UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A NO. 3
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended September 30, 1994
Commission file number 1-11046
TOP SOURCE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter).
DELAWARE 84-1027821
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2000 PGA BOULEVARD, SUITE 3200 PALM BEACH GARDENS, FLORIDA 33408
(Address of Principal executive office) (zip code)
Registrant's telephone number, including area code: (407) 775-5756
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
.001 par value common stock (Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
Incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K Yes No X
As of December 31, 1994, 27,303,080 shares of $.001 par value Common Stock (the
Registrant's only class of voting stock) were outstanding. The aggregate market
value of the common shares of the Registrant on December 31, 1994 (based upon
the closing sales price) held by non-affiliates of the Registrant, was
approximately $153,650,209.
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN FORM 10-K INCORPORATED DOCUMENT
Part III-Items 10, 11, & 12 Definitive Proxy Statement in
connection with its annual
meeting of stockholders to be
held on March 15, 1995
PART I
ITEM 1. BUSINESS
A. GENERAL DESCRIPTION OF BUSINESS
Top Source Technologies, Inc. (the Company or TSI) was organized in 1986 under
the name Top Sound International, Inc. to distribute a patented overhead mounted
speaker system for vehicles. In 1989, the Company's mission was expanded to
include developing and marketing of products, services and technologies for the
transportation and related industries. The Company expanded its product line
and changed its name to Top Source, Inc. By 1994 the Company was marketing, in
addition to the Overhead Speaker System, two technologies licensed exclusively
from the Massachusetts Institute of Technology, (M.I.T.), a high energy ignition
system and a safety restraint technology. The Company also acquired three oil
analysis laboratories and developed in conjunction with Thermo Instrument
Systems, Inc. (a division of Thermo Electron) a unique on-site oil analyzer for
use in the petrochemical, automotive and equipment service industries. In March
1994, the Company changed its name to Top Source Technologies, Inc.
The Company derives revenue from the manufacture and sale of its Overhead
Speaker Systems and from the sale of oil analysis service. In December of 1994,
the Company also began its initial roll-out of the On-Site Oil Analyzer.
Customer sites include an oil refinery, new car dealer, automotive quick lube,
oil jobbers and heavy duty equipment dealers. Also, the Company is seeking to
license its ignition system and safety restraint technology to auto makers or
their suppliers.
The Company receives new technology ideas for possible inclusion into the Top
Source program from individuals, universities and other companies. The
technologies are screened for their proprietary nature, market potential and fit
with the Company structure and business.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company currently has two industry segments: automotive technology and oil
analysis service. (For information on industry segments and export sales, see
Item 8. - Financial Statements and Supplementary Data, Note 20. Segment
Information.)
C. NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company now has four proprietary technologies, including two licensed from
M.I.T., concerning injury reduction in frontal crashes, ARCS (Acceleration
Restraint Curve Safety Seat), and EFECS (Engine Fuel Economy Emissions Control
Reduction System). The Company markets one product, an Overhead Speaker System
(OHSS), and provides one service, Oil Analysis.
PRODUCTS AND TECHNOLOGIES
OVERHEAD SPEAKER SYSTEM
In 1987, the Company acquired from its Swedish inventor the exclusive rights to
distribute in the United States and Canada a patented automotive overhead
mounted speaker system. The Company holds a number of patents for the OHSS
which expire at various times through 2009. In addition, the Company has patent
applications for other uses of OHSS. The patents cover the design and mounting
method which permits speakers, dome lights and other accessories to be mounted
overhead. The assembly includes enclosed audio speakers pre-wired in an
overhead mounting system. The unit, about six inches wide, mounts up against
the headliner across the width of the vehicle as a rear speaker system.
Overhead mounted speakers deliver unobstructed sound directly to the listener
whereas speakers mounted in the side doors, tailgate or cargo area can become
obstructed by passengers or cargo. The OHSS eliminates the need for rear
speakers in traditional locations, reduces weight in the liftgate and because of
their fixed overhead mounting, are not subject to the
ITEM 1. BUSINESS, (CONTINUED)
same risks of damage as speakers located in door or liftgate panels. The OHSS
provides the Original Equipment Manufacturers (OEMs) with a cost effective
solution to improved audio without additional expensive tooling and within
relatively short lead times, and the assembly dramatically reduces installation
time in factory applications.
The Company's original marketing effort focused on both the automotive
aftermarket and OEMs. Sales through auto parts retailers, catalogs, auto sound
specialists and new car dealers were not material. The Company refocused its
effort toward the OEMs for endorsement and possible production line installation
as standard or factory optional equipment.
The Company established an engineering team that worked on housing designs,
materials, and other features, as well as audio issues. The team, which
included internal engineers and outside consultants, identified vehicle
opportunities for the OHSS and built working prototypes. The Company's
marketing group presented these units to OEM audio, trim and product planning
engineers for evaluation.
In 1991, a custom designed OHSS was approved by Chrysler Corporation for dealer
installation on the Jeep(R) Wrangler, and a purchase order was received. The
Wrangler OHSS is the only practical mounting location for speakers to provide
audio with the vehicle top down. The OHSS unit can be installed in less than 30
minutes, and retails for around $300.
The second custom OHSS unit was designed for the Jeep(R) Cherokee, a high volume
vehicle in production since 1984. The Cherokee unit was molded from reinforced
urethane and housed two 51/4 inch speakers. The unit mounted over the rear
cargo area and incorporated the cargo area dome light. In May of 1992,
Chrysler approved this unit and a purchase order was received for dealer
installation.
The third custom unit which was designed for the new Jeep(R) Grand Cherokee
featured four speakers and mounted above the cargo area in the rear of the
vehicle. In early 1993, the Company received approval and a purchase order for
the Grand Cherokee unit as a dealer installed option. Patents have been applied
for in regard to both Cherokees.
In 1992, the Company focused its marketing effort on expanded production line
installation opportunities for both the Wrangler and Cherokee. That opportunity
promised significant increases in OHSS volumes compared to dealer installed
application. To support that effort the Company, in early 1993, established its
own assembly operation in a leased Michigan facility. The in-house assembly
assured reduced costs and permitted the Company total control of quality and
delivery schedules.
The Jeep(R) Wrangler unit became standard equipment on the top-of-the-line model
with a retail list price of under $250, a factory option on most models and
continued as a dealer installed option for the entire new and used Wrangler
line. Chrysler requested that TSI add a dome light to the OHSS unit which was a
feature not available before on the Wrangler soft top. Chrysler trademarked the
OHSS under the label "Sound Bar." In mid-1993, Chrysler decided to replace the
rear liftgate mounted speakers on the Jeep(R) Cherokee and use the Sound Bar as
the only rear speaker system. More than 75% of the Cherokees built include rear
speakers. By September of 1993, the Company was shipping significantly
increased OHSS units due to the production line purchase orders.
Based on an excellent rating from Chrysler for quality, performance and on-time
delivery over several years, the Company was awarded a preferred supplier
rating. This positions TSI favorably as a tier one supplier for new business,
long-term contracts and joint ventures. The present contracts for the Wrangler
and Cherokee extend through model year 1996. The Company believes that based
upon product acceptance and the limited redesign of these vehicles that prior to
the year 2000, the purchase order will be renewed. The Company also received a
purchase order from Chrysler International Operations for several custom OHSS
units. This represents an opportunity for significantly increased revenue
beginning in fiscal year 1995.
ITEM 1. BUSINESS, (CONTINUED)
In 1993, General Motors renewed its parts and service contract for the universal
unit approved by General Motors for 15 sport utility vehicles. In early 1994,
General Motors approved and ordered a custom designed unit for dealer
installation on the Geo Tracker. At the same time, Suzuki approved and ordered
a custom unit for their Sidekick vehicle.
The Geo Tracker and Suzuki are presently in an early launching stage. All of
these programs are only available as dealer installed at this time. Sales of
the OHSS on these vehicles have not been material.
The Company has designed and presented many more custom units to domestic and
foreign OEMs. These units are being considered for future dealer, as well as
production line installation. The Company's marketing efforts are focused on
sport utility, pick-up trucks and vans.
In 1990, the Company shipped approximately 7,480 OHSS units. In 1994, that
number grew to 142,550 OHSS units. The OHSS unit volume in 1994 represented
less than 5% of the target vehicle market in the United States and Canada.
Although no confirmed orders have been received to date for additional new
vehicle production line installation, the Company is optimistic that it will
receive additional purchase orders in the future.
The Company is confident it can meet any additional demand from present or new
customers. In anticipation of new business, the Company intends to expand
present production capacity early in 1995. The Company will continue to service
its customers in a just-in-time manner. OHSS operations will remain assembly-
only, which requires minimal capital support. Components of the OHSS such as
speakers, grills, wiring harnesses, housings and dome lights are sourced either
by the Company or the OEM customer. Back-up sources are available for all
components. The Company is prepared with back-up contingency manufacturing
plans and is capable of establishing satellite assembly facilities to support
just-in-time delivery demand for incremental business in the United States,
Canada, Mexico and Europe.
The Company intends to continue an aggressive
patent effort and expects to remain a sole source supplier due to the unique
patent position in regard to the OHSS design. The selling prices to the OEMs
range from $55 to over $125 based upon quality and number of speakers,
dome lights, amplifiers and other variables.
OIL ANALYSIS - UNITED TESTING GROUP - ON-SITE ANALYSIS
Oil Analysis is a 50-year-old technology initially used by the railroad industry
to monitor the internal condition of their engines (similar to using a blood
test to find early warning signs and diagnose illness). Over the past 30 years,
use of the technology expanded and oil analysis is now widely used for
diagnostic and preventative maintenance programs for equipment in the aircraft,
marine, heavy duty vehicles, industrial machines, defense and automotive
industries. The technology is also used for quality control and pipe line
monitoring in the petroleum industry, as well as many other chemical and mineral
production processes.
It is estimated that the size of the oil analysis market is in excess of one
billion dollars. This includes oil analysis performed by independent and in-
house laboratories. The Company believes that the use of oil analysis will
increase as a preventative maintenance and process control technology. The
Company also believes that advances in oil analysis technology owned by the
Company will permit oil analysis utilization in new markets, such as automotive,
and will increase oil analysis utilization by those presently using the
technology.
The service requires extracting a small sample of used oil from oil lubricated
equipment and sending it to a laboratory. Scientific tests identify and
quantify metal debris that is the result of wear. The amount of metal debris,
correlated to time or mileage the oil has been in service, indicates if wear is
normal or abnormal. Other laboratory tests will indicate and measure if there
is any coolant or water in the oil, the amount of airborne dirt, viscosity,
acidity, depletion level of the additive package, flash point, coloration and
many other factors. Oil analysis users select the tests from a service menu
based on their particular needs. Once the empirical data are generated by
laboratory tests, a trained evaluator reviews the results and generates a
report, which often contains service recommendations, and sends it to the end
user.
ITEM 1. BUSINESS, (CONTINUED)
All major oil companies provide oil analysis service for their industrial and
commercial lubricant customers to help them monitor the service and maintenance
needs of their equipment. These oil companies either contract with an
independent laboratory for a private label package or perform the service in
their own laboratory. Caterpillar has their own program called "Scheduled Oil
Sampling" (SOS); they operate over 70 of their own laboratories at dealers and
send samples to independent laboratories as well. Truck fleets, like Penske
Truck Leasing, perform oil analysis on their entire fleet of diesel trucks at
each oil change.
In 1989, the Company became involved with oil analysis by acquiring the
exclusive rights to market a proprietary oil analysis program focused on
automotive and light duty truck engines, transmissions and gear cases, developed
by Spectro Metrics Inc. (SMI), an Atlanta-based laboratory. SMI provided oil
analysis service, for over 30 years, to a wide variety of customers including
oil companies, fleets, aircraft, marine, industrial, etc. This program,
trademarked "Detect", used a state-of-the-art high speed computer aided
analysis system and a proprietary database containing oil analysis results
from thousands of engines and transmissions. In addition, SMI had
developed computer aided technology which generated empirical data from
infrared analysis based on known standards eliminating the need for several
physical tests. This system automatically diagnoses component condition
based on wear metal debris and contamination levels in the sample compared
to standards in the database. The Detect System, due to its high volume
capacity and low cost, enabled oil analysis to be offered, for the first
time, to the large yet untapped passenger vehicle market. In addition, the
automated process with further refinements would dramatically reduce the
cost of processing other types of oil samples.
The Company focused its marketing of the Detect Program on the automotive OEMs
and the aftermarket. A kit containing a sample vial, extractor tube and pump
as well as a return mailer with information sheet was sold to distributors with
the laboratory service prepaid for under $6.00. Retail distributors included
auto parts stores, mass merchandisers with automotive departments, hardware
chains, quick lubes, parts catalogs and new car dealers. Retail repeat sales
were very slow due to lack of consumer awareness. The new car dealer, service
centers and quick lubes wanted to be able to perform the service on the shop
floor and not wait five to ten days for customer reports to be returned from the
laboratory. OEMs did not want to purchase the Detect Program as part of their
service and parts offering to their dealers.
In March of 1992, the Company decided to pursue the concept of an On-Site
Analyzer (OSA) using the advanced software technology, automated diagnostic
system and proprietary database developed and used at SMI. The Company entered
into an agreement with SMI to solicit instrument manufacturers with the goal of
designing and building a low cost test instrument, for use on the shop floor,
which is capable of performing many of the services provided by an oil analysis
laboratory. This would provide instant results by eliminating the need to send
a sample to a laboratory. The Company intended to license the proprietary
software and database from SMI, purchase On-Site Analyzers from an instrument
manufacturer and either sell the instrument or sell the service on a per test
basis. The Company also conducted primary market research in many markets to
verify the demand, acceptability and requirements of an On-Site Analyzer.
In order to provide present and potential users of On-Site Analyzers with the
oil analysis data, they require that the oil sample must be tested by two
distinctly different types of spectrometers: an emission spectrometer to
identify and quantify metal elements and an infrared spectrometer to measure
other parameters and non-elemental substances. Other specifications for the
instrument include parameters such as: user friendly, low cost, minimal
maintenance, near laboratory accuracy and repeatability, reliability, several
minute turn around time, etc. The overall objective has been to provide high
volume oil analysis locations with an On-Site Analyzer that delivers acceptable
data in minutes at about the same price they pay for similar data by sending
samples to a laboratory.
