UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A NO. 2
[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
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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.
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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.
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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.
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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.
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.
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.
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ITEM 1. BUSINESS, (CONTINUED)
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.
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.
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ITEM 1. BUSINESS, (CONTINUED)
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. 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
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,
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ITEM 1. BUSINESS, (CONTINUED)
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.
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.
-8-
ITEM 1. BUSINESS, (CONTINUED)
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.
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.
-9-
ITEM 1. BUSINESS, (CONTINUED)
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
-10-
ITEM 2. DESCRIPTION OF PROPERTY, (CONTINUED)
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.
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
-11-
ITEM 6. SELECTED FINANCIAL DATA, (CONTINUED)
statements and related notes in Item 8 below. (See Item 8. Financial
Statements and Supplementary Data, Note 2. Acquisitions.)
<TABLE>
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
<CAPTION>
BALANCE SHEET DATA: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Current Assets $ 5,619,900 $ 2,367,983 $ 1,537,877 $ 1,508,460 $ 2,211,605
Total Assets 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*<F1> 7,341,098 737,072 1,515,477 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)**<F2> 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 - - - - -
<FN>
*<F1> Net tangible book value equals total assets minus total liabilities and intangible assets.
**<F2> 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.
</FN>
</TABLE>
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.
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, (CONTINUED)
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 2.5 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
placed its chief financial officer in charge of UTG.
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 2-1/2 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 2-1/2 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.
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 2-1/2 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.
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, (CONTINUED)
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 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 funds advanced to the third
party and commenced litigation against that party. At September 30,1993 due
to concerns over the recoverability of funds 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.)
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.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, (CONTINUED)
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.
<TABLE>
Following is a summary of the Company's pretax book losses and taxable losses for the last five years.
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
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.
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.
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, (CONTINUED)
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 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
$(1,229,180). Accounts receivable increased $2,143,976 primarily due to
increased OHSS sales to Chrysler.
Net cash used in investing activities was $(1,709,896) 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 $1,475,484 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
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, (CONTINUED)
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 Technologies 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 Nine Months Ended September 30, 1992 . . . . . . . . . . 22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 23
-17-
TOP SOURCE TECHNOLOGIES, INC.
Annual Report on Form 10-K
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS<PAGE>
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.
-18-
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
Restricted cash 85,705 ---
Accounts receivable (net of allowance of $150,000
and $13,145 in 1994 and 1993, respectively) 3,363,560 1,564,923
Advance to officer 40,000 ---
Inventories 356,498 263,524
Prepaid expenses 221,900 99,336
Other 122,875 77,849
------------ ------------
Total current assets 5,619,900 2,367,983
Property and equipment, net 2,344,858 1,362,444
Manufacturing and distribution rights and patents, net 376,799 286,822
Capitalized database, net 2,916,527 3,127,360
Intangible assets relating to businesses acquired, net 4,869,746 3,697,559
Deferred income tax assets, net 2,270,000 ---
Other assets, net 82,125 ---
------------ ------------
TOTAL ASSETS 18,479,955 10,842,168
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 1,605,322 1,106,796
Accrued liabilities 657,779 513,076
Accrued testing costs 624,642 209,251
Current portion of notes payable --- 305,864
Note payable-affiliate 88,042 400,000
------------ ------------
Total current liabilities 2,975,785 2,534,987
Notes payable, net of current portion --- 22,776
Notes payable-affiliate --- 435,592
------------ ------------
Total liabilities 2,975,785 2,993,355
------------ ------------
Commitments and contingencies (Notes 7,10, and 13)
Stockholders' equity:
Preferred stock-$.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 statments are an
integral part of these consolidated balance sheets.
