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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, 1997
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 ($0.0001 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, 1997, 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 $600,000.
As of December 31, 1997, the registrant had 15,576,069 shares of common stock
outstanding.
PART I
ITEM 1. BUSINESS.
In addition to historical information, this annual report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the section
entitled "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations." Readers should carefully review the risks described
in this and other documents that the Company files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
to be filed by the Company in 1998. Readers are cautioned not to place undue
reliance on the forward-looking statements, which speak only to the date of this
Annual Report on Form 10-K. The Company undertakes no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
General:
Global Environmental Corp., through its wholly-owned subsidiary, fabricates
metal parts, primarily, truck bodies for the service and utility markets. At
October 31, 1997, Global Environmental Corp.'s other business units were being
sold. These business units, Airline and Schindler Elevator, were sold during
fiscal 1998.
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., and 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 has the ability to produce and install 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 designed and assembled 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 and moved these assets to its
manufacturing facilities. The Company began production of the bodies in December
1993. Prior to this date, the Company produced its own proprietary truck bodies.
In October 1994, the Company's Texcon subsidiary was closed. All Texcon products
and systems were then 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 his employment agreement and a cash
payment by the Company.
In August 1997, the company decided that the future of the Company was in the
metal fabrication relating to manufacture and distribution of truck bodies. A
strategic direction was established that called for the removal of all business
that was not associated with truck bodies by the end of the first quarter of
1998.
In November 1997, the Company sold the Airline business to Rage, Inc. for
$413,000 ($150,000 was paid at closing and the remaining $263,000 became a 6%
promissory note secured by the Airline assets and maturing May 19, 2001). To
date Rage, Inc. has paid $25,000 pursuant to the note. The Company entered this
product line in the early 1960s.
In April 1998, Danzer shipped the last orders for Schindler Elevator, an
elevator manufacturer, and has collected the related receivables. This product
line was not profitable and its elimination offered the Company the opportunity
to sharpen its focus on truck body fabrication.
Substantial business developments:
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.
In September 1994, Global completed a private offering of 7,550 shares of
10% Cumulative Convertible Senior Preferred Stock (the `10% Preferred') at
$100 per share. Each share of the 10% Preferred was convertible into 200
shares of common stock.
On December 31, 1994, Renaissance Capital Partners, Ltd. (`Renaissance')
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 ("Series B Preferred") 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 was convertible into 200 shares of common stock.
In August 1995, 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..
During fiscal 1996 and 1997, the holders of the 10% Preferred and the
Series B Preferred converted their shares and accrued dividends to common
stock at a conversion rate of $0.25 per share.
In March 1997, Renaissance loaned the Company $150,000 in the form of a 10%
Convertible Promissory Note ("Note"), convertible into common stock at
$0.25 per share. The note provided that Renaissance would convert the
entire principal into 600,000 shares of common stock upon the Company
obtaining a loan secured by a lien on the land and improvements owned by
Danzer under terms acceptable to Renaissance.
Effective August 1997 Duncan-Smith Co. ("DSC") loaned Danzer $650,000
pursuant to an 11% Promissory Note ("DSC Note") secured by a lien on all
real property and improvements owned by Danzer, including the manufacturing
facility in Hagerstown, MD. To effectuate the DSC Note, Fremont Financial
Corporation ("Fremont"), the Company's provider for revolving credit,
agreed to subordinate its previously senior position in the Company's real
property and improvements, including the manufacturing facility in
Hagerstown, MD, to the DSC Note.
Contemporaneous with the closing of the DSC Note, Renaissance, in
accordance with the provisions of the Note, converted the entire note into
600,000 shares of common stock.
In August of 1997, the Company made a strategic decision to focus solely on
manufacturing of truck bodies and move away from the Airline and Schindler
Elevator businesses. Management believes this renewed focus will allow the
Company to maximize shareholder value by eliminating non-synergistic
operations, increasing manufacturing efficiencies, streamlining capital
resources, reducing overall cost structure and enabling the Company to
better compete in a core business, truck bodies.
At the annual Shareholder's meeting held December 1997, the Company elected
a new Board of Directors consisting of Goodhue W. Smith, III, Chairman of
the Board, Stephen C. Davis, Russell G. Cleveland and William L. Pryor,
III.
In December 1997, R.W. Schuster retired as President and CEO of the
Company. Stephen C. Davis, a member of the Company's Board of Directors,
took over as interim CEO and agreed to lead the search for a new President
and CEO.
In December 1997, Renaissance agreed to loan the Company $150,000 pursuant
to a 10% promissory note secured by substantially all of the assets of the
Company. All interest and principal due under the note is payable on or
before September 30, 1998.
In March 1998, the Company hired Mr. M.E. Williams as President and CEO.
Mr. Williams has over 30 years of experience in manufacturing and 7 years
of truck body manufacturing experience. Mr. Williams serves as an advisory
director to the Company.
Description of the Business:
Global is a holding company and through its operating subsidiary is engaged in
the manufacturing and marketing of specialized truck bodies.
Manufacturing Capabilities:
The Company's manufacturing activities are located at Danzer's operating
facility in Hagerstown, MD where the Company produces truck bodies for sale
under the Morrison trademark as well as bodies built to order for other original
equipment truck manufacturers. The standard body sizes are 96, 108 and 132
inches in length and are painted with a finish paint or primer depending on
customer requirements. The Company outsources certain small parts such as door
cables, door gaskets, hinges and locks. The equipment used at Danzer's facility
enables the Company to fabricate certain metal products up to 1/2 inches thick.
Materials used include aluminum, stainless steel, and mild steel in both sheet
and plate. The finished bodies are shipped to customers for installation on
truck body chassis. Danzer offers heliarc and MIG welding, brazing, forming,
assembly, and painting services to its customers. Danzer also maintains in-house
design and engineering capabilities.
