UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X]Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended September 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
corporation or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (561)775-5756
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
$.001 par value Common Stock (Title of Class)
None
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 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
Incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
As of January 12, 2001, 29,804,281 shares of $.001 par value Common Stock (the
Registrant's only class of voting stock) were outstanding. The aggregate market
value of the common shares of the Registrant on January 12,2001 (on the closing
sales price) held by non-affiliates of the Registrant, was approximately
$14,735,865.
Documents Incorporated by Reference
Location in Form 10-K Incorporated Document
Part III-Items 10, 11, & 12 Definitive Proxy Statement in connection
with its Annual Meeting of Stockholders
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PART I
ITEM 1. BUSINESS
A. General Description of Business
Global Technovations, Inc. (the "Company") was organized in 1986 to distribute a
patented overhead mounted speaker system ("OHSS") for vehicles. With the
September 30, 1999 sale of the Company's OHSS assets to Onkyo America, Inc.
("OAI"), the Company's primary business temporarily became the assembly, sale,
and lease of its proprietary on-site oil analyzer ("OSA-II"), a second
generation proprietary oil analysis instrument that combines two spectrometers
in order to analyze both new or used oil in approximately five minutes.
Following the sale of OHSS assets, the Company re-acquired them with its
purchase of OAI for $25 million on August 31, 2000.
The Company conducts substantially all of its operations through two wholly
owned operating subsidiaries, OAI, which conducts the Company's automotive
speaker technology business and On-Site Analysis, Inc. ("On-Site"), which
conducts the Company's oil analysis business. In late December 2000, On-Site
acquired the assets of Boston Advanced Technologies, Inc. ("BAT"). BAT was
engaged in the development and manufacture of a family of portable spectroscopic
instruments and a line of diesel fuel and gasoline property analyzers.
For the fiscal year ended September 30, 2000 OAI recorded revenue of $6,478,163
and On-Site recorded revenue of $1,124,265. OAI revenues represent one month of
operations.
The Company's mission is to identify, acquire, and/or incubate proprietary
technologies that address specific customer needs. The Company's aim is to
maximize technology commercialization through strategic relationships with
business entities, which share its vision and possess the financial and
organizational resources to realize its goals.
B. Financial Information About Industry Segments
The Company currently has two industry segments: oil analysis service and
automotive speaker technology. See Note 17. Segment Information in accompanying
consolidated financial statements.
C. Narrative Description of Business
General
The Company manufactures, assembles, and markets two products, oil analysis
instruments, which are sold and leased to a diverse group of industries, and
through the sales of speakers and speaker components (collectively, "Speakers"),
which are sold to automotive Original Equipment Manufacturers ("OEMs"), the
automotive and home aftermarkets, and to the computer, television and telephone
industries. With the purchase of OAI, effective August 31, 2000, the Company
began including the revenues of OAI in its consolidated financial statements.
Accordingly, for accounting purposes, September 2000 sales of OAI, and 12 months
of OSA-II sales accounted for all of the Company's revenue from operations in
fiscal 2000.
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Products and Technologies
OAI
OAI was organized in 1987 and began producing and selling automotive related
Speakers in September 1988. OAI has grown primarily through internal growth,
normal market expansion, and the September 30, 1999 acquisition of the assets of
TSA. OAI owns a manufacturing plant in Columbus, Indiana, has a sales and
engineering office in Troy, Michigan and a sales office in San Diego,
California.
OAI is a leading domestic manufacturer of high quality automotive Speakers,
primarily for four OEMs in North America -- General Motors ("GM"), Toyota,
Nissan, and Daimler-Chrysler. OAI manufactures and sells paper and plastic based
automotive Speakers to OEMs and OEM distributors. OAI is also engaged in the
development and manufacture of audio Speakers for the consumer electronics
industry, which includes computers, televisions, telephones, and aftermarket
home.
OAI believes it is one of the top two OEM Speaker manufacturers in the United
States with Panasonic, each shipping approximately 14 million Speakers annually.
Management believes this leading position is attributable to its outstanding
quality, delivery, manufacturing, marketing, flexible service and technology.
The overall global annual Speaker market is estimated at approximately $1
billion. The major segments that comprise this market are OEM automobile,
aftermarket automobile, aftermarket home Speaker systems, and OEM computer,
television and telephone manufacturers.
Industry
The automotive audio industry consists of a large array of Speaker manufacturers
that design various systems that can be added to enhance the car's sound
performance. In addition to supplying aftermarket systems to improve the audio
performance of an automobile, the industry also focuses upon manufacturing
"standard" car Speaker systems for automotive OEMs. At the present day, there
exists an average of 5.1 Speakers per car, up from 4.0 in the mid 1980s. This
growth has been a key driver in OAI's rise to become a market leader in the OEM
automotive Speaker manufacturing industry.
OAI's principal business is the design, manufacturing and sale of Speakers to
automotive OEMs. These Speakers are installed in a full range of vehicles
including sports utility vehicles, trucks, passenger sedans and coupes, and
sport cars.
OAI manufactures Speakers, and produces over 150 models of various automotive
and consumer related Speakers. These Speakers are produced in different shapes,
such as elliptical and round. OAI's main product lines consist of 6x9, 4x6, 4, 5
1/4, and 6 inch Speakers and are primarily for the front, rear, and side
interior panels of a wide array of automobile makes and models. OAI also
provides enclosures, through the use of its in-house plastic injection molding
facilities, for a select number of Speakers it manufactures.
OAI's strategy has been to provide a cost competitive, high quality product to
automotive OEMs, complemented with quick delivery and top-notch customer
service, highlighted by engineered Speaker enclosure, and design leadership.
On September 30, 1999, OAI acquired from the Company the assets of its TSA
subsidiary, which was a designer and manufacturer of overhead mounted speaker
systems for the Jeep Wrangler and other sport utility vehicles. TSA is now
inactive.
TSA began importing overhead speaker systems from Sweden in the early 1980s.
After distributing the product, TSA began noticing additional market potential
and decided to target the entire North American market.
At September 30, 2000, OAI does not have significant backlog.
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The TSA acquisition presented OAI an opportunity to diversify its customer base,
reinforce OAI's superior quality standards, acquire a premier
research/development facility, and expand market presence in Detroit.
Significant cost reductions were achieved in the areas of labor and
administration due to the TSA acquisition. With the addition of a new customer,
OAI gained entry as a supplier to a Big 3 automaker, while also diversifying its
customer base. Since OAI acquired TSA, it has leveraged its engineering design
expertise and customer relationships to expand its presence within Clarion, GM
and Daimler-Chrysler.
Following OAI's acquisition by the Company, OAI leveraged its Speaker
manufacturing expertise by expanding into the manufacture and sale of Speakers
for a leading supplier of sound systems for the home consumer market. OAI
received an initial $700,000 purchase order in December 2000 and a commitment in
January 2001 for an additional $1.5 million in 2001 from this supplier.
Manufacturing
All manufacturing takes place at OAI's Columbus, Indiana 130,000 sq. ft.
manufacturing facility. OAI's QS9000 certified approved manufacturing process
consists of several highly automated and robotic production lines complemented
with several shorter, more customized manufacturing modules. The more automated
lines allow OAI to engage in long production runs, utilizing less labor
(non-union) and increasing efficiency. The smaller modules allow OAI to produce
low volume, customized Speakers. This unique mix of manufacturing capabilities
allows OAI to engage in a wide array of Speaker offerings.
Suppliers
Currently, approximately 50% of all manufacturing, raw material and supplies are
sourced domestically and the remainder is sourced from Asia. OAI has maintained
a long-term relationship with its suppliers, and believes that there are ample
alternatives beyond its current supplier base. OAI management believes that the
loss of any one or more suppliers would not have a material effect on it nor
affect long-term profitability. However, OAI purchases tweeters from an
affiliate of Onkyo Corporation, which was one of the August 31, 2000 sellers of
OAI. Although alternate sources are available, the loss of this supplier would
result in a delay in obtaining a replacement acceptable to OAI's customers. The
Company cannot quantify the financial impact if this occurs.
Customers
OAI sells approximately 80% of its Speakers to three customers - Delphi Delco
Electronics ("Delco"), which accounted for approximately 55% of sales in fiscal
2000, and Daimler- Chrysler and Fujitsu Ten together accounted for approximately
25% of sales in fiscal 2000. Delco is a Tier One supplier to GM and Fujitsu Ten
is a Tier One supplier to Toyota. A new practice is beginning to occur in the
automotive industry as major OEMs such as GM and Daimler-Chrysler have begun to
procure necessary componentry directly from manufacturers like OAI rather than
using the traditional network of independent Tier One distributors like Delco,
which sell the products of Tier Two and Three companies (as well as their own
products). OAI currently acts as a Tier One supplier to Daimler-Chrysler and
Nissan, and as a Tier Two supplier to GM and Toyota. OAI has been approved as a
Tier One supplier for direct sales to GM beginning in 2003.
OAI has managed to maintain a strong relationship with Delco and with Delco's
drive to supply non-GM customers, OAI expects that it will supply Speakers to
Delco for other OEMs. Delco is the largest, most diversified automotive OEM
supplier in the world. Since Delco's spin-off from GM in 1997, it has continued
to aggressively diversify its customer base, procure products, and negotiate
cost competitive market prices for its customers. Delco is the world's leader in
supplying audio systems to the OEM automotive market.
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The loss of Delco, Daimler-Chrysler, or Fujitsu Ten as customers (or an
impairment of OAI's future relationship with GM) could have a material adverse
effect on the Company.
Service
OAI is always aware that service to the customer takes place both before and
after the sale. OAI's sales and design engineering personnel are in constant
contact with the customers from the initial design concept stages through the
end of the product life cycle. Any issues at the OEMs assembly plant or
dealerships for warranty claims are addressed promptly and professionally. OAI's
staff makes regular visits to assembly plants to view "first hand" the
installation of its Speakers. Any failures in the field that are returned are
subject to complete tear down analysis and prompt corrective actions to prevent
any future occurrences.
Competition
OAI faces significant competition in all aspects of its business. In the
automotive OEM market, which represents the majority of its business, OAI
believes it is one of two leading suppliers. The principal competitors include
Panasonic the other leading manufacturer, and Foster, and Harman/Oxford. In
supplying Speakers for the computer, television and telephone OEMs OAI competes
with virtually all-small Speaker manufacturers. In the consumer and automotive
aftermarket segment, OAI competes with Eminence and Credence and a large number
of Asian manufacturers. Additionally, in the consumer home Speaker market where
OAI is currently an insignificant player, OAI competes with companies that have
well known brand names and broad-based distribution.
Many of these competitors are significantly larger than OAI and have
substantially more financial resources. OAI competes in these markets through
its 12-year history and reputation for quality, timely service, technological
innovations, and competitive pricing as well as its domestic presence.
Technology
While it may seem the Speaker industry is geared towards a "commodity" product,
manufacturers are always looking for technological advantages to set their
products apart. Advances in both materials and manufacturing methods can benefit
the manufacturers by improving performance and/or reducing costs. OAI continues
to invest in the development of new processes and materials through its research
and development efforts. OAI's technology has enabled it to remain competitive,
expand its business, and improve the overall performance of its products while
maintaining a centrally located U.S. manufacturing location.
On-Site
Oil Analysis
Oil analysis service requires extracting a small sample of used oil from
oil-lubricated equipment and sending it to a laboratory. Scientific tests
identify and quantify metal debris that is the result of wear. The amount of
metal debris, correlated to time or mileage that the oil has been in service,
indicates if wear is normal or abnormal. Other laboratory tests indicate and
measure if there is any coolant or water in the oil, the amount of airborne
dirt, viscosity, acidity, depletion level of the additive package, flash point,
coloration and many other factors. Oil analysis users select the tests from a
service menu based on their particular needs. Once the empirical data is
generated by laboratory tests, a trained evaluator reviews the results and
generates a report, which often contains service recommendations. The report is
then sent to the end user.
Oil analysis is now widely used for diagnostic and preventative maintenance
programs for equipment in many different industries including those markets
where the Company is concentrating its marketing efforts for the OSA-II. These
markets are the truck market which includes truck stops, truck maintenance and
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truck quick-lube centers, the automotive market which includes automobile
auctions, automobile power train development, motorcycle engine development,
automobile dealerships, automobile and truck racing markets, and automotive
fleet maintenance, the consumer market which includes retail automobile service
outlets, marine applications, the government market which includes the United
States military and municipalities, the industrial and the heavy equipment
market which includes railroads, and mining. Additionally, the Company is
marketing the OSA-II through the Internet, and direct mail.
Industry sources have estimated that the size of the oil analysis market is in
excess of two billion dollars. This includes oil analysis performed by
independent and in-house laboratories. The Company believes that the use of oil
analysis will increase as a preventative maintenance technology. The Company
also believes that advances in oil analysis technology owned by the Company will
increase oil analysis utilization in new and existing markets.
The concept behind the OSA-II is that the oil sample must be tested by two
distinctly different types of spectrometers: an emission spectrometer to
identify and quantify metal elements and an infrared spectrometer to measure the
physical and chemical properties of the used oil. Other specifications for the
instrument included parameters such as: user friendly, low cost, minimal
maintenance, near laboratory accuracy and repeatability, reliability and short
turn around time. The overall objective is to provide high volume oil analysis
locations with an instrument that delivers acceptable data in minutes at about
the same price they pay for similar data by sending samples to a laboratory.
On-Site referred to its initial instruments as the OSA-I and began initial
testing with potential customers in 1996 by placing them in various test market
locations in diverse industries and generated a minimal amount of revenue.
Between 1997 and 1998, On-Site sold five OSA-I units. Four of these five units
were sold to automotive OEMs.
At the end of fiscal 1997, On-Site began the development of the
second-generation OSA-II unit. By August 1998, On-Site completed the first
production run of seven OSA-II units and shipped them for use in a
revenue-generating trial, at a Jacksonville, Florida tire retailer in September
1998. Due to inconsistent levels of interest from store to store in March 1999,
all seven OSA-II units were returned to On-Site.
On November 13, 1998, On-Site entered into a strategic alliance with Flying J,
Inc. ("Flying J"), a company engaged in various facets of highway-related
products and services including the operation of large truck stops. Flying J
agreed to purchase and market OSA-IIs in up to 100 of its truck-stop service
centers. The initial purchase order placed by Flying J was for the outright
purchase of 10 OSA-II units for approximately $700,000, which represented the
largest single OSA-II order since the inception of the technology.
The agreement covered a potential purchase of up to 100 OSA-IIs and joint
development and marketing of product enhancements to assist in the further
commercialization of the OSA-IIs within the truck-stop industry. After receipt
of the initial 10 OSA-IIs, Flying J could terminate the agreement without any
liability. Flying J has not purchased any units since its initial order or 10
units; therefore, the original agreement is no longer in effect.
Because of the nature of Flying J's business, its management determined that a
self-service OSA-II unit was more appropriate for the large majority of its
service plazas. On-Site's management has been in regular communication with
Flying J's management concerning development of a self-service OSA-II,
("OSA-II/SS"). Additionally, On-Site's technical staff commenced initial
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development of the instrument and expended funds during fiscal 1999. The primary
issue for resolution concerned the sharing of the cost of approximately $500,000
needed to complete the OSA-II/SS. On-Site worked on the development of the
OSA-II/SS during the fiscal 2000 year. However, due to the Company's financial
condition and a lack of additional funding that was expected to be received from
Flying J, this project has proceeded much slower than originally anticipated.
Management believes that it will develop a working OSA-II/SS during fiscal 2001;
however, there can be no assurances that there will be sufficient Company
resources to complete this project, nor can there be any assurance that Flying J
or any other current or potential customers will purchase the OSA-II/SS.
On-Site's principal revenue during fiscal 2000 was generated primarily from the
leasing of OSA-IIs to truck-stops, automotive auctions; and from outright sales
of OSA-II to customers in diverse industries.
During fiscal 2000, the principal OSA-II customer was Speedco, a truck stop
operator, an affiliate of Shell/Equilon, which currently operates approximately
40 OSA-II units.
On November 27, 2000, On-Site entered into an agreement to place five additional
revenue-generating MotorCheck(TM) OSA-II instruments with the Shell Global
Solutions Technical Group's ("Shell GST Group") facilities at locations
overseas. Previously, On-site had shipped an initial OSA-II unit overseas for
use by the Shell GST Group overseas. To date, four new units have been shipped,
and the remaining unit is expected to be shipped in January 2001.