Under their agreement, TSI and SMI jointly developed an initial design that
outlined the flow of oil and information in a potential instrument, defined the
specifications required by the target market and identified the user friendly
aspects. The instrument considerations included cost limits, calibration,
diagnostic and service issues. The concept design and specifications were
presented to several instrument manufacturers around the world.
ITEM 1. BUSINESS, (CONTINUED)
By January of 1993 TSI and SMI entered into an initial development agreement
with the Thermo Jarrell Ash (TJA) Division of Thermo Instrument Systems, Inc.
(THI) to jointly develop an On-Site Analyzer with both emission and infrared
capability. The intent of the agreement was to provide TJA with exclusive
manufacturing rights in exchange for their development expense and TSI would
receive exclusive distribution rights to the petrochemical and synthetic
lubricants market while TJA could pursue other markets. Under the agreement,
TJA would be responsible for all hardware included in the instrument as well as
software for each individual spectrometer. TSI would be responsible for the
analytical software including quantification files and database and the overall
instrument operating software.
Concurrently, with the development of the OSA, TSI offered to purchase SMI to
insure total ownership and control of the database, hardware and software, and
other proprietary technologies developed and owned by SMI. These technologies
are critical to the operation of an OSA, and when fully exploited in a central
laboratory operation, will dramatically reduce the cost of analyzing oil
samples. Also, in early 1993, the Company became aware that Professional
Services Inc. (PSI), was interested in selling its Oil Analysis Division. PSI
performed similar services to SMI and had built laboratory facilities in Atlanta
and Chicago with a broad customer base in its 11 year existence. PSI's
customers included Penske Truck Leasing, Mobil, Shell and others. The
possibility of consolidating the two laboratories and applying efficiencies of
operation would yield one of the largest single independent laboratories with a
broad and diversified customer base. Consolidation would also provide economies
of scale and improve overall margins through cost reductions.
In July of 1993, the Company acquired both PSI and SMI (see Item 8. Financial
Statements and Supplementary Data, Note 2. Acquisitions). As of the date of
this report, all debt related to these acquisitions has been paid. The
laboratories provided the Company with over $5.8 million in revenue in fiscal
1994. In addition, the Company gained control of the database, technology and
software necessary for the development of the OSA. The Company now had
locations in Atlanta and Chicago. SMI and PSI were merged in July 1993 under
the name United Testing Group (UTG). In January 1994, the Company acquired a
small laboratory in Sparks, Nevada to provide nationwide coverage for central
laboratory operations.
Following the acquisitions, Mr. Joyce, the former president of SMI, was
retained by the Company to be the Chairman of UTG. He later was placed in
charge of the Company's new program to develop the OSA. Company management
subsequently determined that UTG had no experienced operations management since
Mr. Joyce's departure. As the difficulties in consolidation became apparent,
the Company addressed the problems by causing its then Chief Financial
Officer, James P. Samuels, to become President of UTG and be responsible for
UTG's operations. Among other things, Mr. Samuels had extensive experience in
operations prior to joining the Company. (See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
Mr. Samuels was replaced as Chief Financial Officer on June 30, 1995 and
resigned as President of UTG and an employee of the Company in August. UTG
intends to replace Mr. Samuels by recruiting a General Manager.
Although On-Site Analysis has a large market opportunity, there will always be a
need for central laboratories to support low daily volume users of oil analysis
and to perform certain tests not yet possible with the present OSA capabilities.
In August of 1993, On-Site Analysis, Inc. (OSA, Inc.), was formed to exclusively
develop the OSA program. The Company has since staffed itself with
spectroscopists, instrument specialists, marketing, systems and programmer
personnel as well as technicians capable of assisting in installation, operation
and training.
Also, in August of 1993, TJA and OSA, Inc. had progressed with an Alpha
developmental prototype that appeared to be able to meet the requirements and
specifications established for the OSA. TSI committed to purchase 24 OSA Beta
models with anticipated delivery by April 1994. Those units would be placed in
the field at various locations to identify any issues yet to be resolved before
a final design would be established for a larger distribution. In December of
1993, OSA, Inc. introduced the first OSA prototype Beta at Chevron's national
oil distributor convention in San Diego.
ITEM 1. BUSINESS, (CONTINUED)
By the end of 1993, the Company had confirmed, with several oil companies, a
strong interest for OSA use in their operations for process control, pipe line
monitoring, and maintenance of equipment such as compressors, pumps, engines and
gear cases. The petroleum processing industry, including refining, blending and
recycling, is today a large user of oil analysis. Presently, oil production
facilities rely on in-house central laboratories for quality control testing
after each production process. It takes generally more than six hours to get
results which determine if the product is acceptable to go on to the next
process or be shipped. The OSA has the potential to become an at, or on-line
process controller which could provide operators with instant information
concerning the quality of the product. This would permit adjustments to the
process to keep the product "in spec," creating significant cost savings and
increases in production speeds.
In December of 1993, the Company signed a confidentiality agreement with Exxon
Corporation and began evaluating a variety of petroleum product samples. This
initial phase was required to determine if the OSA could produce the accuracy
and repeatability required for a refinery. The preliminary results were very
encouraging, therefore, the Company began negotiating a national lease agreement
with Exxon Corporation which was signed in July of 1994.
If the OSA meets its requirements for accuracy, reliability and repeatability,
the probability exists that OSA units will be placed at line as a process
control technology for multiple petroleum products with numerous oil companies.
Refinery operations run continuously, 24 hours per day, seven days per
week. In addition, the refineries, blenders and recyclers of oil can utilize
the OSA for equipment and pipe line monitoring.
Each OSA has capacity to analyze 15 samples per hour. The Company anticipates
charging less than $10 per sample analyzed. The instrument is anticipated to
require minimal downtime for daily calibration and maintenance.
The Company is targeting markets that offer significant potential utilization of
OSAs including oil refineries, blending plants, chemical plants, new car
dealers, heavy duty equipment dealers, large auto auctions, military, quick
lubes, truck service centers, railroads, municipalities, utilities, marine and
industrial.
The Company has already received requests for OSAs to be placed at sites
including truck stops, Detroit Diesel dealers, Caterpillar dealers, Penske Truck
Leasing, new car dealerships, oil distributors, marine service facilities,
refineries and chemical plants, and other domestic and foreign oil companies.
The first OSA units were shipped from TJA's Franklin, Massachusetts assembly
facility in July of 1994 for field testing in the Atlanta OSA facility. The
initial testing revealed several areas that needed upgrading or modifications of
both hardware and software. Testing of the OSA continued in Franklin and
Atlanta. The chemical properties of oil samples may change with time and
"fresh" samples were required for final instrument evaluation. In July, several
units were shipped to a refinery for actual near line testing of fresh samples.
The Company decided to pause in distributing any additional Beta units until all
hardware and software were thoroughly tested and initial problems resolved.
Upgrades and design modification requirements for the OSA were identified during
the July through October testing period. Those modifications have been
integrated into all existing and future units. Based upon the performance of
the modified units, the Company believes that instruments are capable of
operating with the high degree of reliability, repeatability and accuracy
required for use in nearly all the markets identified.
Based on the initial performance from the first OSAs, the Company ordered an
additional 90 units from TJA in August of 1994. In December 1994, 12 OSA units
were at various customer sites which include an oil refinery, new car dealer,
automotive quick lube, oil jobbers and heavy duty equipment dealers. Because of
the late deliveries, the OSA units produced a minimal amount of revenue for the
first quarter of fiscal year 1995. The balance of the initial 114 OSA units
ordered from TJA are expected to be shipped in 1995. Assuming the initial OSA
units function as intended, additional orders are expected to be received. TJA
has the capacity to produce up to 1,500 units within 12 months and has the
capability to increase their capacity and supply all of TSI's needs given
several months ramp-up time.
ITEM 1. BUSINESS, (CONTINUED)
TJA is now assembling OSAs in its Grand Junction, Colorado facility. The
Company used its existing cash resources to fund the development and purchase of
the initial OSAs. Future units will be paid for with available cash and an
established $4,500,000 line of credit from the First Union National Bank (See
Item 8. Financial Statements and Supplementary Data, Note 21. Subsequent
Events.) Those units and all future units will be built by TJA in their Grand
Junction, Colorado assembly facility. The Company is presently increasing
personnel at OSA, Inc. to handle the anticipated demand for the OSA units.
The Company has expended approximately $1.1 million on OSA equipment which has
been capitalized. The Company believes that the research and development
expenses related to OSA are complete. In addition, TJA has invested several
million dollars in development of the OSA. TJA has advised the Company that it
is now producing and shipping production units and believes that their research
and development is complete although further refinements are likely.
Both TSI and TJA have applied for patent protection on various aspects of the
instrument. TJA has invested considerably into the design of user friendly and
cost effective hardware. TSI has focused, in over two years of research and
development, its resources on the software, database and other analytical
functions. There is presently no known technology to replace that inherent in
the OSA. The proprietary nature of the OSA is protected by trade secrets, high
cost of development, requirement of a large database and a highly complex
analytical process. In addition, TSI expects further barriers to entry to be
established by pricing the OSA such that it is relatively inexpensive to the end
user. The Company could not at this time find any other supplier capable of
developing a comparable unit in the near term.
TSI and TJA are nearing completion of a long-term agreement. The agreement
intends to provide for exclusive manufacturing rights for TJA and exclusive
distribution rights for TSI for petrochemical products and synthetics used as
lubrication.
ARCS (ACCELERATION RESTRAINT CURVE SAFETY SEAT)
Over the past six years the Company has developed a proprietary technology that
involved controlled seat motion that occurs at the instant of a frontal crash to
help restrain vehicle occupants and assist automakers in meeting Federal passive
restraint laws. The Company labeled the technology ARCS (Acceleration Restraint
Curve Safety Seat). This technology
underwent very successful sled testing by a Detroit automaker in December 1993.
The primary objective of this technology is to provide supplemental lower torso
restraint to alleviate abdominal, hip, leg and ankle injuries caused by unwanted
lower torso motion often experienced in a severe frontal crash. The secondary
objective of the technology is to better position the upper torso in a frontal
crash and alleviate injuries to the head, neck and chest. In a severe frontal
crash, occupants restrained by any combination of air bags and seat belts may
experience upper and/or lower torso injuries caused by "submarining" under the
lap belt, shoulder harness and/or air bag. The ARCS technology is designed to
reduce or alleviate those injuries caused by submarining. The ARCS technology
is intended to become part of the overall restraint system along with air bags
and seat belts, eliminating the need and expense of knee bolsters, allowing more
passenger leg room and giving instrument panel designers more latitude.
In 1990, the Company retained a group of independent scientists and engineers
and entered into an exclusive license agreement with M.I.T. for the ARCS
Technology. The term of the license runs until the expiration of the life of
the last patent issued. In addition, the M.I.T. association gave further
credibility both to the concept and the Company and heightened the level of
interest in the technology.
As of this date, the Company has not been granted a patent. Patent
application began in 1991 incorporating the proprietary information learned
during the research and development process. The application was recently
denied and an appeal filed. In addition to seeking to protect the technology,
the Company requests interested potential users, sub-licensees, or other
outside third parties to sign confidentiality and non-compete agreements
whenever possible. As part of the licensing agreement with M.I.T., the Company
has agreed to assign any patents issued to M.I.T. in exchange for the exclusive
license back to TSI from M.I.T. to those patents, including the ability to
sub-license same for the entire
ITEM 1. BUSINESS, (CONTINUED)
life of the patent. In addition, the agreement provides that M.I.T. will
support patent infringement actions and, with permission, will allow the use of
the respected and world-renowned M.I.T. name in association with the technology.
The Company believes that the substantial expense, time frame and highly
technical nature of the research and development required to develop a seat
motion technology may inhibit competition. The Company also believes that it
has a competitive advantage by having an experienced engineering team capable of
immediately providing the complex, advanced engineering support essential to
apply the technology into vehicles. In the opinion of the Company's engineering
team, seat manufacturers and automakers do not normally employ the technical
expertise required to develop the ARCS technology. It is common in the
automotive industry to purchase from outside sources advanced technologies that
manufacturers require rather than invest their own financial resources in a
costly research and development effort. This is particularly true when a
technology helps a manufacturer meet a legislated or popularly demanded need.
The Company is unaware of any other moving seat technology that has been
successfully tested by a major automobile manufacturer.
A prototype seat was built in October of 1990. The Company selected the Wayne
State University Biomechanics Department, based in Detroit, to conduct the sled
tests since the test facility and staff are respected by the auto industry
world-wide. The sled test results proved ARCS' technology ability to provide
significant injury reduction potential for vehicle occupants during a frontal
crash. Sled tests were conducted with the occupant restrained by a shoulder
harness only without the use of an air bag or lapbelt, and the instrument panel
and steering column were removed.
In late 1991, the Company received its first purchase order for an engineering
project concerning the ARCS seat technology from Integram (a division of Magna
Industries), a major vehicle seat manufacturer. In turn, Integram entered into
an agreement with a major Detroit automaker to evaluate the ARCS technology and
seat design for a specific vehicle.
In May 1992, the Detroit automaker conducted a vehicle sled test using the ARCS
safety seat technology. A dummy was restrained only by the air bag and the ARCS
seat motion, which are both passive restraints, requiring no action by the
occupant. The results of the test generated injury criteria levels well within
federal safety standards. The Detroit automaker scheduled further tests of
other scenarios using the ARCS seat.
The Company entered the next phase which involved the design of a production
type mechanism with four mandatory characteristics: it must be lightweight,
inexpensive, rattle-free and perform reliably.
During 1993, the Company refined its technology and with its industry partner,
Integram, developed a pre-production type seat. The Company, in October 1993,
tested the pre-production type mechanism in a preliminary test at the sled-
testing facilities of Allied Signal. The results showed that the prototype seat
exceeded safety criteria. In December 1993, in-house sled tests were conducted
by the Detroit automaker in their test facility, using an Allied supplied airbag
and the Integram pre-production mechanism. The results were very favorable.
During the third and fourth quarters of fiscal year 1994, a major Detroit
automaker sled-tested the ARCS technology in a second vehicle. The results were
within Federal Safety Standards with the occupant restrained using the ARCS seat
motion for the lower torso and an air bag for the upper body. The knee bolsters
were removed, and there was no shoulder harness or lap belt used.