Government Regulation:
The Company is subject to regulation by federal, state, and local agencies that
have jurisdiction over areas such as environmental and fire hazard control
issues and regulate the work place to insure safe working conditions for the
Company's employees. These regulatory bodies could take actions that would have
a material adverse affect upon the Company's ability to do business. The
business of the Company does not subject it to any special regulatory authority.
Competition:
There are a significant number of companies engaged in the manufacture of
service truck bodies 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. Danzer markets its
Morrison product through an internal sales force with its members having
exclusive territories and paid commissions on all sales from a specific
territory based upon payments made by the customer. Commission is calculated
based upon sales achieved. The Company also has representatives attend regional
and national trade shows. The Company offers truck bodies made to individually
specified requirements of its customers.
Principal Customers:
During the fiscal year ended October 31, 1997, the Company had two customers
that represented 10% or more of total net sales: Mobile Tool International, a
truck body supplier, for which the Company supplied truck bodies (41%) and
Schindler, an elevator manufacturer, for which the Company supplied component
parts (13%). The Company's shift to where its only market is truck bodies will
result in the loss of revenues derived from sales to Schindler.
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. The Company made a significant
capital equipment purchase during fiscal 1998. The focus on truck body
manufacturing has exposed a limitation on manufacturing capability. To overcome
this the Company will evaluate the purchase of new pieces of capital euipment.
Employees:
As of October 31, 1997, 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 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, 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, December and early January. 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.
Backlog:
At October 31, 1997, the Company's backlog was approximately $1,400,000, which
is expected to be filled within the 1998 fiscal year.
Export Sales:
Sales of goods exported to foreign countries during the fiscal years ended
October 31, 1997 and 1996 were approximately $0 and $15,000, respectively.
ITEM 2. PROPERTIES
Danzer owns its principal manufacturing facility which is 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. This
property secures the DSC Note and the Company's revolving credit facility with
Fremont. 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
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 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
Fiscal 1997 High Low
First Quarter $ 13/32 $ 3/16
Second Quarter $ 9/32 $ 7/32
Third Quarter $ 5/16 $ 7/32
Fourth Quarter $ 7/32 $ 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 November 27, 1997, there were approximately 820 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. To date Global has not paid a cash
dividend on its common stock The payment and amount of any future cash dividends
would be restricted by the Company's lender and will necessarily depend upon
conditions such as the Company's earnings, financial condition, working capital
requirements and other factors.
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, 1997, 1996, and 1995, 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.
Operating Data: Year Ended October 31,
(Amounts in thousands, except per share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net sales $8,762 $8,154 $7,580 $6,648 $6,233
Income (loss) from operations ( 226) ( 283) ( 90) ( 730) ( 665)
Loss from continuing operations ( 323) ( 366) ( 228) ( 975) ( 975)
Loss from discontinued operations - ( 347) ( 161) ( 4) ( 335)
Loss from sale of Rage Inc. - ( 215) - - -
Net Loss ( 323) ( 928) ( 389) ( 979) ( 1,310)
Net loss per share and fully-diluted
net loss per share attributable to common
shareholders;
Continuing Operations ( 0.02) (0.32) (0.32) (0.52) (0.42)
Discontinued Operations - (0.09) 0.06 0.10 (0.14)
Loss to Disposal - (0.09) - - -
Total ( 0.02) (0.50) (0.26) (0.42) (0.56)
Weighted average number of shares
outstanding 13,601 2,340 2,370 2,361 2,333
Balance Sheet Data: As of October 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital (deficiency) 132,578 (401,536) 360,594 ( 541,111) 710,000
Total assets 3,723,463 4,306,496 3,891,158 4,777,233 4,314,000
Long-term debt, including
current portion 2,177,145 1,888,907 1,786,628 3,910,253 2,750,461
Stockholders' equity (deficiency) 71,815 207,056 560,487 ( 353,062) ( 40,000)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Sales volume increased approximately $600,000 from its fiscal 1996 level due to
increased sales of both truck bodies and air movement product lines. The Company
believes that the truck body market is firm and expects expansion in 1998. The
air movement segment of the business did not appear to be growing, and was sold
in 1998.
The Company's gross profit margin increased from 14.2% to 17.2% during fiscal
1997. The increase 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, 1997 was approximately $1.4 million versus
approximately $2.3 million at October 31, 1996.
The selling, general and administrative costs increased from the fiscal 1996
level by approximately $150,000 as a result of higher sales and marketing costs.
Selling, general and administrative costs also increased as a percentage of net
sales from 19.4% to 19.8%.
The Company's net loss before discontinued operations during fiscal 1997 was
$323,000, a decrease of $179,000 over the fiscal 1996 loss. The decrease in the
Company's loss was primarily due to increases in production efficiencies
associated with manufacturing operations and an increase in net sales offset by
higher selling, general and administrative costs.
Fiscal 1996 Compared to Fiscal 1995
Sales volume increased by $573,000 from its fiscal 1995 level due to increased
sales of both truck bodies and air movement product lines.
The Company's gross profit margin increased from 12.6% 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.
The selling, general and administrative costs increased from the fiscal 1995
level by approximately $400,830 as a result of higher sales and marketing costs.
Selling, general and administrative costs also increased as a percentage of net
sales from 13.8% to 17.7%.
The Company's net loss before discontinued operations during fiscal 1996 was
$502,000, a decrease of $42,000 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.
Liquidity and Capital Resources
Cash at October 31, 1997 increased by $19,000 from the level at October 31,
1996. This increase was the result of the decrease in accounts receivable, a
decrease in payment clearing time and pressure from trade account payable
vendors.
Net accounts receivable decreased approximately $16,000 from their level at
October 31, 1996 due to an increased sales volume and an overall slowness in
collections.
Inventories decreased by $128,000 with a 7% increase in sales due to the
reduction of the production cycle that in effect decreased work in process.
The Company had working capital deficiency of $402,000 at October 31, 1996.
