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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 fiscal year ended October 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.)
17500 York Road 21740
Hagerstown, Maryland (Zip Code)
(Address of principal executive offices)
(301) 582-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.01 par value)
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of the 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. / /
As of October 31, 1996, the aggregate market value of the Company's common
stock held by non-affiliates of the registrant, based on the average bid and
ask price, was approximately $918,000.
As of December 31, 1996, the registrant had 13,203,024 shares of common stock
outstanding.
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PART I
ITEM 1. BUSINESS.
History and Development of Business:
Global Environmental Corp. ("Global"), formerly named Affiliated National,
Inc., was incorporated in New York in 1987. As used herein, the term the
"Company" refers to Global Environmental Corp., its wholly owned subsidiary
Danzer Industries Inc. ("Danzer").
In January, 1988, Global completed an initial underwritten public offering of
400,000 units for an offering price of $1.00 per unit. Each unit consisted of
one share of common stock, three Class A Warrants and three Class B Warrants.
In August, 1988, Global acquired all of the outstanding capital stock of
Global Holdings. In June, 1988, Global Holdings purchased all of Danzer's
outstanding capital stock from Danzer's sole shareholder. Danzer is located
in Hagerstown, MD and produces and installs a wide range of custom designed
and engineered fabricated metal products including those used in pollution
control applications.
In November, 1988, Global Holdings' newly incorporated subsidiary, Texcon,
purchased certain assets from a manufacturing concern (Texcon Inc., a South
Carolina corporation), located in Greenville, SC. The assets acquired
consisted of contracts to produce engineering and design services for
pollution control systems as well as assets used in air monitoring and
testing.
In December, 1988, Global Holdings' newly incorporated subsidiary, Rage,
acquired substantially all of the assets of Rage Engineering, Inc., located
in Plumsteadville, PA. Rage designs and assembles pneumatic handling systems
used in the processing of bulk materials in manufacturing and pollution
control processes.
In August, 1993, the Company acquired the assets of Morrison Industries L.P.,
a manufacturer of specialized utility truck bodies. The Company began
production of the bodies in December 1993.
In October, 1994, the Company's Texcon subsidiary was closed. All Texcon
products and systems are marketed under Rage and/or Global Environmental Corp.
In June, 1996, the Company sold Rage Inc to William V. Rice in exchange for
517,000 shares of Global and cancellation of the employment agreement of
William Rice
Substantial business developments:
- The Company suffered a substantial loss during fiscal 1994 due, in part,
to the continued recession in the Company's lines of business, production
inefficiencies associated with the start-up of the new Morrison product
line for manufacturing utility truck bodies and increased competitive
pressure on gross profit margins.
- As a result of the expiration of the lease for the Plumsteadville location
on December 31, 1993, the Company relocated to its Bedminster facility
during December 1993. The expiration of this lease coincides with the
expiration of the employment contract with the former shareholder of Rage
Inc. and the expiration of amortization of the favorable lease asset and
covenant not to compete.
- During the fourth quarter of fiscal 1993 and first quarter of fiscal 1994,
the Company acquired certain equipment intended to improve manufacturing
efficiencies. This equipment consisted of a CNC press brake and a CNC
punch plasma unit. The total cost of the equipment was approximately
$613,000.
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- During the first quarter of fiscal 1994, the Company entered into a joint
venture agreement with Cadema Corporation. During the term of the joint
venture terminating December 31, 1998 (unless otherwise extended), the
joint venture has the right to contract for the design and installation of
air pollution control equipment in the Company's name in all areas of the
world outside the United States and its territories.
- September, 1994, Global completed a private offering of 7,550 shares of 10%
Cumulative Convertible Senior Preferred Stock at $100 per share. Each 10%
preferred share is currently convertible into 200 shares of common stock.
- On December 31, 1994, Renaissance Capital Partners, Ltd. exchanged
$1,600,000 principal amount of the Company's 12.5% Convertible Debentures
for 16,000 shares of the Company's Series B Cumulative Convertible Senior
Preferred Stock at $100 per share. The Company also issued Renaissance a
10% Term Note in the principal amount of $211,635 due December 31, 1997
representing interest accrued on the Convertible Debentures through
September 30, 1994. Each Series B preferred share is currently convertible
into 200 shares of common stock.
- In August 1996, the Company issued 1,200,000 shares through a private
placement for $300,000. 1,000,000 shares were issued to R. W. Snyder and
200,000 shares were issued to Renaissance Capital Group, Inc.
- On October 2, 1996, the Company made an offer to the 10% Cumulative
Convertible and Series B preferred shareholders to convert their shares
and accrued dividends to common stock at a conversion rate of $0.25 per
share. The offer was accepted and the conversion was completed in the
first calendar quarter of 1997.
- In March 1997, the Company received $150,000 in the form of convertible
debt from Renaissance Capital Group, Inc.
These events are more fully discussed in Management's Discussion and Analysis.
Global's business plan is to develop the businesses acquired, integrate the
services and capabilities of each business and acquire other complementary
businesses within the truck body and metal fabrication industry.
Description of the Business:
Global is a holding company and through its operating subsidiary is engaged
in the manufacturing of fabricated metal products which include truck bodies
and air movement products.
Manufacturing Capabilities
The Company's manufacturing activities located at Danzer's facility in
Hagerstown, MD, produce truck bodies and a wide range of custom engineered
fabricated metal products including, but not limited to environmental
equipment, ductwork, louvers, penthouses and general sheet metal fabrication
of materials up to 5/8 of an inch thick. The Company's equipment enables the
Company to produce certain metal products up to 1-1/2 inches thick. Materials
used include aluminum, stainless steel, and mild steel in both sheet and
plate. Danzer offers heliarc and MIG welding, brazing, forming, assembly, and
dip-coat cleaning and painting services to its customers. Danzer also
maintains in-house design and engineering capabilities.
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Danzer's Airline Products division manufactures louvers, air control dampers
and penthouses constructed from galvanized steel, aluminum, copper, brass,
bronze, and stainless steel. These products provide equipment ventilation,
air control and prevent water penetration in architectural applications, such
as high rise office buildings and commercial buildings.
Government Regulation:
The Company is subject to regulation by federal, state, and local agencies,
such as environmental, fire hazard control, and working condition, and other
similar regulators that have jurisdiction to take actions which could have a
material adverse affect upon the Company's ability to do business. The
businesses of the Company do not subject it to any special regulatory
authority.
Competition:
There are a significant number of companies engaged in metal fabrication in
the United States. While many of these companies are relatively small and do
not possess the Company's technical capacity, a number of its competitors are
larger and possess equal or greater technical and financial resources. The
Company competes with others in its industry through price and service, with
price being the most important factor.
Marketing:
The Company's manufacturing operation, at its Danzer subsidiary, generally
markets to customers within the Eastern United States. The Company utilizes
an internal sales force in conjunction with independent representatives. The
Danzer's Morrison division markets its product through representatives which
have exclusive territories and are paid commissions on all sales from a
specific territory based upon payments made by the customer. Commission is
calculated based upon sales effort. Danzer's Airline Products division
markets its products principally through independent sales representatives
who are assigned non-exclusive sales areas.
Principal Customers:
During the fiscal year ended October 31, 1996, the Company had two customers
which each represented 10% or more of total net sales: Mobile Tool
International, a truck body supplier, for which the Company supplied truck
bodies (29%) and Schindler, an elevator manufacturer, for which the Company
supplied component parts (10%).
Manufacturing and Facilities:
The Company purchases its raw materials from numerous suppliers and has not
had any difficulty in obtaining components or raw materials. Danzer purchases
domestically produced and imported sheet metal from a number of distributors and
is not dependent upon any particular source of supply. The Company bears the
risks of its products and systems not conforming to customer specifications, but
in most cases, defects and deficiencies are correctable. Management believes
that the Company's existing manufacturing and office facilities are adequate to
meet its present needs and anticipated growth. Consequently, the Company does
not plan any significant capital expansion of its property, plant and equipment
during fiscal 1998 except for usual upgrades and maintenance.
Employees:
As of October 31, 1996, Danzer has approximately 90 employees. Of these
employees, 22 are involved in sales, administration and engineering, and 68 are
in manufacturing, installation and servicing of Danzer's
5
products. The 68 employees are represented by a labor union. Danzer believes
its employee relations are satisfactory.
Patents and Proprietary Technology:
The Company does not rely on any patents, registered trademarks, or special
licenses to give it a competitive advantage. The Company's position in its
industry depends mainly on its ability to offer competitive pricing. The
Company did not incur, during any of its last three fiscal years, and does
not contemplate incurring, any material research and development expenses.
Insurance:
The Company carries a broad range of insurance coverage which management
considers sufficient to provide acceptable levels of financial resources to
protect the employees, assets, and operations of the Company that may be
negatively affected in the event of a loss. The Company does not currently
maintain, and in the future may not choose to or may not be able to obtain,
coverage for liabilities arising from environmental damage or professional
design deficiencies or other circumstances which could arise as a result of
the type of business in which the Company engages. To date, the Company has
not had difficulty in obtaining insurance. However, if the Company should be
unable to obtain adequate insurance or should decide to operate without
insurance, a partially or completely uninsured claim against the Company, if
successful and of sufficient magnitude, could have a material adverse affect
upon the Company's business or its financial condition.
Seasonality:
The Company's business has not generally been seasonal in the past. However,
the Company has historically experienced a reduced flow of orders during late
November and December. No seasonal modification of the Company's production
schedule or staffing is required under normal business circumstances.
Warranties:
In connection with most contracts for manufacture the Company warrants its
product to be free from defects in material and workmanship and performance
under normal use and service for a period of twelve months after shipment.
The obligation of the Company is generally limited to the repair or
replacement of the defective product. Warranty related expenses are
recognized as incurred.
Backlog:
At October 31, 1996, the Company's backlog was approximately $2,300,000,
which is all expected to be filled within the current 1997 fiscal year
Export Sales:
Sales of goods exported to foreign countries during the fiscal years ended
October 31, 1996 and 1995 were approximately $15,000 and 50,000, respectively.
ITEM 2. PROPERTIES.
Danzer owns its principal manufacturing facilities which are located in an
80,000 square foot plant on an eleven acre site in Hagerstown, Maryland, near
the intersection of two major interstate highways. Approximately 75,000
square feet are used in manufacturing and 5,000 square feet are used as
office space. Fremont Financial Corporation has a priority security interest
on such property.
See Note 3 of the Financial Statements concerning the Plumsteadville Property.
6
The Company believes that all of its properties, plants and equipment are
well maintained and adequate for its requirements. The Company also believes
that all of its properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
In October, 1994, Jeffrey Richardson, an individual plaintiff, filed a
complaint against 15 defendants, including Rage Inc., a former Global
subsidiary, in the superior court of the State of New Jersey, County of
Burlington, Docket No. BUR-L-03543-93. The complaint alleges that the Company
supplied a product which caused harm to plaintiff and claimed damages in an
unspecified amount arising from alleged product liability. Although damages
claimed by the plaintiff significantly exceed the Company's insurance
coverage, the Company and outside counsel believe that the case will be
settled within the Company's insurance policy limits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Global's common stock was listed on the National Association of Security
Dealers Automated Quotations System (NASDAQ) under the symbol "GLEN" until
September 29, 1993 at which time the Company was "delisted". Global's common
stock is currently traded on the Over-the-Counter Electronic Bulletin Board.
The following table sets forth the high and low bid quotations for the common
stock for the fiscal quarters indicated.
Fiscal 1995
High Low
--------- ---------
First Quarter................................................................ $ 3/4 $ 1/4
Second Quarter............................................................... $ 9/16 $ 1/4
Third Quarter................................................................ $ 9/16 $ 5/16
Fourth Quarter............................................................... $ 9/16 $ 9/32
Fiscal 1996
High Low
--------- ---------
First Quarter............................................................... $ 1/2 $ 6/25
Second Quarter.............................................................. $ 5/16 $ 7/32
Third Quarter............................................................... $ 5/16 $ 5/32
Fourth Quarter.............................................................. $ 11/32 $ 1/8
The above quotations reflect inter-dealer prices, and may not include retail
mark-up, mark down or commissions and may not necessarily represent actual
transactions.
At April 1, 1997, there were approximately 803 holders of record of Global's
common stock. Most of the shares of the common stock are held in street name
for a larger number of beneficial owners.
7
To date Global has not paid a cash dividend on its common stock. The payment
and amount of any future dividends is currently restricted by the terms of
the Company's 10% Cumulative Convertible Senior Preferred Stock and the
Series B Cumulative Convertible Senior Preferred Stock, which require payment
of a 10% dividend on such preferred stock and which restrict the Company's
ability to pay any dividends on the Company's Common Stock until payment of
all accrued dividends on the preferred stock. In addition, payment of after
dividends is restricted by the company's lenders and will unnecessarily
depend upon conditions then existing, including the Company's earnings,
financial condition, working capital requirements, and other factors.