The Company believes research and development costs to TSI of the ARCS Safety
Seat are complete and all future development and application engineering will be
paid for by the vehicle and/or seat manufacturers.
ITEM 1. BUSINESS, (CONTINUED)
The Company is attempting to establish a strategic partner relationship with a
seat manufacturer. There is a requirement to design and build actual pre-
production hardware for automaker testing. The resources to accomplish that
task exist with the seat manufacturers. The Company is in negotiations with a
major international seat supplier. The Company hopes to sell equity in the
technology and maintain a long-term opportunity for royalty income. Due to the
long lead times and additional hardware, as well as other testing required,
royalties will not be generated for at least three years after a contract is
signed with an automaker.
EFECS
In early 1990, the technology licensing office at M.I.T. offered the Company a
new technology that promised to improve the fuel economy and reduce exhaust
emissions of a spark ignited engine, without decreasing power or driveability.
The technology, named EFECS, Engine Fuel Economy Emissions Control Reduction
System, was developed by an engineer who is also an auto race "buff" and a
member of the M.I.T. racing team. EFECS is based on a patented computer
controlled engine operation strategy and employs its own patented high powered
variable output ignition system coupled to a unique spark plug design. The
system is intended to help automakers meet future stringent exhaust emission
standards, including cold start emissions, as well as improve fuel economy.
The EFECS technology may solve the major problems experienced with lean burn
engine operation in the past and also provide a cost and weight effective
solution to cold start emissions. These problems include (i) control of the
transient fuel air charge to maintain driveability, (ii) control of a variable
air fuel ratio, (iii) maintaining low NOX in a lean burn environment, (iv)
ignitability of a lean mixture and (v) misfire control. EFECS' self-tuning
capability eliminates the need to tune-up the engine and keeps it running
efficiently for the life of the vehicle. The controller provides knock and
misfire control, as well as "rev-limiting" and overheat protection. It also
provides diagnostics and trouble-shooting information.
The Company signed an exclusive license agreement with M.I.T. and a consulting
agreement with the EFECS inventor in September of 1990. In connection with the
execution of the License Agreement, the Company made no payments to M.I.T. It
has agreed to pay M.I.T. royalties from future sales, if any. In fiscal 1994,
the Company also paid the inventor an aggregate of approximately $42,800 in
consulting fees and subsequent to that date is paying the consultant $3,000 a
month. The term of the license runs until the termination of the life of the
last patent to arise from the patent rights. The costs of EFECS incurred to
date, excluding management time and general overhead, have been approximately
$422,800 which has been charged to expense. Initial proof of concept testing
was successfully conducted at the Arthur D. Little Automotive Laboratory in
Cambridge, Massachusetts.
In October of 1993, Chrysler Corporation purchased two ignition system
developmental prototypes for a four and six cylinder engine. The other Detroit
automakers will use these units also as the technology is being tested jointly
under the consortium of General Motors, Ford and Chrysler. There is interest
from other European and Asian automakers as well. As of mid-November 1994,
Chrysler completed two series of preliminary tests which generated favorable
results. The units are expected to be sent to General Motors and Ford for
additional testing in early 1995.
The Company has an offer and is negotiating with the inventor to sell back a
controlling interest in the EFECS system. In turn, the inventor will provide
the balance of the research and development required to meet the OEM's requests
for a more advanced prototype capable of underhood testing. The Company does
not expect any near term royalty income from either the OEMs or ignition
manufacturers. The technology is yet unproven and will require more testing
before any manufacturing license agreements can be signed. The Company will
continue to support the marketing whether or not a restructure of the original
license takes place. The Company will, under any scenario, maintain an
opportunity for long-term royalty income.
ITEM 1. BUSINESS, (CONTINUED)
OTHER TECHNOLOGIES
The Company continually is exposed to new technology ideas from outside parties,
universities, auto manufacturers and affiliated engineers and scientists.
SIGNIFICANT CUSTOMER INFORMATION
During 1994, approximately 59.8% of the Company's revenue was derived from the
Overhead Speaker System sold to Chrysler Corporation. For significant customer
information see Item 8. - Financial Statements and Supplementary Data -Notes 18
and 20.
GOVERNMENT REGULATION
The Company is subject to government regulations generally affecting all
businesses, none of which has material adverse effect upon the Company. The
Company's recently established industrial oil analysis subsidiary routinely
disposes of used oil in the course of its ordinary business and as such is
subject to federal, state and local regulations. To handle this oil disposal,
the Company hires a licensed, insured third party. The Company believes that it
and its predecessors are and have been in material compliance with all rules and
regulations of the federal, state and local agencies.
Environmental compliance costs are not expected to have a material effect on the
financial condition and results of operations of the Company. However, in the
event of significant changes in statutes or regulations or unforeseen problems
in connection with the storage of the used oil, the transportation of the used
oil or the disposal, site environmental compliance costs may have a material
adverse effect on the Company. Also, the Company's ARCS Safety Seat has been
developed in response to safety concerns. The EFECS spark engine technology was
conceived to help OEMs meet federal and state exhaust emission and fuel economy
standards.
SEASONAL INFORMATION
The Company's management believes its products and services are not seasonal.
OFFICES AND EMPLOYEES
The Company maintains principal administrative offices in Palm Beach Gardens,
Florida and has an investor relations department in the New York City office.
The Company has a new engineering and product assembly facility in Madison
Heights, Michigan. The UTG office is located near Atlanta, Georgia with
satellite laboratories in Addison, Illinois, a West Coast laboratory in Sparks,
Nevada and a field sales office in Los Angeles, California. On-Site Analysis,
Inc. is located near the UTG facility. The Company employs approximately 140
full-time people and also engages consultants, as needed, with expertise in the
areas of law, finance, research and development, public relations and marketing.
During 1994, the Company expanded its investor relations department to better
serve the growing interest in the Company from brokers, money managers,
individual investors and institutions. In June, the Company hired William G.
Roll III as Director of Investor Relations.
The Company also added Arthur Kirsch, former President of County NatWest
Securities, as an independent Board member. As a result, five of the Company's
nine directors are independent and not employed by the Company.
Fahnestock & Company, Inc. became the first investment banking firm to initiate
an independent research report on the Company. Further research is expected in
1995. The Company has made presentations to many large institutional investors
and other money managers.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the location and use of the Company's facilities.
All of the facilities are leased.
USE LOCATION EXPIRATION
o Corporate Headquarters Palm Beach Gardens, Florida
January 1996
o Investor Relations Office New York, New York
November 1996
o OEM Assembly, Marketing and
Engineering Madison Heights, Michigan
March 1995
o Ancillary Warehouse Madison Heights, Michigan
Month to Month
o UTG-Administration and Main Laboratory Atlanta, Georgia July 1999
o UTG - Satellite Laboratory Addison, Illinois
November 1998
o UTG - Satellite Laboratory Sparks, Nevada June 1995
o OSA, Inc. Atlanta, Georgia May 1997
All facilities are operating below full capacity and future planning by the
Company's management has taken into consideration potential further demand.
Each of these facilities is in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company on April 20, 1994 initiated a suit in the U.S. District Court in
Atlanta, Georgia against PSI, Inc. for failure to honor contractual obligations,
relating to samples sold prior to the Company's purchase of PSI and processed
after the purchase date, as defined in the Asset Purchase Agreement of PSI dated
July 16, 1993. This suit is for approximately $635,700 for sample processing,
of which payment has not been remitted. The Company's counsel believes that the
Company's suit is with merit.
In December 1993, UTG was sued along with nine others in connection with an
aviation accident in January 1989, as referenced in the previous report on Form
10-K. (See Item 8. Financial Statements and Supplementary Data, Note 9. for the
fiscal year ended September 30, 1993.) The lawsuit was settled in July 1994
with the Company securing release from the above lawsuits without any admission
of liability for a nominal sum.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1994.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The following table sets forth for the periods indicated the range of quarterly
high and low representative market prices for the Company's common stock.
Starting in March 1992, the Company's common stock was traded on the American
Stock Exchange Emerging Company Marketplace under the symbol TPS. Since
September 14, 1993, the Company's common stock trades on the American Stock
Exchange under the symbol TPS.
FISCAL 1994 FISCAL 1993
HIGH LOW HIGH LOW
First Quarter (December 31) 4-11/16 2-7/8 2-11/16 1-1/8
Second Quarter (March 31) 9 4-1/4 3-1/8 1-11/16
Third Quarter (June 30) 7-3/4 4-1/4 2-5/8 1-1/2
Fourth Quarter (September 30) 7-7/8 4-1/4 3-1/2 2
HOLDERS
As of December 31, 1994 there were approximately 1,649 holders of record of the
Company's common stock.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS,
(CONTINUED)
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon the earnings, capital requirements and operating and financial
condition of the Company, among other factors. At the present time, the Company
intends to follow a policy of retaining any future earnings in order to finance
the growth and development of its businesses.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the Company's
financial condition and results of operations as of and for the years ended
September 30, 1994 and 1993, December 31, 1991 and 1990 and as of and for the
nine months ended September 30, 1992. The selected financial data should be
read in conjunction with the financial statements and related notes in Item
8 below. (See Item 8. Financial Statements and Supplementary Data, Note 2.
Acquisitions.)
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1993, DECEMBER 31, 1991 AND
1990 AND AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1992
Balance Sheet Data: 1994 1993 1992 1991 1990
Current Assets $5,759,900 $2,367,983 $1,537,877 $1,508,460 $2,211,605
Total Asset 18,479,955 10,842,168 2,353,657 2,085,738 2,876,474
Current
Liabilities 2,975,785 2,534,987 515,997 608,368 446,400
Long-term Debt - 458,368 - - -
Total Liabilities 2,975,785 2,993,355 515,997 608,368 446,400
Stockholders'
Equity 15,504,170 7,848,813 1,837,660 1,477,370 2,430,074
Net Tangible
Book Value* 7,341,098 737,072 ,515,477 1,108,959 2,059,307
Net Tangible
Book Value
Per Share .27 .03 .08 .07 .13
STATEMENT OF OPERATIONS:
Net Sales $15,137,862 $3,881,805 $1,826,623 $1,397,890 $606,480
Net Income
(Loss)** 2,014,577 (3,610,226) (2,118,154) (1,482,418) (1,713,394)
Net Income per
Common and Common
Equivalent Share:
Primary .07 - - - -
Fully Diluted .07 - - - -
Common and Common
Equivalent Shares
Outstanding:
Primary 28,381,211 - - - -
Fully Diluted 28,728,488 - - - -
Net Loss per
Weighted Average
Common Share - (.18) (.12) (.09) (.11)
Weighted Average
Common Shares
Outstanding - 19,613,887 17,518,810 15,920,784 15,645,473
Declared Cash Dividends
Per Common Share - - - - -
*Net tangible book value equals total assets minus total liabilities and
intangible assets.
**The 1994 net income of $2,014,577 includes an income tax benefit of
$2,270,000, resulting primarily from a reduction in the valuation allowance
against deferred income tax assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
In January 1994, the Company acquired the assets of an oil analysis business and
in July 1993, the Company consummated the acquisition of two oil analysis
businesses (See Item 8. - Financial Statements and Supplementary Data, Note 2.
Acquisitions). The operations for the period subsequent to the dates of
acquisitions are included in the 1994 and 1993 financial statements. Costs
associated with culminating the acquisitions of approximately $235,500 have been
capitalized.
In 1992, the Company changed its fiscal year-end to September 30 from December
31. Accordingly, results of operations, statements of changes in stockholders'
equity and cash flow statements have been presented for the years ended
September 30, 1994 and 1993, and the nine months ended September 30, 1992.
1994 COMPARED TO 1993
Net Sales increased 290% for the year ended September 30, 1994 compared to the
year ended September 30, 1993. This increase is due to revenue generated from
the new Oil Analysis Group for a full fiscal year in 1994(only 2 1/2 months of
revenue for fiscal year 1993) and the increased sales volume of the OHSS due to
a new purchase order from Chrysler for the Jeep(R) Cherokee. The Company began
shipping these OHSS units in September 1993. There were no significant price
increases in fiscal 1994.
The gross profit margin increased to 32.6% in fiscal 1994 from 18.5% in fiscal
1993. This increase is primarily attributable to the Automotive Technology
segment's increased sales causing production to operate at increased capacity
levels thereby reducing cost of sales on a per unit basis. The Oil Analysis
Service segment's gross margin percentage decreased slightly. The Oil Analysis
segment experienced a loss during the fiscal year due to administrative and
selling expenses incurred in developing the OSA business base. Although there
is an operating loss of $74,033 at UTG, primarily due to the costs of
consolidation and reorganization, the operation provided positive cash flow from
operations.
Also, UTG's loss of business from existing customers was caused for the
most part by the normal bidding process which occurs every two to three years
with major oil companies. In this bidding process, UTG was outbid by
other competitors. In addition, UTG lost business from existing customers
due to service problems which arose in connection with its 1993 oil
analysis acquisitions and the consolidation of two distinct operations. The
Company has responded to these consolidation problems and recently implemented a
program to reduce expenditures commensurate with the current level of business.
(See Item.1 Business - Products and Technologies)
General and administrative expenses increased 32.3% for the year ended September
30, 1994 compared to the year ended September 30, 1993. The increase is due to
additional expenses incurred related to incentive payments of $151,378 on an
employment contract and the termination of the former President of UTG whose
severance compensation totaled $321,313. (See Item 8. Financial Statements and
Supplementary Data, Note 13. Related Party Transactions).
Selling and marketing expense increased 104.4% for the year ended September 30,
1994 compared to the year ended September 30, 1993. This increase is due
primarily to the addition of the oil analysis laboratories and customer service
function during late fiscal 1993. In fiscal year 1993, there was only
21/2 months of selling and marketing expenses.
Professional fees increased by 80.1% for the year ended September 30, 1994
compared to the year ended September 30, 1993. This increase is due to the
rapid growth and complexity of the Company's operations, additional professional
services were utilized in the areas of banking negotiations, personnel and human
resource matters. Additionally, only 21/2 months of UTG operations were
included in fiscal 1993. This increase is also due in part to a legal suit
regarding the defense of the UTG operation against an aviation claim which
was settled in September 1994 with the Company being released in exchange for
payment of a nominal sum.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, (CONTINUED)
Depreciation and amortization increased 73.1% for the year ended September 30,
1994 compared to the year ended September 30, 1993. The increase is primarily
due to amortization of intangible assets relating to businesses acquired and the
capitalized database (See Item 8. Financial Statements and Supplementary Data,
Note 8. Intangible Assets). The current year reflects a full year of expense
whereas the prior year reflects 21/2 months amortization of the database and
no amortization expense relating to intangible assets of the businesses
acquired.