Working capital at October 31, 1997 was increased to $133,000 . The company
arranged for a $650,000 mortgage on the Hagerstown facility through the
Duncan-Smith Company in 1997. Proceeds from the mortgage were used to eliminate
the long-term debt with Fremont and for working capital purposes. The Fremont
revolving credit facility was also renegotiated reducing the annual interest
rate.
It is anticipated that additional working capital may be required 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 revolving credit facility with
Fremont Financial Corporation. The revolving credit facility is for a maximum of
$1,400,000 at an interest rate of prime plus 3 1/2 % (12% at October 31, 1997)
maturing on January 30, 1999. The loans are collateralized by real estate,
Danzer's accounts receivable, inventory and equipment and the amount that can be
borrowed under the credit facility is limited by eligible accounts receivable
and inventory of Danzer as defined. 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 Global, providing that Danzer maintains a minimum net worth, which
net worth was not maintained at October 31, 1997. At October 31, 1997,
$1,006,000 was outstanding.
In light of the Company's backlog at October 31, 1997, its projected cash flow
from operations, the market for the Company's products, and the amount of
short-term debt due in fiscal 1998, 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 1998, will be dependent upon
the success of the company's efforts to increase sales volume, as well as the
profitability of new business.
Many computer software systems in use today cannot process date-related
information from and after January 1, 2000. The Company has taken steps to
review and modify their computer systems as necessary and be prepared for the
Year 2000. In addition, the Company has inquired of its major service providers
if they are in the process of reviewing their systems with the same goals. The
majority of all providers have represented that they are either taking the
necessary steps to be prepared or are currently prepared for the Year 2000.
Should any of the computer systems employed by the major service providers fail
to process this type of information properly, that could have a negative impact
on the Company's operations. Management has not yet determined the cost related
to achieving Year 2000 compliance but believes that it will be able to manage
the total Year 2000 transition without material adverse effects on its business
operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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
Goodhue W. Smith, III 49 Director 1997
Russell Cleveland 60 Director 1991
William L. Pryor, III 63 Director 1993
Stephen C. Davis 50 Director 1997
Russell Cleveland, a chartered financial analyst, became director of the Company
on April 26, 1991. Mr. Cleveland has for the past eight years been a director,
officer and shareholder of Renaissance Capital Group, Inc., which is the
managing general partner of Renaissance, a business development company pursuant
to the Investment Company Act of 1940. Mr. Cleveland currently serves on the
Board of Directors of Biopharmaceutics, Inc., and Tutogen Medical, Inc. Mr.
Cleveland is the Renaissance designee to the Board of Directors. See "Item 13-
Certain Relationships and Related Transactions" herein.
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 Warren Management and is 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.
Goodhue W. Smith III founded Duncan-Smith Co., an investment banking firm in San
Antonio, Texas, in 1978 and has since such time served as its Secretary and
Treasurer. Mr. Smith is also Director of Citizens National Bank of Milam County,
Ray Ellison Mortgage Acceptance Co. and Consolidated Health Care Associates,
Inc.
Stephen C. Davis completed more than 28 years with Snyder General Corporation
and one of its predecessor companies, The Singer Company. Mr. Davis holds a BS
degree from Tarkio College and an MBA from Lindewood College. Mr. Davis is
currently a Director of Snyder Capital Corporation.
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, 1997, 1996 and 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, 1995 $140,708 200,000 $7,547 (1) $8,895 (2)
Former President 1996 $ 21,154 0 $3,773 (1) $4,031 (3)
Lori Beer 1996 $ 60,000 0 0 0
Former President
Rudolph W. Schuster 1996 $ 14,712 0 $ 0 $ 0
Former President 1997 $ 90,000 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 $8,895 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.
(3) Of the total $4,031 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 $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, 1997. During the year ended October 31, 1997, no stock options were
exercised.
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 $.0001 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 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.
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
$100,00.
There were no options outstanding at October 31, 1997.
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. The directors waived all
of these fees for the year ending October 31, 1997.
Goodhue W. Smith, III who was elected as Chairman of the Board at the Company's
December 15, 1997 Board meeting as a requirement under financing provided by
Duncan-Smith Co., of which Mr. Smith is an officer and director, is to be paid
$1,500 per month as compensation. Mr. Smith did not receive any fees in the year
ended October 31, 1997.
Stephen C. Davis was elected to the Board of Directors at the Company's December
15, 1997 annual meeting of Shareholders. Mr. Davis is a director of the Snyder
Capital Corporation. Mr. Davis provides certain services for Danzer on a
consulting basis from November 1997 through March 1998. Neither Mr. Davis nor
Snyder Capital Corp. received any compensation during the year ended October 31,
1997.
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 1996
with the sale of Rage Inc. Current management in not under an employment
contract.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 27, 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 15,576,069 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. 10,043,792 64.5%
8080 N. Central Expressway,
Suite 210, LB 59
Dallas, TX 75206-1857
Richard W. Snyder 2,046,667 (2) 13.1%
c/o Snyder Capital Corporation
3219 McKinney Ave.
Dallas, TX 75204
Russell G. Cleveland 88,000 (3) 0.3%
c/o Renaissance Capital Group, Inc.
8080 N. Central Expressway,
Suite 210, LB 59
Dallas, TX 75206-1857
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. Snyder..
(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
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 all of its Preferred Stock, accumulated dividends,
accumulated interest and note payable to common stock at a conversion rate of
$0.25 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1994, Renaissance exchanged its Convertible 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). See Item 12 - "PRINCIPAL SHAREHOLDERS - Changes
in Control".
On October 31, 1996, Renaissance converted all of its Preferred Stock,
accumulated dividends, accumulated interest and note payable to common stock at
a conversion rate of $0.25 per share.
On August 1, 1997, the Company entered into a loan agreement with Duncan-Smith
Co., trustee. Terms of the $650,000 loan include an interest rate of 11% with
payments due quarterly and a final notoriety on June 15, 2002. Duncan-Smith Co.
received a cash fee of $32,500 and a warrant to purchase 650,000 shares of
common stock at $0.25 per share with an expiration date of August 2002.