Effective for the year ended October 31, 1996 all Series B and 3,000 10%
Cumulative Convertible Senior Preferred Stock was converted to common stock
at $0.25. The balance of the 10% Cumulative Convertible Senior Preferred and
accumulated dividends were converted by the first calendar quarter of 1997.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial
information concerning the Company. This information is not covered by the
independent auditor's report. For further information, see the accompanying
Consolidated Financial Statements of Global Environmental Corp. and
subsidiary for the years ended October 31, 1996, 1995, and 1994, and the
information set forth in item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and in Item 8, "Financial
Statements and Supplementary data" below.
Selected Consolidated Financial Information
The following information is a summary of the consolidated financial
statements of the Company included elsewhere and should be read in connection
with such consolidated financial statements. (Amounts in thousands, except
per share data)
Operating Data: Year Ended October 31,
1996 1995 1994 1993
--------- --------- --------- ---------
Net sales.................................................................. $ 8,154 $ 7,526 $ 6,648 $ 6,233
Income (loss) from operations.............................................. (420) (275) (1,001) (665)
Loss from continuing operations............................................ (502) (543) (1,215) (975)
Loss from discontinued operations.......................................... (210) 154 236 (335)
Loss from sale of Rage Inc................................................. (215)
Net Loss................................................................... (928) (389) (979) (1,310)
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Net loss per share and fully-diluted net loss per share attributable to
common shareholders (1);
Continuing Operations...................................................... (0.32) (0.32) (0.52) (0.42)
Discontinued Operations.................................................... (0.09) 0.06 0.10 (0.14)
Loss of Disposal........................................................... (0.09)
Total...................................................................... (0.50) (0.26) (0.42) (0.56)
Weighted average number of shares outstanding (1).......................... 2,340 2,370 2,361 2,333
Balance Sheet Data: As of October 31,
1996 1995 1994 1993
---------- ---------- ---------- ----------
Working capital (deficiency).................................. (401,436) 360,594 (541,111) 94,000
Total assets.................................................. 4,306,496 3,891,158 4,777,233 3,826,000
Long-term debt................................................ 1,344,182 1,604,567 2,649,783 1,910,000
Stockholders' equity (deficiency)............................. 207,056 560,487 (353,062) (40,000)
- ------------------------
(1) The 10% Cumulative Convertible Senior Preferred Stock and assumed
conversion of stock options and warrants have not been considered in the
calculation of earnings per share, the effect of which would be
anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
RESULTS OF OPERATIONS
Fiscal 1996 Compared to Fiscal 1995
Sales volume increased by $627,932 from its fiscal 1995 level due to
increased sales of both truck bodies and air movement product lines. The
Company believes that both markets are firm or expect expansion in 1997.
The Company's gross profit margin increased from 11.9% to 14.2% during fiscal
1996. The was due to the decrease in inefficiencies of the Morrison product
line and an increase in manufacturing operations which decreased the effect
of fixed manufacturing costs on gross profit.
Consolidated backlog at October 31, 1996 was approximately $2,300,000 versus
approximately $2,000,000 at October 31, 1995.
9
The selling, general and administrative costs increased from the fiscal 1995
level by approximately $407,232 as a result of higher sales and marketing
costs. Selling, general and administrative costs also increased as a
percentage of net sales from 15.6% to 19.4%.
The Company's net loss before discontinued operations during fiscal 1996 was
$502,294, a decrease of $40,595 over the fiscal 1995 loss. The decrease in
loss was primarily due to higher selling, general and administrative costs
offset by increases in production efficiencies associated with manufacturing
operations and an increase of net sales.
Fiscal 1995 Compared to Fiscal 1994
Sales volume increased by $877,280 from its fiscal 1994 level due an increase
in activity in the air movement product lines.
There were several major factors that caused a decline in the Company's gross
profit margins in fiscal 1994 to 2.2%. In addition to the continued increased
competition from other providers of similar products and services and the
continued recession in the Company's lines of business, the Company
experienced production inefficiencies attributable to the learning process
associated with the start-up of the Company's new Morrison product line,
which manufactures utility truck bodies. In fiscal 1995 gross profit margin
increase to 11.9% due to stronger markets and increases in production
efficiencies.
Consolidated backlog at October 31, 1995 was approximately $2,000,000 versus
approximately $1,500,000 at October 31, 1994.
Miscellaneous income for the year ended 1996 includes the sale of securities,
the value of which was insignificant in prior years.
Interest expense decreased during fiscal 1995 primarily due to the conversion
of convertible debentures to convertible preferred shares.
The Company's net loss before discontinued operations during fiscal 1995 was
$542,889, a decrease of $672,692 over the fiscal 1994 loss. The 1994 loss was
primarily due to certain production inefficiencies associated with the
start-up of the Morrison product line.
During the first quarter of fiscal 1994, the Company entered into a joint
venture agreement with Cadema Corporation. The joint venture has been
capitalized by Cadema with $350,000 in cash and by Global with $1,000. During
the term of the joint venture terminating December 31, 1998, the joint
venture has the exclusive right (unless otherwise extended) to contract for
the design and installation of air pollution control equipment in the
Company's name in all areas of the world outside the United States and its
territories. The business of the joint venture is managed by the Company and
income or loss from the joint venture will be allocated 51% to Cadema and 49%
to Global. As a result, income or loss reported by the joint venture is
recorded on Global's books as equity income from a joint venture; net sales
revenue for the joint venture is not consolidated on Global's books. The
agreement allows Global 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 partners.
Liquidity and Capital Resources
Cash at October 31, 1996 decreased by $285,971 from the level at October 31,
1995. This decrease was the result of the increase in accounts receivable, a
decrease in payment clearing time and pressure from trade account payable
vendors.
Accounts receivable increased approximately $567,942 from their level at
October 31, 1995 due to an increased sales volume and an overall slowness in
collections.
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Inventories remained stable over their October 31, 1995 level despite a 8%
increase in sales due to the reduction of the production cycle which in
effect decreased work in process.
The Company had working capital of $360,594 at October 31, 1995. Working
capital at October 31, 1996 was decreased to ($401,436) due to
reclassification of the joint venture note payable ($345,000) from long term
to current. The Fremont revolving credit facility was renegotiated increasing
long term debt and reducing current liabilities in 1995.
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.
The Company's Danzer subsidiary currently has a credit facility with Fremont
Financial Corporation comprised of a revolving credit facility and an
equipment term loan. The term loan is for up to $350,000 and the revolving
credit facility is for up to $1,150,000 at an interest rate of prime plus
4.5% maturing on January 31, 1998 with an extension of three years at the
option of the lender. The loans are collateralized by real estate, Danzer's
accounts receivable, inventory and equipment. The revolving loan balance
under the Fremont facility at October 31, 1996 ($942,165) was incurred in
connection with the refinancing of the Danzer mortgage and is based upon
eligible accounts receivable and inventory of Danzer as defined. The
equipment term loan had a balance of $246,500 at October 31, 1996. 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, 1996.
The Company was in default on the January 1, April 1, July 1, and October 1,
1995 interest payments due Renaissance. The Company received a waiver of
default, including a waiver of remedies due to payment default, from
Renaissance through November 1, 1995. On December 31, 1994 the Convertible
Debentures were exchanged for preferred stock, the $211,635 of accrued
interest thereon was converted to a three-year 10% Term Note and the Company
paid Renaissance $50,000 representing interest on the Convertible Debentures
from October 1, 1994 through December 31, 1994.
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. As of October 31, 1996
all Series B and 3,000 shares of the 10% Cumulative Convertible Preferred
Stock and accumulated dividends were converted to common stock. The balance
of the 10% Cumulative Convertible Preferred Stock and accumulated dividends
were converted to common stock during the first calendar quarter of 1997.
As of October 31, 1995, the Company was in default under the Term Note due to
Renaissance. 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. At October 31, 1996 this note and accrued interest was
converted to common stock.
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 and provides additional working capital for overall
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business activity. During 1996, the over advance was transferred to the term
note portion of the financing facility.
In light of the Company's backlog at October 31, 1996, its projected cash
flow from operations, the market for the Company's products, and the amount
of short-term debt due in fiscal 1996 it is anticipated that the Company may
need increased sales, an increase in its profit margin and/or an infusion 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 1997, will be
dependent upon the success of the company's efforts to increase sales volume,
as well as the profitability of new business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See "Index to Consolidated Financial Statements on page F- below.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information with respect to all of the
incumbent directors of the Company.
Position with Director
Name Age Company Since
- ----- --- --------------- ---------
Rudolph W. Schuster............................ 65 President, Chief Executive 1996
Officer, Treasurer and Director
Russell Cleveland.............................. 58 Director
William L. Pryor, III.......................... 63 Director
(1) Rudolph W. Schuster has been a director, the President and Chief
Executive Officer of the Company since September 1996. From 1989 to 1996
Mr. Schuster served as Operations Manager of Snyder General/AAF McQuay
Dallas, Texas and from 1974 to 1989 Mr. Schuster served as Vice President
of Fischer & Porter Company located in Pennsylvania.
(2) Russell Cleveland, a chartered financial analyst, became director of the
Company on April 26, 1991. Mr. Cleveland has for the past five years been
a director, officer and shareholder of Renaissance Capital Group, Inc.,
which is the managing general partner of Renaissance Capital Partner,
Ltd., a business development company. Mr. Cleveland is a director of
Greiner Engineering, an engineering company, AFN, Inc., an information
processing and data base service, Unico, Inc., a direct mail advertising
company, International Movie Group, Inc., and independent foreign
distributor of American films and Biopharmaceutics, Inc., a manufacturer
of over-the-counter generic and prescription drugs, Mr. Cleveland is
Renaissance's designee to the Board of Directors. See "Item 13- Certain
Relationships and Related Transactions" herein.
(3) William L. Pryor, III is the Chairman of Prism Group, Inc. a diskette
duplication manufacturing company at 441 Lexington Avenue, Suite 502, New
York, NY. Mr. Pryor was the Managing Director of
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Warren Management Chief Executive Officer of Manufacturing Solutions,
Inc. (formerly Applicon Corporation), a manufacturer of computer
workstations and other electronic and computer peripheral devices. Mr.
Pryor is presently a member of the Board of trustees of Kent School, a
member of the Board of National Defense University, and a Trustee of IIE
(Institute of International Education). Mr. Pryor currently serves as a
director of World View, a multi-media CD ROM publisher, MacSimmum, a
distributor of Apple and MacIntosh add-on peripherals and of Prism.
Executive Officers
The Company's executive officers are appointed by the Board of Directors and
hold office at the pleasure of the Board until successors are appointed and
have qualified.
Compliance with Section 16 (a) of the Securities Exchange Act of 1934 Section
16 (a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers, and persons who own more than ten percent of
the Company's Common Stock ("10% Shareholders") to file reports of Ownership
and reports of changes in ownership of the Company's Common Stock with the
Securities Exchange Commission ("SEC"). Officers, Directors and Shareholders
are required by SEC regulation to furnish the Company with copies of all
forms they file under Section 16 (a). Based solely on its review of the
copies of such forms received by it with respect to its fiscal year ended
October 31, 1996 and written representations from certain reporting persons
that no other reports were required to those persons, the Company believes
that all Section 16 (a) filing requirements applicable to its officers,
directors and 10% Shareholders were complied.
ITEM 11. EXECUTIVE COMPENSATION
Summary and Compensation Table
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered during the
Company's fiscal year ended October 31, 1995 by the named officer.
SUMMARY COMPENSATION TABLE
Annual Compensation
---------------------------------------------------------------
Name and Principal Salary Common Other Annual All Other
Position Year ($) Stock Options Compensation Compensation
(a) (b) (c) (d) (e) (f)
- ---------------------------------------- --------- ------------------ ------------- ------------- -------------
William V. Rice,........................ 1993 $ 60,652 0 $ 7,547 (1) $ 8,114 (2)
Former President 1994 $ 96,250 0 $ 7,547 (1) $ 8,543 (3)
1995 $ 140,708 200,000 $ 7,547 (1) $ 8,895 (4)
1996 $ 21,154 0 $ 3,773 (1) $ 4,031 (5)
Lori Beer .............................. 1996 $ 60,000 0 0 0
Former President
Rudolph W. Schuster
President and Chief Executive Officer. 1996 $ 14,712 0 $ 0 $ 0
- ------------------------
(1) Represents lease payments and automobile insurance paid by the Company
for a car provided for the use of Mr. Rice.
(2) Of the total $8,114 paid to Mr. Rice "in all other compensations," the
Company paid $7,181. (amount based on two-thirds of the total cost of the
policy) for term life insurance on Mr. Rice in the amount of 1.5 million.
The policy provides that the Company will receive one-third of any
proceeds from the policy and
13
Mr. Rice's beneficiary will receive two-thirds of any such proceeds.
An additional $933. was paid by the Company to the account of Mr. Rice as
a matching contribution under the Company's Tax Savings Investment Plan,
described below.
(3) Of the total $8,543 paid to Mr. Rice "in all other compensations," the
Company paid $7,181. (amount based on two-thirds of the total cost of the
policy) for term life insurance on Mr. Rice in the amount of 1.5 million.