As of January 2001, there were 115 OSA-II instruments in operation generating
various levels of revenue from leasing or from useage, some of which was
nominal.
Sale of 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 OAI for $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
OAI. The $6,500,000 note and accrued interest of $46,479 were paid on October
29, 1999, and the $1,000,000 note was paid through issuance of $1,000,000 of OAI
5% Series A Convertible Preferred Stock ("Onkyo Preferred").
Purchase of OAI
On August 31, 2000, the Company acquired 100% of the outstanding common stock of
OAI from Onkyo Corporation, Onkyo Malaysia SDN. BHD., and Onkyo Europe
Electronics GMBH. The purchase price was $25,000,000 plus a contingent sum of up
to $15,000,000 based upon the future post acquisition earnings of OAI (the
"Earn-Out") over a five-year period. At closing, the Company paid $13,000,000 in
cash and delivered the balance of $12,000,000 in promissory notes due in three
years together with accrued interest of 7.51%. The Earn-Out, if any, is due and
payable on August 31, 2005.
To facilitate the acquisition of OAI shares:
(i) The Company refinanced OAI's existing indebtedness with OAI entering
into a secured three-year $31,230,000 credit facility with GMAC
Business Credit, LLC ("GMAC"). The GMAC proceeds were used to repay
OAI's existing indebtedness owed to another institutional lender and
to lend part of the cash purchase price to the Company. The credit
facility consists of a revolving line of credit and two term loans.
The revolving line of credit is for a maximum of $20,000,000 subject
to meeting various financial and other covenants. Under the line of
credit, OAI may borrow up to 85% of eligible accounts receivable plus
the lesser of 60% of all eligible inventory or $7,500,000. The term
loans are for $5,230,000 and $6,000,000. The $5,230,000 term loan is
due in monthly installments of approximately $72,639 with a balloon
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payment due on August 30, 2003 of approximately $2,615,000; the other
term loan is due in monthly installments of $100,000 increasing to
monthly installments of $150,000 on October 1, 2001 and again
increasing to $250,000 per month on October 1, 2002. The final payment
is due on August 30, 2003. Except for LIBOR loans, which may be
advanced under the line of credit, interest on each of the loans under
the credit facility is at the greater of the federal funds rate
established by the Federal Reserve Bank of New York plus one-half
percent or the published prime rate.
The credit facility is secured by a first lien on all of the assets of
OAI. The Company guaranteed the credit facility and pledged all of its
outstanding stock of OAI as additional security. At the closing, the
Company borrowed a total of $20,543,338 under the credit facility.
(ii) OAI borrowed $7,000,000 from a family trust of which Mr. George Jeff
Mennen, is a director of the Company (the "Mennen Trust"). This loan
is due in eight years and is secured by a second lien on all of the
assets of OAI; and
(iii)The Company borrowed $5,000,000 from the Mennen Trust. This loan is
due in eight years and is secured by a first lien on all of the assets
of GTI except for the capital stock and assets of OAI.
(iv) In connection with the loans made by the Mennen Trust, the Company
issued warrants to purchase 1,500,000 shares of its common stock
exercisable at $.94 per share over a 10-year period. The issuance of
these warrants resulted in the Company recognizing approximately
$1,000,000 using Black Scholes formula of original issue discount,
which is being amortized on interest expense over the life of the
loans.
The interest on both loans made by the Mennen Trust is 15% per annum, of which
12.5% payable monthly with 2.5% per annum accruing and due at the time the
principal is due.
In early January 2001, Onkyo Corporation, the Company and OAI modified the Share
Purchase Agreement by reducing Onkyo Corporation's note by $1,000,000 and
waiving the interest on the $1,000,000. Additionally, Onkyo Corporation extended
the time for OAI to pay it approximately $3,200,000 from May 31, 2000 to March
10, 2002. In making these concessions, Onkyo Corporation recognized that the
recent softness in the automotive industry had reduced OAI's cash flow. The
Company also believes that these concessions helped facilitate GMAC waiving
OAI's breach of a loan covenant. See Item 8. Financial Statements and
Supplementary Data, Note 8 and Item 7.
Purchase of the Assets of BAT
In late December 2000, On-Site purchased substantially all of the assets of BAT
of Marlboro, Massachusetts. BAT, under an exclusive agreement with a
multi-billion-dollar chemical company, develops and manufactures a family of
portable, spectroscopic instruments marketed under the name of SpecTrace(TM)
liquid petroleum marker systems. The automatic SpecTrace(TM) instruments,
utilize sophisticated chemometric analysis to make accurate, in-the-field
measurement of marker concentration in many forms of refined petroleum products.
The marker systems are currently used by a number of governments for fuel excise
tax enforcement and by gasoline and oil marketers for brand integrity and
quality control. In addition to its work with the major chemical company, BAT
also manufactures the PetroAnalytics(TM) line of diesel fuel and gasoline
properties analyzers for the automotive, truck and heavy-duty equipment service
markets. The diesel fuel analyzer, which was developed in collaboration with a
major international oil company, provides instant, on-site measurement of cetane
number and five other important fuel parameters including the cetane improver
additive. This instrument employs mid-infrared spectroscopic analysis and
chemometrics to automatically measure fuel properties that previously were
available only from testing laboratories at a cost of several hundred dollars
per sample. Similarly, BAT's gasoline analyzer measures octane, composition and
volatility parameters that are important to the performance of automobile
engines.
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On-Site paid $125,000 in cash, agreed to assume $250,000 in debt ($150,000 of
which is long-term debt due in three years) and the Company, issued 280,000
warrants at a strike price of $3.00 per share, and 10,000 warrants at a strike
price of $2.00 per share. Additionally, On-Site agreed to pay a contingent
earn-out based upon the performance of the BAT division post-acquisition. In
return, On-Site received assets valued at approximately $100,000 and the rights
to six patents. BAT recorded approximately $1,600,000 in unaudited revenues and
near break-even cash flow for the 12-month period ended September 30, 2000.
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. 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. In order to maintain its exclusive rights, the Company had to
generate $1,000,000 in sales by May 31, 2001. In December 1999, the Company
began actively marketing this product under the name Mighty Clean 2000(TM).
These marketing efforts were unsuccessful resulting in nominal sales. The
Company discontinued its marketing efforts on the product in May 2000.
ARCS (Acceleration Restraint Curve Safety Seat)
Over the past 10 years the Company worked on developing a proprietary technology
involving controlled seat motion that occurs at the instant of a frontal crash
to help restrain vehicle occupants and assist automakers in meeting federal
passive restraint laws. The Company labeled the technology ARCS (Acceleration
Restraint Curve Safety Seat). The primary objective of this technology is to
provide supplemental lower torso restraint to alleviate abdominal, hip, leg and
ankle injuries caused by unwanted lower torso motion often experienced in a
severe frontal crash.
Management is unaware of any other moving seat technology that has been
successfully tested by a major automobile manufacturer. In December 1996, the
U.S. Patent Office granted patent protection for ARCS technology. The Company
has not expended funds on ACRS development since 1997.
The Company believes research and development costs to the Company for the ARCS
are complete and all future development and application engineering will be paid
for by the vehicle and/or seat manufacturers. Due to the requirement to design
and build actual pre-production hardware for automaker testing, the Company is
attempting to establish a strategic partner relationship with a seat
manufacturer. The Company had hoped to sell the technology and maintain a
long-term opportunity for future royalty income; however, the opportunities to
accomplish this are minimal. Even if the company is successful, based on lead
times in the automobile industry, royalties would not be generated for a minimum
of four years after a contract is signed.
Significant Customer Information
During fiscal 2000, approximately 80% of the Company's Speaker revenue was
derived from sales to three customers and approximately 40% from the sales and
lease of OSA-IIs, was derived from one customer. ( See Item 8 Financial
Statements and Supplementary Data.)
Government Regulation
The Company is subject to government regulations generally affecting all
businesses. The Company believes that it is in material compliance with all such
regulations.
Seasonal Information
The Company's management believes that its business is not seasonal.
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Offices and Employees
The Company maintains its executive and administrative offices in Palm Beach
Gardens, Florida. The Company's subsidiaries have facilities in Atlanta,
Georgia, Columbus, Indiana, Marlboro, Massachusetts, Troy, Michigan and San
Diego, California. On-Site is in the process of closing down its Atlanta office,
which will be completed by March 31, 2001. Future assembly of OSA-IIs will occur
at OAI's plant in Columbus, Indiana. BAT personnel will supply engineering and
software support. As of January 12, 2001, the Company has 436 full-time
employees. None of which are represented by unions.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the location and use of the Company's facilities.
All of the facilities are leased, except for the Columbus, Indiana facility
which is owned.
<TABLE>
<S> <C> <C>
USE LOCATION EXPIRATION
Corporate Headquarters Palm Beach Gardens, Florida January 2002
On-Site Atlanta, Georgia September 2001
On-Site Marlboro, Massachusetts January 2006
OAI Sales and Engineering Troy, Michigan March 1, 2003
OAI Sales San Diego, California April 30, 2003
OAI Manufacturing, Administration Columbus, Indiana Not Applicable
and On-Site Assembly
</TABLE>
OAI manufactures Speakers in a 130,000 square foot manufacturing facility
situated within a 26-acre parcel of land. Columbus is located approximately 40
miles south of Indianapolis, Indiana and 100 miles south of Kokomo, the
headquarters of Delco. OAI's strategic location plays a major role in its
ability to service and deliver OEM manufacturers and distributors such as
Toyota, which is located in Georgetown, Kentucky; Nissan, in Smyrna, Tennessee;
and Chrysler in Toledo, Ohio. OAI has the ability to expand its base business by
adding to its current manufacturing facility. The Columbus facility is owned by
OAI and is located in a free trade zone. The building is pledged as collateral
under GMAC loan facility.
All facilities have excess capacity and the capability to accommodate
significant future growth. Each of these facilities is in good condition. As
stated above, On-Site is in the process of closing the Atlanta facility.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims in the
ordinary course of business. The Company is not currently aware of any legal
proceedings or claims that the Company believes are likely to have a material
adverse effect on the Company's financial position or results of operations,
except as described below. However, the Company may incur substantial expenses
in defending against third party claims. In the event of a determination adverse
to the Company, the Company may incur substantial monetary liability, and be
required to change its business practices. Either of these could have a material
adverse effect on the Company's financial position and results of operations.
10
<PAGE>
On September 16, 1999, NCT Audio Products, Inc. ("NCT") commenced an action
against Top Source Technologies, Inc. (known now as Global Technovations, Inc.)
and Top Source Automotive, Inc. ("TSA", and collectively, "Top Source") 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 Top
Source's sale of TSA's assets to Onkyo America, Inc. on the ground that NCT was
entitled to purchase TSA's assets pursuant to the terms of an Asset Purchase
Agreement between NCT and Top Source dated August 14, 1998 (the "Asset Purchase
Agreement"). On October 6, 1999, NCT withdrew its motion and on May 5, 2000, the
action was dismissed with prejudice.
Also on September 16, 1999, NCT commenced an arbitration proceeding before the
American Arbitration Association (the "AAA Action"). NCT's Statement of Claim
asserts that Top Source committed breach of contract and fraud, breached
fiduciary duties, and violated Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder in connection with NCT's attempts to
acquire substantially all of the assets of TSA. Specific performance of the
Asset Purchase Agreement and compensatory damages in excess of $3.5 million are
sought.
On December 8, 1999, Top Source 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.
On June 20, 2000, a preliminary hearing was held by the American Arbitration
Association for the matter between Top Source and NCT. A schedule for amended
filings and discovery was set forth and agreed to by the parties. On November
17, 2000, a conference call was held to resolve any discovery issues remaining
between the parties. Depositions are scheduled to be completed in February 2001.
This case is at a preliminary stage, and is being defended vigorously. However,
the Company has recorded amounts due to NCT on its balance sheet.
On July 19, 2000, a former employee filed an action against OAI in the United
States District Court, Southern District of Indiana, alleging that he was
terminated and denied contractual severance benefits three months after such
termination because of his age and further alleging discriminatory acts on the
part of OAI. The complaint sought severance payments and other damages in
unspecified amounts, compensatory and punitive damages, and attorneys' fees.
Recently, counsel for the former employee, has filed a motion to amend the
complaint to add claims for treble damages. OAI ceased the severance payments
after discovering what it believed to be improper conduct on the part of the
former employee. This suit is at an early stage and is being defended
vigorously. The Company cannot quantify OAI's potential liability, if any.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information For Common Stock The following table sets forth for the
periods indicated the range of quarterly high and low representative market
prices for the Company's Common Stock. The Company's Common Stock trades on the
American Stock Exchange under the symbol "GTN".
11
<PAGE>
Fiscal 2000 Fiscal 1999
High Low High Low
First Quarter (December 31) $1.43 $ .50 $1.32 $ .50
Second Quarter (March 31) $1.94 $ .69 $1.75 $ .82
Third Quarter (June 30) $1.44 $ .75 $1.50 $.95
Fourth Quarter (September 30) $1.50 $ .75 $1.57 $ .95
Holders
As of January 12, 2001, there were approximately 1,072 holders of record of the
Company's Common Stock.
Dividend Policy
The Company has never paid cash dividends on its Common Stock. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon the earnings, capital requirements and operating and financial
condition of the Company, and any restrictions in loan agreements among other
factors. Currently, the Company intends to follow a policy of retaining future
earnings in order to finance the growth and development of its businesses. The
Company is required to pay dividends to its outstanding Series B and Series C
Preferred Stock.
Recent Sales of Unregistered Securities
During the past three years, the following persons and entities acquired shares
of stock and other securities from us as set forth in the following tables .
These securities were not registered under the Securities Act of 1933. No
underwriters were employed with respect to the sale of any of the securities
listed below. All securities were sold to accredited investors, which purchased
for investment in reliance on Section 4(2) and Rule 506 thereunder.
<TABLE>
<S> <C> <C> <C>
Date Name No. and Type of Securities Consideration
May 1998 Excalibur Limited 700 shares of Series A $700,000
Partnership Preferred Stock
131,250 Warrants
May 1998 Gundyco in Trust for RRSP 300 shares of Series A $300,000
Preferred Stock
56,250 Warrants
May 1998 H & H Securities Limited 20,500 Warrants Commission
May 1998 Intercontinental Holding 21,000 Warrants Commission
Company, Ltd.