-19-
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
-20-
<TABLE>
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
<CAPTION>
ADDITIONAL DEFERRED DEFERRED STOCK TOTAL
PAID-IN ACCUMULATED OFFICERS' TREASURY OFFERING SUBSCRIPTION STCKHOLDER
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION STOCK COSTS RECEIVABLE EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 16,823,333 $16,823 $7,714,465 ($5,891,403) ($57,497) ($50,018) -- ($255,000) $1,477,370
Stock subscriptions collected -- -- -- -- -- -- -- 255,000 255,000
Exercise of stock options
($.25 to $.5625 per share) 142,136 142 38,806 -- -- -- -- -- 38,948
Sale of common stock
($2.50 per share) 942,000 942 2,187,658 -- -- -- -- -- 2,188,600
Issuance of common stock for
services ($3.25 per share) 25,000 25 81,225 -- -- -- -- -- 81,250
Cancellation of shares (1,250) (1) 1 -- -- -- -- -- --
Purchases of treasury stock
from officers, 25,872 --
shares ($2.56 to $3.94) -- -- -- -- -- (81,767) -- -- (81,767)
Deferred offering costs -- -- -- -- -- -- (22,250) -- (22,250)
Amortization of deferred
officers' compensation -- -- -- -- 18,663 -- -- -- 18,663
Net loss -- -- -- (2,118,154) -- -- -- -- (2,118,154)
----------- -------- ----------- ------------ ---------- ---------- ---------- ------- ------------
BALANCE, SEPTEMBER 30, 1992 17,931,219 17,931 10,022,155 (8,009,557) (38,834) (131,785) (22,250) -- 1,837,660
Exercise of stock options
($.28125 to $1.25 per share) 467,541 468 458,791 -- -- -- -- -- 459,259
Exercise of warrants
($.01 to $1.6875 per share) 1,158,700 1,159 1,618,169 -- -- -- -- -- 1,619,328
Sale of common stock
($1.27 to $1.50 per share) 4,073,439 4,073 5,260,335 -- -- -- -- -- 5,264,408
Common stock issued in acquisitions
($2.0625 to $3.375 per share) 700,000 700 2,230,550 -- -- -- -- -- 2,231,250
Write-off of deferred offering costs -- -- -- -- -- -- 22,250 -- 22,250
Amortization of deferred
officers' compensation -- -- -- -- 24,884 -- -- -- 24,884
Net loss -- -- -- (3,610,226) -- -- -- -- (3,610,226)
----------- -------- ----------- ------------ ---------- ---------- ---------- ------- ------------
BALANCE, SEPTEMBER 30, 1993 24,330,899 24,331 19,590,000 (11,619,783) (13,950) (131,785) -- -- 7,848,813
Exercise of stock options
($.28125 to $6.00 per share) 708,800 709 1,275,722 -- -- -- -- -- 1,276,431
Exercise of warrants
($1.00 to $3.00 per share) 1,052,300 1,052 2,894,346 -- -- -- -- -- 2,895,398
Sale of common stock
($1.75 per share) 550,000 550 961,950 -- -- -- -- -- 962,500
Common stock issued in acquisition
($6.62 per share) 74,396 74 492,427 -- -- -- -- -- 492,501
Amortization of deferred
officers' compensation -- -- -- -- 13,950 -- -- -- 13,950
Net income -- -- -- 2,014,577 -- -- -- -- 2,014,577
----------- -------- ----------- ------------ ---------- ---------- ---------- ------- -----------
BALANCE, SEPTEMBER 30, 1994 26,716,395 $26,716 $25,214,445 ($9,605,206) $0 ($131,785) $0 $0 $15,504,170
=========== ======== =========== ============ ========== ========== ========== ======= ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
</FN>
</TABLE>
-21-
TOP SOURCE TECHNOLOGIES, INC.
Annual Report on Form 10-K
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 expenses (122,564) 25,285 (87,601)
Decrease(increase) in other assets (130,776) 54,138 (4,464)
Increase(decrease) in accounts payable 498,526 561,766 (59,239)
Increase(decrease) in accrued liabilities (65,394) 331,213 48,118
----------- ----------- -----------
Net cash used in operating activities (1,229,180) (2,934,003) (2,261,393)
INVESTING ACTIVITIES:
Purchases of property and equipment, net(1,475,484) (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 (1,709,896) (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 receivable --- --- 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
-22-
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) and oil analysis test kits (Oil
Analysis Service segment) at the time the products or test kits are
shipped. For the Oil Analysis Service segment, the Company performs the
analysis service when the test kit is returned for processing. The
estimated cost of analyzing oil samples is accrued in the same period as
the related sale. This estimate is classified as accrued testing costs in
the accompanying consolidated balance sheets.
INVENTORIES - Inventories are stated at the lower of cost or market and are
valued by the first-in, first-out (FIFO) method.
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.
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
INTANGIBLE ASSETS - Intangible assets primarily consist of the cost of
acquired businesses in excess of the fair value of net tangible 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 $65/8 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.