The policy provides that the Company will receive one-third of any
proceeds from the policy and Mr. Rice's beneficiary will receive
two-thirds of any such proceeds. An additional $1,362. was paid by the
Company to the account of Mr. Rice as a matching contribution under the
Company's Tax Savings Investment Plan, described below.
(4) Of the total $8,895 paid to Mr. Rice "in all other compensations," the
Company paid $7,181. (amount based on two-thirds of the total cost of the
policy) for term life insurance on Mr. Rice in the amount of 1.5 million.
The policy provides that the Company will receive one-third of any
proceeds from the policy and Mr. Rice's beneficiary will receive
two-thirds of any such proceeds. An additional $1,714. was paid by the
Company to the account of Mr. Rice as a matching contribution under the
Company's Tax Savings Investment Plan, described below.
(5) Of the total $4,031 paid to Mr. Rice "in all other compensations," the
Company paid $3,250. (amount based on two-thirds of the total cost of the
policy) for term life insurance on Mr. Rice in the amount of 1.5 million.
The policy provides that the Company will receive one-third of any
proceeds from the policy and Mr. Rice's beneficiary will receive
two-thirds of any such proceeds. An additional $258. was paid by the
Company to the account of Mr. Rice as a matching contribution under the
Company's Tax Savings Investment Plan, described below
The Company maintains a Tax Savings Investment Plan (the "Investment Plan")
which qualifies as a cash deferred salary arrangement under Section 401(K) of
the Internal Revenue Code. Employees are eligible to participate in the
Investment Plan if they have been employed for 3 months, and are not members
of a collective bargaining unit.
Under the Investment Plan, participants may defer up to 15% of the pre-tax
salary. The Company will match 50% of the participant's deferral up to 2% of
salary and 25% of the next 4% of salary. The Company's matching will be
invested in the money market fund. The participant's pre-tax salary deferrals
will be invested, at the participant's direction, in an Index Fund, Bond
Fund, Money Market Fund, or in combination of these funds.
Participant's are vested in their salary deferrals and all earnings on those
deferrals. However, the Company's matching contribution and earnings thereon
become vested only upon the third year of vesting services with the Company,
with 33% vesting being given up for each year up to the third year.
Investment Plan benefits will be paid upon retirement, termination of
employment, disability, or death. In addition, benefits may be distributed to
a participant in the event of financial hardship.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal year end
Option/SR Values
There were no stock options held by any of the Company's officer as of
October 31, 1996. During the year ended October 31, 1996, no stock options
were exercised.
Warrants totaling 300,000 were issued to L. Beer during the current year.
Conversion is at $0.50 per share and they expire in 1999.
The Company maintains a Stock Option Plan (the "Plan") under which options of
purchase 800,000 shares of the Company's Common Stock, par value $.001 per
share, have been reserved. Pursuant to the Plan, the Company is permitted to
issue incentive stock options ("Incentive Stock Options") and non-qualified
stock options ("Non-Qualified Stock Options") to employees or directors of
the Company; provided, however, that no incentive Stock Options shall be
granted to a non-employee director. Incentive
14
Stock Options under the Plan are intended to qualify for the tax treatment
accord under Section 422A of the Internal Code of 1986, as amended (the
"Code). Non-Qualified Options under the plan are intended to be options which
do not qualify for the tax treatment accorded under Section 422A of the Code.
All directors and key employees of the Company and its subsidiaries are
eligible to participate in the Plan. The Plan is administered by the Board of
Directors of the Company which, to the extent it determine, may delegate its
power with respect to the administration of the Plan to a compensation
advisory committee consisting of not less than three members, at least of
whom two shall be directors for the Company.
Under the Plan, Incentive Stock Options to purchase shares of the Company's
Common Stock may not be granted for less than 100 percent of fair market
value of the Common Stock on the date the Incentive Stock Option is granted;
provided, however, that in the case of an Incentive Stock Option granted to
any person then owning 10 percent of the voting power of all classes of the
Company's stock, the Purchase Price per share of all classes of the Company's
stock, the Purchase Price per share subject to the Incentive Stock Option may
not be less than 110 percent of the fair market value of the stock on the
date of the grant of the option. The option price per share with respect to
each Non-Qualified Stock Option granted under the Plan is to be determined by
the Board of Directors, but may not be less than 85% of the fair market value
of the Common Stock on the date the Non-Qualified Stock Option is granted.
15
Options under the Plan may not have a term of more than 10 years: provided,
however, that an Incentive Stock Option granted to a person then owing more
than 10 percent of the voting power of all classes of the Company's stock may
not be exercised more than 5 years after the date such option is granted. In
addition, the aggregate fair market value, determined at the time the options
granted, of the stock with respect to which Incentive Stock Options are
exercised for the first time by an employee in any calendar year under the
Plan may not exceed $100,000.
Compensation of Directors
Directors who are not employees of the Company are entitled to a board
meeting attendance fee of $750 plus reimbursement of expenses.
Employment Agreements
Mr. Rice had a five year employment agreement terminating April 15, 1996,
which was automatically renewable for successive one year terms, unless
otherwise canceled 60 days prior to the end of the initial terms of any
successive term. The contract required a salary of approximately $115,000 per
annum with an increase each year of not less than 5% of the prior's years
salary. The agreement provided a bonus payment of up to 35% of base
compensation, the amount of which will be based upon the realization by the
Company of certain levels of pre-tax income. Under the argument, the employee
may elect to require the Company to provide life insurance for such employee
in the amount of $1,000,000. The agreement may be terminated by the Company
for certain events constituting "cause" upon death or upon disability. Upon
disability, the employee would receive fifty percent of his salary for the
remaining term of the agreement. Upon death, the employee's beneficiary would
receive fifty percent of his base salary for a period of twelve months. If
the Company discharges the employee (other than a discharge for "cause" or a
discharge as a result of the employee's disability) or if he terminates the
agreement because of the company's breach, he is entitled to the salary due
him for the remaining term of the agreement and is entitled to continue to
receive employee benefits provided under the agreement through the end of the
then-current.
Mr. Rice resigned May 1996 and the employment contract was canceled June 1966
with the sale of Rage Inc. Current management in not under an employment
contract.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
16
The following table sets forth, as of April 1, 1997 information concerning
the shares of the Company's Common Stock beneficially owned by (a) each
person or group known to the Company to be the beneficial owner of more than
5% of the outstanding shares of the Common Stock, (b) each director and
nominee, and (c) all directors and officers as a group. The outstanding
voting securities of the Company as of the record date consisted of
15,174,693 shares of common stock. Except as otherwise indicated, each person
named or included in a group has sole voting and investment power with
respect to his or its shares of Common Stock.
Name and Address of Beneficial Amount and Nature of Percent
Owner or Identity of Group Beneficial Ownership of Class (1)
- ---------------------------------- -------------------- ------------
Renaissance Capital Partners, Ltd. 9,443,792 57.4%
8080 No. Central Expressway,
Suite 219-L869
Dallas, TX 75206-1857
Richard W. & Robert M. Snyder 2,006,667 (2) 12.2%
c/o Snyder Capital Group
3219 McKinney Ave.
Dallas, TX 75204
Russell G. Cleveland 40,000 (3) 0.2%
c/o Renaissance Capital Group, Inc.
8080 N. Central Expressway,
Suite 210L869
Dallas, TX 75206-1847
William L. Pryor, III 25,000 (4) 0.2%
Prism Group, Inc.
441 Lexington Avenue, Suite 502
New York, NY 10017
(1) Common Stock which is not outstanding but which a person has a right to
acquire with 60 days of the record date are considered as Common stock
outstanding for purposes of computing the percentage of Common Stock owned by
such person, but such Common stock is not deemed outstanding for purposes of
computing the percentage of common Stock owned by any other person.
(2) Includes 100,000 shares of common stock issuable upon exercise of
warrants granted to Mr. Synder.
(3) Mr. Cleveland is a director, officer and principal shareholder of
Renaissance Capital Group inc., the managing general partner of Renaissance
Capital Partners, Ltd., and may be deemed to share voting and investment
control over such shares.
(4) Represents 25,000 shares of common stock issuable upon exercise of
options granted to Mr. pryor under the Company's Stock Option Plan.
Changes in Control
17
Renaissance Capital Partners, Ltd. acquired control of the company on
December 31, 1994, pursuant to a Purchase Agreement with the Company (the
"Purchase Agreement") under which Renaissance exchanged $1,600,000 principal
amount of the Company's 12.5% Convertible Debentures (the "Debentures") for
16,000 shares of the Company's Series B Preferred Stock. The Company also
issued Renaissance a 10% Term Note originally due December 31, 1997 in the
principal amount of $211,635.40 (representing interest on the Debentures
accrued through September 30, 1994) and paid Renaissance $50,000
(representing interest on the Debentures from October 1, 1994 through
December 31, 1994. At October 31, 1996, Renaissance converted Series A and B
Preferred Stock, accumulated dividends, accumulated interest and note payable
to common stock at a conversion rate of $0.25per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 25, 1991, the Company issued to Renaissance a convertible debenture
(the "1991 Debenture") in the principal amount of $1,250,000 which was then
convertible into the Company's common stock at a conversion price of $.90 per
share. The 1991 Debenture bore interest at the rate of 12.5% per annum. The
principal of the 1991 Debenture was repayable in quarterly installments of
$40,000 each, beginning on July 1, 1994 and was payable in full at maturity
on March 31, 1998. The conversion price of the 1991 Debenture was reduced to
$.70 per share in December, 1992.
On December 30, 1992, the Company issued to Renaissance a second convertible
debenture in the amount of $350,000 (the: 1992 Debenture"). The 1992
Debenture bore interest at an annual rate of 12.5%. The principal of the 1992
Debenture was repayable in quarterly installments of $10,500 each, beginning
on July 1, 1994, and was payable in full at maturity on March 31, 1998. The
1992 Debenture was convertible into the Company's common stock at a
conversion price of $.70 per share.
On December 31, 1994, Renaissance exchanged the Debenture for 16,000 shares
of the Company's Series B Preferred Stock. The Company also issued
Renaissance a 10% Term Note due December 31, 1996 in the principal amount of
approximately $211,635 for unpaid accrued interest on the Debentures and paid
Renaissance $50,000 (representing interest on the Debentures from October 1,
1994 through December 31, 1994). Renaissance currently may convert the Series
B Preferred Stock into 3,200,000 shares of the Company's common stock at the
rate of $.50 per share, subject to adjustment. See "PRINCIPAL
SHAREHOLDERS--Change in Control".
On October 31, 1996, Renaissance converted Series A and B Preferred Stock,
accumulated dividends, accumulated interest and note payable to common stock
at a conversion rate of $0.25per share.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K:
(1) Financial Statements.
See "Index to Consolidated Financial Statements and Financial Statement
Schedules" on page F-1 herein.
18
(2) Financial Statement Schedules Required to be Filed by Item 8 on
this Form.
NONE
(3) Exhibits.
INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTION OR FILED HEREWITH
- ------------- ---------------------------------------- ------------------------------------
3(i)(a) Certificate of Incorporation as Incorporated by reference to
amended through August 18, 1994 Exhibit 3(i) to Registrant's Form
10-Q for the period ended July 31,
1994
3(i)(b) Certificate of Amendment to Certificate Incorporated by reference to
of Incorporation filed December 30, 1994 Exhibit 4.1 to Registrant's Form 8-
K dated December 31, 1994
3(ii) By Laws Incorporated by reference to
Exhibit 3.3 to the Registration
Statement on Form S-18 (No. 33-
18636-NY) (the "Registration
Statement").
4(a) Stock Certificate Incorporated by reference to
Exhibit 4.1 to the Registration
Statement.
4(b) Certificate of Incorporated by reference to
Amendment to Certificate Exhibit 4 of Registrant's Form
of Incorporation filed 10-Q for the period ended
August 18, 1994 (with terms of July 31, 1994.
10% Senior Preferred Stock)
4(c) Certificate of Incorporated by reference to
Amendment to Certificate Exhibit 4.1 to Registrant's Form
of Incorporation filed 8-K dated December 31, 1994.
December 30, 1994 (with terms
of Series B Senior Preferred Stock)
10(a) Employment Incorporated by reference to
Agreement dated Exhibit 10(c) to Form 10-K
April 16, 1991, between Report dated January 28, 1993.
Global Environmental Corp.
and William V. Rice
10(b) Global Incorporated by reference to
Environmental Corp. Exhibit 10(j) to the October
Stock Option Plan 31, 1990 Form 10-K.
10(c) Mortgage Note and Incorporated by reference to
Mortgage Agreement Exhibit 10(k) to the October
dated April 3, 1990 of Global 31, 1990 Form 10-K.
Environmental Corp.
with Continental Bank
19
INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTION OR FILED HEREWITH
- ------------- ---------------------------------------- ------------------------------------
10(d) Convertible Incorporated by reference to
Debenture Agreement Exhibit 10(c) to Form 10-K
in the amount of Report dated January 28, 1993.
$1,250,000 dated April 25, 1991
between Global Environmental
Corp. and Renaissance Capital
Partners, Ltd.
10(e) First Amendment Incorporated by reference to
dated December 30, Exhibit (10j) to Form 10-K
1992 to Convertible Report dated January 28, 1993.