Research and development increased 71.6% for the year ended September 30, 1994
compared to the year ended September 30, 1993 due to research and development
costs associated with OSA.
Interest income increased 215.8% for the year ended September 30, 1994 compared
to the year ended September 30, 1993. This increase is due to the interest
earned on the increased funds invested in the current fiscal period.
Interest expense-affiliate decreased 71% for the year ended September 30, 1994
compared to the year ended September 30, 1993. This decrease is due to the
payment-in-full of the $400,000 affiliate note and payments of $347,550 on the
remaining affiliate note balance. During October and November 1994, the Company
paid the remaining balance of approximately $88,000.
Other income increased significantly for the year ended September 30,
1994 compared to the year ended September 30, 1993 due to a refund of $278,000
which had been written off in 1993. In fiscal year 1993, the Company paid
$278,000 in loan fees to a third party relating to the establishment of a line
of credit. After working with this organization for over 90 days, the Company
found that they were not licensed by Florida as a loan broker and the
third party's liquidity was questionable. The Company was uncertain at the end
of fiscal year 1993 as to the recovery of the loan fees advanced to the
third party and commenced litigation against that party. At September 30,
1993, due to concerns over the recoverability of loan fees advanced, the
$278,000 was written off. Five months later, in fiscal 1994, the Company
filed a lawsuit against the entity in which it made the payment and
recovered the entire amount of $278,000, at which time the Company recorded the
recovery as other income.
Income tax benefit - During fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 (SFAS No. 109) - Accounting for Income
Taxes. SFAS No. 109 requires an asset and liability approach to accounting for
income taxes whereas Accounting Principles Board Opinion No. 11 (APB No. 11)
required a deferral approach. SFAS No. 109 results in the recording of deferred
income tax assets for tax attributes, such as net operating loss carryforwards,
which APB No. 11 did not require to be recognized. SFAS No. 109 also requires
companies to assess their deferred tax assets for realizability and where
management cannot conclude that it is "more likely than not" that the deferred
income tax asset will be realized. SFAS No. 109 requires the recording of a
valuation allowance equal to the portion of the deferred income tax asset deemed
not realizable.
The net deferred tax asset consists primarily of net operating loss
carryforwards. The Company has determined that, over the relevant period, the
reversal patterns of its deferred tax liabilities are such that they offset
similar amounts of deferred tax assets. To realize the benefits of the net
deferred tax asset, the Company will need to generate approximately $5.5 million
of taxable income in the carryforward period. The regular tax carryforward
period for net operating losses extends for 15 years from the year of
origination. Based on expectations for future taxable income, management
believes that it is more likely than not that the net deferred tax assets not
reserved for will be realized before expiration. The future taxable income
assumptions are largely based on increased sales of Overhead Speaker System
units as the Company attains greater penetration in the Jeep Cherokee and
Wrangler models and expands into other Chrysler models and other automobile
companies. The Overhead Speaker System is performing well in its current
applications and is expected to gain broader utilization going forward. (See
Item 8. Financial Statements and Supplementary Data Note 12. Income Taxes for a
discussion of income taxes.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, (CONTINUED)
The Company has reflected in the accompanying financial statements for
fiscal 1994 a tax benefit of $2,270,000 which largely consists of a reduction in
the valuation allowance that was established upon adoption of SFAS No. 109 of
$2,209,874. This reduction is based on expectations of future taxable income.
The Company estimates future taxable income by projecting the results of its
business activities based on known factors existing at the current date.
The Company's estimate of future taxable income changed from the beginning
of fiscal 1994 due to:
o greater certainty regarding the Company's OHSS units for Jeep Cherokee
production installation (this application began in September 1993).
o greater penetration in the Grand Cherokee OHSS application being
attained.
o the decision by Chrysler to convert its Toledo facility to full
utilization for Jeep Cherokee production, thereby increasing the number of
units the Company would be supplying (previously the Toledo facility
produced not only Jeep Cherokees but also other Chrysler models).
o progress, during mid-fiscal year 1994, in gaining new vehicle
applications for the OHSS.
Following is a summary of the Company's pretax book losses and taxable losses
for the last five years.
1994 1993 1992 1991 1990
Pretax book
loss $(255,423) $(3,610,226) $(2,118,154) $(1,482,418) $(1,713,394)
Taxable loss $(67,200) $(3,920,523) $(2,144,267) $(1,432,117) $(1,780,355)
1993 COMPARED TO 1992
Net Sales increased 112.5% for the year ended September 30, 1993 compared to the
nine months ended September 30, 1992. The increase in 1993 is due to the
purchase order of the OHSS for factory installation in the Cherokee which
generated approximately $391,200 in sales and the revenue generated by UTG, the
new oil analysis group, of $1,345,465. There were no significant price
increases during fiscal 1993. The decrease in the gross profit margin of 5%
from 1992 to 1993 is due to the write-off of inventory which included models and
packaging deemed obsolete. In fiscal 1993, the Company wrote off inventory of
$273,010. The inventory write-off related to specific speaker inventory that
was no longer saleable. The inventory represented a retail product that had a
design which was different than the design on the manufacturing contract for
original equipment installation. This inventory was, on the average, 18 months
old and could not be resold due to this design difference. The write-off
reflected the full carrying value of that inventory. This will not reoccur
since the Company is not supplying speakers for this particular vehicle model.
Currently, there are not any uncertainties associated with the recoverability of
inventory since the turnover is running approximately two weeks.
The increase of 30.1% in general and administrative expense for the year ended
September 30, 1993 compared to the nine months ended September 30, 1992 is due
to the increased operations of the Company (1993 has three months of additional
operations) and the additional general and administrative cost of approximately
$338,000 incurred by UTG. Consulting expenses increased $448,084 primarily due
to the acquisitions and the general growth of the business.
Selling and marketing expense increased 74.3% for the year ended September 30,
1993 compared to the nine months ended September 30, 1992. This increase is due
primarily to the addition of the new sales force whose salaries, benefits and
related expenses totalled $159,000 through the first quarter of fiscal 1993 (see
restructuring expense discussed below) and also the increased promotion, trade
show presence and public relations efforts in fiscal 1993. Also, in late July,
in connection with the acquisition of UTG, expenses were incurred due to the
customer service function. Customer service is an integral part of the
marketing function at UTG.
Professional fees decreased 33.2% for the year ended September 30, 1993 compared
to the nine months ended September 30, 1992. The decrease is primarily due to
lower legal costs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, (CONTINUED)
Depreciation and amortization increased 89.4% for the year ended September 30,
1993 compared to the nine months ended September 30, 1992. The increase is due
to depreciation and amortization on the additional depreciable capital assets of
$617,257 purchased by the Company during fiscal 1993 and the additional
amortization expense on the new intangible asset (database) of approximately
$35,140. Also, the Company acquired approximately $652,115 of additional
depreciable assets through its two acquisitions in July 1993.
Research and development increased 39.2% for the year ended September 30, 1993
compared to the nine months ended September 30, 1992. This increase is due to
development in 1993 of prototype designs for tooling for Chrysler and other
vehicle manufacturers.
Restructuring expense relates to the costs associated with severance of sales,
middle management and other personnel (See Item 8. - Financial Statements and
Supplementary Data, Note 19. Restructuring Expense).
Interest income decreased 66.1% for the year ended September 30, 1993 compared
to the nine months ended September 30, 1992. This decrease relates primarily to
the decreased funds yielding interest as a result of the utilization of cash to
fund operations and acquisitions.
Interest expense increased $79,352 for the year ended September 30, 1993
compared to the nine months ended September 30, 1992. This is due primarily to
the interest on the new promissory notes entered into in November 1992.
Interest expense-affiliate was $38,150 for interest on notes payable incurred in
connection with the acquisition of SMI and is classified as a note payable to an
affiliate because the former principal stockholder of SMI became the Chairman of
UTG. There were no notes payable in fiscal 1992.
Other expense increased $305,906 for the year ended September 30, 1993
compared to the nine months ended September 30, 1992 due to a $250,000
payment of loan fees to a third party to establish a line of credit which
was deemed to be unrealizable and, therefore, was written off. Also, $28,000
of loan fees were abandoned with regard to funding on a conventional loan. It
was deemed not in the best interests of the Company to continue on the terms
and conditions of this funding.
The Company has made significant changes in its internal policies in order to
prevent reoccurrence of situations such as those described in Quarterly
Information of Note 1. to Consolidated Financial Statements. The Company has
engaged its auditors to perform timely quarterly reviews of its interim
financial information. Additionally, the Company has instituted a procedure
that whenever there is any accelerated vesting of options, notification is made
to the appropriate parties to address whether or not compensation issues arise
as a result.
The Company is dependent upon the automobile industry, particularly Chrysler
Corporation. In recent years, sales by the United States automobile
manufacturers including Chrysler have been eroded, due to economic conditions
and foreign competition. However, the Company's sales of OHSS units are aimed
at a niche market consisting of sports and utility vehicles rather than standard
passenger vehicles. Demand for these vehicles has been strong at Chrysler. No
assurances can be given that consumer demand will continue.
The remaining products marketed by the Company may be adversely affected by
economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operations during the current fiscal year
totalled $(1,369,180). Accounts receivable increased $2,143,976 primarily
due to increased OHSS sales to Chrysler.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, (CONTINUED)
Net cash used in investing activities was $(1,569,896) of which
approximately $96,324 was used for the acquisition of Pro-Tech, Inc. (See
Item 8. Financial Statements and Supplementary Data, Notes 2 and 3 Acquisitions
and Statements of Cash Flows, respectively.) Additionally, for the fiscal
year ended September 30, 1994 $1,335,484 was expended for capital assets.
Net cash provided by financing activities was $4,006,087 which included sales of
2,311,100 shares of common stock through two private placements (550,000 shares
at $1.75 per share) and the exercise of stock options and warrants (exercise
prices ranged from $.28125 to $6.00) and in total generated approximately
$5,237,858 in gross proceeds. For the year ended September 30, 1994, the
Company made repayment on notes of $1,728,242. During fiscal 1994, the Company
paid off all debt due from the acquisition of SMI with the exception of
approximately $88,000, which was subsequently repaid by November 1994. Also,
in the year ended September 30, 1994, the Company utilized their line of
credit with Comerica Bank and borrowed $600,000 (December 1993) which was
subsequently repaid in full.
The Company is confident based on the cash flow from existing purchase orders
from Chrysler and the availability of its $500,000 working capital credit line
that all short-term liquidity needs can be met therefrom.
The Company has obtained a $4,500,000 line of credit ("OSA Line") from the
First Union National Bank to finance future orders of OSAs (See Item 8.
Financial Statements and Supplementary Data, Note 22. Subsequent Events.) As
part of the First Union National Bank loan agreement, the Company is required
to pay $1.9 million to Thermo Jarrell Ash before First Union National Bank is
required to fund any of the OSA Line. The Company has funded $1,241,000 to
present, and intends to fund the difference through a convertible debenture with
Ganz Capital Management. This convertible debenture will be for $3 million,
with a five-year term, 9% rate of interest and convertible after one year
to Top Source echnologies common stock at $10 per share. If OSA orders require
the Company to obtain additional financing, the Company believes that
adequate additional financing sources will be available. The Company
anticipates that cash flow from operations will meet its remaining long-term
liquidity needs.
INFLATION
The impact of inflation has become less significant with dormant inflation rates
in recent years. The Company believes inflation has not had a material effect
on the Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX PAGE
Report of Independent Certified Public Accountants . . . . . . . . . . . . . 18
Consolidated Balance Sheets as of September 30, 1994 and 1993 . . . . . . . . 19
Consolidated Statements of Operations for the Years Ended September 30, 1994,
1993 and the Nine Months Ended September 30, 1992 . . . . . . . . . . . . . .20
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1994, 1993 and the Nine Months Ended September 30, 1992 . . . 21
Consolidated Statements of Cash Flows for the Years Ended September
30, 1994, 1993 and the the Nine Months Ended September 30, 1992 . . . . . . .22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 23
TOP SOURCE TECHNOLOGIES, INC.
Annual Report on Form 10-K
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Top Source Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Top Source
Technologies, Inc., (a Delaware corporation) and subsidiaries as of September
30, 1994 and 1993, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended September 30, 1994 and
1993 and the nine month period ended September 30, 1992. These financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our 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 financial position of Top Source Technologies, Inc.
and subsidiaries as of September 30, 1994 and 1993 and the results of their
operations and their cash flows for the years ended September 30, 1994 and 1993
and the nine month period ended September 30, 1992 in conformity with generally
accepted accounting principles.
As explained in Note 12 to the financial statements, effective October 1, 1993,
the Company changed its method of accounting for income taxes.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedules VIII and X are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
December 28, 1994. (except with respect to the matter discussed in Note
22. paragraph 2, as to which the date is June 9, 1995.)
TOP SOURCE TECHNOLOGIES, INC.
Annual Report on Form 10-K
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1994 AND 1993
1994 1993
=======================
ASSETS (restated)
Current Assets:
Cash and cash equivalents 1,429,362 362,351
Accounts receivable (net of allowance of $150,000
and $13,145 in 1994 and 1993, respectively) 3,363,560 1,564,923
Advance to officer 40,000 ---
Inventories 356,498 263,524
Prepaid expenses 307,605 99,336
Other 262,875 77,849
-----------------------
Total current assets 5,759,900 2,367,983
Property and equipment, net 2,204,858 1,362,444
Manufacturing and distribution rights and
patents, net 376,799 286,822
Capitalized database, net 2,916,527 3,127,360
Intangible assets relating to businesses
acquired, net 4,869,746 3,697,559
Deferred income tax assets, net 2,270,000 ---
Other assets, net 82,125 ---
-----------------------
TOTAL ASSETS 18,479,955 10,842,168
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 1,605,322 1,106,796
Accrued liabilities 657,779 513,076
Deferred service revenue 624,642 209,251
Current portion of notes payable --- 305,864
Note payable-affiliate 88,042 400,000
-----------------------
Total current liabilities 2,975,785 2,534,987
Notes payable, net of current portion --- 22,776
Notes payable-affiliate --- 435,592
-----------------------
Total liabilities 2,975,785 2,993,355
-----------------------
Commitments and contingencies (Notes 7,10, and 13)
Stockholders' equity:
Preferred stock-$.10 par value, 5,000,000 shares
authorized; none outstanding --- ---
Common stock-$.001 par value, 50,000,000 shares
authorized; 26,716,395 and 24,330,899 shares
issued in 1994 and 1993, respectively 26,716 24,331
Additional paid-in capital 25,214,445 19,590,000
Accumulated deficit (9,605,206)(11,619,783)
Deferred officers' compensation --- (13,950)
Treasury stock-at cost; 87,534 shares (131,785) (131,785)
----------------------
Total stockholders' equity 15,504,170 7,848,813
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 18,479,955 10,842,168
=======================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
TOP SOURCE TECHNOLOGIES, INC.
