annual Base Salary provided for in Section 3(A).
The Company also shall pay to the Executive, in a lump sum in cash within 30
days of the Date of Termination (or, in the case of any Performance Bonus, as
soon as practicable after the end of the calculation period in which the Date of
Termination occurs), the Accrued Obligations. However, not withstanding the
foregoing, if the Company terminates the Executive or the Executive resigns for
Good Reason as a result of Change of Control, events outlined in 3(H), the
Company shall continue to pay to the Executive, until the expiration of 36
months after the Date of Termination, the Annual Base Salary provided for in
Section 3(A). The Company also shall pay to the Executive, in a lump sum in cash
within 30 days of the Date of Termination (or, in the case of any Performance
Bonus, as soon as practicable after the end of the calculation period in which
the Date of Termination occurs), the Accrued Obligations. The Company shall
continue to provide the Executive and the spouse and dependents of the
Executive, at the expense of the Company with the medical insurance then
provided generally to dependents of employees of the Company, for the period
during the termination pay (12 months or 36 months, respectively) following the
termination of the employment of the Executive, which medical insurance coverage
shall be included as part of any required COBRA Coverage; provided, however,
that the COBRA Coverage shall terminate with respect to the Executive, the
spouse and/or dependents of the Executive as of the date that any such
individual receives equivalent coverage and benefits under any plans, programs
and/or arrangements of a subsequent employer. The rights and benefits of the
Executive under the benefit plans and programs of the Company shall be
determined in accordance with the provisions of such plans and programs. The
rights and benefits of the Executive with respect to the options referred to in
Section 3(C) shall be determined in accordance with the provisions of the plans
and grant agreements governing such options. Except as otherwise specified in
this Agreement, neither the Executive nor the Company shall have any further
rights or obligations under this Agreement. The payments and benefits provided
pursuant to this paragraph (C) of Section 6 are intended as liquidated damages
for a termination of the Executive's employment by the Company other than for
Cause or Disability or for the actions of the Company leading to a termination
of the Executive's employment by the Executive for Good Reason.
(D) BY THE COMPANY FOR CAUSE; BY THE EXECUTIVE OTHER THAN FOR GOOD
REASON. If the Executive's employment is terminated by the Company for Cause
during the Employment Period, or if the Executive voluntarily terminates
employment during the Employment Period, other than for Good Reason, the Company
shall pay to the Executive in a lump sum in cash within 30 days of the Date of
Termination any portion of the Executive's Annual Base Salary through the Date
of Termination that has not yet been paid plus any accrued but unpaid vacation
pay to which Executive was entitled on the Date of Termination, and the Company
shall have no further obligations under this Agreement, except as otherwise
specified in this Agreement. The rights and benefits of the Executive under the
benefit plans and programs of the Company shall be determined in accordance with
the provisions of such plans and programs. The rights and benefits of the
Executive with respect to the options referred to in Section 3(C) shall be
determined in accordance with the provisions of the plans and grant agreements
governing such options.
(E) The Company's obligation to deliver the liquidated damages payments
described in paragraph (C) of this Section 6 shall be contingent on the
Executive delivering to the Company, on or about the Date or Termination, a
legal release in a form acceptable to counsel to the Company, releasing the
Company, its affiliates, and the current and former directors, officers and
employees of the Company from any obligations relating to his employment
hereunder, subject to the Company's continuing obligations under this Agreement
and subject to the Executive's continuing rights under the terms and conditions
of the compensation and benefit plans in which the Executive is a participant,
as such plans may be amended from time to time.
(F) The respective obligations of the Company and the Executive under
Sections 9, 10, 11, 12 and 13 shall survive any termination of Executive's
employment.
(G) Notwithstanding any other provision of this Agreement, to the
extent the Company reasonably determines that the Executive would be subject to
the excise tax under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), on any payments under Section 6 of this Agreement and such
other amounts or benefits the Executive receives from the Company, any person
whose actions result in a change of ownership covered by Section 280G(b)(2) of
the Code or any person affiliated with the Company or such person, required to
be included in the calculation of parachute payments for purposes of Sections
280G and 4999 of the Code, the amounts provided under this Agreement shall be
automatically reduced to an amount one dollar less than that which, when
combined with such other amounts, would subject the Executive to such excise
tax.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit
the Executive's continuing or future participation in any plan, program, policy
or practice provided by the Company or any of its affiliated companies for which
the Executive may qualify, nor, subject to paragraph (F) of Section 14, shall
anything in this Agreement limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Vested benefits and other amounts that the Executive
is otherwise entitled to receive under the Stock Option Plan, or any other plan,
policy, practice or program of, or any contract of agreement with, the Company
or any of its affiliated companies on or after the Date of Termination shall be
payable in accordance with the terms of each such plan, policy, practice,
program, contract or agreement, as the case may be.