Debenture Agreement in the amount of
$1,250,000 dated April 25, 1991
between Gobal Environmental Corp.
and Renaissance Capital Partners, Ltd.
10(f) Convertible Incorporated by reference
Debenture Agreement to Exhibit (10k) to Form 10-K
in the amount of Report dated January 28, 1993.
$350,000 dated December 30, 1992
between Global Environmental Corp.
and Renaissance Capital Partners, Ltd. II
10(g) Loan and Security Incorporated by reference to
Agreement dated Exhibit 10(h) to Form 10-K Report
May 28, 1993 between dated January 28, 1994.
Danzer Metal Works Co.
and Fremont Financial Corporation
10(h) Asset purchase agreement dated Incorporated by reference to Exhibit 10() to Form
August 25, 1993 between 10-K Report dated January 28, 1994.
Morrison Industries L.P. and Global
Environmental Corp.
10(I) Joint Venture Agreement dated December Incorporated by reference to Exhibit 10(j)
31, 1993 between Global Environmental to Form 10-K Report dated
Corp. and Cadema Corporation. January 28, 1994.
10(j) Equipment Purchase and Security Incorporated by reference to Exhibit 10(k) to
Agreement dated September 17, 1993 Form 10-K Report dated January 28, 1994.
between U.S. Amada, Ltd. and
The Danzer Metal Works Co.
10(k) Equipment Purchase and Security Incorporated by reference to
Agreement dated Exhibit 10(l) to Form 10-K Report
September 17, 1993 dated January 28, 1994.
between U.S. Amada, Ltd. and
The Danzer Metal Works Co.
20
INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTION OR FILED HEREWITH
- ------------- ---------------------------------------- ------------------------------------
10(l) Equipment Purchase and Security Agreement dated Incorporated by reference to Exhibit 10(m) to
September 17, 1993 between U.S. Amada, Ltd. and Form 10-K Report dated January 28, 1994
The Danzer Metal Works Co.
10(m) Purchase Agreement dated December 31, 1994 Incorporated by reference to Exhibit 99.1 to
between Global Environmental Corp. Registrant's Form 8-K dated December 31, 1994.
and Renaissance Capital Partners,
Ltd. to exchange $1,600,000 of
Convertible Debentures for 16,000
Series B Cumulative Convertible
Senior Preferred Stock.
10(n) 10% Term Note in principal amount of Incorporated by reference to Exhibit 10(n) to
$211,635 due December 31, 1997. Registrant's Form 8-K dated December 31, 1994
10(o) Loan and Security Agreement Incorporated by reference to Exhibit 10(o) to
dated June 23, 1995 between Form 10-K dated April 1, 1996
Danzer Metal Works Co. and Fremont
Financial Corporation
10(p) Mortgage Note and Mortgage Agreement dated Incorporated by reference to Exhibit 10(p) to
January 25, 1996 of Global Environmental Corp. Form 10-K dated April 1, 1996
with Midlantic Bank
10(q) Loan and Security Agreement dated May 1, 1996, Filed herewith Exhibit 10 (q)
between Danzer Industries, Inc and Fremont
Financial Corporation
10( r) Common Stock Purchase Agreement between William Filed herewith Exhibit 10 ( r)
V. Rice and the Company dated May 21, 1996
21 List of Subsidiaries Incorporated by reference to Exhibit 22 to the
October 31, 1989 Form 10-K.
(b) Reports on Form 8-K No reports on Form 8-K were
filed during the last quarter of the fiscal year
ended October 31, 1996
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLOBAL ENVIRONMENTAL CORP.
BY: /S/ RUDOLPH W. SCHUSTER
-----------------------------------------
Rudolph W. Schuster, Director,
President and Chief Operating Officer
22
APRIL 1, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
April 1, 1997
By: /s/William F. Clarke
--------------------------------------
William F. Clarke
Chief Financial and Accounting Officer
April 1, 1997
By: /s/Russell G. Cleveland
-----------------------------------------
Russell G. Cleveland, Director
April 1, 1997
By: /s/William L. Pryor
-----------------------------------------
William L. Pryor, Director
23
GLOBAL ENVIRONMENTAL CORP AND SUBSIDIARY
Exhibit No. 10 (p)
FOURTH AMENDMENT
TO LOAN AND SECURITY AGREEMENT
BETWEEN DANZER METAL WORKS COMPANY
AND FREMONT FINANCIAL CORPORATION
This THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
made as of May 1,1996 by and between FREMONT FINANCIAL CORPORATION ("Fremont")
and DANZER INDUSTRIES. INC. ("Borrower"), in light of the following:
WHEREAS, Borrower and Fremont entered into a Loan and Security Agreement
dated May 28, 1993 (as amended from time to time, the "Loan Agreement":
Capitalized terms used herein shall have them earnings set forth in the Loan
Agreement unless specifically defined herein); and
WHEREAS, Borrower and Fremont wish to amend the Loan Agreement as set forth
herein.
NOW THEREFORE, in consideration of the mutual promises and agreements of the
parties hereinafter set forth and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged the parties hereto agree
as follows:
1. The first sentence of Section 3.1 of the Loan Agreement is deleted in
its entirely and replaced with the following:
3.1 This Agreement shall become effective upon acceptance by Fremont and
shall continue in full force and effect for a term ending January 31, 1998
(the Renewal Date) and from year to year thereafter, unless sooner terminated
pursuant to the terms hereof.
2. Borrower reaffirms, ratifies and confirms its Obligations under the
Loan Agreement, acknowledges that all the terms and conditions in the Loan
Agreement (except as amended herein) remain in full force and effect and
further acknowledges that the security interest granted to Fremont in the
Collateral is valid and perfected.
3. Borrower is not aware of any events which now constitute, or with the
passage of time or the giving of notice would constitute ,an Event of Default
under the Loan Agreement.
24
4. This Amendment constitutes the entire agreement of the parties in
connection with the agreement of the parties in connection with the subject
matter of this Agreement and cannot be changed or terminated orally. All
prior agreements, understandings, representations, warranties and
negotiations regarding the subject matter hereof, if any, are merged into
this Amendment.
5. This Amendment may be executed in counterparts, each of which, when
so executed and delivered shall be deemed an original, and all of such
counterparts together shall constitute but one and the same agreement.
6. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, Borrower and Fremont have executed this Amendment as of
the date first written above.
FREMONT FINANCIAL
CORPORATION,
a California corporation,
By: --------------------------------
Print Name:
Title/Capacity:
DANZER INDUSRIES,INC
a Maryland corporation,
By: ---------------------------------
Print Name:
Title/Capacity:
25
GLOBAL ENVIRONMENTAL CORP AND SUBSIDIARY
Exhibit No. 10 (r)
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "Agreement") is made on May 22,
1996, by and between Global Environmental Corp., a New York corporation
("Global"), Global Environmental Holdings, Inc., a Delaware corporation
("Holdings") (Global and Holdings shall be referred to collectively in the
remainder of this Agreement as "Global," except where specifically indicated to
the contrary), Rage, Inc., a Delaware corporation ("Rage"), and William V. Rice
("Rice").
WHEREAS, Global Environmental Corp. is a public company which operates its
businesses through subsidiaries;
WHEREAS, Holdings is a wholly-owned subsidiary of Global;
WHEREAS, Rage is a wholly-owned subsidiary of Holdings;
WHEREAS, Global Environmental Corp. and Global Environmental Holdings, Inc.
desire to sell their subsidiary, Rage, and Rice desires to acquire Rage from
Global Environmental Holdings, Inc. through the purchase of all the issued and
outstanding capital stock of Rage upon the terms and conditions set forth in
this Agreement; and
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
covenants, representations, and warranties herein contained, and intending to be
legally bound, the parties hereby agree as follows:
1. Sale of Rage by Global. In reliance upon the representation and
warranties contained and subject to the terms and conditions hereof, and in
consideration of the transfer of assets described in paragraph 2, Global will
assign and deliver to Rice, and Rice will acquire from Global, at the Closing,
the following:
(a) Forty-five (45) shares of common stock of Rage, representing all the
issued and outstanding shares of Rage (the "Rage Stock") (assigned value of
$100,000);
(b) The real property and improvements, commonly referred to as
Bedminster Industrial Park, Unit One, Apple Tree Lane, Township of
Bedminster, Bucks County, Pennsylvania (the "Real Property"). The transfer
of said property shall
26
be accomplished and set forth in a separate Agreement of Sale for Real Estate
("Real Estate Sale Agreement"), a copy of which is attached hereto as Exhibit A
(assigned value of $500,000);
(c) $104,600, payable as follows:
(i) Twenty-six (26) equal payment of $2,100 each, to be paid by Global
to Rice on a bi-weekly basis, commencing May 17, 1996 and continuing
bi-weekly thereafter until paid in full;
(ii) $25,000 paid by Global on May 10, 1996;
(iii) $25,000 to be paid by Global May 25, 1996.
2. Purchase by Rice. In reliance upon the representation and warranties of
Global contained herein, and subject to the terms and conditions hereof, and in
consideration of the transfer of assets described above in paragraph 1, Rice
shall deliver the following to Global at Closing:
(a) 517,000 shares of Common Stock of Global representing all of the
common shares owned by Rice and all the right, title, and interest in Global
(the "Global Stock") (assigned value of $105,000);
(b) All securities representing all of Rice's employee stock options
and/or any derivative rights relating to Global and its subsidiaries, other
than Rage (the "options") (upon execution of this Agreement, all these
derivative rights shall be canceled);
(c) Release by Rice of all amounts payable to Rice under the terms of
the Employment Agreement by and between Rice and Global Environmental Corp.,
dated April 16, 1991 (assigned value of $145,000). Upon execution of this
Agreement, said Employment Agreement shall be canceled, and Rice's
employment with Global Environment Corp. shall terminate.
(d) Assumption by Rice of all mortgage debt on the Real Property
(approximately $350,000).
3. Closing. The purchase and sale of the assets described above in
paragraphs 1 and 2, and the execution of the Real Estate Sale Agreement, and the
delivery of the documents and the performance of the other matters described in
paragraphs 1, 2, 4 and 5 hereof, shall take place at the offices of Global,
Bedminster Industrial Park, Unit One, Apple Tree Lane, Township of Bedminster,
Bucks County, Pennsylvania, on May 22, 1996, or at any later date mutually
agreed upon by Rice and Global. The closing is referred to in this Agreement as
the "Closing". The agreed upon date of the closing is referred to in this
Agreement as the "Closing Date".
27
4. Documents to be delivered by Global. At the Closing, Global shall deliver
to Rice the following documents:
(a) any certificate or certificates and stock powers as shall be
necessary to convey and vest in Rice all Global's right, title, and interest
in and to all of the Rage Stock;
(b) The executed Real Estate Agreement of Sale and other documents as
shall be necessary to convey and vest in Rice all of Global's right, title,
and interest to the property commonly referred to as Bedminster Industrial
Park, Unit One, Apple Tree Lane, Township of Bedminster, Bucks County,
Pennsylvania.
5. Documents to be delivered by Rice. At the Closing, Rice shall deliver to
Global the following:
(a) 517,000 shares of Common Stock of Global, represented by such stock
certificate or certificates and/or stock powers as shall be necessary to
convey and vest in Global all the Global Stock;
(b) all certificates or other securities evidencing all the Options and
any securities powers as shall be necessary to convey and/or cancel the
Options;
(c) all original signature copies of Rice's employment contract, which
shall be marked "Canceled" at the Closing and initialed by Rice and Global.
6. Representation and Warranties by Global. Global represents and warrants
to Rice as follows:
(a) Corporate Status. Global Environmental Corp. and Global Holdings,
Inc. are corporations duly organized, validly existing, and in good standing
under the laws of the State of New York and Delaware, respectively, with
full corporate power and authority to carry on their businesses, as now
conducted at 17500 York Road, Hagerstown, MD, 21740. Global Environmental
Corp. owns 100% of the issued and outstanding shares of capital stock of
Global Environment Holdings, Inc. and Global Environmental Holdings, Inc.
owns 100% of the issued and outstanding stock of Rage, Inc.
(b) Authority of the Agreement. The Board of Directors of Global
Environmental Corp., and the Board of Directors of Global Environmental
Holdings, Inc. have unanimously approved the sale of Rage and has instructed
the Secretary to deliver a proxy statement to Global's common shareholders
calling for a special to ratifying this transaction. Global anticipates
holding this meeting on or around July 22, 1996. The Board of Directors of
28
Global has given the requisite authority to Lawrence Beer to negotiate and
execute all documents relating to this transaction. Upon ratification by the
common shareholders of Global, this Agreement shall constitute the valid and
legally binding obligation of Global, enforceable against Global in
accordance with its terms, except to the extent, if any, that such
enforceability may be limited by bankruptcy, insolvency, reorganization, or
other laws affecting the enforcement of creditors' rights generally, now or
hereafter in effect and subject to the application of equitable principles
and the availability of equitable remedies. The execution, delivery, and
performance of this Agreement and the other instruments and agreements to be
executed, delivered, and performed by Global pursuant hereto and the
consummation of the transaction contemplated hereby and thereby by Global do
not and will not, with or without the giving of notice and/or the passage of
time, violate or conflict with or result in a breach or termination of any
provision of, or constitute a default under, any order, judgment, decree,
statute, regulation, contract, agreement, or other restriction of any kind
or description to which Global may be bound.