Subsequently, Goodhue W. Smith, III, a director and officer of Duncan-Smith Co.,
was elected Chairman of the Board.
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.
(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
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 to
Debenture Agreement 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 Incorporated by reference to
agreement dated Exhibit 10() to Form 10-K Report
August 25, 1993 between dated January 28, 1994.
Morrison Industries L.P.
and Global Environmental Corp.
10(I) Joint Venture Incorporated by reference to
Agreement dated Exhibit 10(j) to Form 10-K Report
December 31, 1993 dated January 28, 1994.
between Global Environmental
Corp. and Cadema Corporation.
10(j) Equipment Purchase and Incorporated by reference to
Security Agreement dated Exhibit 10(k) to Form 10-K Report
September 17, 1993 dated January 28, 1994.
between U.S. Amada, Ltd.
and The Danzer Metal Works Co.
10(k) Equipment Purchase and Incorporated by reference to
Security 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.
10(l) Equipment Purchase and Incorporated by reference to
Security Agreement dated Exhibit 10(m) to Form 10-K
September 17, 1993 Report dated January 28, 1994
between U.S. Amada, Ltd.
and The Danzer Metal Works Co.
10(m) Purchase Agreement Incorporated by reference to
dated December 31, Exhibit 99.1 to Registrant's Form
1994 between Global 8-K dated December 31, 1994.
Environmental Corp. 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 Incorporated by reference to
principal amount of Exhibit 10(n) to Registrant's Form
$211,635 due December 31, 1997. 8-K dated December 31, 1994
10(o) Loan and Security Agreement Incorporated by reference to
dated June 23, 1995 between Exhibit 10(o) to Form 10-K
Danzer Metal Works Co. dated April 1, 1996
and Fremont Financial Corporation
10(p) Mortgage Note and Incorporated by reference to
Mortgage Agreement Exhibit 10(p) to Form 10-K
dated January 25, 1996 of Global dated April 1, 1996
Environmental Corp.
with Midlantic Bank
10(q) Loan and Security Agreement Incorporated by reference to
dated May 1, 1996, between Exhibit 10(q) to Form 10-K dated
Danzer Industries, Inc July 7, 1997
and Fremont Financial Corporation
10(r) Common Stock Purchase Agreement Incorporated by reference to
between William V. Rice and the Exhibit 10(r) Form 10-K dated
Company dated May 21, 1996 dated July 7, 1997
10(s) Asset Purchase Agreement dated Filed here herewith as Exhibit 10(s)
November 14, 1997
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, 1997
GLOBAL ENVIRONMENTTAL CORP.
AND SUBSIDIARY
YEARS ENDED
OCTOBER 31, 1997, 1996 AND 1995
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
PAGE(s)
-------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-1
Consolidated Balance Sheets - October 31, 1997 and 1996 F-2
Consolidated Statements of Operations -
Years Ended October 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Changes in Stockholders'
Equity Years Ended October 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows Years Ended
October 31, 1997, 1996 and 1995 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-25
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, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended October 31, 1997.
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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1997, in conformity with generally
accepted accounting principles.
July 17, 1998
Blue Bell, Pennsylvania
F-1
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
CURRENT ASSETS
Cash $ 68,933 $ 50,008
Accounts receivable net of allowance for doubtful
accounts of $346,000, 1997 and $52,188, 1996 1,419,870 1,436,339
Inventories 662,989 791,758
Prepaid expenses and other 37,165 75,717
----------- -----------
Total current assets 2,188,957 2,353,822
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land 25,797 25,797
Building and improvements 1,440,527 1,385,502
Equipment 2,286,085 2,273,920
----------- -----------
3,752,409 3,685,219
Less - accumulated depreciation and amortization (2,271,753) (2,076,765)
----------- -----------
Total property, plant and equipment, net 1,480,656 1,608,454
----------- -----------
OTHER ASSETS
Property under agreement of sale - 344,127
Other 53,850 93
----------- -----------
53,850 344,220
----------- -----------
Total assets $ 3,723,463 $4,306,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 581,876 $ 544,725
Mortgage payable - 344,127
Accounts payable 859,764 1,337,117
Accrued salaries and wages 173,603 147,807
Accrued expenses, other 441,136 381,482
----------- -----------
Total current liabilities 2,056,379 2,755,258
----------- -----------
LONG-TERM DEBT, net of current portion 1,595,269 1,344,182
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.0001 per share;
20,000,000 shares authorized, 15,870,272 and
13,815,603 shares issued in 1997 and 1996,
respectively 1,587 1,382
Preferred stock, $.001 par value, 5,000,000
shares authorized; Class of 10% Cumulative
Convertible Senior Preferred Stock, 10,500
shares authorized, 4,550 shares issued and
outstanding in 1996 (total of $399,044)
Series B Cumulative Convertible Senior
Preferred Stock, 16,000 shares authorized, no
shares issued and outstanding in 1997 or 1996 - 399,044
Additional paid-in capital 5,047,803 4,554,102
Accumulated deficit (4,977,575) (4,654,412)
Less: Treasury stock, at cost
95,579 shares, 1997 and 612,579 shares, 1996 - (93,060)
----------- -----------
Total stockholders' equity 71,815 207,056
-----------
- -----------
Total liabilities and stockholders' equity $3,723,463 $4,306,496
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995
1997 1996 1995
----------- ----------- ----------
NET SALES $ 8,762,518 $ 8,153,689 $7,525,757
COST OF GOODS SOLD 7,257,056 6,993,068 6,627,237
----------- ----------- ----------
Gross profit 1,505,462 1,160,621 898,520
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,731,530 1,580,394 1,173,162
----------- ----------- ----------
Loss from operations (226,068) (419,773) (274,642)
INTEREST EXPENSE (201,627) (239,310) (265,542)
INTEREST INCOME - 931 3,522
OTHER INCOME 104,532 155,858 (6,227)
----------- ----------- ----------
LOSS FROM CONTINUING OPERATIONS (323,163) (502,294) (542,889)
----------- ----------- ----------
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued segment - (210,195) 153,955
Loss on disposal of segment - (215,406) -
----------- ----------- ----------
Loss from discontinued operations - (425,601) 153,955
----------- ----------- ----------
NET LOSS $ (323,163) $ (927,895) $ (388,934)
=========== =========== ==========
NET LOSS PER COMMON SHARE
Loss from continuing operations $ (0.02) $ (0.32) $ (0.32)
Income (loss) from operations of discontinued segment - (0.09) 0.06
Loss on disposal of segment - (0.09) -
----------- ----------- ----------
Net loss $ (0.02) $ (0.50) $ (0.26)
=========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 13,601,270 2,339,756 2,369,565
=========== =========== ==========
See Notes to Consolidated Financial Statements.