8. NO OFFSET, ETC. The Company's obligation to make the payments provided for
in, and otherwise to perform its obligations under, this Agreement shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action that the Company may have against the Executive or others. In no event
shall the Executive be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Executive under any of
the provisions of this Agreement, and such amounts shall not be reduced,
regardless of whether the Executive obtains other employment.
9. INVENTIONS. Any and all inventions, innovations or improvements
("inventions") made, developed or created by the Executive (whether at the
request or suggestion of the Company (which, as used in this Section 9, shall be
deemed to include the Company and each of its subsidiaries) or otherwise,
whether alone or in conjunction with others, and whether during regular hours of
work or otherwise) during the period of his employment with the Company which
may be directly or indirectly useful in, or relate to, the business of the
Company, shall be promptly and fully disclosed by the Executive to the Board and
shall be the Company's exclusive property as against the Executive, and the
Executive shall promptly deliver to an appropriate representative of the Company
as designated by the Board all papers, drawings, models, data and other material
relating to any inventions made, developed or created by him as aforesaid. The
Executive shall, at the request of the Company and without any payment therefor,
execute any documents necessary or advisable in the opinion of the Company's
counsel to direct issuance of patents or copyrights to the Company with respect
to such inventions as are to be the Company's exclusive property as against the
Executive or to vest in the Company title to such inventions as against the
Executive. The expense of securing any such patent or copyright shall be borne
by the Company.
10. CONFIDENTIAL INFORMATION. The Executive shall hold all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies and their respective businesses that the Executive
obtains during the Executive's employment by the Company or any of its
affiliated companies and that is not public knowledge (other than as a result of
the Executive's violation of this Section 10) ("Confidential Information") in
strict confidence. The Executive shall not communicate, divulge or disseminate
Confidential Information at any time during or after the Executive's employment
with the Company, except with the prior written consent of the Company or as
otherwise required by law or regulation or by legal process. If the Executive is
requested pursuant to, or required by, applicable law or regulation or by legal
process to disclose any Confidential Information, the Executive will provide the
Company, as promptly as the circumstances reasonably permit, with notice of such
request or requirement and, unless a protective order or other appropriate
relief is previously obtained, the Confidential Information, subject to such
request, may be disclosed pursuant to and in accordance with the terms of such
request or requirement, provided that the Executive shall use his best efforts
to limit any such disclosure to the precise terms of such request or
requirement.
11. NON-COMPETITION. The Executive acknowledges that the services to be rendered
by him to the Company (which, as used in this Section 11 shall be deemed to
include the Company and each of its subsidiaries) are of a special and unique
character. In consideration of his employment hereunder, the Executive agrees,
for the benefit of the Company, that he will not, during the term of this
Agreement and thereafter until the earlier to occur of (x) the expiration of a
period of twelve (12) months commencing on the date of termination of his
employment with the Company or (y) a Change in Control, (a) engage, directly or
indirectly, whether as principal, agent, distributor, representative,
consultant, employee, partner, stockholder, limited partner or other investor
(other than an investment of not more than (I) two percent (2%) of the stock or
equity of any corporation the capital stock of which is publicly traded or (II)
two percent (2%) of the ownership interest of any limited partnership or other
entity) or otherwise, within the United States of America, in any business which
is competitive with the business now, or at any time during the term of this
Agreement, conducted by the Company, (B) solicit or entice to endeavor to
solicit or entice away from the Company any person who was an officer, employee
or sales representative of the Company, either for his own account or for any
individual, firm or corporation, whether or not such person would commit any
breach of his contract of employment by reason of leaving the service of the
Company, and the Executive agrees not to employ, directly or indirectly, any
person who was an officer, employee or sales representative of the Company or
who by reason of such position at any time is or may be likely to be in
possession of any confidential information or trade secrets relating to the
businesses or products of the Company, or (C) solicit or entice or endeavor to
solicit or entice away from the Company any customer or prospective customer of
the Company, either for his own account or for any individual, firm or
corporation. In addition, the Executive shall not, at any time during the term
of this Agreement or at any time thereafter, engage in the business which uses
as its name, in whole or in part, "Global Technovations," "Top Source," or any
other tradename or trademark or corporate name used by the Company or any of its
subsidiaries.