(c) Stock Ownership. Global Environmental Corp. is the lawful record and
beneficial owner of 100% of the issued and outstanding capital stock of
Global Environmental Holdings, Inc. and Global Environmental Holdings, Inc.
is the lawful record and beneficial owner of 100% of the issued and
outstanding capital stock of Rage and the Rage Stock is free of all security
interests, liens, encumbrances, claims, pledges, rights, or any obligations
of any kind, except for the lien filed by Patriot Funding as more fully
described in the UCC-1 filed by Patriot Funding. Global has the full right,
power, and authority to sell the Global Stock pursuant to the terms and
conditions of this Agreement, to the effect that Rice, immediately after the
Closing, shall be the lawful record and beneficial owner of Rage Stock,
which, as of the date hereof, shall comprise 100% of the issued and
outstanding Common Stock of Rage and shall be free of all encumbrances,
except as otherwise described herein and except as may arise from acts or
omissions of Rice.
(d) Complete Transfer. As evidenced by the transfer of all the Rage
Stock, Global is conveying all assets owned or associated with Rage, and all
liabilities associated with Rage, both those asserted and those nonasserted,
as listed to the greatest extent possible on Exhibit B.
(e) Capitalization of Rage. Rage is authorized by its Article of
Incorporation to issue 1000 shares, no par value, all of which are of the
same class and all of which are to be designated as Common Stock. Rage has
no authorized, issued or outstanding shares of preferred stock.
7. Representation and Warranties of Rice. Rice represents and warrants to
Global as follows:
29
(a) Individual Status. Rice is an individual living at 4895 Gloucester,
Doylestown, Pennsylvania, 18901.
(b) Authority for Agreement. Rice has the power and authority to execute
and deliver this Agreement and to carry out its obligations hereunder. Rice
owns all of the securities being transferred pursuant to this Agreement,
owns the securities individually, and does not own any of these securities
in common with any other individual, including, but not limited to, his
spouse. This Agreement constitutes a valid and legally binding obligation of
Rice, enforceable against Rice in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, reorganization, or other laws
affecting the enforcement of creditors' rights generally now or hereafter in
effect and subject to the application of equitable principles and the
availability of equitable remedies.
(c) Complete Transfer. As evidenced by the transfer of all Global Stock,
Rice is conveying all assets owned or associated with Global, and all
liabilities owned or associated with Global, both those asserted and those
nonasserted, as listed to the greatest extent possible in Exhibit B.
(d) Stock Ownership. Rice is the lawful record and beneficial owner of
517,000 shares of Common Stock of Global, and has an option or a derivative
right in additional shares of Global Common Stock. These securities are
free and clear of any and all security interest, liens, encumbrances,
claims, pledges, rights, charges, escrow, options, rights of first refusal,
contracts, commitments, understandings and obligations of any kind. Rice has
the full right, power, and authority to sell the Stock to be transferred by
him pursuant to the terms and conditions of this Agreement, and these
securities represent 100% of Rice's ownership interest in Global.
Immediately after the Closing, Global shall be the lawful and beneficial
owner of 517,000 shares of Global, free and clear of any and all security
interests, liens, encumbrances, claims, pledges, rights, charges, escrow,
options, rights of first refusal, contracts, commitments, understandings or
obligation of any kind, except as may arise from acts or omissions of
Global. The execution, delivery, and performance of this Agreement and the
other instruments and agreements to be executed, delivered, and performed by
Rice pursuant hereto, and the consummation of the transaction contemplated
hereby and thereby do not and will not, with or without the giving of notice
and/or the passage of time, violate or conflict with or result in a breach
or termination of any provision of, or constitute a default under, any
order, judgment, decree, stature, regulation, contract, agreement, or any
other restriction of any kind or description to which Rice is a party or by
which Rice may be bound. Rice acknowledges that he was the founder of Global
and its predecessor companies and is fully aware of the financial conditions
of both Global and Rage, and that until April 9,1996, Rice held the position
of President and member of the Board of Directors. Rice acknowledges that
30
Global makes no representations or warranties as to the present or future
financial health of Rage.
(e) Restricted Securities. Rice understands that the stock of Rage is
not registered under the Securities Act on the grounds that the sale
provided for in this Agreement is exempt from registration under the
Securities Act, pursuant to Section 4.2 thereof. The Shares are and will be
"restricted securities," as the term is defined in Rule 144 of the Rules and
Regulations promulgated under the Act. The Shares may not be sold or
otherwise transferred unless they first have been registered under the Act
and all applicable state securities laws, or unless exemptions from such
registration provisions are available with respect to said resale or
transfer. Global's reliance on such exemption is predicated in part on
Rice's representation that he is an "Accredited Investor". The term
"Accredited Investor" as used herein shall be defined pursuant to the Rules
and Regulations of the SEC.
(f) Exemptions. Rice understands that the Shares are being offered and
sold in reliance on specific exemptions from the registration requirements
of United States Federal and State securities laws and that the Company is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments, and understandings of Rice set forth herein in
order to determine the applicability of such exemptions and the suitability
of Rice to acquire the Shares, and Rice acknowledges that it is solely
Rice's responsibility to satisfy himself as to the full observance by this
offering and the sale of the Shares.
(g) Legends. Rice's stock certificates, representing all shares of Rage
owned by Rice, shall be endorsed with the legends set forth below:
(1) The following legend under the Securities Act:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY
AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
(2) Any legend imposed or required by the Company's Bylaws or applicable
state securities laws.
(h) Receipt of Information. Rice acknowledges that he has had extensive
access to all relevant information necessary to his consideration of whether
31
or not this transaction is appropriate for him. Rice represents that he is
experienced in evaluating these types of transactions, that he can bear the
economic risk of such a transaction, and that he possesses such knowledge
and experience in financial and business matters as to render him capable of
evaluating the merits and risks of the transaction.
(i) Capitalization. Rice warrants that Global Environmental Corp. owns
100% of the issued and outstanding shares of capital stock of Global
Environment Holdings, Inc. and Global Environmental Holdings, Inc. owns 100%
of the issued and outstanding stock of Rage, Inc.
(j) Vote of stock. Rice agrees to vote all his shares held in Global in
favor of the transaction contemplated herein.
(k) Confidentiality. Rice agrees not to approach Morrison Industries,
Inc., or Buffalo Ventures for the purpose of obtaining a license to make
truck bodies or to obtain truck bodies from Morrison for period of two (2)
years from the date of this Agreement.
8. Conditions to Effectiveness of Transactions.
(a) Board of Director and Shareholder approval by Global is a condition
precedent;
(b) Renaissance Capital Partners, Ltd. must give a signed letter to the
parties of this transaction that it will agree to vote all of its shares held in
Global in favor of the transaction contemplated herein;
(c) The Real Estate Sale Agreement must be executed;
(d) All inter-company transaction (debit and credits) shall have been
canceled prior to Closing; and
(e) Assumption by Rice of the lease on his personal automobile.
9. Tax Aspects of the Transaction. Global shall be responsible for taxes
incurred by Rage for all periods prior to the Closing. Rice shall be responsible
for all taxes incurred by Rage in periods beginning after the Closing. Any taxes
incurred in the transfer of the Real Property shall be paid equally by Rice and
Global. Rice shall be allocated the corresponding Net Operating Loss carry
forward applicable to Rage, less any taxes incurred by Rage by the cancellation
of inter-company accounts.
32
10. Release by Rice. Rice does hereby, and for anyone claiming by or through
or under him, fully remise, release, acquit, and forever discharge Global and
any subsidiary or affiliated corporation, their partners, agents, lenders,
employees, stockholders, directors, officers, successors and assigns, jointly
and severally (collectively, "Released Parties"), of any from any and all
rights, claims, demands, actions, and causes of action, of any nature
whatsoever, whether arising at law or in equity, including accrued vacation
or sick leave and travel expenses, which Rice may have had, may now have, or may
hereafter have, against the Released Parties by reason of any matter, cause,
happening or thing occurring prior to and including the date of this Agreement.
It is intended by Rice by this Agreement to forever remise, acquit, waiver,
release and forever discharge the Released Parties from all claims, demands for
losses, injuries, and damages, rights known or unknown, direct or indirect,
arising from the aforementioned described matters, and from any other matter
occurring prior to the date of this Agreement, it being understood that all
rights which Rice or any person who claims by, through, or under him may have
against Released Parties shall be forever barred from bringing or asserting the
same in their own name or names, jointly with or through any person, natural or
corporate, for or upon or by reason of any act, matter, transaction, cause or
thing whatsoever. In addition, Rice hereby agrees to refrain at all times from
any defamation, libel, or slander of the Company and any of its officers or
directors.
11. Release by Global. Global does hereby, and for anyone claiming by or
through or under it, fully remise, release, acquit, and forever discharge Rice,
Rage and any subsidiary or affiliated corporation, their partners, agents,
lenders, employees, stockholders, directors, officers, successors and assigns,
jointly and severally (collectively, "Released Parties"), (the "Released
Parties"), of any from any and all rights, claims, demands, actions, and causes
of action, of any nature whatsoever, whether arising at law or in equity, which
Global may have had, may now have, or may hereafter have, against the Released
Parties by reason of any other matter, cause, happening or thing occurring prior
to and including the date of this Agreement. Global intends, by this Agreement,
to forever remise, acquit, waive, release, and forever discharge the Released
Parties from all claims, demands for losses, injuries and damages, rights known
or unknown, direct or indirect, arising from the aforementioned described
matters, and from any other matter occurring prior to the date of this
Agreement, it being understood that all rights which Global or any person who
claims by, through, or under it may have against the Released Parties shall be
forever barred from bringing or asserting the same in their own name or names,
jointly with or through any person, natural or corporate, for or upon or by
reason of any act, matter, transaction, cause or thing whatsoever. In addition,
Global hereby agrees to refrain at all times from any defamation, libel or
slander of the Released Parties.
12. Indemnification.
(a) From time to time, and after the date hereof, Global will indemnify and
hold harmless Rice against any and all liability, damage, deficiency, loss,
cost, or expense (including reasonable attorneys' fees and expenses) that are
based upon or that arise out of any misrepresentation or breach of any warranty
33
or agreement made by Global herein. Global agrees to indemnify Rage against any
and all claims and liabilities of Global asserted against Rage.
(b) From and after the date hereof, Rice will indemnify and hold harmless
Global against any and all liability, damage, deficiency, loss, cost, or expense
(including reasonable attorneys' fees and expenses) that are based upon or that
arise out of any warranty or agreement made by Rice herein. Rice agrees to
indemnify Global against any and all claims and liabilities of Rage asserted
against Global.
(c) Each party entitled to indemnification under this Agreement (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "indemnifying Party") promptly after each indemnified
Party has actual knowledge of any third-party claim as to which indemnity may
be sought, and shall permit the Indemnifying Party (at its expense) to assume
the defense of any claim or any litigation resulting therefrom; provided that
counsel for the Indemnifying Party who shall conduct the defense of such
claim or litigation, shall be reasonably satisfactory to the Indemnified
Party, and the Indemnified Party may participate in such defense, but only at
such Indemnified Party's expense; and provided further that the omission by
any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its indemnification obligations under this Agreement
except to the extent that the omission results in a failure of actual notice
to the Indemnifying Party and such Indemnifying Party is damaged as a result
of the failure to give notice. No Indemnifying Party, in the defense of such
claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant
or plaintiff to such Indemnified Party of a release from all liability with
respect to such claim or litigation. In the event that the Indemnifying Party
does not accept the defense of any matter as above provided, the Indemnified
party shall have the full right to defend against any such claim or demand,
and shall be entitled to settle or agree to pay in full such claim or demand
in its sole discretion. In any event, Global and Rice shall cooperate in the
defense of such action and the records of each shall be available to the
other with respect to such defense.
13. Severability. If any provision of this Agreement shall be held or deemed
to be or shall, in fact, be inoperative or unenforceable as applied to any
particular case because it conflicts with any other provision or provisions
hereof or any constitution or statute or rule of public policy, or for any other
reason, such circumstances shall not have the effect of rendering the provision
in question inoperative or unenforceable in any other case or circumstance, or
of rendering any other provision or provisions herein contained invalid,
inoperative, or unenforceable to any extent whatever. The invalidity of any one
or more phrases, sentences, clauses, section, or subsections of this Agreement
shall not affect the remaining portions of this Agreement.
14. Further Assurances. At any time, and from time to time after the
Closing, each party shall, without further consideration, execute and deliver to
34
the other party such other instruments of transfer and assumption, and shall
take such other actions as the other party may reasonably request to carry out
the transfers contemplated by this Agreement.
15. Miscellaneous. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement constitutes the entire
agreement of the parties and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect of the subject matter
hereof and may not be modified or amended except in writing signed by both
parties hereto. This Agreement may be executed in several counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same instrument. this Agreement shall be governed in all respects, including
validity, interpretation, and effect, by the laws of the Commonwealth of
Pennsylvania, applicable to contracts made and to be performed in Pennsylvania.
