<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-17430
GLOBAL ENVIRONMENTAL CORP.
(Exact name of registrant as specified in its charter)
New York 13-3431486
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 1300, Unit 1 Apple Tree Lane 18949
Plumsteadville, PA (Zip Code)
(Address of principal executive offices)
(215) 766-2730
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Common Stock January 31, 1996
---------------- -----------------
$.0001 par value 2,465,144 shares
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
INDEX
PAGE(s)
-------
PART I - CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - January 31, 1996 and
October 31, 1995. 3
Consolidated Statements of Operations -
Three Months Ended January 31, 1996 and 1995 5
Consolidated Statements of Cash Flows -
Three Months Ended January 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II - OTHER INFORMATION: 19
2
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GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
JANUARY 31, OCTOBER 31,
1996 1995
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 129,497 $ 329,213
Restricted cash 167,894 167,894
Accounts receivable, less allowance for
doubtful accounts of $51,725 and $41,669
respectively 1,675,604 1,721,458
Inventories 1,016,643 932,411
Costs and estimated earnings in excess of
billings on uncompleted contracts 81,843 77,518
Prepaid expenses and other 39,399 52,383
--------- ---------
Total current assets 3,110,520 3,280,877
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land 150,797 150,797
Building and improvements 1,823,825 1,823,825
Equipment 2,708,096 2,690,789
--------- ---------
4,682,718 4,665,411
Less - accumulated depreciation and
amortization (2,427,469) (2,369,535)
--------- ---------
Total property, plant and equipment,
net 2,255,249 2,295,876
--------- ---------
OTHER ASSETS
Investment in joint venture 8,630 8,950
Goodwill, net of accumulated amortization of
$33,305 and $32,027, respectively 68,891 70,169
Other, net 51,964 46,192
--------- ---------
129,485 125,311
--------- ---------
$5,495,254 $5,702,064
--------- ---------
--------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
JANUARY 31, OCTOBER 31,
1996 1995
------------ -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 195,061 $ 195,061
Accounts payable 2,204,584 2,030,372
Billings in excess of costs and
estimated earnings on uncompleted
contracts 220,206 331,262
Accrued salaries and wages 136,626 124,787
Accrued commissions 16,700 26,700
Accrued expenses, other 506,622 486,962
---------- ----------
Total current liabilities 3,279,799 3,195,144
---------- ----------
LONG-TERM DEBT, net of current portion 2,009,715 1,946,433
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, par value $.0001 per share;
20,000,000 shares authorized; 2,465,144
shares issued 247 247
Preferred stock, $.001 par value;
5,000,000 shares authorized; Class of 10%
Cumulative Convertible Senior Preferred
Stock, 10,500 shares authorized, 7,550
shares issued and outstanding in 1995
and 1994 (total of $662,150);
Series B Cumulative Convertible Senior
Preferred Stock, 16,000 shares authorized,
issued and outstanding 1995 (total of
$1,511,319); 2,173,469 2,173,469
Additional paid-in capital 1,877,784 1,877,784
Deficit (3,845,762) (3,491,013)
Less: Treasury stock, 95,579 shares, at cost - -
---------- ----------
Total stockholders' equity 205,740 560,487
---------- ----------
$ 5,495,254 $ 5,702,064
---------- ----------
---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31,
------------------------------
1996 1995
------------ ------------
NET SALES $ 2,643,178 $ 2,701,757
COST OF GOODS SOLD 2,436,839 2,441,216
------------ ------------
GROSS PROFIT 206,339 260,541
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 474,881 443,544
------------ ------------
LOSS FROM OPERATIONS (268,542) (183,003)
------------ ------------
INTEREST EXPENSE, NET ( 39,011) (100,368)
OTHER INCOME 11,678 14,140
OTHER EXPENSE - ( 86,569)
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (295,875) (355,800)
------------ ------------
INCOME TAX BENEFIT - -
------------ ------------
NET LOSS ($295,875) ($355,800)
------------ ------------
NET LOSS PER SHARE ($.14) ($.16)
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 2,465,144 2,369,565
------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31,
------------------------------