May 1998 San Rafael Consulting 21,000 Warrants Commission
Group
November 17,1998 Mennen Trust 3,500 shares of Series B $3,500,000
Preferred Stock
350,000 Warrants
November 8, 1998 Excalibur Limited 271,288 shares of Common Conversion of Series A
Partnership Stock Preferred
17,500 Warrants
November 8, 1998 Gundyco in Trust for RRSP 116,266 shares of Common Conversion of Series A
Stock Preferred
7,500 Warrants
December 15, 1998 Ganz Noteholders 248,383 Warrants Restructuring of debt
March 30,1999 Excalibur Limited 245,000 shares of Common Conversion of Series A
Partnership Stock
March 30,1999 Gundyco in Trust for RRSP 105,000 shares of Common Conversion of Series A
Stock
May 1, 1999 Mennen Trusts 50,000 Warrants Modification of Series B
Preferred registration rights
and redemption provisions
("Modification")
August 13, 1999 Mennen Trusts $500,000 Note Loan
100,000 Warrants
October 21, 1999 Mennen Trusts 250,000 Warrants Modification
August 31, 2000 Mennen Trust $5,000,000 Note Loan
1,500,000 Warrants
November 30, 2000 Mennen Trust 150,000 Warrants Loan Guarantee
December 21, 2000 BAT 280,000 Warrants Acquisition of BAT
December 21, 2000 B.U.N.P. 10,000 Warrants Restructure of BAT debt
January 9, 2001 Mennen Trusts 25,000 Warrants Modification
January 11, 2001 Mennen Trust 400,000 Warrants Standby commitment fee
January 12, 2001 Mennen Trust 2,000 shares of Series C $2,000,000
Preferred Stock
200,000 Warrants
</TABLE>
All of the warrants became (or will become ) exercisable upon the earlier of (i)
the effective date of a registration statement or (ii) one year from the date of
issuance. For a description of the terms of the various series of preferred
stock and the warrants, see Item 8. Financial Statements and Financial Data,
Notes 13, 19 and 20. All of the proceeds were used for working capital except
the August 31, 2000 proceeds that were used to acquire OAI
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the Company's
financial condition and results of operations as of and for the years ended
September 30, 2000, 1999, 1998, 1997 and 1996. The selected financial data
should be read in conjunction with Item 8. Financial Statements and
Supplementary Data and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<TABLE>
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, 1998, 1997 AND 1996
<S> <C> <C> <C> <C> <C>
Balance Sheet Data 2000 1999 1998 1997 1996
Total Assets $67,966,631 $15,674,348 $7,273,095 $ 11,355,030 $ 16,012,716
Long-term Debt 32,200,045 -0- 3,020,000 3,020,000 3,020,000
Total Liabilities 64,085,638 7,158,293 6,816,124 6,870,577 7,095,991
Stockholders' Equity 3,880,993 8,516,055 456,971 4,484,453 8,916,725
Statement of Operations Data
Net Sales $7,602,428 $10,253,492 $11,207,858 $16,984,123 $16,146,524
Income (loss) (5,417,118) 5,189,874 (5,529,562) (3,304,057) (4,831,786)
Net Income (Loss) Available to Common
Stockholders (6,039,654) 3,973,882 (5,852,382) (3,235,316) (6,698,787)
Net Income (Loss) per Basic
Weighted Average Common Share
From Continuing Operations (0.21) 0.14 (0.21) (0.12) (0.17)
Net Income (Loss) per Basic
Weighted Average Common Share (0.21) 0.14 (0.21) (0.12) (0.24)
Net Income (Loss) per Diluted
Weighted Average Common Share (0.21) 0.13 (0.21) (0.12) (0.17)
Net Income (Loss) per Diluted
Weighted Average Common Share (0.21) 0.13 (0.21) (0.12) (0.24)
</TABLE>
See Notes to Consolidated Financial Statements for information on transactions
and accounting classifications, which have affected the comparability of the
periods presented above. The Company has not declared cash dividends on its
Common Stock for any of the periods presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On September 30, 1999 the Company sold substantially all of the assets of its
85% owned subsidiary, TSA and other assets used in TSA's business to OAI.
Accordingly, the operations and financial activity associated with this business
were previously reclassified as discontinued operations, but have now been
13
<PAGE>
reclassified as continuing operations as a result of the Company's re-entry into
the automotive speaker business with the acquisition of OAI on August 31, 2000.
Therefore, the consolidated statements of operations of the Company for the year
ended September 30, 2000 include one month of operations for OAI and a full year
of operations for On-Site. The consolidated statements of operations of the
Company for the years ended September 30, 1999 and 1998 each include a full year
of operations for both TSA and On-Site.
2000 Compared to 1999
Total revenue for the year ended September 30, 2000 was $7,602,428 compared to
$10,253,492 for the same period in 1999. The decrease in Speaker sales of
$2,385,651 or 26.9% is attributable to a comparison of different entities for
different time periods. Fiscal year 2000 sales include one month's worth of
Speaker revenues of $6,478,163 from OAI, compared to 12 month's worth of
revenues of $8,863,814 from TSA. The decrease in On-Site sales revenue of
$687,612 or 73.9% is primarily attributable to the sale of four OSA-II machines
during the year ended September 30, 2000 compared to the sale of 13 OSA-II
machines during same period in 1999. The increase in On-Site lease revenue of
$422,199 or 92.0% is primarily attributable to an increase in the number of
units leased and on trial (generally for three to six months) 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. The units currently on lease
and on trial are in a variety of industries which includes truck stops,
auctions, automobile dealerships, truck lube centers, engine development
laboratories, municipalities, and others.
Gross profit margin for year ended September 30, 2000 was 0.8% compared to 33.9%
for the same period in 1999. The decrease in gross profit margin is due to a
reduction in On-Site sales revenue due to lower sales and reduced sales price
and a decrease in overall gross profit margin on OAI speaker sales compared to
TSA sales.
General and administrative expenses were $3,305,067 for the year ended September
30, 2000 compared to $4,015,748 for the same period in 1999. The decrease of
$710,681 or 17.7% is primarily attributable to the decrease in TSA as a result
of the sale and a reduction in expenses for both corporate and On-Site partially
offset by the addition of OAI expenses of $192,982.
Selling and marketing expenses were $1,078,796 for the year ended September 30,
2000 compared to $1,078,626 for the same period in 1999. The slight increase of
$170 or 0.1% is primarily attributable to the decrease in TSA of $326,000 as a
result of the sale offset by an increase in salaries and benefits as a result of
additions to On-Site sales personnel of $72,000 and an increase in promotion and
advertising expenses of $113,000 at On-Site and the addition of OAI expenses of
$113,000.
Depreciation and amortization was $521,914 (excluding depreciation included in
cost of sales) for the year ended September 30, 2000 compared to $439,186 for
the same period in 1999. This increase of $82,728 or 18.84% is primarily
attributable to the amortization of goodwill recorded in connection with the
acquisition of OAI of $132,000 offset by the decrease in TSA of $60,000 as a
result of the sale. For fiscal 2001, depreciation and amortization relating to
the OAI acquisition will be approximately $1,700,000.
Interest income was $216,427 for the year ended September 30, 2000 compared to
$80,774 for the same period in 1999. The increase of $135,653 or 167.9% is
primarily due to an increase in cash and cash equivalents from the sale of TSA.
14
<PAGE>
Interest expense was $755,097 for the year ended September 30, 2000 compared to
$589,909 for the same period in 1999. The increase of $165,188 or 28.0% is
primarily due to the interest expense on the approximately $45 million in debt
incurred in connection with the acquisition of OAI partially offset by the
payoff of the Nations Credit Facility on October 1, 1999. Higher debt levels
will cause the Company to incur significantly higher interest costs in fiscal
2001.
Other income (expense) was $121,270 for the year ended September 30, 2000
compared to ($10,141) for the same period in 1999. This increase of $131,411 is
primarily attributable to the $100,000 redemption premium incurred in fiscal
year 1999 in connection with the redemption of 50% of the Series A Preferred
Stock.
Gain on sale of subsidiary of $8,030,832 for the year ended September 30, 1999
represents the sale of TSA to OAI on September 30, 1999.
Loss on extinguishment of debt of $27,266 for the year ended September 30, 1999
represents loss of $186,011 on early payoff the credit facility offset by the
gain of $158,745 from restructuring of a portion of the outstanding $3,020,000
of Notes in fiscal year 1999. See Item 8. Financial Statements and Supplementary
Data, Note 9. Debt.
For fiscal 2000, the Company sustained a net loss of $5,417,118 and a Net Income
(Loss) Available to Common Stockholders of $6,039,654 after reductions related
to preferred stock transactions and dividends. The comparable numbers in fiscal
1999 were net income of $5,162,608 (as the result of the one time gain of
$8,030,832 on the TSA sale) and Net Income (Loss) Available to Common
Stockholders of $3,973,882.
The recent slowness in the economy including the United States automotive
industry resulting in customers not operating at full capacity has substantially
affected OAI's results of operations for the first three months of fiscal 2001.
The Company is realizing benefits in reducing costs and improving efficiencies,
however, the Company cannot predict when sales will return to historic levels or
what total fiscal 2001 revenue will be.
On a consolidated basis, future operating results will be affected by
amortization expense of approximately $1,700,000 per year resulting from
goodwill related to the OAI acquisition and amortization of the value of
1,500,000 outstanding warrants and options, most of which were issued in
connection with the Company's continuing financing efforts.
In January 2001, the Company announced that it was closing its OSA facility and
redploying personnel to Columbus, Indiana and Marlboro, Massachusetts. The
result is a one-time charge at approximately $250,000 to earnings in the
Company's second fiscal quarter.
1999 Compared to 1998
Total revenue for the year ended September 30, 1999 was $10,253,492 compared to
$11,207,858 for the same period in 1998. TSA speaker sales decreased by
$1,951,391 or 18.0% for the year ended September 30, 1999 due to the loss of the
Grand Cherokee contract, which expired in October 1998. On-Site sales revenue
increased by $735,073 or 375.7% for the year ended September 30, 1999 as a
result of the sale of 13 OSA-II machines compared to the sale of 3 OSA-I
machines during same period in 1998. The increase in lease revenue of $261,952
or 133.0% is primarily attributable to an increase in the number of units leased
and on trial generating various levels of revenue (some of which were nominal)
compared to the number of units leased and on trial for the same period in 1998.
The units currently on lease and on trial are in a variety of industries which
includes automobile dealerships, mini labs, truck lube centers, truck stops,
engine development laboratories, municipalities, and others.
Gross profit margin for year ended September 30, 1999 was 33.9% compared to
28.4% for the same period in 1998.
15
<PAGE>
General and administrative expenses were $4,015,748 for the year ended September
30, 1999 compared to $4,562,183 for the same period in 1998. The decrease of
$546,435 or 12.0% is attributable to a reduction in expenses at the corporate
office offset partially by increases in expenses at On-Site as a result of the
growth and expansion of the business.
Selling and marketing expenses were $1,078,626 for the year ended September 30,
1999 compared to $1,258,681 for the same period in 1998. The decrease of
$180,055 or 14.3% is attributable to a reduction in personnel expenses at
On-Site.
Write-down of fixed assets of $880,911 for the year ended September 30, 1998
related to the original OSA-I machines, which were deemed to be impaired and
were written off. (See Item 8. Financial Statements and Supplementary Data, Note
2. Oil Analysis Service Segment.)
Severance expense of $1,085,587 for the year ended September 30, 1998 is
attributable to the resignation of the Company's former Chairman and CEO. (See
Item 8. Financial Statements and Supplementary Data, Note 13. Related Party
transactions).
Depreciation and amortization was $439,186 for the year ended September 30, 1999
compared to $922,820 for the same period in 1998. This decrease of $483,634 or
52.4% is primarily attributable to the write-down of the original OSA-I machines
in September 1998.
Research and development was $208,674 for the year ended September 30, 1999
compared to $325,212 for the same period in 1998. This decrease of $116,538 or
35.8% is primarily attributable to the initial costs incurred in the development
of the OSA-II machine in fiscal year 1998.
Interest income was $80,774 for the year ended September 30, 1999 compared to
$74,669 for the same period in 1998. The increase of $6,105 or 8.2% is primarily
due to an increase in the average cash balance in fiscal year 1999.
Interest expense was $589,909 for the year ended September 30, 1999 compared to
$664,142 for the same period in 1998. The decrease of $74,233 or 11.2% is due to
a decrease in interest as a result of the restructuring of the senior
subordinated convertible notes in November and December 1998, offset by an
increase in interest expense associated with a loan from a trust controlled by a
director of the Company and issuance of warrants as additional consideration for
the loan.
Other income (expense) was ($10,141) for the year ended September 30, 1999
compared to $9,978 for the same period in 1998. This decrease of $20,119 or
201.6% is primarily attributable to the $100,000 redemption premium incurred in
fiscal year 1999 in connection with the redemption of 50% of the Series A
Preferred Stock offset partially by an increase in royalty and miscellaneous
income.
Gain on sale of subsidiary was $8,030,832 for the year ended September 30, 1999
compared to $962,760 for the same period in 1998. The increase of $7,068,072 or
734.2% is primarily due to the sale of 14.5% equity in TSA during the year ended
September 30, 1998 with the remainder portion of the sale completed during the
year ended September 30, 1999.
Loss on extinguishment of debt of $27,266 for the year ended September 30, 1999
represents loss of $186,011 on early payoff the credit facility offset by the
gain of $158,745 from restructuring of a portion of the outstanding $3,020,000
of Notes. (See Note 9. Debt)
16
<PAGE>
Liquidity and Capital Resources
Net cash used in operating activities was $6,372,910 for the year ended
September 30, 2000. This usage of cash was attributable to a net loss of
$4,296,307, which excludes depreciation and amortization. In addition, an
increase in accounts receivable of $2,008,474 and a decrease in accounts payable
$1,998,549 offset by an increase in deferred revenue of $971,606 and a decrease
in inventory of $990,978 contributed to net cash used in operating activities.
Net cash used in investing activities was $8,788,242 for the year ended
September 30, 2000. This decrease in cash was attributable to the acquisition of
OAI and expenditures by On-Site for capital assets partially offset by the
receipt of a $6,500,000 9% secured note paid by OAI to TSA in October 1999
offset by payment of expenses associated with the sale of TSA. For fiscal 2001,
OAI does not have material capital commitments. On-Site capital expenditures
will vary depending upon the number of OSA-II leases.
Net cash provided by financing activities was $13,898,352, which consisted
primarily of proceeds from the GMAC Revolving Credit Facility and Term A and B
loans and the senior secured promissory notes from the Mennen Trust. These
proceeds were utilized for the cash portion of the OAI acquisition and repayment
of debt assumed in connection with the OAI acquisition.
As a condition of granting the Credit Facility to OAI, GMAC required that this
facility be used to provide working capital to OAI only. Except for the
possibility of the payment of management fees and a dividend on the Company's
over $3,000,000 preferred stock investment in OAI, OAI is restricted from using
its credit facility to fund the activities of the Company's corporate office or
any of its other subsidiaries. As of January 12, 2001, OAI had not paid the
Company any management fees or preferred dividends and none are presently
anticipated to be paid.
In order to acquire OAI, the Company occurred substantial debt as described
elsewhere in this Report. In addition to substantial interest payments, which
are required to be paid by OAI, the senior debt owed to GMAC requires principal
payments of approximately $173,000 per month through August 31, 2001, increasing
to approximately $223,000 per month on September 1, 2001. These required
principal payments will continue to place substantial pressure on OAI's
liquidity.
As of January 12, 2001, OAI was current on all principal payments and interest
payments to GMAC and the Mennen Trust. However, due to significant and
unexpected downturn in the automotive industry, which uses OAI Speakers, OAI
breached its Fixed Charge Coverage Ratio ("Coverage Ratio") in November 2000 by
going below the required 1.15 to 1 ratio. On January 12, 2001, GMAC waived the
covenant violation ("Waiver") and reset the monthly Coverage Ratio and certain
other operating ratios to lower levels. As a condition of the Waiver, OAI and
the Mennen Trust agreed to suspend all interest payments due to the Mennen Trust
until OAI reaches a cumulative Coverage Ratio of 1.15 to 1. The Company has
agreed to pay monthly interest payments to the Mennen Trust from corporate funds
until OAI resumes payments.
In order to meet its working capital needs, the Company has entered into several
recent transactions with the Mennen Trust. Initially, the Mennen Trust
guaranteed a $1,000,000 note from the Company to TSA, the Company's 85% owned
subsidiary. This guarantee permitted the Company to use TSA's cash, which had
been allocated in the event the arbitration proceeding with NCT was
unsuccessful. In January 2001, a Mennen Trust purchased $2,000,000 of 10% Series
Convertible Preferred Stock and also agreed to purchase an additional $2,000,000
of another series of 10% convertible preferred stock if the Company's cash and
cash equivalents (apart from OAI) fell below $400,000 during the fiscal year
ending September 30, 2001. Also, the Company also entered into an agreement with
one of the sellers of OAI common stock extending the time for OAI to pay
approximately $3,200,000 from May 31, 2001 until March 10, 2002.
17
<PAGE>
The Company has incurred significant losses since its inception and has funded
these losses through equity offerings of preferred stock, debt instruments and
the sale of assets. The Company is and will continue to be highly leveraged for
the immediate future. The Company has incurred substantial indebtedness as a
result of its acquisitions, new product research and development and operating
losses. Cash flows from operations were inadequate to cover these charges. The
Company's high level of debt may have several important effects on its future
operations including the following: (i) a substantial portion of the Company's
cash flow must be dedicated to the payment of interest and dividends on
indebtedness and preferred stock (ii) the financial covenants contained in the
GMAC facility will require the Company to meet certain financial tests and other
restrictions which limits its ability to borrow additional funds or to dispose
of assets, and (iii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures and for general corporate
purposes may be limited.