This agreement shall be binding upon and inure to the benefit of and be
enforceable by the successors and assigns of the parties hereto. This Agreement
shall not be assignable by either party without the prior written consent of the
other, such consent not to be unreasonably withheld. The rights and obligations
contained in this Agreement are solely for the benefit of the parties hereto and
are not intended to benefit or be enforceable by any other party, under the
third party beneficiary doctrine or otherwise. All representations and
warranties made by Rice and Global herein shall survive delivery of the
securities and the execution of this Agreement.
All matters affecting the interpretation, form, validity, enforcement and
performance of this Agreement shall be decided under the laws of the
Commonwealth of Pennsylvania and in a forum located in Bucks County,
Pennsylvania. Both parties consent to the jurisdiction of the Federal Court for
the Eastern District of Pennsylvania with respect to any claims or litigation
arising out of this Agreement. Any and all disputes concerning the rights and
obligation of the parties hereto shall be resolved by binding arbitration under
the supervision of three (3) arbitrators appointed under and pursuant to the
rules of the American Arbitration Association.
16. PENNSYLVANIA SECURITY LAWS:
RICE AGREES TO COMPLY WITH THE PROVISIONS OF THE PENNSYLVANIA SECURITIES
LAWS WITH RESPECT TO THE RAGE STOCK BEING ACQUIRED PURSUANT TO THE TERMS OF THIS
AGREEMENT.
UNDER PROVISION OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (THE "1972
ACT"), EACH PENNSYLVANIA RESIDENT SHALL HAVE THE RIGHT TO WITHDRAW HIS
ACCEPTANCE WITHOUT INCURRING ANY LIABILITY TO THE SELLER, UNDERWRITER (IFANY)
OR ANY OTHER PERSON, WITHIN TWO BUSINESS DAYS FROM THE DATE OF RECEIPT BY
THEISSUER OF HIS WRITTEN BINGING CONTRACT OF PURCHASE OR IN THE CASE OF A
TRANSACTION IN WHICH THERE IS NO WRITTEN BINDING CONTRACT OF PURCHASE, WITHIN
TWO BUSINESS DAYS AFTER HE MAKES THE INITIAL PAYMENT FOR THE SECURITIES BEING
35
OFFERED. TO ACCOMPLISH THIS WITHDRAWAL, A SUBSCRIBER NEED ONLY SEND A LETTER
OR TELEGRAM TO THE SELLING AGENT AT THE ADDRESS SET FORTH IN THE TEXT OF THE
MEMORANDUM, INDICATING HIS OR HER INTENTION TO WITHDRAW. SUCH LETTER OR
TELEGRAM SHOULD BE SENT OR POSTMARKED PRIOR TO THE END OF THE AFOREMENTONED
SECOND BUSINESS DAY. IT IS PRUDENT TO SEND SUCH LETTER BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, TO ENSURE THAT IT WAS RECEIVED AND ALSO TO EVIDENCE
THE TIME WHEN IT WAS MAILED. IF THE REQUEST IF MADE ORALLY (IN PERSON OR BY
TELEPHONE, TO THE SELLING AGENT AT THE NUMBER LISTED IN THE NTEXT OF THE
MEMORANDUM), A WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED SHOULD
BE REQUESTED.
The parties have duly executed this Agreement as of the date first above
written.
GLOBAL ENVIRONMENTAL CORP.
By:----------------------------
Lawrence Beer
President
GLOBAL ENVIRONMENTAL HOLDINGS, INC.
By:-------------------------------
Lawrence Beer
President
WILLIAM V. RICE
By: -------------------------------
William V. Rice
Individually
I, Leonora C. Rice, understand that this contract transfers legal title to
securities and assets that I may have an ownership interest in based on
community property laws. I hereby consent to this contract and shall be legally
bound by its terms and conditions.
By:----------------------------------
Leonora C. Rice
36
GLOBAL ENVIRONMENTAL CORP.
AND SUBSIDIARY
YEARS ENDED
OCTOBER 31, 1996, 1995 AND 1994
37
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
PAGE(S)
-------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-1
Consolidated Balance Sheets--October 31, 1996 and 1995 F-2
Consolidated Statements of Operations--Years Ended F-3
October 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' F-4
Equity (Deficiency) Years Ended October 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows--Years Ended F-5 to F-6
October 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements F-7 to F-22
INDEPENDENT AUDITORS' REPORT
Board of Directors
Global Environmental Corp.
Hagerstown, Maryland
We have audited the accompanying consolidated balance sheets of Global
Environmental Corp. and Subsidiary as of October 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
October 31, 1996. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global
Environmental Corp. and Subsidiary as of October 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has experienced substantial losses from
operations and at October 31, 1996 had a working capital deficiency. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
discussed in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 6 to the financial statements, the Company adopted
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes,"
effective November 1, 1993.
January 15, 1997,
Except for the last paragraph of Note 2,
which is as of March 25, 1997
Plymouth Meeting, Pennsylvania
F-1
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
ASSETS
1996 1995
----------- -----------
CURRENT ASSETS
Cash............................................................. $ 50,008 $ 335,979
Accounts receivable, net of allowance for doubtful accounts of
$52,188, 1996 and $38,409, 1995................................. 1,436,339 906,897
Inventories...................................................... 791,758 790,903
Prepaid expenses and other....................................... 75,717 52,919
----------- -----------
Total current assets........................................... 2,353,822 2,086,698
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land............................................................. 25,797 25,797
Building and improvements........................................ 1,385,502 1,370,328
Equipment........................................................ 2,273,920 2,383,102
----------- -----------
3,685,219 3,779,227
Less--accumulated depreciation and amortization.................. (2,076,765) (2,015,605)
----------- -----------
Total property, plant and equipment, net....................... 1,608,454 1,763,622
----------- -----------
OTHER ASSETS
Property under agreement of sale................................. 344,127 --
Miscellaneous.................................................... 93 40,838
----------- -----------
344,220 40,838
----------- -----------
$ 4,306,496 $ 3,891,158
----------- -----------
----------- -----------
See Notes to Consolidated Financial Statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
---------- -----------
CURRENT LIABILITIES
Current portion of long-term debt........ $ 544,725 $ 182,061
Mortgage payable......................... 344,127 --
Accounts payable......................... 1,337,117 1,044,159
Accrued salaries and wages............... 147,807 124,787
Accrued expenses, other.................. 381,482 322,420
Net liabilities of discontinued
operations............................ -- 52,677
---------- ----------
Total current liabilities.............. 2,755,258 1,726,104
---------- ----------
LONG-TERM DEBT, net of current portion..... 1,344,182 1,604,567
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.0001 per share;
20,000,000 shares authorized, 13,815,603
and 2,465,144 shares issued in 1996 and
1995, respectively....................... 1,382 247
Preferred stock, $.001 par value, 5,000,000
shares authorized; Class of 10%
Cumulative Convertible Senior Preferred
Stock, 10,500 shares authorized, 4,550
and 7,550 shares issued and outstanding
in 1996 and 1995, respectively (total of
$399,044, 1996 and $662,150, 1995);
Series B Cumulative Convertible Senior
Preferred Stock, 16,000 shares
authorized, no shares issued and
outstanding in 1996 and 16,000 shares
issued and outstanding in 1995 (total of
$1,511,319).............................. 399,04 2,173,469
Additional paid-in capital................. 4,554,102 1,877,784
Accumulated deficit........................ (4,654,412) (3,491,013)
Less: Treasury stock, at cost
612,579 shares, 1996 and 95,579 shares,
1995..................................... (93,060) --
---------- ----------
Total stockholders' equity............. 207,056 560,487
---------- ----------
$4,306,496 $3,891,158
---------- ----------
---------- ----------
F-3
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
NET SALES............................................................... $ 8,153,689 $ 7,525,757 $ 6,648,477
COST OF GOODS SOLD...................................................... 6,993,068 6,627,237 6,501,534
------------ ------------ ------------
Gross profit.......................................................... 1,160,621 898,520 146,943
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................ 1,580,394 1,173,162 1,147,586
------------ ------------ ------------
Loss from operations.................................................. (419,773) (274,642) (1,000,643)
------------ ------------ ------------
INTEREST EXPENSE........................................................ (239,310) (265,542) (332,465)
INTEREST INCOME......................................................... 931 3,522 2,348
OTHER INCOME............................................................ 155,858 (6,227) 115,179
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS......................................... (502,294) (542,889) (1,215,581)
------------ ------------ ------------
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued segment................. (210,195) 153,955 236,921
Loss on disposal of segment........................................... (215,406) -- --
------------ ------------ ------------
Loss from discontinued operations................................... (425,601) 153,955 236,921
------------ ------------ ------------
NET LOSS ($927,895) ($388,934) ($978,660)
------------ ------------ ------------
------------ ------------ ------------
PER COMMON SHARE DATA
Loss from continuing operations...................................... ($.32) ($.32) ($.52)
Income (loss) from operations of discontinued segment (.09) .06 .10
Loss on disposal of segment.......................................... (.09) -- --
------------ ------------ ------------
Net loss............................................................. ($.50) ($.26) ($.42)
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING..................................... 2,339,756 2,369,565 2,360,966
------------ ------------ ------------
------------ ------------ ------------
See Notes to Consolidated Financial Statements.
F-4
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
PREFERRED STOCK
10% AND SERIES B
COMMON STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------------ --------- ----------- -----------
Balance, October 31, 1993...................................... 2,434,374 $ 243 -- $ --
Issuance of 30,770 common shares............................... 30,770 4 -- --
Issuance of 7,550 preferred shares............................. -- -- 7,550 662,150
Net loss....................................................... -- -- -- --
Dividends on preferred stock................................... -- -- -- --
------------ --------- ----------- -----------
Balance, October 31, 1994...................................... 2,465,144 247 7,550 662,150
Issuance of 16,000 Series B preferred shares................... -- -- 16,000 1,511,319
Net loss....................................................... -- -- -- --
Dividends on preferred stock................................... -- -- -- --
------------ --------- ----------- -----------
Balance, October 31, 1995...................................... 2,465,144 247 23,550 2,173,469
Acquisition of treasury stock in connection with disposal of
segment...................................................... -- -- -- --
Issuance of 1,200,000 common shares............................ 1,200,000 120 -- --
Conversion of Series A (3,000) and Series B (16,000) preferred
shares and Renaissance term note and related accrued interest
and dividends................................................ 10,150,459 1,015 (19,000) (1,774,425)
Net loss....................................................... -- -- -- --
Dividends on preferred stock................................... -- -- -- --
------------ --------- ----------- -----------
Balance, October 31, 1996...................................... 13,815,603 $ 1,382 4,550 $ 399,044
------------ --------- ----------- -----------
------------ --------- ----------- -----------
See Notes to Consolidated Financial Statements.