1996 1995
------------ ------------
OPERATING ACTIVITIES:
Net loss ($ 295,875) ($ 355,800)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 59,212 56,863
Write-off of deferred financing fees - 86,569
Net (increase) decrease in non-cash
current assets:
Accounts receivable 45,854 87,068
Inventories (84,232) (267,453)
Costs and estimated earnings in
excess of billings on
uncompleted contracts ( 3,965) 5,299
Prepaid expenses and other 12,984 70,011
Net increase (decrease) in non-debt
current liabilities:
Accounts payable 174,212 17,263
Billings in excess of
costs and estimated
earnings on uncompleted
contracts (111,056) 7,969
Accrued commissions,
salaries and wages 1,839 ( 28,568)
Accrued expenses, other 19,211 470,260
(Increase) decrease in other assets,
net ( 5,772) 16,268
------------ ------------
Net cash provided by (used
in) operating activities (187,588) 165,749
------------ ------------
INVESTING ACTIVITIES:
Purchase of property, plant and
equipment ( 17,307) ( 41,573)
------------ ------------
Net cash used in investing
activities ( 17,307) ( 41,573)
FINANCING ACTIVITIES:
Net borrowings (repayments) under
revolving loan agreement 71,234 (253,567)
Payments of long-term debt ( 7,181) ( 88,543)
Payment of dividends on preferred stock (58,874) ( 24,326)
------------ ------------
Net cash provided by (used in)
financing activities 5,179 ( 366,436)
------------ ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (199,716) ( 242,260)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 329,213 353,465
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 129,497 $ 111,205
------------ ------------
------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31,
------------------------------
1996 1995
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid for -
Interest $ 39,011 $ 100,368
------------ ------------
Income taxes $ - $ -
------------ ------------
NONCASH FINANCING ACTIVITIES:
Conversion of Renaissance debt to
preferred stock (Note 7) $ - $1,600,000
------------ ------------
------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Global Environmental Corp. (formerly Affiliated National, Inc.) was
incorporated on October 6, 1987. Effective August 1, 1988, Global
Environmental Corp. acquired all of the issued and outstanding common shares
of Global Environmental Holdings, Inc. (Global) (Note 2).
Danzer Industries, Inc. (Danzer), a wholly-owned subsidiary of Global, is
principally engaged in the design, manufacture and installation of fabricated
metal products. Products produced are normally based upon specifications
received from customers. Danzer's revenues represent approximately 60% of the
Company's total revenues and are generated throughout the United States.
Rage, Inc. ("Rage"), a wholly-owned subsidiary of Global, is engaged in the
business of engineering, and supplying pneumatic material handling systems
(Note 2). Revenues from the Rage subsidiary represent approximately 40% of
the Company's total revenues and are generated throughout the United States.
Effective June 20, 1989, Affiliated National, Inc. changed its name to Global
Environmental Corp. Effective November 22, 1995 Danzer Metal Works Company
changed its name to Danzer Industries, Inc.
The accompanying consolidated financial statements present the accounts of
Global Environmental Corp. and its wholly-owned subsidiary. The entities are
collectively referred to herein as the "Company". All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company uses the equity method of accounting for a 49% owned interest in
a joint venture. The original investment is recorded at cost, adjusted for
the Company's share of undistributed earnings or losses. The operations of
the joint venture are presently immaterial.
Summary of Significant Accounting Policies
REVENUE RECOGNITION
Revenues from the manufacture of sheet metal products and fabrications are
generally recognized when products are shipped to the customer.
Contract revenues are recognized utilizing the percent-age of completion
method of accounting. Contract costs include all direct material and labor
costs and those indirect costs related to contract performance. Selling,
general and administrative costs are charged to expense as incurred.
Provision for estimated losses on contracts are made during the period in
which the Company first becomes aware that a loss on a contract is probable.