In addition, the Company's ability to meet its debt obligations and to reduce
its total debt will be dependent upon the Company's future performance, which
will be subject to general economic conditions and to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control. There can be no assurance that the Company's future performance
will not be adversely affected by such economic conditions and financial,
business and other factors.
As of January 15, 2001, the Company had approximately $2,000,000 in cash. The
Company believes that its current cash on hand, the Mennen commitment for an
additional $2,000,000, and its continuing ability to reduce operating costs will
be sufficient to fund its operations through at least September 30, 2001.
Forward-Looking Statements
The matters discussed in this Report in the Business section (Item 1) and above
in Liquidity and Capital Resources relating to (1) OAI's future relationship
with GM and with Delco, (2) On-Site's completion of a working OSA-II/SS, (3)
On-Site's future shipments to the Shell GST Group, (4) increases in its OSA-II
sales, (5) the capability of the Company's facilities to accommodate significant
future growth, (6) the Company's ability to reduce expenses, (7) the adequacy of
the Company's working capital and its ability to obtain new working capital and
(8) receipt of an order by OAI for the sale of Speakers to a leading supplier of
home sound systems. Additionally, words such as "expects", "intends", "believes"
and similar words are used to identify forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Some or all of these forward-looking statements may not occur. These statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
risks and uncertainties include the following: (1) the continued reliability of
the OSA technology over an extended period of time, (2) the Company's ability to
expand the market of OSA-IIs, (3) the acceptance of the OSA technology by the
marketplace, (4) the general tendency of large corporations to slowly change
from known technology to emerging new technology, (5) potential future
competition from third parties that may develop proprietary technology, which
either does not violate the Company's proprietary rights or is claimed not to
violate the Company's proprietary rights, (6) the ability of the leading
supplier of home systems to market the Speakers supplied by OAI and the
performance of these Speakers, (7) unanticipated problems arising from the
performance of Speakers sold to Delco for installation in GM vehicles, (8) the
ability of Delco to develop relationships with other OEMs, (9) the ability of
the Company to raise additional working capital to permit it to develop the
OSA-II/SS, (10) improvements in the United States economy in general and the
United States automobile industry in particular, and (11) the ability of the
OSA-II units to operate as anticipated at the Shell GST Group installations. The
Company does not intend to update any forward-looking statements. Investors
should also consider the factors contained in the Company's filings with the
Securities and Exchange Commission.
18
<PAGE>
Inflation The impact of inflation has become less significant in recent years.
The Company believes inflation has not had a material effect on the Company's
operations.
New Accounting Standards In June 1997, the Financial Accounting Standards Board
("FASB")" issued Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which is
required to be adopted in fiscal years beginning after December 15, 1997. This
statement establishes standards for the way public business enterprises report
information about products, services, geographic areas and major customers. The
Company has adopted SFAS No. 131 for fiscal year ended September 30, 1999. The
adoption of SFAS No. 131 did not have a material impact on its financial
position or results of operations.
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
amended by SFAS No. 137 requires companies to recognize all derivative contracts
as either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged assets or liabilities that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging instrument,
the gain and loss is recognized in income in the period of change. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect the adoption of the new standard to have material impact on the
Company's financial position, results of operations, or cash flows.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements, which provides interpretive
guidance on the recognition presentation, and disclosure of revenue in financial
statements. SAB 101 must be applied to financial statements no later than the
quarter ended September 30, 2000. There was no material impact from the
application of SAB 101 on the Company's financial position, results of
operations, or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation, and an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Opinion No. 25 for (a) the
definition of an employee for purposes of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in business combination. FIN 44 became effective
July 2, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998, or January 12, 2000. FIN 44 did not have a material
impact on the Company's financial position, results of operations, or cash
flows.
19
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, the Company had approximately $23,071,000 in variable
rate short and long-term debt tied directly to the prime rate. See Note 9. Debt
in the accompanying consolidated financial statements. Since August 31, 2000,
when the Company first incurred this debt in connection with the acquisition of
OAI, this balance has fluctuated between $16,000,000 and $23,200,000 due to
varying levels of borrowing on OAI's line of credit.
Each 100 basis point increase or decrease in the prime rate would result in an
increase or decrease in the Company's annual interest expense equivalent to 1%
times the average total indebtedness or between $160,000 to $230,000 per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------------------------- -----------
INDEX PAGE
------------------------------------------------------------------------------------------------------------------- -----------
Reports of Independent Certified Public Accountants 21-22
------------------------------------------------------------------------------------------------------------------- -----------
------------------------------------------------------------------------------------------------------------------- -----------
Consolidated Balance Sheets as of September 30, 2000 and 1999 23
------------------------------------------------------------------------------------------------------------------- -----------
------------------------------------------------------------------------------------------------------------------- -----------
Consolidated Statements of Operations for the Years Ended September 30, 2000, 1999 and 1998 24
------------------------------------------------------------------------------------------------------------------- -----------
------------------------------------------------------------------------------------------------------------------- -----------
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2000, 1999 and 1998 25
------------------------------------------------------------------------------------------------------------------- -----------
------------------------------------------------------------------------------------------------------------------- -----------
Consolidated Statements of Cash Flows for the Years Ended September 30, 2000, 1999 and 1998 26
------------------------------------------------------------------------------------------------------------------- -----------
------------------------------------------------------------------------------------------------------------------- -----------
Notes to Consolidated Financial Statements 27
------------------------------------------------------------------------------------------------------------------- -----------
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Global Technovations, Inc.
We have audited the accompanying consolidated balance sheet of Global
Technovations, Inc. (a Delaware corporation) and subsidiaries as of September
30, 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended September 30, 2000. These financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global
Technovations, Inc. and subsidiaries as of September 30, 2000 and the results of
its operations and its cash flows for the year ended September 30, 2000 in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedules I and II are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state, in all material respects the financial data
required to be set forth therein, as of and for the year ended September 30,
2000 in relation to the basic financial statements taken as a whole.
BDO SEIDMAN, LLP
West Palm Beach, Florida
January 12, 2001
21
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Global Technovations, Inc.
We have audited the accompanying consolidated balance sheet of Global
Technovations, Inc. (f/k/a/ Top Source Technologies, Inc., a Delaware
corporation) and subsidiaries as of September 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Technovations, Inc. and
subsidiaries as of September 30, 1999 and the results of its operations and its
cash flows for each of the two years in the period ended September 30, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
November 24, 1999.
22
<PAGE>
<TABLE>
GLOBAL TECHNOVATIONS, INC
FORM 10-K
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 and 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 2000 1999
----------------- ----------------
Current Assets:
Cash and cash equivalents $ 1,046,152 $ 2,308,952
Trade accounts receivable, net of allowance for doubtful
accounts of $120,000 at September 30, 2000 13,105,629 209,554
Due from buyer of automotive subsidiary - 6,000,000
Inventories 7,465,007 1,935,832
Prepaid expenses 82,662 76,657
Other 100,224 102,867
----------------- ----------------
Total current assets 21,799,674 10,633,862
Property and equipment, net 11,662,864 1,533,117
Capitalized database, net 1,651,527 1,862,361
Due from buyer of automotive subsidiary - 1,500,000
Goodwill, net of amortization of $132,000 31,439,799 -
Other assets, net 1,412,767 145,008
----------------- ----------------
TOTAL ASSETS $ 67,966,631 $ 15,674,348
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 11,841,418 $ 1,913,986
Current portion of long term debt 3,449,666 1,207,000
Accounts payable 11,053,264 302,553
Deferred revenue 312,801 98,675
Accrued liabilities 3,336,192 2,515,445
Payable to former buyer of automotive subsidiary 994,232 1,030,835
----------------- ----------------
Total current liabilities 30,987,573 7,068,494
----------------- ----------------
Long term debt, less current portion 32,200,045 -
Other liabilities 898,020 89,799
----------------- ----------------
Total long term liabilities 33,098,065 89,799
----------------- ----------------
Total liabilities 64,085,638 7,158,293
Commitments and contingencies (See Notes 3 and 10) - -
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,500 shares issued and
outstanding in 2000 and 1999 3,500,000 3,444,644
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,804,281 and 29,799,281 shares issued and
outstanding in 2000 and 1999, respectively 29,804 29,799
Additional paid-in capital 32,557,802 31,208,571
Accumulated deficit (30,857,259) (24,817,605)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
----------------- ----------------
Total stockholders' equity 3,880,993 8,516,055
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,966,631 $ 15,674,348
================= ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
23
<PAGE>
<TABLE>
GLOBAL TECHNOVATIONS, INC
FORM 10-K
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
----------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C>
2000 1999 1998
--------------- -------------- ----------------
Revenue:
Sales revenue - speakers $6,478,163 $8,863,814 $10,815,205
Sales revenue - instruments 243,137 930,749 195,676
Lease revenue - instruments 881,128 458,929 196,977
--------------- -------------- ----------------
Total revenue 7,602,428 10,253,492 11,207,858
Cost of sales and leasing
Cost of sales - speakers 5,712,543 5,523,319 7,417,402
Cost of sales - instruments 119,024 357,845 73,270
Cost of leasing - instruments 1,708,150 898,776 535,818
--------------- -------------- ----------------
Total of cost of sales and leasing 7,539,717 6,779,940 8,026,490
--------------- -------------- ----------------
Gross profit 62,711 3,473,552 3,181,368
--------------- -------------- ----------------
Expenses:
General and administrative 3,305,067 4,015,748 4,562,183
Selling and marketing 1,078,796 1,078,626 1,258,681
Write down of fixed assets - - 880,911
Severance expense - - 1,085,587
Depreciation and amortization 521,914 439,186 922,820
Research and development 156,652 208,674 325,212
--------------- -------------- ----------------
Total expenses 5,062,429 5,742,234 9,035,394
--------------- -------------- ----------------
Loss from operations (4,999,718) (2,268,682) (5,854,026)
Other income (expense):
Interest income 216,427 80,774 74,669
Interest expense (755,097) (589,909) (664,142)
Gain on sale of subsidiary - 8,030,832 962,760
Other (expense) income, net 121,270 (10,141) 9,978
--------------- -------------- ----------------
Net other income (expense) (417,400) 7,511,556 383,265
--------------- -------------- ----------------
Income (loss) before income taxes (5,417,118) 5,242,874 (5,470,761)
Income tax expense - (53,000) (58,801)
--------------- -------------- ----------------
Income (loss) before extraordinary item (5,417,118) 5,189,874 (5,529,562)
Loss on extinguishment of debt - (27,266) -
--------------- -------------- ----------------
Net income (loss) (5,417,118) 5,162,608 (5,529,562)
Embedded dividends on preferred stock (55,356) (619,462) (193,807)
Preferred dividends (315,000) (277,458) (20,034)
Value of warrants issued with preferred stock (252,180) (291,806) (108,979)
--------------- -------------- ----------------
Net income (loss) available to common stockholders ($6,039,654) $3,973,882 ($5,852,382)
=============== ============== ================
Basic Earnings (Loss) Per Share
Income (loss) before extraordinary item $ (0.21) $ 0.14 $ (0.21)
Extraordinary item - (0.00) -
--------------- -------------- ----------------
Net Income (Loss) $ (0.21) $ 0.14 $ (0.21)
=============== ============== ================
Diluted Earnings (Loss) Per Share
Income (loss) before extraordinary item $ (0.21) $ 0.13 $ (0.21)
Extraordinary item - (0.00) -
--------------- -------------- ----------------
Net Income (Loss) $ (0.21) $ 0.13 $ (0.21)
=============== ============== ================
Basic weighted average common shares outstanding 29,333,047 29,108,705 28,242,005
=============== ============== ================
Diluted weighted average common shares outstanding 29,333,047 33,147,737 28,242,005
=============== ============== ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements .
24
<PAGE>
<TABLE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-K
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<S> <C> <C> <C> <C> <C> <C>
ADDITIONAL TOTAL
COMMON STOCK PREFERRED PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
-------------------
SHARES AMOUNT STOCK CAPITAL DEFICIT STOCK EQUITY
--------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 28,461,477 $28,461 - $28,744,451 $(22,939,105) $(1,349,354) $4,484,453
Exercise of stock options
($.53 to $1.50 per share) 549,700 550 - 387,791 - - 388,341
Issuance of convertible preferred stock
- Series A- - - 1 ,000,000 - - - 1,000,000
Preferred stock issuance costs and fees - - - (118,606) - - (118,606)
Issuance of common stock for payment of
dividend on preferred stock 42,626 43 - 19,991 (20,034) - -
Intrinsic value of preferred stock
conversion feature - - (250,000) 250,000 - - -
Preferred stock embedded dividend - - 193,807 - (193,807) - -
Value of warrants issued with preferred
stock - - - 108,979 (108,979) - -
Options and warrants issued for services - - - 232,345 - - 232,345
Net loss - - - - (5,529,562) - (5,529,562)
--------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 29,053,803 29,054 943,807 29,624,951 (28,791,487) (1,349,354) 456,971
Exercise of stock options
($.53 to $.875 per share) 50,550 51 - 26,827 - - 26,878
Redemption of convertible preferred
stock - Series A - - (500,000) - - - (500,000)
Conversion of convertible preferred
stock - Series A to common stock 669,149 668 (500,000) 499,332 - - -
Issuance of convertible preferred
stock - Series B - - 3,500,000 - - - 3,500,000
Preferred stock issuance costs and fees - - - (129,701) - - (129,701)
Issuance of common stock for payment
of dividend on preferred stock 25,779 26 - 12,105 (12,131) - -
Preferred stock dividend - - - - (265,327) - (265,327)
Intrinsic value of preferred stock
conversion feature - - (618,625) 618,625 - - -
Preferred stock embedded dividend - - 619,462 - (619,462) - -
Value of warrants issued with
preferred stock - - - 291,806 (291,806) - -
Options and warrants issued for services - - - 264,626 - - 264,626
Net Income - - - - 5,162,608 - 5,162,608
--------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 29,799,281 29,799 3,444,644 31,208,571 (24,817,605) (1,349,354) 8,516,055
Exercise of stock options
($.53 per share) 5,000 5 - 2,645 - - 2,650
Preferred stock issuance costs and fees - - - (27,332) - - (27,332)
Preferred stock dividend - - - - (315,000) - (315,000)
Preferred stock embedded dividend - - 55,356 - (55,356) - -
Value of warrants issued with
preferred stock - - - 252,180 (252,180) - -
Options and warrants issued for services - - - 1,121,738 - - 1,121,738
Net loss - - - - (5,417,118) - (5,417,118)
--------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 29,804,281 $29,804 $3,500,000 $32,557,802 $(30,857,259) $(1,349,354) $3,880,993
======================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements . </TABLE>
25
<PAGE>
<TABLE>
GLOBAL TECHNOVATIONS, INC.