Annual Report on Form 10-K
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1994
AND 1993 AND NINE MONTHS ENDED SEPTEMBER 30, 1992
1994 1993 1992
---------------------------------
Product sales 9,203,938 2,423,488 1,706,183
Service revenue 5,878,281 1,345,465 ---
Other 55,643 112,852 120,440
---------------------------------
Net sales 15,137,862 3,881,805 1,826,623
Cost of product sales 5,596,167 2,080,400 1,237,458
Cost of services 4,593,539 1,018,466 ---
Other 10,151 63,796 ---
---------------------------------
Cost of sales 10,199,857 3,162,662 1,237,458
---------------------------------
Gross profit 4,938,005 719,143 589,165
Expenses:
General and administrative 3,227,761 2,440,392 1,875,383
Selling and marketing 1,075,076 525,883 301,795
Professional fees 371,323 206,184 308,454
Depreciation and amortization 484,809 279,994 147,823
Research and development 265,330 154,643 111,102
Restructuring expense --- 310,036 ---
---------------------------------
Total expenses 5,424,299 3,917,132 2,744,557
---------------------------------
Loss from operations (486,294)(3,197,989) (2,155,392)
Other income (expense):
Interest income 42,219 13,367 39,434
Interest expense (68,305) (79,361) (9)
Interest expense-affiliate (11,066) (38,150) ---
Other income (expense) 268,023 (308,093) (2,187)
---------------------------------
Net other income (expense) 230,871 (412,237) 37,238
----------------------------------
Net loss before income taxes (255,423) (3,610,226)(2,118,154)
Income tax benefit 2,270,000 --- ---
---------------------------------
Net income (loss) 2,014,577 (3,610,226)(2,118,154)
=================================
Net income per common and common
equivalent share:
Primary $0.07
==========
Fully diluted $0.07
Common and common equivalent shares: ===========
Primary 28,381,211
===========
Fully diluted 28,728,488
===========
Net loss per common share outstanding: ($0.18) ($0.12)
=======================
Common shares 19,613,887 17,518,810
=======================
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1993,
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1992 SHARES AMOUNT
BALANCE, DECEMBER 31, 1991 16,823,333 $16,823
Stock subscriptions collected -- --
Exercise of stock options ($.25 to $.5625 per share) 142,136 142
Sale of common stock ($2.50 per share) 942,000 942
Issuance of common stock for services ($3.25 per share) 25,000 25
Cancellation of shares (1,250) (1)
Purchases of treasury stock from officers, 25,872
shares ($2.56 to $3.94) -- --
Deferred offering costs -- --
Amortization of deferred officers' compensation -- --
Net loss -- --
BALANCE, SEPTEMBER 30, 1992 17,931,219 17,931
Exercise of stock options ($.28125 to $1.25 per share) 467,541 468
Exercise of warrants ($.01 to $1.6875 per share) 1,158,700 1,159
Sale of common stock ($1.27 to $1.50 per share) 4,073,439 4,073
Common stock issued in acquisitions ($2.0625
to $3.375 per share) 700,000 700
Write-off of deferred offering costs -- --
Amortization of deferred officers' compensation -- --
Net loss -- --
BALANCE, SEPTEMBER 30, 1993 24,330,899 24,331
Exercise of stock options ($.28125 to $6.00 per share) 708,800 709
Exercise of warrants ($1.00 to $3.00 per share) 1,052,300 1,052
Sale of common stock ($1.75 per share) 550,000 550
Common stock issued in acquisition ($6.62 per share) 74,396 74
Amortization of deferred officers' compensation -- --
Net income -- --
BALANCE, SEPTEMBER 30, 1994 26,716,395 $26,716
(Continued)
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT
BALANCE, DECEMBER 31, 1991 $7,714,465 ($5,891,403)
Stock subscriptions collected -- --
Exercise of stock options ($.25 to $.5625 per share) 38,806 --
Sale of common stock ($2.50 per share) 2,187,658 --
Issuance of common stock for services ($3.25 per share) 81,225 --
Cancellation of shares 1 --
Purchases of treasury stock from officers, 25,872
shares ($2.56 to $3.94) -- --
Deferred offering costs -- --
Amortization of deferred officers' compensation -- --
Net loss -- (2,118,154)
BALANCE, SEPTEMBER 30, 1992 10,022,155 (8,009,557)
Exercise of stock options ($.28125 to $1.25 per share) 458,791 --
Exercise of warrants ($.01 to $1.6875 per share) 1,618,169 --
Sale of common stock ($1.27 to $1.50 per share) 5,260,335 --
Common stock issued in acquisitions ($2.0625
to $3.375 per share) 2,230,550 --
Write-off of deferred offering costs -- --
Amortization of deferred officers' compensation -- --
Net loss -- (3,610,226)
BALANCE, SEPTEMBER 30, 1993 19,590,000 (11,619,783)
Exercise of stock options ($.28125 to $6.00 per share) 1,275,722 --
Exercise of warrants ($1.00 to $3.00 per share) 2,894,346 --
Sale of common stock ($1.75 per share) 961,950 --
Common stock issued in acquisition ($6.62 per share) 492,427 --
Amortization of deferred officers' compensation -- --
Net income -- 2,014,577
BALANCE, SEPTEMBER 30, 1994 $25,214,445 ($9,605,206)
(Continued)
DEFERRED
OFFICERS' TREASURY
COMPENSATION STOCK
BALANCE, DECEMBER 31, 1991 ($57,497) ($50,018)
Stock subscriptions collected -- --
Exercise of stock options ($.25 to $.5625 per share) -- --
Sale of common stock ($2.50 per share) -- --
Issuance of common stock for services ($3.25 per share) -- --
Cancellation of shares -- --
Purchases of treasury stock from officers, 25,872 -- (81,767)
shares ($2.56 to $3.94)
Deferred offering costs -- --
Amortization of deferred officers' compensation 18,663 --
Net loss -- --
BALANCE, SEPTEMBER 30, 1992 (38,834) (131,785)
Exercise of stock options ($.28125 to $1.25 per share) -- --
Exercise of warrants ($.01 to $1.6875 per share) -- --
Sale of common stock ($1.27 to $1.50 per share) -- --
Common stock issued in acquisitions ($2.0625 -- --
to $3.375 per share)
Write-off of deferred offering costs -- --
Amortization of deferred officers' compensation 24,884 --
Net loss -- --
BALANCE, SEPTEMBER 30, 1993 (13,950) (131,785)
Exercise of stock options ($.28125 to $6.00 per share) -- --
Exercise of warrants ($1.00 to $3.00 per share) -- --
Sale of common stock ($1.75 per share) -- --
Common stock issued in acquisition ($6.62 per share) -- --
Amortization of deferred officers' compensation 13,950 --
Net income -- --
BALANCE, SEPTEMBER 30, 1994 $0 ($131,785)
(Continued)
DEFERRED STOCK
OFFERING SUBSCRIPTIONS
COSTS RECEIVABLE
BALANCE, DECEMBER 31, 1991 -- ($255,000)
Stock subscriptions collected -- 255,000
Exercise of stock options ($.25 to $.5625 per share) -- --
Sale of common stock ($2.50 per share) -- --
Issuance of common stock for services ($3.25 per share) -- --
Cancellation of shares -- --
Purchases of treasury stock from officers, 25,872 --
shares ($2.56 to $3.94) -- --
Deferred offering costs (22,250) --
Amortization of deferred officers' compensation -- --
Net loss -- --
BALANCE, SEPTEMBER 30, 1992 (22,250) --
Exercise of stock options ($.28125 to $1.25 per share) -- --
Exercise of warrants ($.01 to $1.6875 per share) -- --
Sale of common stock ($1.27 to $1.50 per share) -- --
Common stock issued in acquisitions ($2.0625
to $3.375 per share) -- --
Write-off of deferred offering costs 22,250 --
Amortization of deferred officers' compensation -- --
Net loss -- --
BALANCE, SEPTEMBER 30, 1993 -- --
Exercise of stock options ($.28125 to $6.00 per share) -- --
Exercise of warrants ($1.00 to $3.00 per share) -- --
Sale of common stock ($1.75 per share) -- --
Common stock issued in acquisition ($6.62 per share) -- --
Amortization of deferred officers' compensation -- --
Net income -- --
BALANCE, SEPTEMBER 30, 1994 $0 $0
(continued)
TOTAL
STOCKHOLDERS'
EQUITY
BALANCE, DECEMBER 31, 1991 $1,477,370
Stock subscriptions collected 255,000
Exercise of stock options ($.25 to $.5625 per share) 38,948
Sale of common stock ($2.50 per share) 2,188,600
Issuance of common stock for services ($3.25 per share) 81,250
Cancellation of shares --
Purchases of treasury stock from officers, 25,872
shares ($2.56 to $3.94) (81,767)
Deferred offering costs (22,250)
Amortization of deferred officers' compensation 18,663
Net loss (2,118,154)
BALANCE, SEPTEMBER 30, 1992 1,837,660
Exercise of stock options ($.28125 to $1.25 per share) 459,259
Exercise of warrants ($.01 to $1.6875 per share) 1,619,328
Sale of common stock ($1.27 to $1.50 per share) 5,264,408
Common stock issued in acquisitions ($2.0625
to $3.375 per share) 2,231,250
Write-off of deferred offering costs 22,250
Amortization of deferred officers' compensation 24,884
Net loss (3,610,226)
BALANCE, SEPTEMBER 30, 1993 7,848,813
Exercise of stock options ($.28125 to $6.00 per share) 1,276,431
Exercise of warrants ($1.00 to $3.00 per share) 2,895,398
Sale of common stock ($1.75 per share) 962,500
Common stock issued in acquisition ($6.62 per share) 492,501
Amortization of deferred officers' compensation 13,950
Net income 2,014,577
BALANCE, SEPTEMBER 30, 1994 $15,504,170
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1994
AND 1993 AND NINE MONTHS ENDED SEPTEMBER 30, 1992
1994 1993 1992
OPERATING ACTIVITIES: ---------------------------------
Net income (loss) 2,014,577 (3,610,226)(2,118,154)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 875,393 343,835 185,786
Discount amortization 52,052 44,044 ---
Amortization of deferred officers'
compensation 13,950 24,884 18,663
Write-off of obsolete equipment and
inventory 45,151 349,318 15,188
Write-off of deferred offering costs and
patents --- 22,250 50,734
Provision for doubtful accounts 136,855 --- ---
Deferred income taxes (33,126) --- ---
Increase in deferred tax assets, net (2,236,874) --- ---
Advances to officers (140,000) --- ---
Repayments from officers 100,000 --- ---
Increase in accounts receivable (2,143,976) (831,478) (78,152)
Increase in inventories (92,974) (249,032) (232,272)
Decrease (increase) in prepaid expense (208,269) 25,285 (87,601)
Decrease (increase) in other assets (270,776) 54,138 (4,464)
Increase (decrease) in accounts payabl 498,526 561,766 (59,239)
Increase (decrease) in accrued
liabilities 20,311 331,213 48,118
----------------------------------
Net cash used in operating activities (1,369,180)(2,934,003)(2,261,393)
INVESTING ACTIVITIES:
Purchases of property and
equipment, net (1,335,484) (617,257) (396,303)
Additions to patent costs (138,088) (6,225) (36,800)
Purchase of businesses, net (96,324)(3,835,260) ---
Decrease (increase) in other assets --- 57,107 (57,107)
---------------------------------
Net cash used in investing activities (1,569,896)(4,401,635) (490,210)
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 5,237,858 7,935,763 2,393,948
Commissions/expenses on stock sales (103,529) (632,614) (166,400)
Payment of deferred offering costs --- --- (22,250)
Collection of stock subscriptions
receivables --- --- 255,000
Purchases of treasury stock --- --- (81,767)
Proceeds from borrowings 600,000 500,000 ---
Repayments of borrowings (1,728,242) (633,880) ---
---------------------------------
Net cash provided by financing activities 4,006,087 7,169,269 2,378,531
---------------------------------
Net increase (decrease) in cash and cash
equivalents 1,067,011 (166,369) (373,072)
Cash and cash equivalents at beginning of
period 362,351 528,720 901,792
---------------------------------
Cash and cash equivalents at end of period 1,429,362 362,351 528,720
=================================
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Top Source Technologies, Inc. (the "Company") is focused on
developing and commercializing state-of-the-art technologies for use in the
transportation, industrial and petrochemical marketplaces.
The Company focuses on two industry segments: automotive technology and oil
analysis service. Within these two segments, the Company has four proprietary
technologies: two licensed from the Massachusetts Institute of Technology, ARCS
(a safety and restraint technology) and EFECS (an engine ignition and control
system); one patented product - an Overhead Speaker System; and one service, oil
analysis which includes both the United Testing Group (consisting of three oil
analysis laboratories); and the On-Site Analyzer (developed jointly with the
Thermo Jarrell Ash (TJA) Division of Thermo Instrument Systems, Inc.), which is
a proprietary oil analysis instrument that combines two spectrometers in order
to analyze both new or used oil in under three minutes at the end-user's site.
The Company provides the initial financing, management and outside consultants
needed to adequately research, develop and test technologies, and the marketing
and sales expertise required to develop and implement programs to commercialize
technologies.