F-3
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
10% AND SERIES B
CUMULATIVE
CONVERTIBLE SENIOR ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED TRESURY STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ------ ------ ------- ------- ------ ------ -----
Balance, October 31, 1994 2,465,144 $ 247 7,550 $ 662,150 $ 1,877,784 $(2,893,244) 95,579 $ - $(353,063)
Issuance of 16,000 shares - - 16,000 1,511,319 - - - - 1,511,319
Net loss - - - - - (388,934) - - (388,934)
Dividends on preferred stock - - - - - (208,835) - - (208,835)
------ ------ ------ ------ ------- ------- ------ ------ -----
Balance, October 31, 1995 2,465,144 247 23,550 2,173,469 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 1,200,000 120 - - 299,880 - - - 300,000
Conversion of 10% (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) 2,376,438 - - - 603,028
Net loss - - - - - (927,895) - - (927,895)
Dividends on preferred stock - - - - - (235,504) - - (235,504)
------ ------ ------ ------ ------- ------- ------ ------ -----
Balance, October, 31,1996 13,815,603 1,382 4,550 399,044 4,554,102 (4,654,412) 612,579 (93,060) 207,056
Conversion of 10% preferred
shares and related accrued
dividends 1,971,669 197 (4,550) (399,044) 436,769 - - - 37,922
Conversion of Renaissance
loan to common stock 600,000 60 - - 149,940 - - - 150,000
Cancellation of treasury
shares (517,000) (52) - - (93,008) - (517,000) 93,060 -
Net loss - - - - - (323,163) - - (323,163)
------ ------ ------ ------ ------- ------- ------ ------ -----
Balance, October,31,1997 15,870,272 $1,587 - $ - $5,047,803 $(4,977,575) 95,579 $ - $ 71,815
========== ====== ====== ======== ========== =========== ====== ======= ========
See Notes to Consolidated Financial Statements.
F-4
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- -------- --------
OPERATING ACTIVITIES
Net loss $(323,163) $(927,895) $(388,934)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 194,988 183,623 250,648
Write-off deferred financing fees - - 86,569
Provision for bad debts 305,387 38,500 38,500
Net loss on disposition of items
included in discontinued segment - 21,843 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (288,918) (567,942) 320,797
Inventories 128,769 (855) 267,898
Net assets from discontinued operations - - 133,114
Prepaid expenses and other 38,552 (22,798) 22,159
Other assets, net (53,757) 40,745 (19,447)
Increase (decrease) in:
Accounts payable (477,353) 292,958 288,355
Net liabilities from discontinued operations - (167,580) -
Accrued salaries and wages 25,796 23,020 (78,600)
Accrued expenses, other 97,576 226,326 (181,008)
-------- -------- --------
Net cash provided by (used in)
operating activities (352,123) (860,055) 740,051
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (67,190) (65,199) (93,337)
Investment in joint venture - - (320)
Proceeds from sale of equipment - 36,744 -
-------- -------- --------
Net cash used in investing activities (67,190) (28,455) (93,657)
-------- -------- --------
FINANCING ACTIVITIES
Net borrowings (repayments) under revolving
loan agreement 63,624 497,111 (288,485)
Proceeds from the issuance of long-term debt 800,000 - -
Payments of long-term debt (425,386) (183,197) (235,140)
Payment of legal fees in connection with
conversion of debt to preferred stock - - (88,681)
Net proceeds from the issuance of common stock - 300,000 -
Payment of dividends on preferred stock - (11,375) (46,708)
-------- -------- --------
Net cash provided by (used in)
financing activities 438,238 602,539 (659,014)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 18,925 (285,971) (12,620)
CASH, BEGINNING 50,008 335,979 348,599
-------- -------- --------
CASH, ENDING $ 68,933 $50,008 $335,979
======== ======== ========
See Notes to Consolidated Financial Statements
F-5
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
--------- --------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOWS INFORMATION:
Cash paid for interest $ 179,988 $ 239,310 $ 210,984
========= ========= ==========
NON-CASH FINANCING ACTIVITIES:
Conversion of Renaissance debt to preferred stock - - $1,600,000
==========
Conversion of convertible debt to common stock $ 150,000 - -
=========
Reclass of revolving loan to long-term debt
due to modification of loan agreement - - $ 933,530
==========
Cancellation of treasury shares $ 93,060 - -
=========
Conversion of 10% and Series B Preferred
Shares and related accrued dividends and
Renaissance term note and related accrued
interest to common stock $ 436,966 $ 603,028 -
========= =========
Accrual of dividends on Senior Preferred Stock:
10% Cumulative Convertible - $ 75,504 $ 28,794
========= ==========
Series B Cumulative Convertible - $ 160,000 $ 133,333
========= ==========
NON-CASH INVESTING ACTIVITIES:
Reclass of property to property under
agreement of sale in connection with
disposal of Rage and reclass of related
mortgage payable - $ 344,127 -
=========
Satisfaction of mortgage payable and
cumulation of previous sale of related
property held under agreement of sale $(344,127) - -
==========
See Notes to Consolidated Financial Statements
F-6
GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
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 virtually 100% of the Company's revenues and
are generated throughout the Eastern and Midwestern 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 former officer
(Note 3). Accordingly, the results of Rage's operations for the fiscal
year ended October 31, 1996 are presented as "discontinued operations"
in the respective consolidated Statement of Operations. The results of
Rage's operations for the fiscal year ended October 31, 1995 have been
reclassified to conform with the 1996 method of presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
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-7
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market and, at October 31, 1997 and 1996 are comprised of the
following components:
1997 1996
---- ----
Raw materials and supplies $297,125 $420,469
Work-in-progress 301,277 286,122
Finished goods 64,587 85,167
-------- --------
$662,989 $791,758
======== ========
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, 1997, 1996 and 1995 included in continuing
operations was $194,988, $183,623 and $184,547, 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.