F-5
ADDITIONAL TREASURY STOCK
PAID-IN ACCUMULATED ----------------------------
CAPITAL DEFICIT SHARES AMOUNT TOTAL
---------- ------------ ------- -------- ---------
Balance, October 31, 1993...................................... $1,865,288 ($ 1,902,842) 95,579 $ -- ($37,311)
Issuance of 30,770 common shares............................... 12,496 -- -- -- 12,500
Issuance of 7,550 preferred shares............................. -- -- -- -- 662,150
Net loss....................................................... -- (978,660) -- -- (978,660)
Dividends on preferred stock................................... -- (11,742) -- -- (11,742)
---------- ------------ ------- -------- ---------
Balance, October 31, 1994...................................... 1,877,784 (2,893,244) 95,579 -- (353,063)
Issuance of 16,000 Series B preferred shares................... -- -- -- -- 1,511,319
Net loss....................................................... -- (388,934) -- -- (388,934)
Dividends on preferred stock................................... -- (208,835) -- -- (208,835)
---------- ------------ ------- -------- ---------
Balance, October 31, 1995...................................... 1,877,784 (3,491,013) 95,579 -- 560,487
Acquisition of treasury stock in connection with disposal of
segment...................................................... -- -- 517,000 (93,060) (93,060)
Issuance of 1,200,000 common shares............................ 299,880 -- -- -- 300,000
Conversion of Series A (3,000) and Series B (16,000) preferred
shares and Renaissance term note and related accrued interest
and dividends................................................ 2,376,438 -- -- -- 603,028
Net loss....................................................... -- (927,895) -- -- (927,895)
Dividends on preferred stock................................... -- (235,504) -- -- (235,504)
---------- ------------ ------- -------- ---------
Balance, October 31, 1996...................................... $4,554,102 ($ 4,654,412) 612,579 ($93,060) $207,056
---------- ------------ ------- -------- ---------
---------- ------------ ------- -------- ---------
F-6
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994
---------- ---------- ------------
OPERATING ACTIVITIES
Net loss ($927,895) ($388,934) ($ 978,660)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................................................ 183,623 250,648 242,683
Write-off of deferred financing fees......................................... -- 86,569 --
Provision for bad debts...................................................... 38,500 38,500 21,618
Gain on sale of equipment.................................................... -- -- (26,227)
Net loss on disposition of items
included in discontinued segment........................................... 21,843 -- --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.......................................................... (567,942) 320,797 (234,812)
Inventories.................................................................. (855) 267,898 (75,801)
Net assets from discontinued operations...................................... -- 133,114 (2,748)
Prepaid expenses and other................................................... (22,798) 22,159 (54,078)
Other assets, net............................................................ 40,745 (19,447) 879
Increase (decrease) in:
Accounts payable............................................................. 292,958 288,355 138,804
Net liabilities from discontinued operations................................. (167,580) -- --
Accrued salaries and wages................................................... 23,020 (78,600) 203,387
Accrued expenses, other...................................................... 226,326 (181,008) (193,914)
---------- ---------- ------------
Net cash provided by (used in) operating activities...................... (860,055) 740,051 (958,869)
---------- ---------- ------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment........................................ (65,199) (93,337) (153,452)
Investment in joint venture...................................................... -- (320) (8,630)
Proceeds from sale of equipment.................................................. 36,744 -- 46,286
---------- ---------- ------------
Net cash used in investing activities.................................... (28,455) (93,657) (115,796)
---------- ---------- ------------
FINANCING ACTIVITIES
Net borrowings (repayments) under revolving loan agreement....................... 497,111 (288,485) 333,530
Proceeds from the issuance of long-term debt..................................... -- -- 575,891
Payments of long-term debt....................................................... (183,197) (235,140) (199,565)
Payment of legal fees in connection with conversion of
debt to preferred stock........................................................ -- (88,681) --
Payments of loan acquisition fees................................................ -- -- (15,000)
Net proceeds from the issuance of preferred stock................................ -- -- 662,150
Net proceeds from the issuance of common stock................................... 300,000 -- --
Payment of dividends on preferred stock.......................................... (11,375) (46,708) (11,742)
---------- ---------- ------------
Net cash provided by (used in) financing activities...................... 602,539 (659,014) 1,345,264
---------- ---------- ------------
NET INCREASE (DECREASE) IN CASH.................................................... (285,971) (12,620) 270,599
CASH, BEGINNING.................................................................... 335,979 348,599 78,000
---------- ---------- ------------
CASH, ENDING....................................................................... $ 50,008 $ 335,979 $ 348,599
---------- ---------- ------------
---------- ---------- ------------
See Notes to Consolidated Financial Statements.
F-7
YRS ENDED OCTOBER 31,
---------------------
1996 1995 1994
-------- ---------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest....................................... $239,310 $ 210,984 $362,465
-------- ---------- --------
-------- ---------- --------
NON-CASH FINANCING ACTIVITIES:
Conversion of Renaissance debt to preferred stock.......... -- $1,600,000 --
----------
----------
Reclass of revolving loan to long-term debt
due to modification of loan agreement.................... -- $ 933,530 --
----------
----------
Conversion of 10% (3,000) and Series B (16,000)
Preferred Shares and related accrued dividends
and Renaissance term note and related accrued
interest to common stock................................. $603,028 -- --
--------
--------
Accrual of dividends on Senior Preferred Stock
10% Cumulative Convertible............................... $ 75,504 $ 28,794 --
-------- ----------
-------- ----------
Series B Cumulative Convertible............................ $160,000 $ 133,333 --
-------- ----------
-------- ----------
Issuance of long-term debt in connection with
purchase of equipment.................................... -- -- $439,100
--------
--------
Issuance of 30,770 shares of common stock
in connection with a legal settlement.................... -- -- $ 12,500
--------
--------
Reclass of accrued interest to long-term debt
in connection with Renaissance conversion................ -- -- $ 28,298
--------
--------
NON-CASH INVESTING ACTIVITIES:
Reclass of deposit on equipment purchase..................... -- -- $ 21,451
-------- ---------- --------
-------- ---------- --------
Reclass of property to property under
agreement of sale in connection with
disposal of Rage and reclass of related
mortgage payable........................................... $344,127
--------
--------
See Notes to Consolidated Financial Statements.
F-8
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business
Global Environmental Corp. (the "Company") 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 Holdings").
Danzer Industries, Inc.("Danzer"), a wholly-owned subsidiary of Global
Holdings, 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 (subsequent to the
sale of the Company's Rage subsidiary as described below) represent
approximately 100% of the Company's revenues and are generated throughout the
United States.
Rage Inc. ("Rage") was a wholly-owned subsidiary of Global Holdings through
April 30, 1996 and was engaged in the business of engineering and supplying
pneumatic material handling systems throughout the United States. Effective
April 30, 1996, Rage was sold to a third party. Accordingly, the results of
Rage's operations for the fiscal year ended October 31, 1996 are presented as
"discontinued operations" in the consolidated statement of operations (Note 3).
The results of Rage's operations for the fiscal years ended October 31, 1995 and
1994 have been reclassified to conform with the 1996 method of presentation.
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.
Revenue Recognition
Revenues from the manufacture of sheet metal products and fabrications
are generally recognized when products are shipped to the customer.
F-9
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and, at October 31, 1996 and 1995 are comprised of the following
components:
1996 1995
---- ----
Raw materials and supplies................ $ 420,469 $ 443,965
Work-in-process........................... 286,122 161,960
Finished goods............................ 85,167 184,978
---------- ----------
$ 791,758 $ 790,903
---------- ----------
---------- ----------
Work-in-process and finished goods include purchased materials, direct labor
and allocated overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and 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
Depreciation expense of property, plant and equipment for the years ended
October 31, 1996, 1995 and 1994 included in continuing operations was
$183,623, $184,547, and $164,443, respectively.
Concentration of Credit Risk
The Company maintains cash balances at a bank, which at various times
throughout the year, exceeded the Federal Deposit Insurance Corporation
(FDIC) limit.
F-10
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Major Customers
The following is a list of the Company's customers which represent 10% or
more of consolidated net sales (from continuing operations):
TOTAL PERCENTAGE OF NET SALES
YEAR ENDED OCTOBER 31,
----------------------
1996 1995 1994
---- ---- ----
Elevator Manufacturer..... 10% 11% 10%
Truck Body Manufacturer... 29% 32% 32%
Use of Estimates
The preparation of 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 contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 presentation.
Recently Issued Accounting Standards
In March 1995, FASB issued Statement 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 standard is effective for the
Company's fiscal year beginning November 1, 1996. The Company has not
determined the effect, if any, that this Statement will have on its financial
position or results of operations.
F-11
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Standards (Continued)
In October 1995, FASB issued SFAS _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 _25, "Accounting for Stock Issued
To Employees" (APB _25). FASB encourages entities to adopt the fair
value-based method but does not require adoption of this method. The Standard
will be effective for the Company's fiscal year beginning November 1, 1996.
The Company anticipates that it will continue its current accounting policy;
SFAS _123 is not expected to have a material impact on its financial
position or its results of operations.
In February 1997, the FASB issued SFAS _128 "Earnings per Share" and
SFAS _129, "Disclosure of Information About Capital Structures" (the
"Statements") which specify new computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock and require additional information to be disclosed for
capital structures of certain companies. The Statements are effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The Company has not yet determined the effect the
Statements will have on its financial condition or results of operations.
NOTE 2. FINANCING ARRANGEMENTS, OPERATIONS AND MANAGEMENT'S
PLANS
The Company had net sales of $8,153,689 for the year ended October 31,
1996 (an 8% increase over the prior year) and a loss from continuing
operations of $502,294. Working capital decreased from 1995 to 1996 to a
deficiency of $401,436 at October 31, 1996. This was due primarily to the
reclassification from long-term debt of the note payable to joint venture of
$345,000 and mortgage payable of $344,127 to current liabilities.
Stockholders' equity decreased by $353,431 to $207,056 at October 31, 1996
due to dividends accrued and a net loss incurred, offset by the issuance of
common stock and the conversion of certain debt, and accrued interest and
dividends on common stock.
F-12
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 2. 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 was 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, 1996. Because of the sale
of the Company's Rage Subsidiary (Note 3), it is not anticipated that the
Joint Venture will provide significant revenue or earnings for the Company in
the future. In addition, Management is presently negotiating with the other
party to the Joint Venture with respect to payment by the Company of the loan
due to the Joint Venture.
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. During 1996, 3,000 of such shares were converted to common stock
and subsequent to October 31, 1996, shareholders representing the remaining
4,550 shares agreed to convert their preferred shares and related accrued
dividends to common stock (see Note 7).
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. At October 31, 1996, such preferred shares, related accrued
dividends, a related term note and accrued interest were converted to common
stock (see Note 7).
As of October 31, 1996, the Company was in violation of certain loan
covenants with Fremont Financial Corporation and has received waivers of such
noncompliance through November 1, 1997. In addition, the terms of the Loan
and Security Agreement with Fremont were modified in 1996 and extend payment
of principal until January 1998.
F-13
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 2.FINANCING ARRANGEMENTS, OPERATIONS AND MANAGEMENT'S PLANS(Continued)
In February 1996, the Company's revolving loan payable to Fremont
Financial Corporation was increased by $200,000. The increase enabled the
Company to borrow $200,000 in excess of their previously allowed borrowings
under the revolving loan agreement and provided additional working capital
for overall business activity. During fiscal 1996, this increase in the
revolving loan was reclassified as a term loan (Note 5).
The Company's ability to meet certain interest and principal payments and
its working capital needs in order to execute its backlog and generate sales
volume during fiscal 1997, will be dependent upon the success of the
Company's efforts to increase sales volume, the profitability of new business
generated and the ability to secure additional financing.
In March 1997, the Company received $150,000 from Renaissance Capital
Group, Inc. in the form of convertible debt. The debt bears interest at 10%
per annum. Principal and any accrued and unpaid interest is due and payable
in March 1999. The loan is convertible to common shares upon the Company
obtaining a loan secured by certain land and building owned by the Company.
In addition, between November 1, 1996 and March 25, 1997, shareholders of the
Company's remaining 4,550 shares of preferred stock agreed to convert such
preferred stock to common stock (Note 7). The Company is also in negotiations
for the closing of a $650,000 mortgage on its Hagerstown, Maryland facility,
which funds are expected to repay certain term debt and to provide working
capital.
NOTE 3. DISCONTINUED OPERATIONS
On April 30, 1996, the Company adopted a formal plan to sell its Rage
subsidiary to the past President and Chief Executive Officer of the Company
("Buyer"). On May 22, 1996, the Company completed the sale of all of the
outstanding stock of Rage. The net assets of Rage consisted primarily of
accounts receivable, inventories, and property, plant and equipment less
accounts payable and accrued expenses. The transaction required the Company
to pay $104,600 in cash, and transfer certain real property and improvements
with a net book value of approximately $464,000 in exchange for 517,000
shares of the common stock of the Company owned by the Buyer, cancellation of
an employment agreement with the Buyer and assumption by the Buyer of the
Company's mortgage amounting to approximately $349,000 related to the real
property transferred. The common stock previously owned by the Buyer was
recorded as treasury stock in the amount of $93,060 based upon the fair value
of the Company's common stock at the date of the transaction.
F-14
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 3. DISCONTINUED OPERATIONS (Continued)
Operating results of Rage, Inc. for the year ended October 31, 1996 are
shown separately in the accompanying statement of operations as discontinued
operations for the period November 1, 1995 through April 30, 1996. The
statements of operations for 1995 and 1994 have been similarly reclassified.
Net sales of Rage Inc. were approximately $1,118,000, $5,001,000 and
$5,064,000 for the six months ended April 30, 1996 and the years ended
October 31, 1995 and 1994, respectively. These amounts are not included in
net sales in the accompanying statements of operations.
The loss from operations of Rage totaled $210,195 for the six months
ended April 30, 1996. The loss on sale of Rage was $215,406.
Assets and liabilities relating to discontinued operations have been
reclassified as of October 31, 1995 and have been separately classified in
the accompanying balance sheet at October 31, 1995 as "net liabilities of
discontinued operations". Assets and liabilities of Rage sold effective April
30, 1996 and "net liabilities of discontinued operations" at October 31, 1995
consisted of:
APRIL 30,1996 OCTOBER 31, 1995
------------- ----------------
Accounts receivable, net $ 364,000 $ 814,000
Inventories 134,000 142,000
Property, plant and equipment, net 521,000 532,000
Other assets 209,000 323,000
----------- -------------
1,228,000 1,811,000
Accounts payable and accrued expenses (749,000) (1,509,000)
Mortgage payable (350,000) (355,000)
----------- -------------
Net assets (liabilities) $ 129,000 ($ 53,000)
----------- -------------
----------- -------------
In accordance with the terms of the Common Stock Purchase Agreement (the
"Agreement"), the Buyer assumed certain mortgage debt on real property and
improvements sold by Global to the Buyer and has been making the required
monthly payments. As of October 31, 1996, the Company has not been released
by the mortgagor from this obligation and, accordingly, has recorded
"property under agreement of sale" and "mortgage payable" in the amount of
$344,127 in the accompanying October 31, 1996 balance sheet. The terms of the
mortgage require monthly principal and interest payments, with a final
payment due April 30, 1997. Interest is at 9% and the loan is collateralized
by certain land and building.