FORM 10-K
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
--------------- --------------- ----------------
OPERATING ACTIVITIES:
Net income (loss) $ (5,417,118) $ 5,162,608 $ (5,529,562)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Gain on sale of subsidiary - (8,030,832) (962,760)
Depreciation 648,440 459,118 950,503
Amortization 461,764 383,113 341,204
Amortization of original issue discount on debt 10,607 - -
Write down of fixed assets and inventory - - 1,294,045
Loss on extinguishment of debt - 27,266 -
Loss on disposal of equipment - 3,100 160,963
Non cash value of services 64,771 184,620 232,345
Repayments from officers - 26,260 107,661
(Increase) decrease in accounts receivable, net (2,008,474) (626,340) 598,986
Decrease (increase) in inventories 990,978 (842,740) (1,021,951)
Decrease in prepaid expenses 29,581 87,435 24,964
(Increase) decrease in other assets (21,036) 31,977 745,187
(Decrease) increase in accounts payable (1,998,549) 279,144 170,067
Increase in deferred revenue 971,606 - -
Increase (decrease) in accrued liabilities 20,922 261,417 (340,695)
Decrease in payable to former buyer of automotive subsidiary (36,603) - -
(Decrease) increase in other liabilities (89,799) (339,725) 429,524
--------------- --------------- ----------------
Net cash used in operating activities (6,372,910) (2,933,579) (2,799,519)
--------------- --------------- ----------------
INVESTING ACTIVITIES:
Payment for purchase of stock of OAI, net of cash acquired (12,815,724) - -
Proceeds from sale of subsidiary 5,549,978 4,497,750 1,326,917
Purchases of property and equipment, net (1,519,989) (1,338,955) (631,412)
Additions to patent costs, net (2,507) (114,644) (102,995)
--------------- --------------- ----------------
Net cash (used in) provided by investing activities (8,788,242) 3,044,151 592,510
--------------- --------------- ----------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options 2,650 26,878 388,341
Preferred stock issuance, net (27,332) 3,370,299 881,394
(Repayment) proceeds from loan payable (500,000) 500,000 -
Redemption of preferred stock Series A - (500,000) -
Repayments of Senior Convertible Notes (329,000) (2,064,617) -
Payment of extinguishment of debt costs - (110,403) -
Payment of preferred stock dividend (393,750) (107,827) -
Payment of deferred financing costs (1,187,010) - -
Proceeds from revolving line of credit 11,841,418 - -
Proceeds from term loans 11,230,000 - -
Proceeds from senior secured promissory note 12,000,000 - -
Repayment of debt assumed on acquisition (16,824,638) - -
(Repayments) proceeds from borrowings, net (1,913,986) 595,151 (677,506)
--------------- --------------- ----------------
Net cash provided by financing activities 13,898,352 1,709,481 592,229
--------------- --------------- ----------------
Net (decrease) increase in cash and cash equivalents (1,262,800) 1,820,053 (1,614,780)
Cash and cash equivalents at beginning of period 2,308,952 488,899 2,103,679
--------------- --------------- ----------------
Cash and cash equivalents at end of period $1,046,152 $2,308,952 $488,899
=============== =============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 327,513 $ 338,878 $ 564,091
Cash paid for income taxes $ 150,000 $ 60,000 $ 108,801
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation - As of September 30, 2000, Global
Technovations, Inc., (the "Company), or ("GTI") has five wholly owned
subsidiaries, including On-Site Analysis, Inc. ("On-Site"), which markets,
leases and sells oil analysis services through use of the OSA-II, a freestanding
oil analyzer used primarily by truck-stops, and numerous other diverse
industries; Onkyo America, Inc. ("OAI"), which manufactures, assembles and
distributes audio speakers for the automotive, computer, television and
telephone industries; Top Source Oil Analysis, Inc. ("TSOA"), and ARCS Safety
Seat, Inc.; and HairTek, LCC , which are both inactive. Additionally, the
Company has one 85% owned subsidiary, Top Source Automotive, Inc. ("TSA"). (See
Note 3. Sale of TSA.)
The accompanying Consolidated Financial Statements include the accounts of the
Company, and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. In order to maintain consistency and
comparability between periods presented certain amounts have been reclassified
from previously reported financial statements in order to conform to the
financial statement presentation of the current year. On September 30, 1999 the
Company sold substantially all of the assets of its 85% owned subsidiary, TSA
and other assets used in TSA's business to OAI. Accordingly, the operations and
financial activity associated with this business were previously classified as
discontinued operations, but have been reclassified as continuing operations as
a result of the Company acquiring 100% of the outstanding stock of OAI on August
31, 2000. Therefore, the consolidated statement of operations of the Company for
the year ended September 30, 1999 includes a full year of operations for TSA
(see Note 4).
Cash Equivalents - The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
Revenue Recognition - The Company recognizes revenue from sales of speakers and
OSA units at the time the products are shipped. Revenue from leased OSA units is
recognized ratably over the lease term, which range from 3 to 48 months. All
existing leases are classified as operating leases.
Inventories - Inventories are stated at the lower of cost (standards, which
approximate actual cost on first-in-first out basis) or market.
Fair value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities
approximates fair value.
Property and Equipment - Property and equipment are stated at cost. Repairs and
maintenance costs are charged to expense as incurred. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, or the lease term if shorter in the case of
leasehold improvements, ranging from two to thirty years. When property or
equipment is retired or otherwise disposed of, the cost less related accumulated
depreciation is removed from the accounts and the resulting gains or losses are
included in other expense in the accompanying statements of operations.
27
<PAGE>
Capitalized Database - The capitalized database relates to a portion of the cost
in excess of the fair value related to the TSOA acquisition, which was retained
by On-Site to support its OSA technology. The capitalized database is being
amortized over 15 years using the straight-line method (see Note 8. Capitalized
Database).
Goodwill - Goodwill represents the excess of the cost of OAI over the fair value
of the net assets acquired. Amortization is computed using the straight-line
method over twenty years.
Long-Lived Assets - The Company continually evaluates factors, events and
circumstances, which include, but are not limited to, the historical and
projected operating performance, specific industry trends and general economic
conditions to assess whether the remaining estimated useful life of the
Company's long-lived assets may warrant revision or that the assets may not be
recoverable. When such factors, events or circumstances indicate that the
long-lived assets should be evaluated for possible impairment, the Company uses
an estimate of undiscounted cash flow generated from the long-lived assets over
the remaining lives of those assets in measuring its recoverability.
Research and Development - The costs associated with research and development of
products and technologies are expensed as incurred.
Use of Estimates - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of assets and liabilities at the date of the
consolidating financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Comprehensive Income - For the years ended September 30, 2000, 1999 and 1998,
there were no differences between net income and comprehensive income.
Stock-Based Compensation - Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," encourages, but does not
require companies to record compensation plans using a fair value based method.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value based method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's Common Stock at the date of the grant over
the amount an employee must pay to acquire the stock.
Option and Warrant Valuation - The value of options and warrants issued to
non-employees are calculated using the Black-Scholes Option Pricing Model in
accordance with SFAS No. 123.
2. OIL ANALYSIS SERVICE
During fiscal 1998, and as a result of the introduction of the OSA-IIs, the
original OSA-I units and related inventory were deemed to be impaired and
written-off. An impairment loss, in the amounts of $880,911 and $413,134, was
charged to operations and are included in "Write down of fixed assets" and "Cost
of Sales and Service", respectively, in the accompanying Consolidated Statements
of Operations for the year ended September 30, 1998.
28
<PAGE>
The Company believes that its marketing efforts relating to the OSA-II will be
successful. However, if the Company is unable to meet goals or to have the
necessary resources to sustain its marketing activities it could have a material
adverse effect on the Company's financial condition and the carrying value of
its assets.
3. SALE OF 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 OAI 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 OAI. OAI was subsequently
purchased by the Company on August 31, 2000 (see Note 4.) The $6,500,000 note
and accrued interest of $46,479 were paid on October 29, 1999, and the
$1,000,000 note was paid through issuance of $1,000,000 of OAI 5% Series A
Convertible Preferred Stock.
Previously, the Company and TSA had entered into a TSA Asset Purchase Agreement
with NCT Audio Products, Inc. ("NCT") on August 14, 1998. During the period
August 14, 1998 and July 15, 1999, the Company received in excess of $3,500,000
from NCT and granted NCT two extensions to close the transaction. 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 asset purchase agreement to lapse. As
a result, the Company and TSA proceeded to negotiate a definitive agreement and
ultimately close on the sale of the assets to OAI on September 30, 1999. In
September 1999, NCT commenced an arbitration proceeding 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 Reports on Form 10-Q
for the quarters ending December 31, 1999, March 31, 2000 and June 30, 2000, 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 that are subject to the
counterclaims, is 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.
4. ACQUISITION OF OAI
Pursuant to a Share Purchase Agreement, effective August 31, 2000, the Company
acquired for $25 million ($13 million in cash and $12 million in promissory
notes certain assets and assumed certain liabilities of OAI from Onkyo
Corporation ("ONKYO"). The acquisition has been accounted for under the purchase
method of accounting. The results of OAI's operations are included in the
statement of operations for the year ended September 30, 2000, since the date of
acquisition. The excess of the purchase price over the estimated fair value of
net assets acquired was $31.6 million. The allocation of the purchase price is
based upon preliminary estimates made by the Company and is subject to change.
29
<PAGE>
Certain litigation contingencies of OAI, which existed at the date of
acquisition, may offset the final purchase price allocation when resolved. The
components of the purchase price and its allocation are as follows:
Purchase Price - Cash $13,000,000
Purchase Price - Notes 12,000,000
Acquisition Costs 522,581
Liabilities assumed 33,611,035
Allocation of purchase price:
Current assets (18,311,817)
Property and equipment (9,250,000)
----------
Cost in excess of nets assets acquired $31,571,799
===========
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition had occurred at the beginning of the years
ended September 30, 2000 and 1999 presented and do not purport to be indicative
of what would have occurred had the acquisition been made as of those dates or
of results that may occur in the future. The pro forma amounts give effect to
appropriate adjustments for the fair value of the net assets acquired,
amortization of the excess of the cost over the net assets acquired, interest
expense, and intercompany transactions.
<TABLE>
<S> <C> <C>
2000 1999
---- ----
Net sales $76,911,000 $83,168,000
Income before extraordinary item (10,348,000) 806,000 (1)
Net income (loss) (10,348,000) 778,734
Earnings per common share:
Basic:
Income before extraordinary item (0.35) 0.03
Net income (loss) (0.35) 0.03
Diluted: (0.35) 0.03
Income before extraordinary item
Net income (loss) (0.35) 0.03
(1) Net income includes a one-time gain of $8,030,832 on the sale of TSA.
</TABLE>
5. STATEMENT OF CASH FLOWS
See Note 4 for non-cash investing and financing activities resulting from the
acquisition of OAI during fiscal 2000
In connection with the restructuring of substantially all of the outstanding
Senior Subordinated Convertible Notes (see Note 9. Debt), the Company recorded a
non-cash gain on extinguishments of debt of $248,383 for the year ended
September 30, 1999.
There were no significant non-cash investing or financing activities for the
year ended September 30, 1998.
30
<PAGE>
6. INVENTORIES
Inventories consisted of the following at September 30, 2000 and 1999:
<TABLE>
<S> <C> <C> <C>
2000 1999
------------------------ ----------------------- ---------------------
------------------------ ----------------------- ---------------------
Raw materials $5,519,573 $984,082
------------------------ ----------------------- ---------------------
Finished goods 2,125,434 951,750
------------------------ ----------------------- ---------------------
Less allowance for
obsolescence (180,000) --
------------------------ ----------------------- ---------------------
$7,465,007 $1,935,832
------------------------ ----------------------- ---------------------
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2000 and
1999:
<TABLE>
<S> <C> <C> <C>
--------------------------------------- ------------- ----------------- ------------------
Useful Life
(Years)
Life (Years) 2000 1999
--------------------------------------- ------------- ----------------- ------------------
Building 30 $4,000,000 $0
--------------------------------------- ------------- ----------------- ------------------
Land N/A 500,000 0
--------------------------------------- ------------- ----------------- ------------------
Construction in process N/A 1,222,838 0
--------------------------------------- ------------- ----------------- ------------------
Computer equipment 3-4 1,132,433 $967,753
--------------------------------------- ------------- ----------------- ------------------
Machinery and equipment 7 2,910,712 --
--------------------------------------- ------------- ----------------- ------------------
On-Site Analyzers 5 2,729,415 1,482,829
--------------------------------------- ------------- ----------------- ------------------
Tooling 5 372,998 24,253
--------------------------------------- ------------- ----------------- ------------------
Furniture and fixtures 3-5 463,675 190,452
--------------------------------------- ------------- ----------------- ------------------
Leasehold improvements 2-5 126,845 26,555
--------------------------------------- ------------- ----------------- ------------------
13,458,916 2,691,842
--------------------------------------- ------------- ----------------- ------------------
Less: accumulated depreciation and
amortization (1,796,052) (1,158,725)
--------------------------------------- ------------- ----------------- ------------------
$11,662,864 $1,533,117
=========== ==========
</TABLE>
Depreciation of leased OSA-II machines in the amount of $440,271 and $160,029
for the years ended September 30, 2000 and 1999, respectively, has been
allocated to cost of sales as it directly relates to cost of services.
8. CAPITALIZED DATABASE
Capitalized database consisted of the following at September 30, 2000 and 1999:
<TABLE>
<S> <C> <C> <C>
Useful
Life (Years) 2000 1999
------------------------------------------ ---------------- ------------------ ------------------
Capitalized database 15 $3,162,500 $3,162,500
------------------------------------------ ---------------- ------------------ ------------------
Less: accumulated amortization (1,510,973) (1,300,139)
------------------------------------------ ---------------- ------------------ ------------------
$1,651,527 $1,862,361
========== ==========
</TABLE>
31
<PAGE>
The capitalized database contains an active library of engine and machine tests
that have a diagnosed history. The value of the capitalized database was
determined based on an assessment of the number of samples included in the
database and a per unit cost to develop/buy the data.
<PAGE>
9. DEBT
Lines of credit at September 30, 2000 and 1999 are as follows:
<TABLE>
<S> <C> <C>
2000 1999
----------------------------------------------------------- ---------------- ----------------
----------------------------------------------------------- ---------------- ----------------
Nations Credit Commercial Corporation $ -- $1,913,986
----------------------------------------------------------- ---------------- ----------------
GMAC Business Credit, LLC 11,841,418 --
----------------------------------------------------------- ---------------- ----------------
$11,841,418 $1,913,986
----------------------------------------------------------- ---------------- ----------------
</TABLE>
Long-term debt at September 30, 2000 and 1999 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Due Date Rate 2000 1999
Short-term unsecured loan February 2000 10% $ -- $500,000
Note payable - Onkyo May 31, 2001 6.06% 1,000,000 --
Senior subordinated convertible
notes June 2001 10% 378,000 707,000
Term A Loan August 2003 (see below) 5,230,000 --
Term B Loan August 2003 (see below) 6,000,000 --
Promissory notes August 2003 7.51% 12,000,000 --
Senior secured promissory notes August 2008 15% 12,000,000 --
---------- ----------
Less: 36,608,000 1,207,000
Original issue discount - Warrants (958,289)
--
Current maturities (3,449,666) (1,207,000)
---------- -----------
$32,200,045
=========== $===========
</TABLE>
Scheduled maturities of notes payable are as follows:
Fiscal Year Ending September 30:
Consolidated GTI
2001 $3,449,000 $ 378,000
2002 2,672,000 --
2003 18,487,000 12,000,000
2004 -- --
Thereafter 12,000,000 5,000,000
---------- ---------
$36,608,000 $17,378,000
=========== ===========
32
<PAGE>
Senior Subordinated Convertible Notes
On June 9, 1995, the Company entered into an agreement with advisory clients of
Ganz Capital Management, Inc., now Mellon Private Asset Management ("Mellon"),
whereby the holders would purchase $3,020,000 nine percent (9%) Senior
Subordinated Convertible Notes (the "Notes") from the Company, which matured in
June 2000. The Notes were subject to an Indebtedness to Equity ratio that could
not exceed 1.5 to 1.0. As of September 30, 1998, the Company was not in
compliance with the ratio. In fiscal 1999, the Company restructured
substantially all of the $3,020,000 Notes, which included a waiver of the debt
to equity ratio until September 30,1999. As of September 30, 1999, the Company
was in compliance with this ratio.
During December 1998, in connection with the restructure of substantially all of
the outstanding $3,020,000 Notes, the Company prepaid an aggregate of $745,000
principal amount of Notes for $496,617 resulting in a savings of $248,383 in
principal amount (not including future debt service costs.) In connection with
the discounting of these Notes, the Company issued to the Noteholders warrants
to purchase an aggregate of 248,383 shares of the Company's Common Stock
exercisable over a five-year period at $1.78 per share. In addition, on December
15, 1998 concurrent with the approval of the sale of TSA Assets by the Company's
stockholders, Noteholders representing $2,240,000 of the remaining $2,275,000 in
Notes outstanding agreed to be prepaid $1,568,000 of the Notes, leaving $707,000
of principal outstanding due in June 2000.
In connection with this redemption, the Noteholders agreed to reduce the
interest rate from 9% to 5% and reduce the conversion price on the remaining 30%
Note balance from $10.00 per share to $2.00 per share. In connection with the
repayment of the Notes, a waiver of certain restrictive provisions of the Note
Purchase Agreement, including the requirement that the Company maintain a 1.5 to
1 debt to equity ratio, was received (through and including September 30, 1999).