Total estimated costs are periodically revised, if necessary, to reflect
changes to the original contract and changes to total estimated contract
costs based upon deviations of actual costs to date from original estimates
and anticipated future deviations from such original estimates. The
percentage of completion method relies heavily on the use of estimates and
assumptions by management. Actual results of operations could differ from
those estimates.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability "Billings in excess of costs and estimated earnings on uncompleted
contracts," represents amounts billed in excess of revenues recognized.
8
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Summary of Significant Accounting Policies (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and are comprised of the following components:
JANUARY 31, OCTOBER 31,
1995 1995
----------- -----------
Raw materials and supplies $ 491,610 $585,473
Work-in-process 481,962 161,960
Finished goods 43,071 184,978
--------- -------
$1,016,643 $932,411
--------- -------
--------- -------
Work-in-process and finished goods include purchased materials, direct labor
and allocated overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment placed in service are depreciated on the
straight-line method over the following estimated useful lives:
Building and improvements 10 to 30 years
Equipment 5 to 20 years
CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments purchased with an
original maturity of three months or less.
INCOME TAXES
The Company files a consolidated income tax return for Federal tax purposes.
Global Environmental Corp., Global and each of Global's subsidiaries file
separate state income tax returns. As discussed in Note 3, the Company
adopted Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR
INCOME TAXES," effective November 1, 1993.
9
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at a bank which, at various times during
the year, exceeded the Federal Deposit Insurance Corporation limit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of management's estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, FASB issued Statement No. 121, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF"
("Statement"). The Statement established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. The Statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Measurement of an impairment loss for long-lived assets
and identifiable intangibles that an entity expects to hold and use should be
based on the fair value of the asset. The Company has not determined the
effect, if any, that this Statement will have on its financial position or
results of operations.
In October 1995, FASB issued SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," ("Statement") which provides an alternative method of
accounting for stock-based compensation arrangements, based on fair value of
the stock-based compensation utilizing various assumptions regarding the
underlying attributes of the options and the Company's stock, rather than
the existing method of accounting for stock-based compensation which is
provided in Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES" (APB No. 25). FASB encourages entities to adopt the fair
value-based method but does not require adoption of this method. The Company
anticipates that it will continue its current accounting policy; however, if
adopted, SFAS No. 123 is not expected to have a material impact on its
financial position or its results of operations.
Both of the above standards would be effective for the Company's fiscal year
beginning November 1, 1996.
10
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 2. OTHER ASSETS
In connection with the acquisition of Rage, certain other assets were
purchased and valued as follows:
FAVORABLE LEASE TERMS
A lease agreement was entered into as of the date of the closing with the
previous sole stockholder of Rage for the office, manufacturing and warehouse
facilities. The Company determined that payments under this lease were
$175,000 less in the aggregate than those for similar terms for similar space
in the area. This amount was capitalized and amortized over five years, the
term of the lease. The lease agreement expired December 31, 1993.
COVENANT NOT-TO-COMPETE
A covenant not-to-compete was entered into with the previous shareholder of
Rage. This amount, valued at $200,000, was capitalized and amortized on a
straight-line basis over five years, the term of the agreement. The agreement
expired December 31, 1993.
GOODWILL
The purchase price in excess of the fair value of the net assets of Rage
acquired was $105,446. This amount is being amortized over 20 years.
OTHER
Included in other assets as of October 31, 1995 and 1994 are certain deferred
financing fees incurred in connection with the issuance of long-term debt.
In connection with the conversion of long-term debt, in December 1994, the
Company wrote-off the related deferred financing fees.
NOTE 3. NOTE PAYABLE
Effective May 28, 1993, Danzer entered into a loan and security agreement
(the "Agreement") with Fremont Financial Corporation comprised of a revolving
credit facility (the "Facility") and an equipment term loan (the "Term
Loan"). The amount available under the Facility is based on a defined
percentage of eligible accounts receivable and inventory. The Company had
drawn $841,796 at January 31, 1996 which represented 56% of the amount
available under the Agreement at that date. The maximum amounts available
under the Facility and the term loan are $1,150,000 and $350,000,
respectively. Borrowings under the Agreement accrue interest at prime plus
4.5% (13.25% at January 31, 1996). The Agreement was amended most recently on
June 23, 1995, extending the term of the Agreement to January 31, 1997.