Fair Value of Financial Investments
The Company believes that the carrying value of its financial
instruments, such as long-term debt (all of which are held for purposes
other than trading) are approximately equal to their fair values.
F-8
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
YEARS ENDED OCTOBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Elevator Manufacturer 13% 10% 11%
Truck Body Manufacturer 41% 29% 32%
As of October 31, 1997, the amount due from the truck body
manufacturer, and which was collected subsequent to October 31, 1997,
was approximately $484,000.
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.
Stock-Based Compensation
In fiscal year 1997, the Company adopted the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
but elected to continue to utilize the "intrinsic value" method of
accounting for recording stock-based compensation expense provided for
in Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees."
F-9
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable
Accounts receivable are earned in the normal course of business
and are unsecured.
The allowance for doubtful accounts is established through
charges to earnings in the form of a charge to bad debt expense.
Accounts which are determined to be uncollectible are charged against
the allowance account. Management makes periodic assessments of the
adequacy of the allowance which requires the Company to recognize
additions or reductions to the allowance. It is reasonably possible that
factors may change significantly and, therefore, affect management's
determination of the allowance for doubtful accounts in the near term.
Charge-offs amounted to $12,000 in 1997, $25,000 in 1996 and $56,000 in
1995.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("Statement"). The Statement established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The Statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should
be based on the fair value of the asset. The Company adopted the
Statement effective November 1, 1996; the Statement did not have a
material effect on the Company's financial position or results of
operations.
In February 1997, the FASB issued SFAS No. 128 "Earnings per
Share" and SFAS No. 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, results of operations or
disclosure, but does not believe it will be material.
F-10
NOTE 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Standards (Continued)
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for
reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. Such items may include foreign currency
translation adjustments, unrealized gains/losses from investing
activities, and other transactions. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. This Statement is required to be adopted for fiscal years
beginning after December 15, 1997. The adoption of this Statement is not
expected to have a material effect on the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
Statement is required to be adopted for fiscal years beginning after
December 15, 1997. The Company does not believe that this Statement will
have a material effect on the disclosures in the Company's financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits." This
Statement revises employer's disclosures about pension plans; the
Statement does not change the measurement or recognition of those plans.
The Statement is effective for financial statements issued for years
beginning after December 15, 1997. The Company does not believe that
this Statement will have a material effect on the disclosures in the
Company's financial statements.
F-11
NOTE 2. FINANCING ARRANGEMENTS, OPERATIONS AND MANAGEMENT'S PLANS
The Company had net sales of $8,762,518 for the year ended
October 31, 1997 (a 7.5% increase over the prior year) and a loss from
continuing operations of $323,163. Working capital increased from 1996
to 1997 from a deficiency to positive working capital of $132,578 at
October 31, 1997. This was due primarily to the repayment of accounts
payable and the release of a mortgage payable obligation of $344,127
(Note 3). Stockholders' equity decreased by $135,241 to $71,815 at
October 31, 1997 due to a net loss incurred, offset by the conversion of
certain debt, preferred stock and accrued dividends to common stock.
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 is 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 $350,000 from the joint
venture as of October 31, 1997 (Note 5). 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 and 1997, these
shares and related accrued dividends were converted to common stock
(Note 7).
F-12
NOTE 2. FINANCING ARRANGEMENTS, OPERATIONS AND MANAGEMENT'S PLANS (Continued)
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. During 1996, such preferred shares,
related accrued dividends, a related term note and accrued interest were
converted to common stock (Note 7).
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).
In March 1997, the Company received $150,000 from Renaissance
Capital Group, Inc. in the form of convertible debt. During 1997, this
debt was converted into 600,000 shares of common stock.
On August 1, 1997, Danzer borrowed $650,000 from a private
company. A portion of the net proceeds of $603,000 was used to pay-off
certain term debt ($174,000) owed to Fremont Financial Corporation, with
the remainder ($429,000) available for working capital purposes (Note
5). The Company also entered into an agreement with Fremont Financial
Corporation redefining the method of determining the Company's
borrowings from Fremont and extending the term of its agreement with
Fremont until January 31, 1999 (Notes 4 and 5).
In November 1997, the Company completed the sale of an operating
division and its associated assets (inventory, property and equipment
and customer lists) for proceeds of $413,000. The Company did not
realize a significant gain or loss on this transaction. In addition,
sales attributed to this division in fiscal 1997 approximated $2.6
million.
In December 1997, the Company received $150,000 from Renaissance
in the form of a promissory note (the "Note"). The Note bears interest
at 10% per annum and is payable at maturity (September 30, 1998) along
with the principal balance.
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 1998, 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.
F-13
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.
Operating results of Rage for the year ended October 31, 1996 are
shown separately in the accompanying Consolidated Statement of
Operations as discontinued operations for the period November 1, 1995
through April 30, 1996. The Consolidated Statement of Operations for
1995 has been similarly reclassified.
Net sales of Rage were approximately $1,118,000 and $5,001,000
for the six months ended April 30, 1996 and the year ended October 31,
1995, respectively. These amounts are not included in net sales in the
accompanying Consolidated Statements of Operations.
The loss from operations of Rage totaled $210,195 for the six
months ended April 30, 1996. The loss on the sale of Rage was $215,406.