In June 2000, the Company repaid $329,000 of the outstanding Notes. In addition,
the Company and Noteholders representing $363,000 of Notes agreed to extend the
due date of the Notes until June 2001. In return, the Company agreed to increase
the interest rate from 5% to 10% and reduce the conversion price from $2.00 per
share to $1.50 per share. Additionally by allowing the Company to enter into the
OAI acquisition, the remaining Ganz Noteholders permanently waived the 1.5 to
1.0 indebtedness requirement.
Short-Term Unsecured Loan
On August 13, 1999, a trust in which Mr. G. Jeff Mennen, a director of the
Company, is one of the trustees provided the Company a six-month short-term
unsecured loan of $500,000 at a 10% interest rate. As consideration, the Trust
received 50,000 warrants at the market price of $.875 exercisable immediately,
and 50,000 warrants at the market price of $.875 exercisable in one year. The
value of these warrants of $76,344 has been deducted as interest expense in the
fourth quarter of fiscal year 1999. The loan plus accrued interest was repaid in
January 2000.
Lines of Credit
On July 1, 1997, the Company entered into a three-year asset-based financing
agreement with Nations Credit Commercial Corporation ("Nations Credit
Facility"). The Nations Credit Facility, which was secured by substantially all
of the assets of the Company, enabled the Company to borrow up to $5,000,000
based upon certain percentages of accounts receivable and inventory balances.
The interest rate on the Nations Credit Facility was 1-1/2% over the prime rate
and was payable monthly. The weighted average interest rate during the year
ended September 30, 1999 was 17.4%. The maximum amount outstanding at any month
end was $1,913,986 at September 30, 1999. The average outstanding balance was
$1,090,287 during the year ended September 30, 1999. As a result of the sale of
TSA assets, the note balance of approximately $1,914,000, which included a
redemption fee of $100,000, was paid, the Credit Facility was cancelled, and
liens on all assets of the Company were released on October 1, 1999.
33
<PAGE>
In connection with the acquisition of OAI, the Company entered into a secured
three-year $31,230,000 credit facility with GMAC Business Credit, LLC, (the
"GMAC Credit Facility"). The proceeds were used to repay OAI's existing
indebtedness owed to another institutional lender and to lend part of the cash
purchase price to GTI. The GMAC Credit Facility consists of a revolving line of
credit and two term loans.
The revolving line of credit is for a maximum of $20,000,000 subject to meeting
various financial and other covenants. Under the line of credit, OAI may borrow
up to 85% of eligible accounts receivable plus the lesser of 60% of all eligible
inventory or $7,500,000. This facility cannot be used to fund the operations of
the Company and its subsidiaries, other than OAI. As a condition of granting the
GMAC Credit Facility, GMAC required that this facility be used to provide
working capital to OAI only. Except for the possibility of the payment of
management fees and a dividend on the Company's over $3,000,000 preferred stock
investment in OAI, OAI is restricted from using its credit facility to fund the
activities of the Company's corporate office or any of its other subsidiaries.
As of January 12, 2001, OAI had not paid the Company any management fees or
preferred dividends and none are presently anticipated to be paid. The GMAC
Credit Facility includes, among other things, covenants regarding certain
financial ratios of OAI. At September 30, 2000, Management believes OAI is in
compliance with such covenants. See Note 20. Subsequent Events.
The weighted average interest rate at and during the year ended September 30,
2000 was 10.5%. The maximum amount outstanding at any month end was $11,841,418
at September 30, 2000. The average outstanding balance was $9,841,267 during the
year ended September 30, 2000.
Term A and B Loans
The GMAC term loans are for $5,230,000 and $6,000,000. The $5,230,000 term loan
("Term A") is due in monthly installments of approximately $72,639 with a
balloon payment due on August 30, 2003 of approximately $2,615,000; the other
term loan ("Term B") is due in monthly installments of $100,000 increasing to
monthly installments of $150,000 on October 1, 2001 and to $250,000 per month on
October 1, 2002. The final payment is due on August 30, 2003. Except for LIBOR
loans, which may be advanced under the line of credit, interest on the revolving
line and the Term A loan is the greater of the Federal Funds Rate plus one-half
percent or prime, increased by one percent. Interest on the Term B loan is the
greater of the Federal Funds Rate plus one-half percent or prime, increased by
one and one-half percent. At the closing, the Company borrowed a total of
$20,543,338 under the GMAC Credit Facility. The GMAC Credit Facility is secured
by a first lien on all of the assets of OAI. GTI guaranteed the GMAC Credit
Facility and pledged all of its outstanding stock of OAI as additional security.
Senior Secured Promissory Notes
As a part of the OAI acquisition, GTI and OAI borrowed a combined $12,000,000
from the Wilmington Trust Company and George Jeff Mennen, co-trustee u\a dated
November 25, 1970 with George S. Mennen FBO John Henry Mennen, collectively (the
"Mennen Trusts"). The OAI loan of $7,000,000 is due in August 2008 and is
secured by a second lien on all of the assets of OAI. The GTI loan of $5,000,000
is due August 2008 and is secured by a first lien on all of the assets of GTI
except for the capital stock and assets of OAI. The interest rate on both loans
is 15% per annum, of which 12.5% is payable monthly, with 2.5% per annum
accruing and due at maturity.
34
<PAGE>
In connection with the loans made by the Mennen Trusts, the Company issued
warrants to purchase 1,500,000 shares of its Common Stock exercisable at $.94
per share over a 10-year period. The value of these warrants, $968,896; has been
recorded as an original issue discount, which is being amortized as interest
expense over the term of the loans.
Promissory Notes
Onkyo accepted $12,000,000 unsecured promissory notes due on August 31, 2003
bearing interest at 7.51%, as a part of the consideration for the sale of OAI.
See Notes 4 and 20. Subsequent Events.
Note Payable-Onkyo
OAI has a $1,000,000 unsecured promissory note payable to Onkyo due on May 2001
bearing interest at the Federal Funds Rate less.5% (See Note 20.)
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space under non-cancelable operating leases.
Approximate future minimum rental commitments under these leases are as follows:
Fiscal Year Ending September 30:
2001 $496,000
2002 336,000
2003 163,000
2004 63,000
Thereafter 66,000
Total rental expense for operations amounted to approximately $222,000, $379,000
and $372,000 for the years ended September 30, 2000, 1999 and 1998,
respectively.
The Company has commitments under certain employment agreements entered into
with individuals in management positions. Approximate base salary payments due
under these agreements are as follows: $1,300,000 in fiscal 2001, and $650,000
in fiscal 2002, and $400,000 in fiscal 2003.
The Company has from time to time incurred expenses associated with litigation
defense and payment of settlements or judgments in connection with its
businesses. The Company believes that such litigation and other legal matters
should not have a significant adverse effect on the Company's financial position
or results of operations.
11. EARNINGS PER SHARE
Net income (loss) per common share is calculated according to SFAS No. 128,
"Earnings Per Share", which establishes standards for computing and presenting
basic and diluted earnings per share. Basic earnings per share are calculated by
dividing Income (Loss) Available to Common Stockholders by the weighted average
number of shares of Common Stock outstanding during each period. Diluted
earnings per share is calculated by dividing Net Income (Loss) Available to
Common Stockholders by the weighted average number of shares of common Stock and
dilutive potential common Stock equivalents outstanding during each period.
For the years ended September 30, 2000, and 1998, the dilutive effect of
convertible securities and common stock equivalent shares of 4,088,871, and
1,274,896, respectively, were not included in the dilutive average common shares
outstanding, as the effect would have been antidilutive.
35
<PAGE>
<TABLE>
<S> <C> <C> <C>
For the Year Ended September 30, 1999
Income Share Per-Share
(Numerator) (Denominator) Amount
Basic
Income available
To common stockholders $3,973,882 29,108,705 $0.14
Effect of Dilutive Securities
Options and Warrants 138,009
Convertible preferred stock 265,327 3,901,023
Diluted
Income available to common
Shareholders plus assumed
Conversion $4,239,209 33,147,737 $0.13
</TABLE>
Options and warrants to purchase 3,272,795 shares of common stock at prices
ranging from $1.06 to $8.75 were outstanding during the period ended September
30, 1999 but were not included in the computation of diluted earnings per share
because exercise price was greater than the market price of the common shares.
12. INCOME TAXES
Income tax expense for the years ended September 30, 2000, 1999, and 1998 was
$0, $53,000, and $58,801, respectively.
A valuation allowance is provided to reduce the deferred tax assets to a level,
which, more likely than not, will be realized. The Company has determined, it is
not more likely than not that the net deferred tax assets at September 30, 2000
will be realized before the expiration of the underlying net operating loss
carryforwards which will begin expiring in 2002. Accordingly, a 100% valuation
allowance has been recorded on the potential tax benefit generated from the
operating loss carryforwards.
At September 30, 2000, the Company has net tax basis Federal operating loss
carryforwards of approximately $34,000,000, which may be used to offset future
taxable income, if any. The Company's net operating loss carryforwards expire
between 2002 and 2019.
13. RELATED PARTY TRANSACTIONS
In order to assure the Company would not violate a covenant under the Notes, in
January 1998, G. Jeff Mennen, a director of the Company, agreed to infuse
sufficient capital into the Company to maintain compliance of this ratio through
October 1, 1998 or refinance the Notes (see Note 9. Debt). In consideration for
this guarantee, the Company issued to Mr. Mennen 50,000, 10-year warrants
exercisable at $2.00 per share and agreed to register the underlying shares of
Common Stock at its sole expense. These warrants were valued at $31,854 and were
recorded as an expense in fiscal 1999.
36
<PAGE>
On November 17, 1998, the Company sold $3,500,000 of Series B Convertible
Preferred Stock ("Series B Preferred") to the Mennen Trust. The Series B
Preferred is convertible into a number of shares of Common Stock computed by
dividing the stated value of $1,000 per share (the "Stated Value") by 85% of the
closing bid price of the Common Stock on the previous trading day (the
"Conversion Price"). The Company had the option to redeem the Series B Preferred
at a price of 115% of Stated Value plus accrued dividends, which option expired
on January 1, 2001. The intrinsic value of the above described beneficial
conversion feature of ($618,625) was recognized as an increase in additional
paid-in-capital and a decrease in Series B Preferred. This beneficial conversion
feature was amortized as an embedded Series B Preferred dividend through
November 1, 1999 (the date on which the stock could have been converted into
Common Stock). The Series B Preferred pays a dividend of 9% per annum in cash
or, if the Company is unable to pay cash, in shares of Common Stock. The number
of shares of Common Stock to be issued in such event shall equal to the sum of:
(A) the amount of the dividend divided by the Conversion Price plus (B) 25% of
the amount obtained in clause (A). As additional consideration, the Company
issued to the Mennen Trust 350,000 warrants to purchase the Company's Common
Stock exercisable over a 10-year period at a price of $1.94 per share (which was
equivalent to $1.00 above the closing price on the day of consummation of the
Series B Preferred sale transaction). These warrants were valued at $177,251,
and have been deducted from Net Income (Loss). Available to Common Stockholders
for the purpose of calculating income per share for the period ended September
30, 1999. Additionally, since the Series B Preferred was not redeemed or
converted into Common Stock on or before May 1, 1999 (which conversion required
the Company's consent), the Company issued to the Mennen Trusts an additional
50,000 10-year warrants exercisable at a price of $1.75, $0.50 per share above
the closing price of the Company's Common Stock on April 30, 1999. These
warrants were valued at $27,048 and have been deducted from Net Income (Loss)
Available to Common Stockholders for the purpose of calculating income per share
for the period ended September 30, 1999.
Under the original terms of the Series B Preferred, the Company was allowed to
redeem the Series B Preferred Stock at a 15% premium until October 27, 1999. A
redemption did not occur by that date, so the Company was required to file a
registration statement no later than November 30, 1999. However, on October 21,
1999, the Mennen Trust 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. Under the terms of the agreement, the Mennen
Trusts received 250,000 warrants at a strike price of $2.38. In return, the
Company maintained its 15% redemption right and was allowed to extend the
required registration or redemption until January 1, 2001. These warrants were
valued at $252,180 and were deducted from Net Income (Loss) Available to Common
Stockholders for the purpose of calculating income per share for the first
quarter of fiscal year 2000. On January 5, 2001, the Mennen Trust again granted
an extension to the Company to redeem the Series B Preferred. See Note 20.
Subsequent Events.
On August 13, 1999, the Mennen Trusts provided the Company a six-month
short-term unsecured loan of $500,000 at a 10% interest rate. As consideration,
the Mennen Trusts received 50,000 warrants at the market price of $.875
exercisable immediately, and 50,000 warrants at the market price of $.875
exercisable in one year. These warrants were valued at $76,344 and were deducted
as interest expense in the fourth quarter of fiscal year 1999. The loan along
with accrued interest was repaid in January 2000.
In fiscal 1993, Stuart Landow, the former Chairman of the Board of Directors,
President and Chief Executive Officer of the Company entered into an employment
agreement ("Employment Agreement") which provided a base salary of $200,000 per
year. Additionally, the Employment Agreement called for incentive compensation
payments. The incentive cash compensation expense for fiscal 2000, 1999, and
1998 was $0, $0 and $92,760, respectively.
37
<PAGE>
As a result of the hiring of a new CEO, who replaced Mr. Landow as CEO in May
1997, a breach in the terms of the Employment Agreement occurred; thus, Mr.
Landow could have requested that the "Good Reason" clause of his contract be
triggered effective July 1, 1997. Mr. Landow waived this clause with the
approval of the Board of Directors. This waiver was effective until June 30,
1998 or earlier, if elected by Mr. Landow at which time the terms of the
original Employment Agreement remained in effect, with the exception of the
incentive payments which would be calculated based on the previous sales for the
period from July 1, 1996 through June 30, 1997.
In June 1998, Mr. Landow agreed to modify his Employment Agreement, which
resulted in Mr. Landow resigning as Chairman and as a director of the Company.
Mr. Landow agreed to a reduction of approximately $195,000 of the total
compensation he was entitled to receive by reducing the 36-month term of the
severance to 30 months. Mr. Landow agreed to raise the exercise price on 200,000
of his options to purchase 600,000 shares of the Company's Common Stock (all of
which remain vested) from $2.06 to $3.56. In return for these modifications to
the Employment Agreement, the Company agreed to extend the exercise period for
all of Mr. Landow's 600,000 vested options from the original expiration date of
July 1, 1999 to the new date of July 1, 2001.
Additionally, the modified Employment Agreement provides that Mr. Landow would
repay the Company approximately $105,000 he previously borrowed, together with
9% per annum interest over the 30-month term. The Company is deducting the
monthly installments from Mr. Landow's monthly severance compensation payments.
As a result of the modification to the Employment Agreement the Company recorded
a one-time charge against earnings of $1,085,587, which is included in
"Severance expense" in the accompanying Consolidated Statement of Operations for
the year ended September 30, 1998. This charge was comprised of $918,507 in
future severance payments and a non-cash charge of $167,080, recorded for the
change in the stock option measurement date.
As of September 30, 2000, the Company owes Mr. Landow additional payments
totaling $89,799, which is included in accrued liabilities in the accompanying
financial statements.
For addtional related party transactions. See Notes 9, 19 and 20.
14. STOCK AND STOCK OPTION PLANS
The 1990 Stock Plan, as amended, covers 3,630,000 shares of Common Stock and is
intended to provide: (a) officers and other employees of the Company
opportunities to purchase stock in the Company pursuant to options ("Options")
granted hereunder which qualify as Incentive Stock Options ("ISOs") under the
Internal Revenue Code of 1986, as amended; (b) directors, officers, employees
and consultants of the Company opportunities to purchase stock in the Company
pursuant to Options granted hereunder which do not qualify as ISO's
("Non-Qualified Options"); (c) directors, officers, employees and consultants of
the Company awards of stock in the Company ("Awards"); (d) directors, officers,
employees and consultants of the Company opportunities to make direct purchases
of stock in the Company ("Purchases"); and (e) directors of the Company who are
not employees of the Company with Non-Discretionary Options.