11
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 3. NOTE PAYABLE (CONTINUED)
Under the terms of the Agreement, borrowings are collateralized by real
estate and Danzer's accounts receivable, inventory and equipment. Borrowings
are also guaranteed personally by the President of the Company, limited to a
defined amount. The Agreement provides for certain restrictions including,
but not limited to, that the Company shall not without prior consent of the
lender: a) sell, lease, transfer, exchange or otherwise dispose of any
assets except in the ordinary course of business; b) enter into any merger,
consolidation, or acquisition of any other business organization; c)guaranty
or otherwise become in any way liable with respect to the obligations of any
third party; or d) change its owner ship by greater than 10%. The Agreement
also restricts: payment of compensation and loans and advances to executives,
officers, directors and certain others; capital expenditures to a specified
level; and distributions to Danzer's Parent. For the period ended January 31,
1996 and the year ended October 31, 1995, the Company was in compliance with
these covenants.
NOTE 4. LONG-TERM DEBT
On April 25, 1991, the Company issued to Renaissance Capital Partners, Ltd.
("Renaissance") an unsecured 12-1/2% convertible debenture (the "1991
Debenture"), convertible into common stock, with a face value of $1,250,000.
On December 30, 1992, Global entered into a second unsecured 12-1/2%
convertible debenture (the "1992 Debenture") with Renaissance for $350,000.
Effective December 31, 1994, Renaissance exchanged the $1,600,000 aggregate
amount of 1991 and 1992 debentures for an aggregate of 16,000 shares of the
Company's Series B Cumulative Convertible Senior Preferred Stock. In
addition, Renaissance agreed to exchange the accrued but unpaid interest on
the Debentures through September 30, 1994, totaling $211,635 for a 10% Term
Note (the "Term Note") originally due December 31, 1997. (Notes 6 and 7).
As a result of the conversion of the Renaissance Debentures effective
December 31, 1994, the Company no longer has an obligation to meet the
minimum financial standards and ratios under the terms of the Debentures. In
addition, the 10% Term Note contains no covenant default provisions and a
default occurs only for failure to pay principal or interest when due.
As of October 31, 1995, the Company had not paid interest in the approximate
amount of $16,500 on the Term Note due to Renaissance and is therefore in
default of the Term Note Agreement. As of October 31, 1995, the lender had
waived its right to demand payment of the principal amount of the Term Note
of $211,635 until December 31, 1996. The lender has not waived the payment of
any past due or future quarterly interest payments.
In connection with the conversion, the Company wrote-off approximately
$87,000 of related deferred financing costs in December 1994.
12
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 5. LONG-TERM DEBT
Maturities on long-term debt as of October 31, 1995 are as follows:
1996 $ 195,061
1997 1,727,930
1998 136,491
1999 82,012
---------
$2,141,494
---------
---------
NOTE 6. FINANCING ARRANGEMENTS, OPERATIONS AND MANAGEMENT'S PLANS
The Company has experienced difficulty executing a portion of its backlog due
to its shortage of working capital. The Company was required to supply a
performance bond for approximately $167,000 related to the completion of a
certain contract which occurred in the second quarter of its fiscal year
ending October 31, 1994. The requirement is for a term of 24 months which
will expire March 1, 1996, which will make the funds available. The Company
satisfied the requirements of the performance bond by executing a letter of
credit, which letter of credit is collateralized by a certificate of deposit
(restricted cash) of $167,894. In addition, the Company's Danzer subsidiary
is limited to making distributions of no more than 75% of its net cash flow
(as defined) to the Company's parent, providing that Danzer maintains a
minimum net worth, which net worth was not maintained at October 31, 1995 and
January 31, 1996.