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.
-24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITIONS, (CONTINUED)
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
============ ============
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 $ - $ -
========== ==========
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 2-5 886,033 246,187
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
----------- ------------
3,238,463 1,833,892
Less: accumulated depreciation (893,605) (471,448)
----------- -----------
$2,344,858 $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.
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
========== ===========
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS, (CONTINUED)
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.
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).
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 -
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES, (CONTINUED)
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.
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.
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES, (CONTINUED)
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.
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:
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES, (CONTINUED)
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:
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
===========
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as repurchase
options are to be imposed on shares subject to Options and the nature of
such restrictions, if any, and (vii) interpret the 1993 Plan and promulgate
and rescind rules and regulations relating to it.
The 1993 Plan also provides for the automatic grant of 30,000 non-qualified
options to any director who is not an employee of the Company. These
options vest in increments of 5,000 options per director every 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.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. STOCK GRANTS, (CONTINUED)
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
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.
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and (3) Corporate and other which includes
general corporate assets consisting primarily of cash and cash equivalents,
property and equipment, deferred income tax assets, and corporate expenses.
For fiscal year 1993, restructuring charges of $310,036 have been included
in the Automotive Technology Segment's operating loss.
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
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT INFORMATION, (CONTINUED)
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 an investment 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 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.
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".
-36-
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)<F3>
3.1 Amendment to Certificate of Incorporation. . . . . . (12)<F14>
3.2 Bylaws of Registrant . . . . . . . . . . . . . . . . . (2)<F4>
3.3 Amendment to Bylaws of Registrant. . . . . . . . . . .(12)<F14>
3.4 Amendment to the Amended and Restated Certificate of
Incorporation . . . . . . . . . . . . . . . . . . . . (14)<F16>
4.0 1990 Stock Plan. . . . . . . . . . . . . . . . . . . . (3)<F5>
4.1 1993 Stock Option Plan . . . . . . . . . . . . . . . . (4)<F6>
10.0 Employment Agreement Between Registrant and
Mr.Stuart Landow . . . . . . . . . . . . . . . . . . . (5)<F7>
10.1 Employment Agreement Between Registrant and Mr.James P.
Samuels . . . . . . . . . . . . . . . . . . . . . . . (6)<F8>
10.2 Lease of Office Space - Palm Beach Gardens, Florida
(amended) . . . . . . . . . . . . . . . . . . . . . . (12)<F14>
10.5 ARCS License Agreement . . . . . . . . . . . . . . . . (7)<F9>
10.6 EFECS License Agreement. . . . . . . . . . . . . . . . (7)<F9>
10.7 Employment Agreement of Carlton S. Joyce . . . . . . . (8)<F10>
10.9 Employment Agreement of W. Earl Somerville . . . . . . (4)<F6>
10.10 Stock Purchase Agreement . . . . . . . . . . . . . . . (9)<F11>
10.11 Asset Purchase and Sale Agreement. . . . . . . . . . . (9)<F11>
10.12 Agreement and Plan of Merger . . . . . . . . . . . . . (9)<F11>
10.13 First Amendment to Stock Purchase Agreement. . . . . . (8)<F10>
10.14 First Amendment to Employment Agreement of Stuart
Landow . . . . . . . . . . . . . . . . . . . . . . . (12)<F14>
10.15 Secured Promissory Notes . . . . . . . . . . . . . . (11)<F13>
10.17 First Amendment to Employment Agreement of Carlton
S. Joyce . . . . . . . . . . . . . . . . . . . . . . .(13)<F15>
10.18 Lease of Office/Laboratory Space -
of United Testing Group,Inc. Addison, Illinois . . . (12)<F14>
10.19 Lease of Office/Warehouse Space of United Testing Group,
Inc.(Spectro Metrics, Inc.) - Atlanta, Georgia . . . (12)<F14>
10.20 Termination Agreement of T.A. Cox . . . . . . . . . .(14)<F16>
10.21 Release and Waiver Agreement of T.A. Cox . . . . . . .(14)<F16>
10.22 Master License Lease Agreement - Exxon . . . . . . . .(14)<F16>
10.23 Equipment Purchase Agreement - Thermo Jarrell Ash
Corporation . . . . . . . . . . . . . . . . . . . . . (14)<F16>
-37-
10.24 Fourth Addendum to Lease of Office Space of Top Source
Technologies, Inc., Palm Beach Gardens, Florida . . . (14)<F16>
10.25 First Amendment to Lease of On-Site Analysis, Inc.,
Atlanta,Georgia . . . . . . . . . . . . . . . . . . . (14)<F16>
10.26 Lease of Office and Warehouse Space of United Testing
Group,Inc., Sparks, Nevada. . . . . . . . . . . . . . (14)<F16>
10.27 Lease of Office Space of Top Source Technologies, Inc.,
New York City, New York . . . . . . . . . . . . . . . (14)<F16>
10.28 Shareholder Rights Plan. . . . . . . . . . . . . . . .(10)<F12>
11.0 Schedule of Computation of Net Income Per Share . . .(14)<F16>
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)<F3> Contained in the Form 8-A dated July 10, 1993.