38
<PAGE>
The 1990 Stock Plan is administered by a committee of three non-employee
directors. The committee, subject to certain restrictions in the 1990 Stock
Plan, has the authority to grant or issue, as applicable, ISOs, Non-Qualified
Options, Awards, Purchases and Non-Discretionary Options. The committee also
establishes exercise or issue prices, vesting schedules and expiration dates.
The Company's 1993 Stock Option Plan (the "1993 Plan") covers 2,150,000 shares
of Common Stock. The 1993 Plan provides: (a) officers and other employees of the
Company opportunities to purchase stock in the Company pursuant to Options
granted hereunder which qualify as ISOs; and (b) directors, officers, employees
and consultants of the Company opportunities to purchase stock in the Company
pursuant to Non-Qualified Options.
A committee of non-employee directors administers the 1993 Plan. The committee,
subject to certain restrictions in the 1993 Plan, has the authority to (i)
determine the employees of the Company to whom ISOs may be granted, and
determine to whom Non-Qualified Options may be granted; (ii) determine the time
or times at which Options may be granted; (iii) determine the exercise price of
shares subject to Options; (iv) determine whether Options granted shall be ISOs
or Non-Qualified Options; (v) determine the time or times when the Options shall
become exercisable, the duration of the exercise period and when the Options
shall vest; (vi) determine whether restrictions such as repurchase Options are
to be imposed on shares subject to Options and the nature of such restrictions,
if any, and (vii) interpret the 1993 Plan and promulgate and rescind rules and
regulations relating to it.
The 1993 Plan also provides for the automatic grant of 30,000 Non-Qualified
Options to any director who is not an employee of the Company. These Options
vest in increments of 5,000 Options per director every June 30 and December 31,
provided that they are still serving as a director at that time. However, in the
event any director resigns prior to full vesting, the Options will vest on a
pro-rata basis.
The Company has issued the following Options and warrants to directors,
officers, employees and consultants during fiscal 2000, 1999 and 1998. All of
the following Options and warrants issued to employees, directors and officers
were issued at the fair market value of the underlying stock at the date of
grant; therefore, no compensation expense has been recognized. The fair value of
Options or warrants issued to consultants was charged to operations.
39
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
2000 1999 1998
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS/ EXERCISE OPTIONS/ EXERCISE OPTIONS/ EXERCISE
WARRANTS PRICE WARRANTS PRICE WARRANTS PRICE
------- ----- ------- ----- ------- -----
Outstanding,
beginning of year:
3,960,461 $1.94 3,265,872 $2.34 3,160,580 $2.66
Granted 2,801,750 $1.11 1,219,748 $1.53 1,683,727 $1.79
Expiration Dates 10/20/04 - 11/13/03 - 01/12/2002-
9/1/2010 9/22/2009 09/01/2008
Exercised (5,000) $.53 (50,550) $.53 (549,700) $.71
Expired or Canceled
(90,379) $3.18 (474,609) $3.23 (1,028,735) $3.33
------- -------- ---------- -----
Outstanding, end
of year: 6,666,832 $1.57 3,960,461 $1.94 3,265,872 $2.34
========= ===== ========= ===== ========= =====
Exercisable,end
of year: 5,093,532 $1.73 3,117,323 $2.12 1,802,234 $2.94
========= ===== ========= ===== ========= =====
Weighted-average
fair value of
options granted
during the year $.85 $.60 $.98
==== ==== ====
Available for
grant, end of year: 331,242
=======
</TABLE>
Included in the above table at September 30, 2000 are 575,000 outstanding
options, which were granted outside of the Stock Option Plans during fiscal 1998
and 1997 with a weighted average price of $2.00, and $1.98, respectively. Also,
included in the above table are 2,823,383 warrants, which were granted during
fiscal 1998, 1999 and 2000 at prices ranging from $.875 - $2.00.
40
<PAGE>
Information about stock options in various price ranges at September 30, 2000
follows:
<TABLE>
<S> <C> <C> <C> <C>
OPTIONS/WARRANTS OUTSTANDING OPTIONS/WARRANTS EXERCISABLE
-------------------------------------------------------------------------------------- ----------------------------------
Weighted-Average Weighted-Average
Outstanding Remaining Exercise Exercisable Weighted-Average
Range of as of Contractual Life Price as of Exercise Price
Exercise Prices 09/30/00 (Years) 09/30/00
$0.00 - $1.00 2,923,250 7.1 $0.92 1,809,453 $0.91
$1.01 - $2.00 2,515,276 7.0 $1.63 2,060,773 $1.70
$2.01 - $3.00 824,820 5.2 $2.28 824,820 $2.28
$3.01 - $5.00 295,000 6.0 $3.47 295,000 $3.47
$5.01 - $8.00 78,486 4.5 $6.81 73,486 $6.83
$8.01 - $10.00 30,000 3.5 $8.75 30,000 $8.75
----- ------ --- ----- ------ -----
6,666,832 6.8 $1.57 5,093,532 $1.73
========= =========
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123,
Accordingly, no compensation cost has been recognized for its Stock Option
Plans. Had compensation for the Company's stock-based compensation plans been
determined pursuant to SFAS No. 123, the Company's net income (loss) and loss
per share would have decreased (increased) accordingly. Using the Black-Scholes
Option Pricing Model for all Options granted after October 1, 1995, the
Company's pro forma net loss and pro forma net loss per share, with related
assumptions, are as follows:
<TABLE>
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
Pro forma net income
(loss) $(6,445,393) $3,445,032 $(6,577,819)
Pro forma basic and diluted net income (loss)
per share (.22) .12 (.23)
Expected life (years) 7 7 7
Risk-Free interest rate 6.14% 6.14% 5.67%
Expected volatility 75% 69% 86%
Quarterly dividend None None None
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to Options
granted prior to October 1995, the resulting pro forma compensation cost may not
be representative of that to be expected in future years.
15. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
During fiscal 2000, 80% of OAI sales were derived from three customers. Delphi
Delco Electronics accounted for approximately 55% and Daimler-Chrysler and
Fujitsu Ten together, accounted for approximately 25%.
During fiscal 2000, approximately 40% of On-Site's revenues were derived from
one customer, Speedco, Inc.
41
<PAGE>
In fiscal 1999, On-Site derived approximately 50% of its revenue from the sale
of 10 OSA-II units to Flying J, Inc. Additionally, in fiscal 1999, On-Site
derived approximately 14% of its revenue from ongoing long-term leases with
Speedco, Inc., a major truck stop company affiliated with Shell/Equilon. Loss of
Speedco, Inc. ongoing revenues during fiscal year 2001 would have a material
adverse impact on the Company.
In fiscal 1999 and 1998, TSA derived approximately 99% of its sales from
Daimler-Chrysler.
During fiscal 1998, approximately 63% of On-Site's revenues was derived from
four customers, all of which were different than the key customers noted above
in fiscal 1999.
16. DISCONTINUED OPERATIONS
On September 30, 1999, the Company sold substantially all of the assets of its
85% owned subsidiary, TSA and other assets used in TSA's business to OAI.
Accordingly, the operations and financial activity associated with this business
were previously classified as discontinued operations, but have been
reclassified as continuing operations as a result of the Company acquiring 100%
of the outstanding stock of OAI on August 31, 2000.
17. SEGMENT INFORMATION
The Company currently classifies its operations into the following segments: (1)
Automotive Audio Technology, which consists of OAI and TSA, and (2) Oil Analysis
Service, which consists of On-Site operations. Corporate and other includes
general corporate assets consisting primarily of cash and cash equivalents,
property and equipment, and corporate expenses. The material components of
corporate general and administrative expenses are salaries and benefits; travel
and entertainment; consulting; and proxy, printing and transfer costs. In fiscal
2000, 1999 and 1998, corporate expenses (salaries, benefits and general and
administrative expenses) have been allocated to the segments. Financial
information about the Company's operations by segments for the years ended
September 30, 2000, 1999 and 1998 is as follows:
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Automotive Oil Analysis Corporate
Audio Technology Service And Other Consolidated
Revenue:
2000 $ 6,478,163 $ 1,124,265 $ - $ 7,602,428
1999 8,863,814 1,389,678 - 10,253,492
1998 10,815,205 392,653 - 11,207,858
Net Income (Loss):
2000 $(61,143) $ (4,462,969) $ (893,006) $(5,417,118)
1999 9,263,284 (3,563,404) (537,270) 5,162,608
1998 1,949,924 (5,550,296) (1,929,190) (5,529,562)
Assets:
2000 $60,301,707 $5,453,413 $2,211,511 $ 67,966,631
1999 - 5,682,570 9,991,778 15,674,348
1998 2,432,786 3,943,553 896,756 7,273,095
Depreciation and
Amortization:
2000 $285,779 $788,661 $ 35,764 $1,110,204
1999 201,980 506,598 133,653 842,231
1998 306,130 847,236 138,341 1,291,707
</TABLE>
18. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------------------------------------
(unaudited)
For the year ended September 30, 2000
Net sales $ 185,050 $ 298,503 $ 311,097 $ 6,807,778 $ 7,602,428
Gross profit (loss) (87,442) (123,853) (151,039) 425,045 62,711
Loss before
extraordinary items (1,414,438) (1,440,784) (1,509,678) (1,674,754) (6,039,654)
Net loss available to
common stockholders (1,414,438) (1,440,784) (1,509,678) (1,674,754) (6,039,654)
Net loss per share (0.05) (0.05) (0.05) (0.06) (0.21)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------------------------------------
(unaudited)
For the year ended September 30, 1999
Net sales $ 2,092,889 $ 2,591,664 $ 2,858,094 $ 2,710,845 $ 10,253,492
Gross profit 781,398 915,807 1,165,029 611,318 3,473,552
Income (loss) before
extraordinary items 326,473 (830,595) 237,175 4,268,095 4,001,148
Net income (loss) available
to common stockholders 485,218 (830,595) 237,175 4,082,084 3,973,882
Net income (loss) per share 0.02 (0.03) 0.01 0.14 0.14
</TABLE>
43
<PAGE>
19. PRIVATE PLACEMENT OF SERIES A AND B CONVERTIBLE PREFERRED STOCK
In May 1998, the Company completed the sale in a private offering to two foreign
investors of 1,000 shares of Series A Convertible Preferred Stock ("Series A
Preferred ") with a liquidation value of $1,000 per share and a par value of
$.10 per share. This funding was comprised of $1,000,000 in Series A Preferred,
less placement and legal fees, yielding $881,394 in net proceeds to the Company.
This Series A Preferred paid an annual dividend of 5% in cash or Common Stock.
The Company issued an aggregate of 25,779 and 42,626 shares of Common Stock for
payment of the dividend due on the Series A Preferred for the periods ending
September 30, 1999, and 1998, respectively.
As part of the transaction, the foreign investors and the placement agent
received a total of 250,000 three-year warrants exercisable at $1.10, of which
100,000 warrants were fully vested upon funding and the remaining 150,000
warrants vested upon the redemption on November 13, 1998. These warrants were
valued at $77,209 and $108,070 and were deducted from Net Income (Loss)
Available to Common Stockholders for the purposes of calculating net income
(loss) per share for the periods ending September 30, 1999 and 1998,
respectively.
Under the terms of the Preferred Stock agreement, the holders of Series A
Preferred had the right to convert each share of Series A Preferred into a
number of shares of Common Stock in whole or in part cumulatively. The Company
had the right to redeem the Series A Preferred, at any time, in whole or in part
at 120% of the purchase price of the Series A Preferred plus all accrued and
unpaid dividends. The intrinsic value of the above described beneficial
conversion feature of ($250,000) was recognized as an increase in additional
paid-in-capital and a decrease in Series A Preferred. This beneficial conversion
feature was amortized as an embedded Series A Preferred dividend through
November 8, 1998 (the date on which all the stock could have been converted into
Common Stock). On November 8, 1998, the Company redeemed one-half or $500,000
Stated Value of the existing Series A Preferred Stock by paying the holders an
aggregate purchase price of $600,000. The holders also agreed not to convert
$350,000 Stated Value of Series A Preferred until after March 31, 1999 (and the
Company retained the right to redeem $350,000 Stated Value of Series A Preferred
Stock at a 20% premium above Stated Value at any time before or after March 31,
1999). The remaining $150,000 Stated Value of Series A Preferred was converted
into an aggregate of 387,554 shares of Common Stock (including accrued
dividends) in accordance with the terms of the Series A Preferred. As
consideration for the delay in converting $350,000 Stated Value of the Series A
Preferred, the Company issued to the two holders thereof, five-year warrants to
purchase an aggregate of 25,000 shares of Common Stock exercisable at $.8937 per
share commencing in April 1999. These warrants were valued at $10,298 and were
deducted from Net Income (Loss) Available to Common Stockholders for the purpose
of calculating net income per share for the year ended September 30, 1999.
On March 30, 1999, the Company and the holders of the Series A Preferred agreed
to modify the conversion terms of the remaining $350,000 of Series A Preferred
resulting in the conversion of the Series A Preferred into Common Stock at $1.00
per share, or 350,000 shares. The holder agreed to restrict public sale of these
350,000 shares of Common Stock until October 1, 1999 and thereafter 70,000
shares, on a cumulative basis, may be sold each month. The $1.00 price was
substantially higher than the price permissible and occurred as the result of
the Company agreeing not to redeem the $350,000 Series A Preferred.
On November 17, 1998, the Company sold $3,500,000 of its Series B Convertible
Preferred Stock (see Note 13. Related Party Transactions).
44
<PAGE>
20. SUBSEQUENT EVENTS
On November 30, 2000, the Mennen Trust guaranteed a 13 month $1,000,000 note
from the Company to TSA, the Company's 85% owned subsidiary. This permits the
Company to use TSA's cash, which had been allocated in the event the arbitration
proceeding with NCT was unsuccessful. In consideration for the guarantee, the
Company agreed to pay the Mennen Trust a $50,000 fee on January 15, 2001 and
issued to them 150,000 ten year warrants exercisable at a strike price of
$.4375. These warrants were valued at approximately $54,000 and will be deducted
from Net Income (Loss) Available to Common Stockholders for the purpose of
calculating income (loss) per share during the first quarter of fiscal year
2001.
If the Mennen Trust is required to pay under the guarantee in whole or in part,
the Company shall issue to them 10% convertible preferred stock, convertible at
a 30% discount from market (but not less than $.60 per share), redeemable at the
Company's option at 115% of face value through June 30, 2001, and 120%
thereafter. Such conversion feature would result in an embedded dividend that
would be deducted from Net Income (Loss) Available to Common Stockholders. The
Company shall use it best efforts to register the Common Stock issuable upon
conversion within six months of issuance of the preferred stock. Only 1/6 of
face value of the underlying Common Stock can be sold per month, cumulative.
On January 9, 2001, the Mennen Trust extended the time for the Company to redeem
the Series B Preferred at 115% of stated value plus accrued dividends until
January 1, 2002. The Series B Preferred cannot be converted prior to January 1,
2002 without the express written consent of the Company. Under the terms of the
extension, the Company shall not be obligated to file a registration statement
for the underlying Common Stock until January 1, 2002. As consideration for this
modification, the Company issued 25,000 warrants to the Mennen Trust at a strike
price of $.4375. These warrants were valued at approximately $9,000 will be
deducted from Net Income (Loss) Available to Common Stockholders for the purpose
of calculating income (loss) per share for the second quarter of fiscal year
2001.
In early December 2000, the Company notified GMAC that OAI had violated the
Fixed Charge Coverage Ratio of at least 1.15 to 1 covenant of the GMAC Credit
Facility. This violation occurred due to the unexpected significant slowdown in
the OEM automobile market during the fourth calendar quarter of 2000. Due to
this slowdown, OAI sales and earnings, which are historically directly
correlated to OEM sales volumes were lower than expected.
In recognition of the severity of the unexpected downturn and due to
management's efforts to reduce operating costs, GMAC waived the covenant
violation and reset OAI's operating covenants to lower levels through the period
ending December 31, 2001.
In early January 2001, Onkyo and the Company modified the Share Purchase
Agreement by reducing the promissory notes payable to Onkyo by $1,000,000 and
waiving the interest on the $1,000,000. Additionally, Onkyo extended the time
for OAI to pay approximately $3,200,000 comprised of a $1,000,000 note payable
(see Note 9. Debt) and approximately $2,200,000 in royalties payable included in
accounts payable at September, 30, 2000, from May 31, 2001 to March 10, 2002.