In the opinion of management, the Company's weakened financial condition has
been caused by the weak economic climate which has negatively affected the
capital goods market where the Company markets its products. It appears that
the capital goods market improved somewhat in 1995, having a positive effect
on the Company's 1995 results from operations. The backlog at the Company's
Danzer subsidiary has been growing. However, the backlog at the Company's
Rage subsidiary as of January 31, 1996 has decreased from its average level
over the last few years which may adversely affect the Company's results of
operations in fiscal 1996.
During the fourth quarter of fiscal 1993, the Company acquired the rights to
manufacture and sell a product line consisting of utility truck bodies
(Morrison) which is similar to a product currently manufactured by the
Company. The Company has begun production of the line and has in place a
sales force and distributor network to market the product. A portion of the
sales of this product, generally approximating 5%, will be paid as a royalty
to the seller of this product line to the Company. The Company anticipates
increased Morrison sales in fiscal 1996, which should increase coverage of
the Company's fixed manufacturing overhead.
13
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 6. FINANCING ARRANGEMENTS, OPERATIONS AND MANAGEMENT'S PLANS (CONTINUED)
During the first quarter of fiscal 1994, the Company entered into a joint
venture agreement (the "Agreement") with Cadema Corporation ("Cadema"). The
joint venture has been capitalized by Cadema with $350,000 in cash and by
Global with $1,000 in cash. The joint venture's principal objective is to
provide the partners with current income by contracting for the design and
installation of air pollution control equipment in its name in all areas of
the world outside the United States and its territories. The term of the
Agreement expires December 31, 1998, unless otherwise extended. Income or
loss from the joint venture will be allocated 51% to Cadema and 49% to the
Company. The Agreement allows Global, subject to certain conditions, to
acquire Cadema's interest in the joint venture for 875,000 shares of Global
common stock or $350,000 in cash or an amount equal to Cadema's capital
account, whichever is greater, subject to certain antidilution provisions.
The Agreement also allows for quarterly distributions of income and capital
to the joint venture partners. The Company had borrowed approximately
$364,000 from the joint venture as of October 31, 1995.
In September 1994, the Company completed a 10% Cumulative Convertible Senior
Preferred Stock offering whereby 7,550 shares were issued. The Company
realized $662,150 of net proceeds, after placement fees and expenses of
approximately $93,000. The funds were used to expand the Company's new
Morrison product line and provide working capital for overall business
activity.
Effective December 31, 1994, Renaissance exchanged the $1,600,000 aggregate
amount of 1991 and 1992 convertible debentures for an aggregate of 16,000
shares of the Company's Series B Cumulative Convertible Senior Preferred
Stock (Notes 5 and 7).
As of October 31, 1995, the Company was in compliance with the loan covenants
with Fremont Financial Corporation and had received waivers of such
noncompliance from the lender concerning the year ended October 31, 1994. In
addition, the terms of the Loan and Security Agreement with Fremont were
modified in 1995 and extend payment of principal until January 1997.
As of October 31, 1995, the Company was in default under the Term Note due to
Renaissance (Note 5). The lender has waived its right to demand payment of
the principal amount of the Term Note of $211,635 until December 31, 1996.
(The original due date was December 31, 1997.) The lender did not waive any
interest payments.
In addition, the terms of the mortgage debt of $354,866 on the Company's
premises (which debt was in default as a result of nonpayment by the Company
on its original due date of April 1, 1995) were modified in January 1996 and
the maturity date extended until April 30, 1997.
In early February 1996, the Company's revolving loan payable to Fremont
Financial Corporation was increased by $200,000. The increase enables the
Company to borrow $200,000 in excess of their allowed borrowings under the
revolving loan agreement (Notes 4 and 5) and provides additional working
capital for overall business activity.