The Company seeks technologies that satisfy global market demands and provide
solutions to problems in areas such as safety, efficiency, diagnostics, and
others. Technologies in both initial and mature stages are reviewed for their
potential commercialization in accordance with this philosophy.
Revenue is currently derived primarily from sales of the Overhead Speaker System
for both production line and dealership installed units and oil analysis.
BASIS OF PRESENTATION - During 1992, the Company changed its fiscal year end
from December 31 to September 30. Certain 1993 and 1992 amounts have been
reclassified to conform to the current year presentation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
REVENUE RECOGNITION - The Company recognizes revenue from sales of its
products (Automotive Technology segment) at the time the products are
shipped. Subsequent to September 30 1994, the Company changed its method
of revenue recognition for its oil analysis test kits (oil analysis service
segment).Previously, the Company recorded revenue from the advance billing of
unprocessed test kits mailed to customers to collect oil samples and accrued
an estimated cost amount for processing such kits. The new policy requires
the Company to recognize revenue from the performance of its oil analysis
services (oil analysis service segment) at the time the service is rendered.
Advance billings for oil analysis services are considered deferred revenue until
such time as the oil analysis service is rendered.
Through the use of computer modeling techniques, creation of a new
software program to track test kits by identification numbers, and based on an
analytic review of the activity of major customers, the Company has
determined that retroactive application of this revised method to correct the
accounting error from using the previous method from the period October 1, 1993
through September 30, 1994 would have resulted in an immaterial net change in
net income for the period. In order to reflect the change in revenue
recognition method, the caption in the liability section of the Company's
balance sheet at September 30, 1994 was changed from "Accrued Testing Costs"
to "Deferred Service Revenue". Advance billings for oil analysis services
will now be considered deferred revenue until such time as the oil analysis
is rendered.
INVENTORIES - Inventories are stated at the lower of cost or market and are
valued by the first-in, first-out (FIFO) method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Repairs and
maintenance costs are charged to expense as incurred. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, or the lease term if shorter in the case of
leasehold improvements, ranging from two to twelve years. When property or
equipment is retired or otherwise disposed of, the cost less related accumulated
depreciation is removed from the accounts and the resulting gains or losses are
included in other expense in the accompanying statements of operations.
MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS - These assets are valued at
the lower of cost or net realizable value and are being amortized using the
straight-line method over the terms of the agreements or life of the patents,
ranging from ten to thirteen years.
INTANGIBLE ASSETS - Intangible assets primarily consist of the cost of acquired
businesses in excess of the fair value of net tangible and identifiable
intangible assets acquired (See Note 8.) The cost in excess of the fair value
of net tangible and identifiable intangible assets is amortized on a straight-
line basis over 40 years. The capitalized database is being amortized over 15
years using the straight-line method. Subsequent to its acquisitions, the
Company continually evaluates factors, events and circumstances which include,
but are not limited to, the historical and projected operating performance of
acquired businesses, specific industry trends and general economic conditions to
assess whether the remaining estimated useful life of intangible assets may
warrant revision or that the remaining balance of intangible assets may not be
recoverable. If such factors, events or circumstances indicate that intangible
assets should be evaluated for possible impairment, the Company will use an
estimate of undiscounted cash flow over the remaining lives of the intangible
assets in measuring their recoverability.
RESEARCH AND DEVELOPMENT - The costs associated with research and development of
products and technologies are expensed as incurred.
QUARTERLY INFORMATION - During the fourth quarter of fiscal 1994, the Company
expensed as compensation an amount for the acceleration of option vesting
related to an officer's severance agreement and capitalized certain costs
related to the On-Site Analyzer (OSA) operation that relate to prior quarters of
fiscal 1994. The following indicates the impact on the fiscal 1994 quarters'
pretax income (loss) of these two items:
Q1 Q2 Q3 Q4
Pretax income (loss),
as reported $251,265 $513,265 $(482,681) $(537,272)
Option Compensation - (262,813) - 262,813
OSA Capitalized Costs 6,124 (42,418) 57,068 (20,774)
Pretax income (loss),
as adjusted $257,389 $208,034 $(425,613) $(295,233)
2. ACQUISITIONS
In January 1994, the Company acquired the assets of Pro-Tech Oil Analysis (Pro-
Tech) of Sparks, Nevada. The total purchase price of $589,075 consisted of
approximately $96,324 in cash and issuance of 74,396 shares of the Company's
common stock which were valued at $6 5/8 per share, the closing market price
on the date of the transaction.
In July 1993, the Company acquired certain assets (exclusive of accounts
receivable) of the oil analysis business of Professional Service Industries,
Inc. ("PSI") for approximately $2,905,000 in cash. The assets consist of
tangible assets, including laboratory equipment, computers, automobiles and
office equipment. The Company also assumed the vacation liability to employees
to be retained and the requirement to process a certain amount of samples sold
prior to closing but not as of that date returned for processing.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS, (CONTINUED)
The Company acquired all of the outstanding stock of Spectro/Metrics, Inc.
("SMI") in July 1993. The cost of the acquisition, a ten-year non-compete
agreement and a four-year employment agreement was $4,800,000. The purchase
price was paid by a $1,670,000 note, $780,000 in cash and 100,000 shares of
common stock of the Company valued at $1.50 per share. These shares were
recorded at the fair market value on the date of issuance, $2.0625 per share,
which differed from the rate attributed to them in the purchase agreement. The
non-compete agreement cost was $600,000, to be paid over a three-year period,
and the employment agreement contained an annual base salary of $400,000.
In September 1993, the original purchase agreement was amended. The amendment
included the issuance of 600,000 shares of common stock of the Company, with a
guaranteed minimum value of $3.375 per share, a portion of which was considered
full consideration for the cancellation of the previous $1,670,000 note. Two
promissory notes totalling $835,592 were issued (See Note 9) and additional cash
payments of $210,000 were made. The original ten-year non-compete agreement was
cancelled and the annual base salary under the four-year employment was reduced
to $200,000. PSI and SMI were later merged and a new subsidiary, United Testing
Group (UTG), was formed.
The above acquisitions were accounted for under the purchase method of
accounting and, accordingly, the results of operations of the businesses
acquired are included in the consolidated statements of operations for the
respective years of acquisition for the period from the dates of the
acquisitions. (See Note 8).
The unaudited pro forma consolidated results of operations of the Company, as if
the PSI and SMI acquisitions had been made at the beginning of each of the two
fiscal years in the period ended September 30, 1993 are as follows:
Year Ended Nine Months
1993 Ended 1992
Net sales $ 9,392,146 $ 6,446,578
Net loss $(3,292,857) $ (1,858,742)
Net loss per common share $ (.14) $ (.09)
The Pro-Tech acquisition was not material and therefore is not included in the
above table.
3. STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Noncash investing activities for the years ended September 30, 1994 and 1993
are:
1994 1993
Accounts receivable $ (208,484) $ 148,298
Property and equipment - 652,115
Capitalized database - 3,162,500
Other - 120,100
Intangibles 1,337,092 3,697,559
Liabilities assumed (539,783) (878,470)
Issuance of stock in
connection with the
acquisitions (492,501) (2,231,250)
Issuance of notes
payable in connection
with the acquisition of SMI - (835,592)
Cash used in acquisitions $ 96,324 $ 3,835,260
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. STATEMENTS OF CASH FLOWS, (CONTINUED)
The 1994 amounts include the preliminary purchase price allocations for the Pro-
Tech acquisition. There were no noncash investing activities during 1992.
There were no noncash financing activities during 1994. Noncash financing
activities during 1993 and 1992 consisted of the following:
1993 1992
Issuance of warrants in connection with notes payable $ 96,096 $ -
Discount on notes payable in connection with the issuance
of warrants (96,096) -
Issuance of common stock for services - 81,250
Decrease in accrued royalty settlement - (81,250)
Cash paid $ - $ -
4. RESTRICTED CASH
Restricted cash at September 30, 1994 is comprised of cash held by the
Company's group health claims processor for the payment of claims prior to the
termination of the minimum premium policy. This amount has been reclassified
to prepaid expenses for the year ended September 30, 1994 as it relates to
prepaid claims.
5. INVENTORIES
Inventories consisted of the following at September 30, 1994 and 1993:
1994 1993
Raw materials $292,211 $147,684
Finished goods 64,287 115,840
__________________________
$356,498 $263,524
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1994 and
1993:
Useful
Life (Years) 1994 1993
Equipment 2-12 $1,142,086 $1,055,424
Computer equipment 3-4 565,472 174,741
On-Site Analyzer 2-5 746,033 246,187
Tooling 2 231,669 131,918
Furniture and fixtures 3-5 198,079 117,021
Vehicles and delivery equipment 3 107,409 54,498
Leasehold improvements 2-5 107,715 54,103
3,098,463 1,833,892
Less: accumulated depreciation (893,605) (471,448)
$2,204,858 $1,362,444
Depreciation of tooling and production equipment in the amount of $337,380 and
$63,841 for the years ended September 30, 1994 and 1993, respectively, has been
allocated to cost of product sales as it directly relates to the product sold.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS
Manufacturing and distribution rights and patents consisted of the following at
September 30, 1994 and 1993:
Useful
Life (Years) 1994 1993
Manufacturing rights 13 $ 58,438 $ 58,438
Distribution rights 13 437,501 437,501
Patents 10 175,392 37,304
______________________________
671,331 533,243
Less: accumulated amortization (294,532) (246,421)
______________________________
$ 376,799 $ 286,822
OHSS (OVERHEAD SPEAKER SYSTEM)
The Company has the exclusive right to produce and sell Pelo Sound products in
North, Central and South America and a non-exclusive right to produce and sell
the products in all other areas of the world, excluding Europe. The value of
these rights is being amortized over thirteen years, and the Company has a
remaining net book value of $31,192 of manufacturing and distribution rights and
patents included in the accompanying balance sheet as of September 30, 1994
related to these rights.
The Company has distribution rights acquired from B&R International Imports,
Corp. related to its Overhead Speaker System. The net book value of these
rights, which are being amortized over 13 years, is $186,479 at September 30,
1994. The Company also has patents on the OHSS relating to improvements and
perfections on the Overhead Speaker System. The net book value of these
patents, which being amortized over ten years is $26,072.
OSA (ON-SITE ANALYZER)
The Company has applied for patent protection on various aspects of the On-Site
Analyzer. The Company has a net book value of $20,671 relating to patents on
the OSA in the accompanying balance sheet at September 30, 1994.
ARCS (ACCELERATION RESTRAINT CURVE SAFETY SEAT)
In September 1990, the Company entered into an exclusive licensing agreement
with M.I.T. for certain technologies associated with the ARCS Seat Safety Motion
whereby M.I.T. would share in any revenue produced from the technologies.
M.I.T. shall receive 5% of any sublicense revenue and one-half of one percent
(.5%) of Net Sales of Licensed Products or Licensed Processes, as defined.
These licensed technologies have contributed to the research, development and
design efforts for the Company's ARCS project.
The Company has a net book value of $73,762 manufacturing and distribution
rights and patents related to the ARCS Seat Safety Device included in the
accompanying balance sheet as of September 30, 1994.
EFECS (ENGINE FUEL ECONOMY EMISSION CONTROL REDUCTION SYSTEM) FUEL SAVING DEVICE
At September 30, 1994, the Company has a net book value of $34,933 in patents
related to the EFECS Fuel Saving Device.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INTANGIBLE ASSETS
Intangible assets consisted of the following at September 30, 1994 and 1993:
Useful
Life (Years) 1994 1993
Capitalized database 15 $3,162,500 $3,162,500
Less: accumulated amortization (245,973) (35,140)
___________ ___________
$2,916,527 $3,127,360
Intangible assets relating to
businesses acquired 40 $5,034,651 $3,697,559
Less: accumulated amortization (164,905) -
____________ ___________
$4,869,746 $3,697,559
The capitalized database contains an active library of engine and machine tests
that have a diagnosed history. The value of the capitalized base was determined
based on an assessment of the number of samples included in the database and a
per unit cost to develop/buy the data. The 15-year amortization period is
supported by an independent study of the expected life in use of each engine
type in the database. Intangible assets related to businesses acquired consist
of the excess of purchase price over estimated fair value of net tangible and
identifiable intangible assets acquired. (See Notes 2 and 3).
9. NOTES PAYABLE
Notes payable at September 30, 1994 and 1993 are as follows:
1994 1993
Secured Promissory Notes - due October
30, 1994, bearing interest at 9.5%,
repaid during 1994 $ - $282,540
Metro Bank - due October 2, 1996, bearing
interest at 10%, repaid during 1994 - 98,152
- 380,692
Less: Unamortized Discount - (52,052)
Less: Current portion - (305,864)
Notes payable - long term $ - $ 22,776
Note payable - affiliate, payable to
sellers of SMI, due October
31, 1994, non-interest bearing $ 88,042 $ 435,592
Note payable - affiliate, payable to
sellers of SMI, repaid when due,
October 31, 1993, non-interest bearing $ - $400,000
In October 1992, the Company obtained $500,000 in financing through the secured
promissory notes. As part of the promissory note agreements, warrants were
issued for the purchase of 50,000 shares of the Company's common stock at $.01
per common share. A portion of the proceeds from the issuance of the promissory
notes issued with the warrants was allocated to the warrants and was accounted
for as additional paid-in capital with a corresponding discount to the
promissory notes. This discount of $96,096 was amortized over the two year
period of the promissory notes. The above warrants were exercised in December
1992. These notes were paid in full in February 1994.
In July 1993, a $1,670,000 note was issued to the former owners of SMI as part
of the acquisition of SMI. The note was subsequently cancelled in connection
with the issuance of 600,000 shares of the Company's common stock valued at
$2,025,000. Two non-interest bearing notes were then issued totalling $835,592.
Interest on the note due October 31, 1994 was imputed at the fair market value
rate of 3.87% in fiscal 1994 and the balance outstanding at September 30, 1994
for this note was paid in full in November 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE, (CONTINUED)
In November 1993, the Company obtained a $750,000 Master Revolving Note from
Comerica Bank of Michigan. The Note is secured by the assets of OHSS (equipment
and fixtures, accounts receivable and inventory) and bears interest at prime
plus 1% and is due on demand. There is no balance outstanding on this note at
September 30, 1994.
See Note 21. Subsequent Events, for additional financing obtained in November
1994.