F-14
NOTE 3. DISCONTINUED OPERATIONS (Continued)
Assets and liabilities of Rage sold effective April 30, 1996
consisted of:
April 30, 1996
--------------
Accounts receivable, net $ 364,000
Inventories 134,000
Property, plant and equipment, net 521,000
Other assets 209,000
---------
1,228,000
Accounts payable and accrued expenses (749,000)
Mortgage payable (350,000)
---------
Net assets $ 129,000
=========
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 had not been released by the mortgagor from this obligation and,
accordingly, recorded "property under agreement of sale" and "mortgage
payable" in the amount of $344,127 in the accompanying October 31, 1996
Consolidated Balance Sheet. During fiscal 1997, the Company was released
by the mortgagor from this obligation.
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 Agreement was most recently
amended on May 1, 1997, extending the term of the Agreement to January
31, 1999. The amount available under the Facility is based on a defined
percentage of eligible accounts receivable and inventory. The Company
had drawn $1,005,789 at October 31, 1997 (Note 5). The maximum amount
available under the Facility is $1,400,000. The Term Loan was repaid in
full in 1997 (Note 5). Borrowings under the Agreement accrue interest at
prime plus 3.5% (12.0% at October 31, 1997).
F-15
NOTE 4. NOTE PAYABLE (Continued)
Under the terms of the Agreement, borrowings are collateralized
by Danzer's accounts receivable, inventory and equipment and a junior
lien on Danzer's real estate. 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.
NOTE 5. LONG-TERM DEBT
At October 31, 1997 and 1996, consolidated long-term debt
consists of the following:
1997 1996
---------- ----------
Revolving note payable to Fremont Financial
due January 1999 (Notes 2 and 4) $1,005,789 $ 942,165
Note payable to joint venture;
interest-free, principal was due
December 31, 1996 345,000 345,000
Term Loan payable to Fremont Financial;
repaid in full in 1997 (Note 4) - 246,500
Term Loans payable to US Amada, Ltd;
monthly payments currently aggregating
$12,513 including interest at 8.5% to 8.75%;
final balance due October 1, 1999;
collateralized by equipment 215,440 355,242
Promissory note payable to Duncan-Smith Co.,
Trustee in the original amount of $650,000;
quarterly payments of $41,903 including
interest at 11.0% through May 2002;
collateralized by Danzer's property and
equipment and accounts receivable (Note 7); a
principal in Duncan-Smith Co. is also a
shareholder in the Company and subsequent to
fiscal 1997, became a Director of the Company. 610,916 -
------------ ----------
2,177,145 1,888,907
Less - current portion (581,876) (544,725)
------------ ----------
Total long-term debt $1,595,269 $1,344,182
============ ==========
F-16
NOTE 5. LONG-TERM DEBT (Continued)
Maturities on long-term debt as of October 31, 1997 are as
follows:
YEARS ENDING
OCTOBER 31, AMOUNT
------------ ------
1998 $ 581,876
1999 1,203,467
2000 128,912
2001 144,005
2002 118,885
----------
$2,177,145
==========
The President of the managing General Partner of Renaissance is
also a Director of the Company. Interest expense incurred with respect
to certain Renaissance convertible debt (Note 2) was approximately
$6,000, $21,000 and $21,000 in 1997, 1996 and 1995, respectively.
NOTE 6. INCOME TAXES
The Company files a consolidated income tax return for Federal
tax purposes. The Company, Global Holdings and Danzer each file separate
state income tax returns. The Company accounts for income taxes in
compliance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets and liabilities are recorded for any
temporary differences between the financial statement and tax bases of
assets and liabilities, using the enacted tax rates and laws expected to
be in effect when the taxes are actually paid or recovered.
F-17
NOTE 6. INCOME TAXES (Continued)
Total income tax benefit from continuing operations amounted to $
- 0 - in each of 1997, 1996 and 1995 (effective tax rates of 0%, in each
of the three years) compared to an income tax benefit of ($110,000),
($171,000), and ($185,000), respectively, computed by applying the
statutory rate of 34.0% to loss from continuing operations. These
differences are accounted for as follows:
1997
----
Percent of
Amount Pretax Loss
------ -----------
Computed "expected" tax benefit ($110,000) (34.0%)
Decrease in benefit due to valuation
allowance provided for deferred
tax assets 110,000 34.0%
--------- ---------
$ - 0%
========= =========
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%
========= =========
Deferred income tax assets (liabilities) result from differences
in the recognition of revenues and expenses for income tax and financial
reporting purposes.
F-18
NOTE 6. INCOME TAXES (Continued)
The net deferred tax assets at October 31, 1997 and 1996 include
the following:
1997 1996
---- ----
Deferred tax assets $1,737,000 $1,484,000
Deferred tax liability (175,000) (173,000)
Valuation allowance for deferred
tax assets (1,562,000) (1,311,000)
---------- ----------
$ - $ -
========== ==========
The Company has recorded a valuation allowance for its entire net
deferred tax asset at October 31, 1997 and 1996 since Management
believes that it is more likely than not that the 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, 1997 and 1996 are
as follows:
1997 1996
---- ----
Net operating loss carryforward $ 1,521,000 $1,484,000
Allowance for doubtful accounts 138,000 -
Accrued expenses 78,000 -
Depreciation (175,000) (173,000)
----------- ----------
$ 1,562,000 $1,311,000)
=========== ===========
As of October 31, 1997, the Company has available Federal net
operating loss carryforwards of approximately $3,800,000 that may be
applied against future Federal taxable income. These carryforwards
expire at various dates through fiscal 2012.
F-19
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, 1997 and 1996, there were 25,000 options outstanding with an
exercise price of $.48 per share. During the year ended October 31,
1997, no options were granted and no options were terminated. During the
year ended October 31, 1996, no options were granted and 350,000 options
were terminated. No options were exercised during the years ended
October 31, 1997 or 1996.