14
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 6. FINANCING ARRANGEMENTS, OPERATIONS AND MANAGEMENT'S PLANS (CONTINUED)
In light of the Company's backlog at January 31, 1996, its projected cash
flow from operations and the market for capital equipment, it is anticipated
that the Company will be dependent on increased sales, higher profit margins
and/or further infusions of capital in order to sustain its operations. The
Company recognizes that the proceeds received from various equity offerings
may not be sufficient to fund its current backlog and provide sufficient
working capital for fiscal 1996. The Company's ability to meet certain
interest and principal payments, as well as its working capital needs to
execute its backlog and generate sales volume during fiscal 1996, will be
dependent upon the success of the Company's efforts to increase sales volume,
as well as the profitability of new business. If it becomes likely that the
Company is unable to meet its scheduled interest and principal payments on
its debt securities, the Company may need to examine the restructuring of
these instruments or the sale of certain assets to satisfy all or a portion
of these outstanding liabilities.
If such efforts to increase the level of business and profitability and/or
obtain an infusion of capital are unsuccessful, the Company may need to
consider additional steps to reduce costs, generate working capital and
improve operating efficiencies to sustain its operations. Such steps may
involve the sale of certain assets, the consolidation of operating
activities, the sale or discontinuance of a line of business, reductions in
staff or other measures, the effect of which is the reduction of expenses,
conservation of cash, and/or generation of working capital. The Company is
also currently attempting to limit cash outlays, aggressively collect
accounts receivable and channel all available resources into its sales
function in order to continue all operations on the basis that it can further
increase its backlog and sales revenue. The Company believes that the
long-term prospects for the industries in which the Company operates are
positive and therefore, offer Global opportunity for revenue growth. However,
due to the unpredictable course of the U.S. economy, and the lack of
environmental regulation enforcement, the realization of this revenue growth
cannot be assured.
NOTE 7. STOCKHOLDERS' EQUITY
On May 7, 1990, the Company's stockholders approved a stock option plan to
issue both "qualified" and "non-qualified" stock options. Under the Plan,
800,000 options to purchase shares of the Company's common stock may be
issued at the discretion of the Company's Board of Directors. The option
price per share will be determined by the Company's Board of Directors, but
in no case will the price be less than 85% of the fair value of the common
stock on the date of grant. Options under the Plan will have a term of not
more than ten years with accelerated termination upon the occurrence of
certain events. As of October 31, 1995 there were 375,000 options
outstanding. Exercise prices ranged from $.30 to $.48 per share with 200,000
options, 150,000 options and 25,000 options exercisable at $.30, $.35, and
$.48 per share, respectively. At October 31, 1994, there were 305,000 options
outstanding. Exercise prices at October 31, 1994 ranged from $.48 to $1.50
per share with 125,000 options, 30,000 options, 10,000 options, 100,000
options and 40,000 options exercisable at $.48, $.56, $1.19, $1.27, and
$1.50 per share, respectively. No options have been exercised as of October
31, 1995. During the year ended October 31, 1995, 350,000 options were
granted and 280,000 options were terminated. In connection with a legal
settlement during 1994, the Company issued 30,770 shares of common stock, par
value $.0001 per share, and warrants to purchase 75,000 shares of common
stock through February 9, 1997 at $1.00 per share, subject to adjustment as
defined.
15
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996
NOTE 7. STOCKHOLDERS' EQUITY (CONTINUED)
In connection with a consulting agreement effective November 2, 1994, the
Company issued warrants to purchase 100,000 shares of common stock through
November 1, 1999 at $.50 per share, subject to adjustment as defined.
During 1994, Global Environmental Corp. completed a private placement
offering by selling 7,550 shares of its 10,500 authorized shares of 10%
Cumulative Convertible Senior Preferred Stock (the "10% Senior Preferred
Stock") at a stated value of $100 per share. The Company raised $662,150, net
of placement fees of $92,850 as a result of the offering. Commencing
September 30, 1994, dividends are cumulative, payable quarterly in arrears at
an annual rate of $10 per share. Total dividends declared during 1994 were
$75,500, of which $28,794 were unpaid as of October 31, 1995. The 10% Senior
Preferred Stock is voting and convertible into the Company's Common Stock,
$.0001 par value, at $.50 per share subject to anti-dilution adjustment and
is equivalent to approximately 1,510,000 common shares at October 31, 1995.