Cash paid for interest for the years ended September 30, 1994, 1993 and nine
months ended September 30, 1992 was $16,253, $73,467 and $9, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancelable operating leases. Future
minimum rental commitments under these leases is as follows:
Fiscal Year Ending September 30:
1995 $ 304,860
1996 250,730
1997 154,551
1998 122,536
1999 82,911
Thereafter -
Total rental expense amounted to $347,555 and $107,982 for the years ended
September 30, 1994 and 1993, respectively, and $99,009 for the nine months ended
September 30, 1992.
The Company has commitments under certain employment agreements entered into
with individuals in management positions. The payments under these agreements
aggregate $752,000 and are payable during fiscal 1995. Also, certain executives
(two) are eligible to receive an incentive payment of half of their base salary
if the Company's operating income as a percentage of net sales exceeds eight
percent. This incentive payment could be as high as twice the base salary if
this percentage is 20 percent or greater. (See Note 13.)
The Company enacted a Retirement Salary Savings Plan (401(k)) (the "Plan")
effective October 1, 1993. All employees that were employed on October 1, 1993
are eligible to join the Plan. Otherwise, they will be eligible to participate
in the Plan if they have completed three months of service and have attained the
age of 21. The enrollment dates are the first day of each quarter. The Company
will match 25% of each dollar contributed by an employee to the Plan, not to
exceed 6% of the salary deferral. The cost the Company incurred for matching
employee contributions and administrative costs during fiscal 1994 was
approximately $42,530.
The Company has a contract to purchase 114 OSA units for approximately
$4,800,000 which are expected to be purchased by the end of calendar year 1995.
The Company, has from time to time incurred expenses associated with litigation
defense and payment of settlements or judgments in connection with its
businesses. The Company believes that such litigation and other legal matters
should not have a significant adverse effect on the Company's financial position
or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. NET INCOME (LOSS) PER SHARE
The Company utilizes the treasury stock method for computing net income per
share. Net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding after reduction for treasury shares.
The common stock options and warrants (See Note 17) have been excluded from the
net loss per share calculation since their inclusion would have been anti-
dilutive.
12. INCOME TAXES
In February 1992, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes".
The Company implemented SFAS No. 109 in fiscal 1994 by accounting for the
cumulative effect of the change in the period of adoption. The cumulative
effect upon adoption was not material. SFAS No. 109 changed the method of
computing deferred income taxes from a deferred method to a liability method.
Under the liability method, deferred income taxes are determined based on
temporary differences between the financial statement and tax bases of assets
and liabilities, using enacted tax rates in effect during the years in which the
differences are expected to reverse, and on available tax carryforwards.
The income tax benefit for the year ended September 30, 1994 consists of the
following components:
Current:
Federal $(27,000)
State -
(27,000)
Deferred:
Federal (28,157)
State (4,969)
(33,126)
Reduction in beginning of the year
valuation allowance (2,209,874)
$(2,270,000)
A reconciliation of the federal income tax benefit at the statutory rate to the
Company's effective income tax benefit for the year ended September 30, 1994 is
as follows:
Income tax benefit at statutory rate $ (86,844)
State income tax benefit (15,325)
Reduction in valuation allowance, net (2,209,874)
Non-deductible expenses 33,696
Other 8,347
$(2,270,000)
The reduction in the valuation allowance of $2,209,874 was based on expectations
of future taxable income. The Company estimates future taxable income by
projecting the results of its business activities based on known factors
existing at the current date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES, (CONTINUED)
The Company's estimate of future taxable income changed from the beginning
of fiscal 1994 due to:
o greater certainty regarding the Company's OHSS units for Jeep Cherokee
production installation (this application began in September 1993).
o greater penetration in the Grand Cherokee OHSS application
being attained.
o the decision by Chrysler to convert its Toledo facility to
full utilization for Jeep Cherokee production, thereby increasing the
number of units the Company would be supplying (previously the Toledo
facility produced not only Jeep Cherokees but also other Chrysler models).
o progress, during mid-fiscal year 1994, in gaining new
vehicle applications for the OHSS.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1994
and October 1, 1993 are as follows:
September 30, 1994 October 1, 1993
Deferred tax assets:
Net operating losses $ 4,784,500 $ 4,760,000
Expenses for book, not for tax 92,000 59,000
4,876,500 4,819,000
Deferred tax liabilities:
Capitalized database (1,167,000) (1,265,000)
Excess book over tax basis of
acquired property and equipment (60,000) (101,000)
Tax over book depreciation (129,374) (57,000)
Other, primarily deductible intangibles
amortization (86,000) (22,000)
(1,442,374) (1,445,000)
Net deferred tax assets before
valuation allowance 3,434,126 3,374,000
Less valuation allowance (1,164,126) (3,374,000)
Net deferred tax assets $ 2,270,000 $ -
At September 30, 1994, the Company has net operating loss carryforwards of
approximately $11,961,000, which may be used to offset future taxable income, if
any. A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The Company has
determined, based on expected future taxable income which can be predicted with
reasonable certainty, that it is more likely than not that the net deferred tax
assets at September 30, 1994 will be realized before the expiration of the
underlying net operating loss carryforwards. The Company's net operating loss
carryforwards begin expiring in 2001. Expiration of the net operating loss
carryforwards will occur as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES, (CONTINUED)
Year Net Operating
Expiring Loss
2001 $ 124,000
2002 306,000
2003 721,000
2004 1,466,000
2005 1,780,000
2006 1,432,000
2007 2,144,000
2008 3,921,000
2009 67,000
___________
$11,961,000
13. RELATED PARTY TRANSACTIONS
In fiscal 1993, the President and Chief Executive Officer (CEO) of the Company
entered into a new employment agreement. The term of this employment agreement
is five years through August 18, 1998. The agreement provides
for a base annual salary of $200,000 per year. The Company's Compensation
Committee will review the base salary annually during the term, and may
increase, but not decrease, the base salary. Additionally, the new agreement
calls for incentive compensation payments based upon revenue (at the rate of 1%
of quarterly revenue, descending downward if quarterly revenue exceeds $6.25
million), and profitability (at the rate of 50% of the incentive amount based on
revenue if net income is 8% of net sales, up to a rate of twice the incentive
amount based on revenue if net income is 20% or greater) of the Company during
the term, payable after the end of each of the Company's fiscal quarters
according to specific formulas contained in the agreement. The incentive
compensation expense for fiscal 1994 was $151,378. Additionally, the Company
granted the President/CEO non-qualified options to purchase 600,000 shares of
common stock of the Company, at the then current market value, under the 1993
Plan, as later defined. The options vest annually, with 200,000 being vested at
September 30, 1994 and 300,000 and 100,000 options vesting on August 18, 1995
and 1996, respectively. In the event of termination without cause or if the
President/CEO resigns for "good reason", as defined in the agreement (which
includes a material diminution of his duties or responsibilities), the Company
is required to make 36 consecutive monthly payments equal to his base and
incentive compensation. The President/CEO will also continue to receive
medical, life and disability insurance coverage during the 36 month term. Also,
during fiscal year 1994 the Company made short-term advances to the President
which aggregated $140,000 of which $100,000 was repaid by September 30, 1994.
The remaining amount of $40,000 was repaid in October 1994.
In January 1994, an employee, the former President of the Company's subsidiary,
UTG, was terminated. The employee was paid his monthly current base salary of
$11,700 through June 30, 1994 for a total of $58,500. The employee exercised
all vested stock options and the Company accelerated vesting of 70,200 of the
employee's remaining stock options. Compensation expense of $262,813 is
included in general and administrative expenses in the accompanying statement of
operations for the year ended September 30, 1994 related to this acceleration.
A former owner of SMI (See Note 2), entered into a four year employment
agreement in July 1993, as amended subsequently, and was appointed Chairman of
UTG and a director of the Company. The employment agreement calls for a base
salary of $200,000 per year and issuance of stock options to purchase 70,000
shares of the Company's common stock. The Company has a note payable to the
sellers of SMI, one of which is this individual, at September 30, 1994 which
resulted from the purchase of SMI by the Company (See Note 9). This note was
paid in full in November 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OFFERINGS
The Company completed two private placements in fiscal 1994. The total common
shares issued through these placements were 550,000 at $1.75 per share. The
gross proceeds generated in these placements were $962,500.
The Company completed various private placements in fiscal 1993. The total
common shares issued through these placements were 4,073,439, at prices ranging
from $1.27 to $1.50 per share. The gross proceeds generated on these placements
was approximately $5,897,000. The commissions and expenses on those placements
was approximately $632,600.
The Company completed two private placements in fiscal 1992. The first private
placement was completed in May 1992, and was for 872,000 units of common stock
at $2.50 a unit which provided $2,180,000 in proceeds. Each unit consisted of
one share of common stock and one four-year warrant exercisable at $7.00 per
share. In connection with this private placement and the private placement
referred to below, the Company retained a broker-dealer as placement agent and
paid a fee of 8% of the proceeds raised and issued unit warrants equal to 5% of
the proceeds raised, which amounted to 95,250 unit warrants. The unit warrants
entitle the broker-dealer to purchase the same units sold by it at $2.50 per
unit. The second private placement, which was completed in July 1992, was for
70,000 units which provided $175,000 in proceeds. The units are identical to
those sold in the first private placement. The commissions paid on these two
private placements was $166,400.
15. STOCK AND STOCK OPTION PLANS
The "1990 Stock Plan", as amended, covers 3,300,000 shares of common stock and
is intended to provide: (a) officers and other employees of the Company and its
Related Corporations opportunities to purchase stock in the Company pursuant to
options granted hereunder which qualify as incentive stock options ("ISOs")
under the Internal Revenue Code of 1986, as amended; (b) directors, officers,
employees and consultants of the Company and its Related Corporations
opportunities to purchase stock in the Company pursuant to options granted
hereunder which do not qualify as ISO's ("Non-Qualified Options"); (c)
directors, officers, employees and consultants of the Company and its Related
Corporations awards of stock in the Company ("Awards"); (d) directors, officers,
employees and consultants of the Company and its Related Corporations
opportunities to make direct purchases of stock in the Company ("Purchases");
and (e) directors of the Company and its Related Corporations who are not
employees of the Company or its Related Corporations with Non-Discretionary
Options.
The 1990 Stock Plan is administered by a committee of two non-employee
directors. The committee, subject to certain restrictions in the 1990 Stock
Plan, has the authority to grant or issue, as applicable, ISOs, Non-Qualified
Options, Awards, Purchases and Non-Discretionary Options. The committee also
establishes exercise or issue prices, vesting schedules and expiration dates.
In August 1993, the Company established a 1993 Stock Option Plan (the "1993
Plan") covering 1,500,000 shares of common stock. The 1993 Plan provides: (a)
officers and other employees of the Company and its Related Corporations
opportunities to purchase stock in the Company pursuant to options granted
hereunder which qualify as "ISOs"; and (b) directors, officers, employees and
consultants of the Company and Related Corporations opportunities to purchase
stock in the Company pursuant to options granted hereunder which do not qualify
as ISOs ("Non-Qualified Options").
The 1993 Plan is administered by a committee of two non-employee directors. The
committee, subject to certain restrictions in the 1993 Plan, has the authority
to (i) determine the employees of the Company and Related Corporations to whom
ISOs may be granted, and determine to whom Non-Qualified Options may be granted;
(ii) determine the time or times at which Options may be granted; (iii)
determine the exercise price of shares subject to Options; (iv) determine
whether Options granted shall be ISOs or Non-Qualified Options; (v) determine
the time or times when the Options shall become exercisable, the duration of
the exercise period and when the Options shall vest; (vi) determine whether
restrictions such restrictions such as repurchase options are to be imposed
on shares subject to Options and the nature of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STOCK AND STOCK OPTION PLANS, (CONTINUED)
such restrictions, if any, and (vii) interpret the 1993 Plan and promulgate and
rescind rules and regulations relating to it.
The 1993 Plan also provides for the automatic grant of 30,000 non-qualified
options to any director who is not an employee of the Company. These options
vest in increments of 5,000 options per director every six months commencing six
months from the date of the director's election to the board, provided that they
are still serving as a director at that time. Subsequent to fiscal 1994, the
1993 Plan was amended to change the vesting periods for both directors and
employees from every six months to June 30 and December 31. However, in the
event any director resigns prior to full vesting, the options will vest on a
pro-rata basis.
16. STOCK GRANTS
The Company issued Awards of 300,000 and 150,000 shares of restricted common
stock to the President/CEO and Executive Vice President, respectively, in 1990
under the 1990 Stock Plan. At September 30, 1994, 350,000 of the shares awarded
to the President/CEO and Executive Vice President are vested. In fiscal 1994
and 1993, the President/CEO deferred vesting of 50,000 shares (a total of
100,000 shares) granted in 1990. Also, in fiscal 1993, the Executive Vice
President cancelled 50,000 shares previously granted to him which were reissued
to a consultant for previous services rendered.
In 1992, the President/CEO and Executive Vice President surrendered to the
Company 14,617 and 11,255 shares, respectively, which vested in 1992 as part of
the original share award. This was in exchange for the Company's payment of
payroll taxes in the amounts of $37,421 and $44,346, respectively, on the shares
granted and vested. Taxes were based on the compensation determined by the
fair market value of the shares on the vesting dates of July 31, 1992 ($2.56)
and January 1, 1992 ($3.94).
In 1992, the Company issued 25,000 shares of common stock at $3.25 per share for
a royalty agreement termination.
17. STOCK OPTIONS AND WARRANTS
The Company has issued the following options and warrants to directors,
officers, employees and consultants during 1994, 1993 and 1992. All of the
following options and warrants were generally issued at or above the fair market
value of the underlying stock at the date of grant; therefore, no expense has
been recognized.