(2)<F4> Contained in the documents previously filed with the
Securities and Exchange Commission in conjunction with the
Form 8-B on 11/16/92.
(3)<F5> Contained in the documents previously filed with the
Securities and Exchange Commission in conjunction with the
12/31/90 Form 10-K.
(4)<F6> Contained as an exhibit to the Proxy Statement dated
January 11, 1994.
(5)<F7> Contained in Amendment No. 1 to the Registration Statement
on Form S-3 filed on November 16, 1993.
(6)<F8> Contained in the documents previously filed with the
Securities and Exchange Commission in conjunction with the
12/31/91 Form 10-K.
(7)<F9> Contained in the documents filed with the Securities and
Exchange Commission in conjunction with the amended 12/31/91
Form 10-K.
(8)<F10> Contained in the Form 8-K/A No. 3 dated November 13, 1993.
(9)<F11> Contained in the Form 8-K/A No. 1 filed on August 9, 1993.
(10)<F12> Contained in Form 8-K dated January 5, 1995.
(11)<F13> Contained in the documents filed with the Securities and
Exchange Commission in conjunction with the 12/31/92
Form 10-Q.
(12)<F14> Contained in the documents filed with the Securities and
Exchange Commission in conjunction with the 9/30/93
Form 10-K.
(13)<F15> Contained in Amendment No. 3 to the Registration Statement
on Form S-3 filed on January 10, 1994.
(14)<F16> Contained in the documents filed with the Securities and
Exchange Commission in conjunction with the 9/30/94
Form 10-K.
-38-
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1993 AND
NINE MONTHS ENDED SEPTEMBER 30,1992
Balance at Charged to Additions
Beginning Costs and Charged to Balance at
Description of Period Expenses Other Deductions end of
Accounts(1)<F3> Period
DEDUCTED FROM
ACCOUNTS
RECEIVABLE -
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
YEAR ENDED
SEPTEMBER 30 1994 $13,145 $136,855 - - $150,000
YEAR ENDED
SEPTEMBER 30, $ - $5,645 $7,500 - $13,145
1993
NINE MONTHS ENDED
SEPTEMBER 30,1992 $ - - - - $ -
(1)<F1> 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.
-39-
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. 2
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/James P. Samuels
James P. Samuels
Vice President of Finance
Dated: May 31, 1995
-40-
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K/A No. 2 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, 3363830 and 33-68092).
Fort Lauderdale, Florida, /s/ARTHUR ANDERSEN LLP
May 30, 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1994
<PERIOD-END> SEP-30-1994
<CASH> 1,515,067
<SECURITIES> 0
<RECEIVABLES> 3,403,560
<ALLOWANCES> 150,000
<INVENTORY> 356,498
<CURRENT-ASSETS> 5,619,900
<PP&E> 2,344,858
<DEPRECIATION> 893,605
<TOTAL-ASSETS> 18,479,955
<CURRENT-LIABILITIES> 2,975,785
<BONDS> 0
<COMMON> 26,716
0
0
<OTHER-SE> 15,477,454
<TOTAL-LIABILITY-AND-EQUITY> 18,479,955
<SALES> 15,137,862
<TOTAL-REVENUES> 15,137,862
<CGS> 10,199,857
<TOTAL-COSTS> 10,199,857
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 136,855
<INTEREST-EXPENSE> 68,305
<INCOME-PRETAX> (255,423)
<INCOME-TAX> (2,270,000)
<INCOME-CONTINUING> 2,014,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,014,577
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