The Senior Preferred Stock is subject to redemption, at a price of $100 per
share plus accrued but unpaid dividends, at the option of the Company
provided certain conditions are met. Effective April 30, 1995, the Company
registered the shares of common stock issuable upon conversion of the Senior
Preferred Stock under the Securities Act of 1933.
Effective December 31, 1994, Renaissance exchanged the $1,600,000 aggregate
amount of 1991 and 1992 Debentures (the "Debentures") (Note 5) for an
aggregate of 16,000 shares of the Company's Series B Cumulative Convertible
Senior Preferred Stock (the "Series B Stock"), par value $.001 per share,
stated value $100 per share. The Company raised $1,511,319 net of legal and
other costs of $88,681 incurred in connection with the offering. Commencing
December 31, 1994, dividends are cumulative, payable quarterly in arrears at
an annual rate of $10 per share. Total dividends declared during 1995 of
$133,333 were payable as of October 31, 1995. The Series B Stock is voting
and convertible into common stock at $.50 per share, subject to anti-dilution
adjustment, and is equivalent to approximately 3,200,000 common shares,
$.0001 par value, at December 31, 1994. The Series B stock is subject to
redemption at a price of $100 per share plus accrued but unpaid dividends at
the option of the Company, provided certain conditions are met.
The 10% Cumulative Convertible Preferred Stock and the Series B Stock require
the Company to comply with certain affirmative and negative covenants
including, but not limited to, the timely filing of financial statements. In
addition, it limits the Company's ability to issue new indebtedness, issue
other classes of preferred stock, pay dividends on the Company's common
stock, purchase equity securities, increase executive compensation, enter
into liens and acquire new businesses, among other items. The Company is also
subject to registration requirements under certain circumstances. As of
October 31, 1995, the Company was in violation of certain of the above
covenants. If certain of the violations remain uncured for twelve
consecutive months, the holders of the Series B Preferred Stock become
entitled to vote as a separate class on certain significant matters.
16
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
Global is made up of two wholly-owned subsidiaries. Danzer Industries, Inc.
(Danzer) is principally engaged in the design, manufacture and installation
of fabricated metal products. Rage, Inc. ("Rage") is engaged in the business
of engineering, and supplying pneumatic material handling systems in the
capital goods market.
RESULTS OF OPERATIONS
Global's sales revenues in the first quarter of fiscal 1996 were $2,643,178
compared to $2,701,757 for the same period last year, a decrease of 2.2%.
Although the market is slow in most segments Global has such a small
percentage of the market that our challenge is to compete more aggressively
and steal market share. Steps also have been taken to reduce costs to match
costs with expected revenues.
The Company's gross profit margin for the first quarter of fiscal 1996
decreased from 9.6% to 7.8%. The increase in margin from manufacturing
operations (Danzer) was more than offset by the combined effect of a decrease
in volume and margin from engineering and environmental operations (Rage).
Selling, general and administrative expenses increase $31,337 over the same
period last year. The increase was planned in expectation of expanding
Danzer's markets and revenue with additional attention to marketing and
sales. The Company's ratio of selling, general and administrative costs
expressed as a percentage of net sales was 18% for the first quarter vs.
16.4% for the same period last year vs. 15.3% in October 31, 1995. The
Company continues to monitor its costs in an effort to improve this ratio.
Interest expense during the first quarter of fiscal 1996 decreased by $61,357
due to the conversion of convertible debentures to preferred stock December
31, 1994.
The Company's net loss after preferred dividends during the first quarter was
$354,749, a decrease of $25,377 over the same period last year. The net loss
was due to the decrease in revenue and unfavorable product mix.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents during the first quarter ended January 31, 1996
decreased by $199,716. This was caused by the net loss ($295,875) and
billing in excess of cost (deposits) ($111,056) offset by an increase in
accounts payable ($174,212). The decrease in the same period of prior year
was $242,260 or $42,544 higher. Every effort is being made to receive
favorable terms of payment from customers and to work closely with our
vendors.