45
<PAGE>
In January 2001, the Company sold $2,000,000 of its Series C Convertible
Preferred Stock ("Series C Preferred") to the Mennen Trusts and received a
commitment for an additional $2,000,000 during fiscal 2001 from Mr. G. Jeff
Mennen, (the "Standby Commitment"), if required as described below. The Series C
Preferred is convertible into a number of shares of Common Stock computed by
dividing the stated value of $1,000 per share (the "Stated Value") by 75% of the
closing bid price of the Common Stock on the previous trading day but not less
than $.4375 per share (the "Conversion Price"). The Company has the option to
redeem the Series C Preferred at a price of 115% of Stated Value plus accrued
dividends, which option expires on June 30, 2001. Thereafter, the redemption
premium increases to 120% of stated value plus accrued dividends. The Series C
Preferred pays a dividend of 10% per annum in cash or, if the Company is unable
to pay cash, in shares of Common Stock. The number of shares of Common Stock to
be issued in such event shall equal to the sum of: (A) the amount of the
dividend divided by the Conversion Price plus (B) 25% of the amount obtained in
clause (A). As additional consideration, the Company issued to the Mennen Trusts
200,000 warrants to purchase the Company's Common Stock exercisable over a
10-year period at a price of $.4375 per share. These warrants were valued at
approximately $72,000 and will be deducted from Net Income (Loss) Available to
Common Stockholders for the purpose of calculating income (loss) per share for
the second quarter of fiscal year 2001. Mr. G. Jeff Mennen, a co-trustee of the
Mennen Trusts, agreed to fund the Standby Commitment if the Company `s cash and
cash equivalents fall below $400,000 during fiscal year 2001. To the extent the
Company obtains equity capital from another source, the Standby Commitment will
be reduced dollar for dollar. To the extent that Mr. Mennen funds the Standby
Commitment, he will receive a new series of convertible preferred stock
substantially similar to the Series C; except that the conversion price will be
equal to fair market value at the time of funding divided by 70% without an
absolute floor price. As consideration for issuance of the Standby Commitment,
the Company issued to the Mennen Trust 400,000 warrants exercisable at $.6875
per share. These Warrants were valued at approximately $204,000 and will be
deducted from Net Income (Loss) Available to Common Stockholders for the purpose
of calculating income (loss) per share for the second quarter of fiscal year
2001.
21. LIQUIDITY
As more fully explained in Note 19, subsequent to year end, the Company sold
$2,000,000 of Series C Convertible Preferred Stock and received a commitment
from Mr. G. Jeff Mennen to provide $2,000,000 to purchase additional shares of
preferred stock should the Company's cash and cash equivalents fall below
$400,000.
As also explained in Note 20, Onkyo, among other things, extended the due date
on $3,200,000 payable to March 2002 from May 2001.
Further, GMAC has reduced the requirements of certain loan covenants to
recognize the effect of the anticipated reduction in automobile production that
reflect on OAI products.
Based upon the above factors, coupled with Management's ability to reduce
expenses should its plan to accelerate the sales of OSA-II units during fiscal
2001 not materialize, Management believes it has the resources to fund its cash
requirements through the next twelve months.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Changes in Accountants
On October 5, 2000, Global Technovations, Inc. (the "Company") retained BDO
Seidman, LLP ("BDO Seidman") as its auditors to replace Arthur Andersen LLP
("Arthur Andersen"), who was dismissed.
On October 5, 2000, the Company engaged BDO Seidman to audit the books and
accounts of the Company for the fiscal year ending September 30, 2000.
Previously, the Board of Directors of the Company and its Audit Committee
approved the decision to change the Company's independent accountants.
The reports of Arthur Andersen on the financial statements of the Company for
the two fiscal years ended September 30, 1999 contain no adverse opinion or
disclaimer of opinion and were not qualified or modified as to any uncertainty,
audit scope or accounting principle.
In connection with the audits for the past two fiscal years and through October
5, 2000, there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Arthur Andersen, would have caused the firm to make reference thereto in their
reports on the financial statements for such period.
During the past two fiscal years and through October 5, 2000, Arthur Andersen
has not advised the Company of any reportable events (as defined in Item
304(a)(1)(v) of Regulation S-K issued by the Securities and Exchange
Commission). The Company has not consulted with BDO Seidman on any matter during
the past two fiscal years and through October 5, 2000.
Disagreements
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated by reference from the Proxy Statement for the
Annual Meeting of Stockholders section entitled "Election of
Directors".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Proxy Statement for the
Annual Meeting of Stockholders section entitled "Executive
Officer Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT Incorporated by reference from the Proxy for the
Annual Meeting of Stockholders Statement section entitled
"Voting Securities and Principal Holders".
47
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Proxy Statement for the
Annual Meeting of Stockholders section entitled "Related Party
Transactions".
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
(a) (1) Financial Statements. (See Item 8. of Form 10-K)............
(a) (2) Financial Statement Schedules required to be filed.
Schedule I - Condensed Financial Information of Registrant.51-53
Schedule II - Valuation and Qualifying Accounts.............54
All other schedules have been omitted because the required
information is shown in the consolidated financial statements or
notes thereto or they are not applicable.
(a) (3) Exhibits
<TABLE>
<S> <C> <C>
EXHIBIT INDEX
------------------- ------------------------------------------------------------------------------------------ --------------
NUMBER EXHIBIT Footnote
3.0 Amended and Restated Certificate of Incorporation 1
3.1 Amendment to Certificate of Incorporation 2
3.2 By-Laws 3
3.3 Amendment to By-Laws 2
3.4 Amendment to the Amended and Restated Certificate of Incorporation 4
3.5 Form of Third Certificate of Designation (Series B Preferred Stock) 5
3.6 Form of Fourth Certificate of Designation (Series C Preferred Stock)
4.0 1990 Stock Plan 6
4.1 1993 Stock Option Plan 4
10.1 First Amendment to Lease of On-Site Analysis, Inc., Atlanta, GA 4
10.2 Shareholder Rights Plan 7
10.3 Note Purchase Agreement dated as of June 9, 1995 8
10.4 First Amendment to Shareholder Rights Plan 2
10.5 Second Amendment to Shareholder Rights Plan 9
10.6 Employment Agreement of David Natan 10
10.7 Lease of office space, Palm Beach Gardens, FL 11
10.8 Employment Agreement of William C. Willis, Jr. 12
10.9 Asset Purchase Agreement - NCT Audio Products, Inc. 13
10.10 Amendment to Asset Purchase Agreement - NCT Audio Products, Inc. 14
10.11 Second Amendment to Asset Purchase Agreement - NCT Audio Products, Inc. 15
10.12 Amendment to Note Purchase Agreement dated as of June 9, 1995 16
10.13 Amended Stock Purchase Agreement - Series B Preferred Stock 16
10.14 Speedco, Inc. Long-Term Lease 18
10.15 Warrant - 1970 Mennen Trust
10.16 Warrant - 1985 Mennen Trust
10.17 Senior Secured Promissory Note 19
10.18 Security Agreement 19
48
<PAGE>
10.19 Audit Committee Charter 19
10.20 Credit Agreement between GMAC Business Credit, L.L.C. ("GMAC") and Onkyo Acquisition 20
Corporation ("OAC") with Schedules
10.21 Subordination Agreement of Mennen Trust in favor of GMAC 20
10.22 Guaranty of Global Technovations, Inc. 20
10.23 Stock Pledge Agreement of Global Technovations, Inc. 20
10.24 Omnibus Amendment Agreement of Onkyo America ("OAI") and OAC 20
10.25 Mortgage and Security Agreement of OAI 20
10.26 Security Agreement of Onkyo America Specialty Products, Inc. ("OASP") 20
10.27 Security Agreement of OAI 20
10.28 Patent and License Security Agreement of OASP 20
10.29 Stock Pledge Agreement from OAI 20
10.30 $7,000,000 Senior Secured 8-year Note of OAC payable to Mennen Trust 20
10.31 Subordinated Loan and Security Agreement of OAC in favor of Mennen 20
10.32 Plan and Agreement of Merger between OAI and OAC 20
10.33 Security Agreement of GTI to Mennen Trust 20
10.34 Share Purchase Agreement with Schedules 20
10.35 Amendment to Share Purchase Agreement 20
10.36 Second Amendment to Share Purchase Agreement
10.37 BAT $3.00 Warrants
10.38 Guarantee
10.39 Mennen Letter Agreement re: Guarantee
10.40 Mennen Agreement re: Series B Extension
10.41 Mennen Agreement re: $2,000,000 standby commitment
</TABLE>
49
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(b) Reports on Form 8-K
Form 8-K dated August 31, 2000 was filed on September 14, 2000, and amended on
November 13, 2000.
Exhibit Index - Footnotes
<TABLE>
<S> <C>
1 Contained in the Form 8-A dated July 10, 1993.
2 Contained in the Form 8-K/A No. 1 dated July 17, 1995.
3 Contained in the documents previously filed with the Securities
and Exchange Commission in conjunction with the Form 8-B on
11/16/92.
4 Contained in the documents filed with the Securities and
Exchange Commission in conjunction with the 9/30/94 Form 10-K.
5 Contained in Form 10-K/A No. 1 for the year ended September 30, 1998.
6 Contained in the documents previously filed with the Securities
and Exchange Commission in conjunction with the 12/31/90 Form
10-K.
7 Contained in Form 8-K dated January 5, 1995.
8 Contained in documents filed with the Securities and Exchange
Commission in conjunction with the 6/30/95 Form 10-Q.
9 Contained in the Form 8-K/A No. 2 dated December 5, 1995.
10 Contained in Amendment No. 3 to the Registration Statement on Form S-3 filed September 27, 1995.
11 Contained in documents filed with the Securities and Exchange
Commission in conjunction with The September 30, 1995 Form 10-K.
12 Contained in documents filed with the Securities and Exchange Commission in conjunction with
September 30, 1997 Form 10-K/A No. 3.
13 Contained in documents filed with the Securities and Exchange
Commission in conjunction with The June 30, 1998 Form 10-Q.
14 Contained as an exhibit to the November 6, 1998 Proxy Statement.
15 Contained in Amendment No. 5 to the Registration Statement Form S-3 filed May 21, 1999.
16 Contained in Form 10-K for the year ended September 30, 1998.
17 Contained in Form 10-K for the year ended September 30, 1999.
18 Contained in Amendment No. 6 to the Registration Statement Form S-3 filed September 3, 1999.
19 Contained in Form 10-Q dated August 21, 2000.
20 Contained in Form 8-K dated September 14, 2000.
</TABLE>
50
<PAGE>
<TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GLOBAL TECHNOVATIONS, INC
SCHEDULE I
CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
<S> <C>
ASSETS 2000
-------------------
Current Assets:
Cash and cash equivalents $ 2,031,083
Other current assets 72,920
-------------------
Total current assets 2,104,003
Property and equipment, net 34,174
Investment in subsidiaries 20,205,501
Other assets, net 249,913
-------------------
TOTAL ASSETS $ 22,593,591
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt 378,000
Accounts payable and accrued liabilities 2,189,680
-------------------
Total current liabilities 2,567,680
-------------------
Long term debt 16,041,711
Other liabilities 103,207
-------------------
Total long term liabilities 16,144,918
-------------------
Total liabilities 18,712,598
Total stockholders' equity 3,880,993
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,593,591
===================
The "Notes to Consolidated Financial Statements of Global Technovations, Inc.
and Subsidiaries" are an integral part of these statements. See accompanying
"Note to Condensed Financial Information of Registrant."
51
<PAGE>
GLOBAL TECHNOVATIONS, INC.
SCHEDULE I
CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------------------------------
2000
-------------------
Total revenue
$ -
-------------------
Expenses:
General and administrative 717,502
Selling and marketing 237,324
Depreciation and amortization 35,764
Research and development 15,613
-------------------
Total expenses 1,006,203
Loss from operations before equity in net loss of subsidiaries (1,006,203)
Equity in net loss of subsidiaries (4,524,112)
-----------------
Loss from operations (5,530,315)
Other income (expense) including interest expense of $233,868 113,197
-------------------
Net loss (5,417,118)
Embedded dividends on preferred stock (55,356)
Preferred dividends (315,000)
Value of warrants issued with preferred stock (252,180)
-------------------
Net loss available to common stockholders ($6,039,654)
===================
</TABLE>
The "Notes to Consolidated Financial Statements of Global Technovations, Inc.
and Subsidiaries" are an integral part of these statements. See accompanying
"Notes to Condensed Financial Information of Registrant."
52
<PAGE>
<TABLE>
GLOBAL TECHNOVATIONS, INC.
SCHEDULE I
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
<S> <C>
-------------------------------------------------------------------------------------------------------
2000
-------------------
OPERATING ACTIVITIES:
Net loss $ (5,417,118)
Adjustments to reconcile net loss to
net cash used in operating activities:
Equity in net loss of subsidiaries 4,524,112
Depreciation and amortization 35,764
Amortization of original issue discount on debt 10,607
Non cash value of services 64,771
Decrease in other assets 22,844
Decrease in accounts payable and accrued liabilities (62,356)
Increase in other liabilities 13,408
-------------------
Net cash used in operating activities (807,968)
-------------------
INVESTING ACTIVITIES:
Investment in subsidiaries (6,880,207)
Proceeds from sale of subsidiary 5,549,978
Purchases of property and equipment (17,115)
-------------------
Net cash used by investing activities (1,347,344)
-------------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options 2,650
Preferred stock issuance costs (27,332)
Repayment from loan payable (500,000)
Repayments of Senior Convertible Notes (329,000)
Payment of preferred stock dividends (393,750)
Payment of deferred financing costs (210,000)
Proceeds from senior secured promissory note 5,000,000
Repayments on borrowings, net (1,913,986)
-------------------
Net cash provided by financing activities 1,628,582
-------------------
Net decrease in cash and cash equivalents (526,730)
Cash and cash equivalents at beginning of period 2,557,813
-------------------
Cash and cash equivalents at end of period $2,031,083
===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 143,472
Cash paid for income taxes $ 150,000
</TABLE>
The "Notes to Consolidated Financial Statements of Global Technovations, Inc.
and Subsidiaries" are an integral part of these statements. See accompanying
"Notes to Condensed Financial Information of Registrant."
Notes To Condensed Financial Information of Registrant
1. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the Condensed Financial Statements of the Registrant do not include all of the
information and notes normally included with financial statements prepared in
accordance with generally accepted accounting principles. It is, therefore,
suggested that these Condensed Financial Statements be read in conjunction with
the Consolidated Financial Statements and Notes on page 20.
53
<PAGE>
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<S> <C> <C> <C> <C> <C>
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Balance at Charged to Additions Charged Balance at
Beginning of Costs and to Other Accounts Deductions End of Period
Description Period Expenses
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Deducted from Accounts
Receivable - Allowance for
Doubtful Accounts
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Year Ended Sept. 30, 2000 $ - $20,000 $100,000 $ - $120,000
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Year Ended Sept. 30, 1999 $ - $ - $ - $ - $ -
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Year Ended Sept. 30, 1998 $ - $ - $ - $ - $ -
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Deducted from
Inventories-Allowance for
Obsolescence
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Year Ended Sept. 30, 2000 $ - $ - $180,000 $ - $180,000
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Year Ended Sept. 30, 1999 $ - $ - $ - $ - $ -
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
Year Ended Sept. 30, 1998 $ - $ - $ - $ - $ -
--------------------------------- ----------------- --------------- -------------------- ---------------- ---------------
</TABLE>
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Registrant's report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
GLOBAL TECHNOVATIONS, INC.
/s/ William C. Willis, Jr.
President and Chief Executive Officer Dated: January 16, 2001
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
Signatures Title Date
/s/ William C. Willis, Jr. Director January 16, 2001
William C. Willis, Jr.
/s/ David Natan Vice President and CFO January 16, 2001
David Natan (Principal Financial and
Accounting Officer) and Director
/s/ Ronald Burd Director January 16, 2001
Ronald Burd
/s/ G. Jeff Mennen Director January 16, 2001
G. Jeff Mennen
/s/ L. Kerry Vickar Director January 16, 2001
L. Kerry Vickar
</TABLE>
55