F-15
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 4. 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 $942,165 at October 31, 1996. 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
October 31, 1996). The Agreement was amended on May 21, 1996, extending the
term of the Agreement to January 31, 1998 (Note 5).
Under the terms of the Agreement, borrowings are collateralized by real
estate and Danzer's accounts receivable, inventory and equipment. The
Agreement provides for certain restrictions including, but not limited to,
the Company's ability to: 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 ownership 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 year ended October 31, 1996, the Company was in violation of certain
covenants and received a waiver through November 1, 1997 for such
noncompliance.
NOTE 5. LONG-TERM DEBT
Consolidated long-term debt consists of the following:
OCTOBER 31,
-----------
1996 1995
---- ----
Revolving note payable to Fremont Financial
due January 1998 (Note 4) $ 942,165 $ 645,045
Note payable to joint venture;
interest-free, principal due December 31, 1996 345,000 345,000
10% Term Note payable to Renaissance Capital
Partners, Ltd. (Renaissance):
interest payable quarterly commencing March 31,
1995; converted to common stock in 1996 (Note 7) - 211,635
F-16
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 5. LONG-TERM DEBT (Continued)
OCTOBER 31,
-----------
1996 1995
---- ----
Term Loan payable to Fremont Financial;
monthly principal payments of $5,833 plus
interest at prime plus 4.5%; through May 2000
(Note 4) $ 246,500 $ 116,667
Term Loans payable to US Amada, Ltd.;
monthly principal payments ranging from $3,450
to $9,063 plus interest at 8.5% to 8.75%; final
balance due October 1, 1999; collateralized by
equipment 355,242 465,037
Other - 3,244
----------- ----------
1,888,907 1,786,628
Less- current portion (544,725) (182,061)
----------- ----------
Total long-term debt $1,344,182 $1,604,567
----------- ----------
----------- ----------
Maturities on long-term debt as of October 31, 1996 are as follows:
YEARS ENDING
OCTOBER 31, AMOUNT
----------- ------
1997 $ 544,725
1998 1,148,652
1999 159,018
2000 36,512
----------
$1,888,907
----------
----------
The President of the managing General Partner of Renaissance is also a
Director of the Company. Interest expense incurred to Renaissance in 1996,
1995 and 1994 was $21,164, $21,164 and $200,000, respectively.
F-17
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 6. 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. Effective November 1,
1993, the Company changed its method of accounting for income taxes to comply
with Statement of Financial Accounting Standards (SFAS) _109, "Accounting for
Income Taxes." A requirement of SFAS _109 is that deferred tax assets and
liabilities be recorded for any temporary differences between the financial
statement and tax bases of assets and liabilities, using the currently
enacted tax rate expected to be in effect when the taxes are actually paid or
recovered. In accordance with SFAS _109, the Company elected to adopt this
statement prospectively in fiscal year 1994 by determining an adjustment for
the cumulative effect on prior years of the change in method of accounting
for income taxes. At November 1, 1993, the cumulative effect on prior years
of adopting SFAS _109 was $-0-.
Total income tax benefit from continuing operations amounted to $-0- in
each of 1996, 1995 and 1994 (effective tax rates of 0%,in each of the three
years) compared to income tax benefit of ($171,000), ($185,000), and
($413,000) computed by applying the statutory rate of 34.0% to continuing
loss before income taxes. These differences are accounted for as follows:
1996
----
PERCENT OF
AMOUNT PRETAX LOSS
------ -----------
Computed "expected" tax benefit ($171,000) (34.0%)
Decrease in benefit due to valuation allowance
provided for deferred tax assets 171,000 34.0%
--------- -----
$ - 0%
--------- ---
--------- ---
1995
----
PERCENT OF
AMOUNT PRETAX LOSS
--------- -------------
Computed "expected" tax benefit ($185,000) (34.0%)
Decrease in benefit due to valuation allowance
provided for deferred tax assets 185,000 34.0%
--------- -----
$ - 0%
--------- -----
--------- -----
F-18
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 6. INCOME TAXES (Continued)
PERCENT OF
AMOUNT PRETAX LOSS
--------- -------------
Computed "expected" tax benefit ($413,000) (34.0%)
Decrease in benefit due to valuation allowance
provided for deferred tax assets 413,000 34.0%
--------- -----
$ - 0%
--------- -----
--------- -----
Deferred income tax assets (liabilities) result from differences in the
recognition of revenues and expenses for income tax and financial reporting
purposes.
The net deferred tax assets at October 31, 1996 and 1995 include the
following:
1996 1995
---- ----
Deferred tax asset $1,484,000 $770,000
Deferred tax liability (173,000) (125,000)
Valuation allowance for deferred tax asset (1,311,000) (645,000)
------------ ----------
$ - $ -
------------ ----------
------------ ----------
The Company has recorded a valuation allowance for its entire net
deferred tax asset at October 31, 1996 and 1995 since management believes
that it is more likely than not that the deferred tax asset will not be
realized.
The tax effect of major temporary differences that gave rise to the
Company's net deferred tax assets at October 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Net operating loss carryforward $1,484,000 $770,000
Depreciation (173,000) (125,000)
------------ ----------
$1,311,000 $645,000
------------ ----------
------------ ----------
F-19
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 6. INCOME TAXES (Continued)
As of October 31, 1996, the Company has available Federal net operating
loss carryforwards of approximately $3,709,000 that may be applied against
future taxable income. These carryforwards expire at various dates through
fiscal 2011.
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, 1996 there were 25,000 options outstanding
with an exercise price of $.48 per share. During the year ended October 31,
1995, 350,000 options were granted and 280,000 operations were terminated.
During the year ended October 31, 1995, there were 375,000 options
outstanding. Exercise prices at October 31, 1995 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. No options were exercised
during the years ended October 31, 1996 or 1995. During the year ended
October 31, 1996, no options were granted and 350,000 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. No warrants have been exercised
through October 31,1996. Subsequent to October 31, 1996, such warrants
expired without being exercised.
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. No
compensation was recorded in connection with the issuance of such warrants.
No warrants were exercised through October 31, 1996.
In connection with the resignation of the Company's President and Chief
Executive Officer in 1996, the Company issued warrants to purchase 200,000
shares of common stock through August 1999 at $.50 per share, subject to
adjustment as defined. No compensation was recorded in connection with the
issuance of such warrants. No warrants were exercised through October 31,
1996.
F-20
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 6. STOCKHOLDERS' EQUITY (Continued)
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 and/or accrued were
$75,504 in each of 1996 and 1995. The 10% Senior Preferred Stock is voting
and convertible into the Company's Common Stock. 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. At October 31,
1996, 3,000 shares and related accrued dividends were converted at a rate of
$.25 per share to common stock. Between November 1, 1996 and March 25, 1997,
the shareholders of the remaining 4,550 shares agreed to convert such shares
plus accrued dividends to common stock at the same conversion rate of $.25.
Effective December 31, 1994, Renaissance exchanged the $1,600,000
aggregate amount 12% convertible debentures 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 were cumulative, payable quarterly in arrears at an annual rate of
$10 per share. Total dividends declared and/or accrued during 1996 and 1995
were $160,000 and $133,333, respectively. On October 31, 1996, Renaissance
converted the 16,000 shares of Series B Stock, a $211,635 term note (see Note
5), accrued interest and accrued dividends to common stock at the conversion
rate of $.25 per share.
The 10% Cumulative Convertible Preferred Stock and the Series B Stock
required the Company to comply with certain affirmative and negative
covenants including, but not limited to, the timely filing of financial
statements. In addition, the covenants limited 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 was also subject to registration requirements under certain
circumstances. As of October 31, 1996 and 1995, the Company was in violation
of certain of the above covenants.
In August 1996, the Company issued 1,200,000 common shares for $300,000,
through a private placement. 1,000,000 shares were issued to a private
investor and 200,000 shares were issued to Renaissance Capital Group, Inc.
F-21
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 8. NET LOSS PER SHARE AMOUNTS AND QUARTERLY DATA
Net loss per share is calculated after deducting dividends earned on
preferred stock of $235,504 in 1996, $208,835 in 1995 and $11,742 in 1994
from the net loss and dividing by the weighted average number of shares of
common stock outstanding during the period. The assumed conversions of the
10% and Series B Cumulative Convertible Senior Preferred Stock at October 31,
1995 and assumed exercise of stock options and warrants for 1996 and 1995
have not been considered in the calculations of loss per share, since the
effect of such conversions/exercises would be antidilutive.
At October 31, 1996, the Company recorded certain adjustments which
increased its net loss by approximately $390,000 or $.17 per share of which
approximately $215,000 or $.09 per share related to loss from discontinued
operations and approximately $175,000 or $.08 per share related to loss from
continuing operations, and which were material to its fourth quarter results
of operations. Such adjustments related to inventory, accruals of
manufacturing costs and accruals of other selling, general and administrative
expenses.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under operating leases expiring at
various times through July 2001. Rent expense was approximately $16,000,
$25,000 and $25,000 for the years ended October 31, 1996, 1995 and 1994,
respectively. The following is a schedule of future minimum rental payments
under operating leases as of October 31, 1996:
YEAR ENDING
OCTOBER 31, AMOUNT
----------- ------
1997 $88,000
1998 62,000
1999 55,000
2000 16,000
2001 11,000
--------
$232,000
--------
--------
Certain of the Company's employees are currently represented by a labor
union, the United Brotherhood of Carpenters and Joiners of America, Local
Union _340 whose contract is in effect to February 1998.
F-22
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
Danzer has a contributory defined benefit pension plan covering all
eligible employees who have elected to participate in the Plan. It is the
Company's policy to fund pension costs as determined by the Plan's actuary.
The weighted average discount rate and expected rate of return on long-term
assets used in determining the actuarial present value of the projected
benefit obligation were 7% each for the Plan's year ended December 31, 1996.
The actuarial information included below, which is as of January 1, 1996, is
for the Plan's fiscal year ended December 31, 1996, and is the most recent
available information.
Pension expense for the year ended December 31, 1996, was as follows:
Benefits earned (service cost) $ 17,845
Interest expense on projected benefit obligation 27,397
Actual return on Plan assets (38,270)
Other items 15,103
---------
$ 22,075
---------
---------
A summary of the status of the Plan as of December 31, 1996 is as follows:
Pension benefit obligation:
Projected benefit obligation:
Vested ($435,962)
Non-vested (659)
----------
(436,621)
---------
Plan assets at fair value 300,787
---------
Funded status (135,834)
Unrecognized gain/(loss) (9,235)
Deferred transition gain/loss 63,310
---------
Accrued pension expense ($ 81,759)
---------
---------
The Company also has a defined contribution 401(k) plan which permits
voluntary employee contributions up to 15% of compensation and which provides
Company matching contributions up to 3% of employee compensation. 401(k) plan
expense for each of the years ended October 31, 1996, 1995 and 1994 was
approximately $9,000, $13,000 and $12,000, respectively.
F-23
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
On August 25, 1993, Global Environmental Corp. (the "Company") entered
into a royalty agreement structured as an asset sale and purchase agreement
(the "Agreement") with Morrison Industries, L.P., DIP, a Delaware Limited
Partnership, (the "Seller"), to buy certain "Intangible" and "Tangible"
assets of the Seller, as defined. In consideration of the sale, the Company
is required to pay monthly to the Seller, 5% of "Qualified Revenues" as
defined, during years 1 through 5 of the Agreement and 2% of Qualified
Revenues, up to $2,000,0000 and 5% of Qualified Revenues in excess of
$2,000,000 during years 6 through 10 of the Agreement. In addition, the
Agreement stipulates certain annual and quarterly minimum sales levels and
requires the Seller to enter into a non-compete agreement indefinitely.
Royalty expenses for 1996, 1995 and 1994 were $100,000, $66,000 and $58,000,
respectively.
The Company is subject to certain unassserted claims; the probability of
assertion cannot be determined and the range of any possible loss also cannot
be determined. In addition, the Rage subsidiary which the Company sold as of
April 30, 1996, is subject to certain litigation which, if adversely
concluded, could materially affect Rage's financial position and results of
its operations. Management of the Company does not believe that any such
litigation against Rage could adversely affect the Company's financial
position.
NOTE 10. PARENT COMPANY FINANCIAL STATEMENTS
The financial statements of the Parent Company (Global Environmental
Corp. or "Corp.") include assets comprised of investments in and advances to
subsidiaries and property under agreement of sale. All of the Company's
common and preferred stock and substantial amounts of long-term debt and
accrued expenses are also recorded on Corp.'s balance sheet. Substantially
all of Corp.'s equity relates to its investment in its subsidiary.
Since Corp.'s only significant source of revenue and cash to pay interest
on debt, dividends on preferred stock and corporate overhead results from
management fees charged to its subsidiaries, and such management fees are
limited, due to the lack of profitability and positive cash flow of these
subsidiaries as well as certain restrictions on the ability of these
subsidiaries to pay distributions or dividends to Corp., available cash to
pay interest and principal on debt, dividends on preferred stock and/or
dividends on common stock, is severely constrained.
F-24