The information for shares under option is as follows:
1994 1993 1992
Outstanding, beginning of year:
SHARES 4,687,072 3,896,791 2,766,375
Price $.28125-4.00 $.28125-7.00 $.25-3.56
Granted:
SHARES 831,757 3,404,155 1,674,750
Price $2.9375-8.75 $.01-4.00 $1.9375-7.00
Expiration Dates 4/1/1994 - 4/29/1996 - 4/30/1996 -
9/1/2004 9/28/2003 6/01/2002
Exercised:
SHARES (1,761,100) (1,626,241) (142,136)
Price $.28125-6.00 $.01-2.00 $.25-.5625
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCK OPTIONS AND WARRANTS, (CONTINUED)
Expired or Cancelled:
SHARES (220,167) (987,633) (402,198)
Price $2.3125-6.00 $.28125-7.00 $.28125-3.56
Outstanding, end of year:
SHARES 3,537,562 4,687,072 3,896,791
Price $.28125-8.75 $.28125-4.00 $.28125-7.00
Exercisable, end of year
SHARES 2,452,411
18. CONCENTRATION OF CREDIT RISK
The majority of the Company's business activity in 1994 is with one customer, an
OEM, in the automotive industry. As of September 30, 1994 the Company's
receivable balance from this customer was $2,322,900. The majority of this
receivable was subsequently collected. Oil analysis services are being provided
to over 4,000 active customers on a normal credit terms basis. The Company does
not require collateral or other security to support the receivable balance.
Ongoing account monitoring procedures are utilized to minimize the risk of loss.
19. RESTRUCTURING EXPENSE
In December 1992, the Company restructured certain areas of its operations. It
refocused its OHSS approach to the OEM and Distributor Channels away from its
Direct Dealer - Parts and Service avenues. This refocusing required the
reduction of five of seven of the Company's field sales and support personnel.
In fiscal 1993, the Company began assembling its OHSS products. In the past,
the Company used a third party for assembly. In connection with a move into a
new assembly facility, the Company vacated its Troy, Michigan office, the future
cost of which had been accrued in the restructuring reserve. In addition, costs
associated with severance of sales, middle-management and other personnel had
also been accrued. In fiscal 1993, the Company has expensed approximately
$310,000 for severance and related costs and lease commitments on the vacated
lease space. Substantially all amounts accrued have been settled through
payment prior to September 30, 1994.
20. SEGMENT INFORMATION
The Company currently classifies its operations into the following
segments: (1) automotive technology which primarily consists of the
Overhead Speaker System, (2) Oil Analysis Service which primarily consists
of UTG and OSA operations. Corporate and other includes general corporate
assets consisting primarily of cash and cash equivalents, property and
equipment, deferred income tax assets, and corporate expenses. The material
components of corporate general and administrative expenses are salaries
and benefits; travel and entertainment; consulting; and proxy, printing and
transfer costs.
The nature of the expenses listed below are general corporate expenses
which cannot be allocated to the operating segments of the Company's
business in a meaningful manner. These expenses have no direct relationship
to any of the operating segments and are being generated by the executive
officers of the Company and the corporate accounting, payroll and
administrative staffs. For fiscal year 1993, restructuring charges of
$310,036 have been included in the Automotive Technology Segment's operating
loss.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT INFORMATION, (CONTINUED)
Financial information about the Company's operations by segments for the years
ended September 30, 1994 and 1993 is as follows:
Automotive Oil Analysis Corporate
Revenue: Technology Service and Other Consolidated
1994 $9,203,938 $5,878,281 $ 55,643 $15,137,862
1993 2,423,488 1,345,465 112,852 $ 3,881,805
Operating Income
(Loss):
1994 2,821,308 (384,367) (2,923,235) $ (486,294)
1993 (833,343) 25,848 (2,390,494) $(3,197,989)
Depreciation and
Amortization:
1994 66,647 323,314 94,848 $ 484,809
1993 80,012 83,205 116,777 $ 279,994
Identifiable
Assets:
1994 1,737,336 10,217,289 6,525,330 $18,479,955
1993 1,843,608 8,634,738 363,822 $10,842,168
Capital
Expenditures:
1994 323,723 1,031,169 120,592 $ 1,475,484
1993 269,742 282,170 65,345 $ 617,257
The Company's revenue was derived from customers in the automotive manufacturing
and automotive parts and accessories industries. In fiscal 1994, one customer
accounted for 59.8% of net sales. That same customer accounted for 63% and 92%
of net sales in both 1993 and 1992. (See Note 18).
Export sales in 1994 and 1993 were insignificant. In fiscal 1992, export sales
were approximately 48% of net sales.
21. OTHER INCOME
Included in Other Income in fiscal 1994 is approximately $278,000 related to
the recovery of loan fees that had been previously written-off in fiscal 1993.
22. SUBSEQUENT EVENTS
Subsequent to September 30, 1994, the Company entered into a $5,000,000 Loan
Agreement with the First Union National Bank of Florida (the "Bank"). The
agreement stipulates that $4,500,000 (OSA Line) of the proceeds are to be used
for the purchase of certain OSAs. The agreement also indicates that $500,000
will be available for short-term working capital through January 31, 1996. The
Bank is not required to fund any part of the OSA Line until such time
as the Company has paid to Thermo Jarrell Ash (TJA) $1,900,000 without Bank
funding and such OSA units leased to lessees are acceptable to the Bank. The
parameters within which the leases would be acceptable to First Union National
Bank are that a lease with an acceptable term (twelve months) be entered into
and that the lessee be creditworthy. The Company may purchase OSAs with any
source of funds (i.e. operations, equity offering, etc.) and in those instances
OSAs purchased do not need to be leased to the Company's customers, however,
OSA's purchased with proceeds from
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. SUBSEQUENT EVENTS, (CONTINUED)
the OSA line are required to be leased to the Company's customers. The Loan
Agreement is secured by each OSA unit purchased by the Company along with all of
the Company's other assets including leases for any of the OSA units and
$650,000 paid by the Company to TJA and is subject to certain covenants. The
Company has paid $991,000 toward the above $1,900,000 requirement. Amounts
outstanding under the Loan Agreement will bear interest at the prime-rate plus
.85% and interest will be payable monthly commencing on December 10, 1994. A
principal payment will be required that is sufficient to reduce the principal
amount to $2,250,000 on December 31, 1996, with the remaining amounts
outstanding being due and payable on December 31, 1997.
On June 9, 1995, the Company entered into an agreement with advisory clients
of Ganz Capital Management, Inc. ("Ganz") whereby the holders would
purchase $3,000,000 in convertible notes from the Company. In June 1995,
the Company issued $2,060,000 of nine percent (9%) convertible notes maturing
in June 2000. After June 9, 1996, the notes can be prepaid by the Company
without penalty, and can be converted by the holders into fully registered
shares of the Company's common stock at a conversion price of $10 per share.
The Company anticipates issuing the remaining $940,000 in notes and receiving
the proceeds by September 30, 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated by reference from the Proxy Statement, for the annual meeting
of stockholders to be held on March 15, 1995, sections entitled "Election
of Directors".
DELINQUENT FILINGS
Based on information supplied to the Company, one non-employee Director,
Mani A. Sadeghi filed one Form 5 to report one late transaction.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Proxy Statement, for the annual meeting
of stockholders to be held on March 15, 1995, section entitled "Executive
Officer Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Proxy Statement, for the annual meeting
of stockholders to be held on March 15, 1995, sections entitled "Voting
Securities and Principal Holders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year 1994, the Company made short-term advances to the
President and Chief Executive Officer. These short-term advances
aggregated $140,000 of which $100,000 was repaid by September 30, 1994.
The remaining amount of $40,000 was repaid in October of 1994.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
(a) (1) FINANCIAL STATEMENTS. See Item 8 of Form 10-K . . . . . . . . . .17
(a) (2) FINANCIAL STATEMENT SCHEDULES REQUIRED TO BE FILED.
Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . 39
Schedule X - Supplementary Income Statement Information . . . . . 39
All other schedules have been omitted because the required
information is shown in the consolidated
financial statements or notes thereto or they are not applicable.
(a) (3) EXHIBITS
3.0 Amended and Restated Certificate of Incorporation . . . . . (1)
3.1 Amendment to Certificate of Incorporation . . . . . . . . (12)
3.2 Bylaws of Registrant . . . . . . . . . . . . . . . . . . . (2)
3.3 Amendment to Bylaws of Registrant . . . . . . . . . . . . .(12)
3.4 Amendment to the Amended and Restated Certificate of
Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . (14)
4.0 1990 Stock Plan . . . . . . . . . . . . . . . . . . . . . . (3)
4.1 1993 Stock Option Plan . . . . . . . . . . . . . . . . . . (4)
10.0 Employment Agreement Between Registrant and Mr. Stuart Landow(5)
10.1 Employment Agreement Between Registrant and Mr. James P. Samuels
(6)
10.2 Lease of Office Space -Palm Beach Gardens, Florida (amended)(12)
10.5 ARCS License Agreement . . . . . . . . . . . . . . . . . . (7)
10.6 EFECS License Agreement . . . . . . . . . . . . . . . . . . (7)
10.7 Employment Agreement of Carlton S. Joyce . . . . . . . . . (8)
10.9 Employment Agreement of W. Earl Somerville . . . . . . . . (4)
10.10 Stock Purchase Agreement . . . . . . . . . . . . . . . . . (9)
10.11 Asset Purchase and Sale Agreement . . . . . . . . . . . . . (9)
10.12 Agreement and Plan of Merger . . . . . . . . . . . . . . . (9)
10.13 First Amendment to Stock Purchase Agreement . . . . . . . . (8)
10.14 First Amendment to Employment Agreement of Stuart Landow . (12)
10.15 Secured Promissory Notes . . . . . . . . . . . . . . . . . (11)
10.17 First Amendment to Employment Agreement of Carlton S. Joyce (13)
10.18 Lease of Office/Laboratory Space - of United Testing Group, Inc.
- -
Addison, Illinois . . . . . . . . . . . . . . . . . . . . (12)
10.19 Lease of Office/Warehouse Space of United Testing Group, Inc.
(Spectro Metrics, Inc.) - Atlanta, Georgia . . . . . . . (12)
10.20 Termination Agreement of T.A. Cox . . . . . . . . . . . . . (14)
10.21 Release and Waiver Agreement of T.A. Cox . . . . . . . . . (14)
10.22 Master License Lease Agreement - Exxon . . . . . . . . . (14)
10.23 Equipment Purchase Agreement -Thermo Jarrell Ash Corporation(14)
10.24 Fourth Addendum to Lease of Office Space of Top Source
Technologies, Inc.,Palm Beach Gardens, Florida . . . . . . .(14)
10.25 First Amendment to Lease of On-Site Analysis, Inc., Atlanta,
Georgia. . . . . . . . . . . . . . . . . . . . . . . . . . (14)
10.26 Lease of Office and Warehouse Space of United Testing Group,
Inc., Sparks, Nevada . . . . . . . . . . . . . . . . . . . (14)
10.27 Lease of Office Space of Top Source Technologies, Inc., New York
City, New York . . . . . . . . . . . . . . . . . . . . . . (14)
10.28 Shareholder Rights Plan . . . . . . . . . . . . . . . . . . (10)
11.0 Schedule of Computation of Net Income Per Share . . . . . . (14)
24.1 Consent of Independent Certified Public Accountants . . . .
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1994.
EXHIBIT INDEX
(1) Contained in the Form 8-A dated July 10, 1993.
(2) Contained in the documents previously filed with the Securities and
Exchange Commission in conjunction with the Form 8-B on 11/16/92.
(3) Contained in the documents previously filed with the Securities and
Exchange Commission in conjunction with the 12/31/90 Form 10-K.
(4) Contained as an exhibit to the Proxy Statement dated January 11,
1994.
(5) Contained in Amendment No. 1 to the Registration Statement on Form
S-3 filed on November 16, 1993.
(6) Contained in the documents previously filed with the Securities and
Exchange Commission in conjunction with the 12/31/91 Form 10-K.
(7) Contained in the documents filed with the Securities and Exchange
Commission in conjunction with the amended 12/31/91 Form 10-K.
(8) Contained in the Form 8-K/A No. 3 dated November 13, 1993.
(9) Contained in the Form 8-K/A No. 1 filed on August 9, 1993.
(10) Contained in Form 8-K dated January 5, 1995.
(11) Contained in the documents filed with the Securities and Exchange
Commission in conjunction with the 12/31/92 Form 10-Q.
(12) Contained in the documents filed with the Securities and Exchange
Commission in conjunction with the 9/30/93 Form 10-K.
(13) Contained in Amendment No. 3 to the Registration Statement on Form
S-3 filed on January 10, 1994.
(14) Contained in the documents filed with the Securities and Exchange
Commission in conjunction with the 9/30/94 Form 10-K.
SCHEDULE VIII - VALUATION AND QUALIFYING
ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1993 AND
NINE MONTHS ENDED SEPTEMBER 30,1992
Balance Charged Additions
at to Costs CHARGED TO BALANCE AT
Beginning and OTHER END OF PERIOD
Description of Period Expenses ACCOUNTS(1) DEDUCTIONS
DEDUCTED FROM ACCOUNTS
RECEIVABLE -
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
YEAR ENDED SEPTEMBER
30 1994
$13,145 $136,855 - - $150,000
YEAR ENDED SEPTEMBER
30,1993
$ - $5,645 $7,500 - $13,145
NINE MONTHS ENDED
SEPTEMBER 30, 1992
$ - - - - $ -
-
(1) ALLOWANCE UPON ACQUISITION OF RECEIVABLES OF SPECTRO/METRICS, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED
SEPTEMBER 30, 1994 AND 1993 AND NINE MONTHS ENDED SEPTEMBER 30, 1992
ITEM CHARGED TO COSTS AND EXPENSES
1994 1993 1992
1. Maintenance and repairs * * *
2. Amortization of manufacturing
and distribution rights and
patents and intangibles $427,474 $ 76,726 $ 32,294
3. Depreciation of property and
equipment $ 447,919 $267,109 $153,492
4. Taxes, other than payroll
or income taxes * * *
5. Royalties * * *
6. Advertising costs * $ 76,628 $ 89,059
* Amount does not exceed one percent of total net sales.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 3
to the Registrant's report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: /s/ David Natan
David Natan
Vice President and Chief Financial
Officer
Dated: September 28, 1995
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to
the incorporation of our report included in this Form 10-K/A No.3, into
the Company's previously filed Registration Statements on Form S-8 (No.
33-43882) and Form S-3 (No.'s 33-57212, 33-48827, 33-63830 and 33-68092).
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
September 22, 1995.
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<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-END> SEP-30-1994
<CASH> 1,429,362
<SECURITIES> 0
<RECEIVABLES> 3,403,560
<ALLOWANCES> 150,000
<INVENTORY> 356,498
<CURRENT-ASSETS> 5,759,900
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<SALES> 15,137,862
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