12. INDEMNIFICATION. (A) The Company shall indemnify the Executive to the
fullest extent permitted by Delaware law in effect as of the date hereof against
all costs, expenses, liabilities and losses (including, without limitation,
attorneys' fees, judgments, fines, penalties, ERISA excise taxes, penalties and
amounts paid in settlement) reasonably incurred by the Executive in connection
with a Proceeding. For the purposes of this Section 12, a "Proceeding" shall
mean any action, suit or proceeding, whether civil, criminal, administrative or
investigative, in which the Executive is made, or is threatened to be made, a
party to, or a witness in, such action, suit or proceeding by reason of the fact
that he is or was an officer, director or employee of the Company or is or was
serving as an officer, director, member, employee, trustee or agent of any other
entity at the request of the Company, whether or not the basis of such
Proceeding arises out of or in connection with the Executive's alleged action or
omission in an official capacity.
(B) The Company shall advance to the Executive all reasonable costs and
expenses incurred by him in connection with a Proceeding within 20 days after
receipt by the Company of a written request for such advance. Such request shall
include an itemized list of the costs and expenses and an undertaking by the
Executive to repay the amount of such advance if it shall ultimately be
determined that he is not entitled to be indemnified against such costs and
expenses.
(C) The Executive shall not be entitled to indemnification under this
Section 12 unless he meets the standard of conduct specified in the Delaware
General Corporation Law. Any indemnification under subsection (A) (unless
ordered by a court) shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the Executive is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware Corporation Law. Such determination shall be
made (1) by the Board by a majority vote of a quorum consisting of directors who
were not parties to such Proceeding, or (2) if such a quorum is not obtainable,
or, even if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the stockholders.
(D) The Company shall not settle any Proceeding or claim in any manner
which would impose on the Executive any penalty or limitation without his prior
written consent. Neither the Company nor the Executive will unreasonably
withhold its or his consent to any proposed settlement.
(E) The indemnification in this Section 12 shall inure to the benefit
of the Executive's heirs, executors and administrators.
(F) The Company agrees to use its best efforts to obtain, continue and
maintain an adequate directors and officers' liability insurance policy and
shall cause such policy to cover the Executive to the extent the Company
provides such coverage for its other executive officers.
13. SUCCESSORS; BENEFICIARIES. (A) This Agreement is personal to the Executive
and, without the prior written consent of the Company, shall not be assignable
by the Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.
(B) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(C) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
(D) The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change the beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
14. MISCELLANEOUS. (A) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Florida, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(B) All notices and other communications under this Agreement shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Mr. William Willis, Jr.
700 Seaview Drive
Juno Beach, Florida 33408-1308
If to the Company:
Global Technovations, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Garden, Florida 33418
Attention: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (B) of Section 14. Notices and communications
shall be effective when actually received by the addressee.
(C) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(D) Notwithstanding any other provision of this Agreement, the Company
may withhold from amounts payable under this Agreement all federal, state, local
and foreign taxes that are required to be withheld by applicable laws or
regulations.
(E) The Executive's or the Company's failure to insist upon strict
compliance with any provisions of, or to assert, any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (C) of Section 5 of this
Agreement) shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement.
(F) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
(G) The rights and benefits of the Executive under this Agreement may
not be anticipated, assigned, alienated or subject to attachment, garnishment,
levy, execution or other legal or equitable process except as required by law.
Any attempt by the Executive to anticipate, alienate, assign, sell, transfer,
pledge, encumber or charge the same shall be void. Payments hereunder shall not
be considered assets of the Executive in the event of insolvency or bankruptcy.
(H) This Agreement may be executed in several counterparts, each of
which shall be deemed an original, and said counterparts shall constitute but
one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization of the Board of Directors,
the Company has caused this Agreement to be executed in its name on its behalf,
all as of the day and year first above written.
William Willis, Jr.
GLOBAL TECHNOVATIONS, INC.
By: David Natan Vice President
and CFO
COMPENSATION COMMITTEE:
G. Jeff Mennen
L. Kerry Vickar