The Company has a working capital deficit of $169,279 at January 31, 1996
from a surplus of $85,733 at October 31, 1995. The working capital ratio
decreased from 1.03 : 1.00 to 0.95 : 1.00. The Company's current cash
position has led to tighter credit terms with some of its vendors.
The Company received $167,894 in a certificate of deposit (restricted cash)
on March 1, 1996.
It is anticipated that additional working capital may be required in order to
efficiently execute the Company's work in progress and backlog. The
Company's weakened financial condition has, in turn, led to tighter credit
terms with certain vendors and has therefore further strained the Company's
working capital.
In light of the Company's backlog at January 31, 1996, its projected cash
flow from operations and the market for capital equipment, it is anticipated
that the Company will be dependent on increased sales,
17
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
higher profit margins and/or further infusions of capital in order to sustain
its operations. The Company's ability to meet certain interest and principal
payments, as well as its working capital needs to execute its backlog and
generate sales volume during fiscal 1996, will be dependent upon the success
of the Company's efforts to increase sales volume, as well as the
profitability of new business. If it becomes likely that the Company is
unable to meet its scheduled interest and principal payments on its debt
securities, the Company may need to examine the restructuring of these
instruments or the sale of certain assets to satisfy all or a portion of
these outstanding liabilities.
If such efforts to increase the level of business and profitability and/or
obtain an infusion of capital are unsuccessful, the Company may need to
consider additional steps to reduce costs, generate working capital and
improve operating efficiencies to sustain its operations. Such steps may
involve the sale of certain assets, the consolidation of operating
activities, the sale or discontinuance of a line of business, reductions in
staff or other measures, the effect of which is the reduction of expenses,
conservation of cash, and/or generation of working capital. The Company is
also currently attempting to limit cash outlays, aggressively collect
accounts receivable and channel all available resources into its sales
function in order to continue all operations on the basis that it can further
increase its backlog and sales revenue. The Company believes that the
long-term prospects for the industries in which the Company operates are
positive and therefore, offer Global opportunity for revenue growth. However,
due to the unpredictable course of the U.S. economy, and the lack of
environmental regulation enforcement, the realization of this revenue growth
cannot be assured.
18
<PAGE>
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
Part II OTHER INFORMATION
ITEM 5 OTHER INFORMATION
MANAGEMENT CHANGE.
Effective April 9, 1996 Lori Beer assumed the positions of President and
Chief Executive Officer of Global Environmental, Danzer Industries, Inc. and
Rage, Inc. This was as a result of the resignation of William V. Rice at the
Global Board meeting on that date. Lori brings to Global and its
subsidiaries, 36 years of management experiences improving the market
position, product and service development, employee satisfaction, growth and
profit, and most importantly, shareholder return on investment position of
numerous companies. These companies have included manufacturing, engineering,
environmental, computer and Defense industry organizations.
Vision and Corrective Action Plan:
A Global FY1998 Vision has been prepared which addresses what the Company
will look like three (3) years from now. This plan describes products and
services, management and marketing, technology development, employee
satisfaction and financial performance. Of particular importance, an FY1996
Corrective Action Plan (CAP) has been prepared which addresses those items
which when accomplished will allow Global to achieve its financial
objectives. The CAP includes cost reduction, market and competitive edge,
technology applications and specific financial targets.
SALE OF RAGE SUBSIDIARY
On May 7, 1996 the Company signed a Letter of Intent to sell its Rage Inc.
(Rage) wholly-owned subsidiary to William V. Rice, former President and
C.E.O., subject to Global Shareholder approval. In the transaction, Mr. Rice
will transfer 517,000 shares of Global Common Stock owned by him to Global in
exchange for 100% of the capital stock of Rage and other considerations.
Global will also transfer title of Rage's executive offices to Rage subject
to the existing mortgage indebtedness encumbering the facility.
19
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<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 129,497
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<RECEIVABLES> 1,727,329
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