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
were exercised through October 31, 1996. During 1997, 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 warrants have been exercised through October 31, 1997. 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 have been
exercised through October 31, 1997.
F-20
NOTE 7. STOCKHOLDERS' EQUITY (Continued)
In connection with a financing agreement effective August 1997,
the Company issued warrants to purchase 650,000 shares of common stock
through August 2002 at $.25 per share, subject to adjustment as defined.
No warrants have been exercised through October 31, 1997.
In April 1998, the Company granted 600,000 stock options,
exercisable at $.10 per share, to its President. The options vest over
two years and expire in April 2004.
Compensation expense that would have been recorded with respect
to stock options and warrants issued in accordance with the basis of
fair value pursuant to SFAS No. 123, if the Company had so elected,
would have been immaterial.
During 1994, Global 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 were 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 was 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. During 1997 and 1996, all such shares
and related accrued dividends were converted to common stock at a
conversion rate of $.25 per share.
Effective December 31, 1994, Renaissance exchanged the $1,600,000
aggregate amount 12 1/2% 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 16,000 shares
of Series B Stock, a $211,635 term note (Note 5), accrued interest and
accrued dividends to common stock at the conversion rate of $.25 per
share.
F-21
NOTE 7. STOCKHOLDERS' EQUITY (Continued)
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, the Company was in violation of certain of the above
covenants. As previously disclosed, the Company converted all
outstanding preferred stock to common stock in 1997 and 1996.
In August 1996, the Company issued 1,200,000 common shares for
$300,000, through a private placement offering. 1,000,000 shares were
issued to a private investor and 200,000 shares were issued to
Renaissance.
In 1997, the Company converted a $150,000 of convertible debt
issued in 1997 and payable to Renaissance into 600,000 shares of common
stock.
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 and $208,835 in 1995 from the
Company's 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, 1996 and 1995 and assumed exercise of stock options and
warrants for 1997, 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, 1997, the Company recorded certain adjustments
which increased its net loss by approximately $250,000 or $.02 per share
and which were material to its fourth quarter results of operations.
Such adjustments related to inventory, bad debt expense, accruals of
manufacturing costs and accruals of other selling, general and
administrative expenses. In addition, the Company recorded certain other
adjustments (the aggregate amount of which has not been determined) in
the fourth quarter of the year ended October 31, 1997, which related to
prior quarters in the year ended October 31, 1997.
F-22
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under operating leases
expiring at various times through July 2001. Rent expense was
approximately $86,000, $16,000, and $25,000 for the years ended October
31, 1997, 1996 and 1995, respectively. The following is a schedule of
future minimum rental payments under operating leases as of October 31,
1997:
YEARS ENDING
OCTOBER 31, AMOUNT
----------- ------
1998 $ 72,000
1999 65,000
2000 21,000
2001 13,000
-------
$171,000
========
Certain of the Company's employees are currently represented by a
labor union, the United Brotherhood of Carpenters and Joiners of
America, Local Union No. 340 whose contract is in effect to February
2000.
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, 1997. The actuarial information included below,
which is as of January 1, 1997, is for the Plan's fiscal year ended
December 31, 1997, and is the most recent available information.
Pension expense for the year ended December 31, 1997, was as
follows:
Benefits earned (service cost) $ 7,587
Interest expense on projected benefit obligation 26,687
Actual return on Plan assets (33,248)
Other items 8,537
--------
$ 9,563
========
F-23
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
A summary of the status of the Plan as of December 31, 1997 is as
follows:
Pension benefit obligation:
Projected benefit obligation:
Vested $(415,511)
Non-vested -
---------
$(415,511)
Plan assets at fair value 361,347
---------
Funded status (54,164)
Unrecognized gain/(loss) (46,095)
Deferred transition gain/(loss) 59,353
---------
Accrued pension expense $ (40,906)
=========
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, 1997, 1996 and 1995 was approximately $8,000, $9,000 and $13,000,
respectively.
On August 25, 1993, 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 1/2% 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 expense for 1997, 1996 and 1995 was
$100,000, $100,000 and $66,000, 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.
F-24
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
The Company is aware of the issues associated with the
programming code in existing computer systems as the year 2000
approaches. The "Year 2000" problem is pervasive and complex, as many
computer systems will be affected in some way by the rollover of the
two-digit year value to 00. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
"Year 2000" issue creates risk for the Company from unforeseen problems
in its own computer systems and from third parties with whom the Company
conducts business.
The Company is currently in the process of updating its
accounting software and operating system with software and systems that
are represented to be "Year 2000" compliant. The Company is analyzing
its remaining computer systems to identify any potential "Year 2000"
issues and will take appropriate corrective action based on the results
of such analysis. Management has not yet determined the cost related to
achieving "Year 2000" compliance. Management believes, based on its
available information, that it will be able to manage its total "Year
2000" transition without any material adverse effects on its business
operations or financial condition.
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. All of the Company's common and
preferred stock and certain 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.
Corp.'s only significant source of revenue and cash available to
pay interest and principal on debt and corporate overhead results from
management fees charged to its subsidiary. Such management fees are
limited due to the lack of profitability and positive cash flow of its
subsidiary as well as certain restrictions on the ability of its
subsidiary to pay distributions or dividends to Corp. Therefore,
available cash to pay interest and principal on debt and/or dividends on
common stock is severely constrained.
F-25
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/ M.E. Williams
---------------------------------
M. E. Williams
President and Chief Executive Officer
December 30, 1998
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.
December 30, 1998
By: /s/ Terry Moore
---------------------------------
Terry Moore
Chief Financial Officer
December 30, 1998
By: /s/ Goodhue Smith
---------------------------------
Goodhue Smith, Director
December 30, 1998
By: /s/ Russell G. Cleveland
---------------------------------
Russell G. Cleveland, Director
December 30, 1998
By: /s/ William L. Pryor
---------------------------------
William L. Pryor, Director
December 30, 1998
By: /s/ Steven C. Davis
---------------------------------
Steven C. Davis, Director