SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended December 31, 1995
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)
7108 FAIRWAY DRIVE, SUITE 200, PALM BEACH GARDENS, FLORIDA 33418
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407)775-5756
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 1, 1996
Common stock, $.001 par value 27,979,477 shares
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1995
(Unaudited) and September 30, 1995 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the
Three Months Ended December 31, 1995 and 1994
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1995 and 1994
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Unaudited Interim Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations . . . . . . . 4
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 7
i
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND SEPTEMBER 30, 1995
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1995 1995
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS 1,703,497 1,154,137
ACCOUNTS RECEIVABLE TRADE (NET OF ALLOWANCE OF
$99,032 AND $145,703 AT DECEMBER 31 AND
SEPTEMBER 30, RESPECTIVELY) 2,935,929 3,489,791
INVENTORIES 847,471 468,169
PREPAID EXPENSES 430,684 436,738
OTHER 144,411 82,258
------------ ------------
TOTAL CURRENT ASSETS 6,061,992 5,631,093
PROPERTY AND EQUIPMENT, NET 3,290,519 3,244,723
MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS, NET 367,172 366,765
CAPITALIZED DATABASE, NET 2,652,985 2,705,693
INTANGIBLE ASSETS RELATING TO BUSINESSES ACQUIRED, NET 4,737,003 4,768,470
DEFERRED INCOME TAX ASSETS, NET 1,720,000 1,720,000
OTHER ASSETS, NET 798,913 808,695
------------ ------------
TOTAL ASSETS 19,628,584 19,245,439
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE 985,200 1,279,761
ACCRUED SALARIES 67,108 318,621
ACCRUED LIABILITIES 325,987 681,961
DEFERRED SERVICE REVENUE 518,620 499,998
------------ ------------
TOTAL CURRENT LIABILITIES 1,896,915 2,780,341
SENIOR CONVERTIBLE NOTES 3,020,000 2,060,000
------------ ------------
TOTAL LIABILITIES 4,916,915 4,840,341
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK - $.10 PAR VALUE, 5,000,000 SHARES
AUTHORIZED; NONE OUTSTANDING --- ---
COMMON STOCK-$.001 PAR VALUE, 50,000,000 SHARES
AUTHORIZED; 27,970,477 AND 27,731,477 SHARES ISSUED
DECEMBER 31 AND SEPTEMBER 30, RESPECTIVELY 27,970 27,731
ADDITIONAL PAID-IN CAPITAL 27,870,215 27,514,154
ACCUMULATED DEFICIT (13,054,731) (13,005,002)
TREASURY STOCK-AT COST; 87,534 SHARES (131,785) (131,785)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,711,669 14,405,098
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 19,628,584 19,245,439
============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1995 AND 1994 (UNAUDITED)
1995 1994
REVENUE: ------------ ------------
PRODUCT SALES 3,429,796 3,126,139
SERVICE REVENUE 1,151,883 1,369,693
------------ ------------
NET SALES 4,581,679 4,495,832
COST OF SALES:
COST OF PRODUCT SALES 2,093,535 1,910,458
COST OF SERVICES 889,677 1,134,059
------------ ------------
COST OF SALES 2,983,212 3,044,517
------------ ------------
GROSS PROFIT 1,598,467 1,451,315
EXPENSES:
GENERAL AND ADMINISTRATIVE 980,890 1,297,977
SELLING AND MARKETING 382,512 272,748
DEPRECIATION AND AMORTIZATION 265,700 203,784
RESEARCH AND DEVELOPMENT 13,207 10,848
------------ ------------
TOTAL EXPENSES 1,642,309 1,785,357
------------ ------------
LOSS FROM OPERATIONS (43,842) (334,042)
OTHER INCOME (EXPENSE):
INTEREST INCOME 40,774 18,122
INTEREST EXPENSE (66,314) ---
OTHER INCOME (EXPENSE), NET 34,653 (3,631)
------------ ------------
NET OTHER INCOME 9,113 14,491
------------ ------------
NET LOSS BEFORE INCOME TAXES (34,729) (319,551)
INCOME TAX EXPENSE (15,000) ---
------------ ------------
NET LOSS (49,729) (319,551)
============ ============
NET LOSS PER WEIGHTED AVERAGE COMMON SHARE
OUTSTANDING (0.00) (0.01)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 27,720,563 27,094,705
============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1995 AND 1994 (UNAUDITED)
1995 1994
OPERATING ACTIVITIES: ------------ ------------
NET LOSS (49,729) (319,551)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION 324,448 227,438
AMORTIZATION 100,411 66,447
DISPOSAL OF EQUIPMENT 10,750 ---
ADVANCE TO OFFICER --- (30,000)
REPAYMENT FROM OFFICER --- 40,000
DECREASE IN ACCOUNTS RECEIVABLE, NET 553,862 171,400
INCREASE IN INVENTORIES (379,302) (145,215)
DECREASE (INCREASE) IN PREPAID EXPENSES 6,054 (115,447)
DECREASE (INCREASE) IN OTHER ASSETS (53,310) 12,905
DECREASE IN ACCOUNTS PAYABLE (294,561) (129,037)
INCREASE (DECREASE) IN ACCRUED SALARIES (251,513) 43,827
DECREASE IN ACCRUED LIABILITIES (355,974) (285,711)
INCREASE (DECREASE) IN DEFERRED SERVICE REVENUE 18,622 (79,554)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (370,242) (542,498)
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY AND EQUIPMENT, NET (381,523) (1,163,084)
ADDITIONS TO PATENT COSTS (15,175) (7,801)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (396,698) (1,170,885)
FINANCING ACTIVITIES:
PROCEEDS FROM SALE OF COMMON STOCK, NET 356,300 712,591
PROCEEDS FROM BORROWINGS 960,000 ---
REPAYMENTS OF BORROWINGS --- (88,042)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,316,300 624,549
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 549,360 (1,088,834)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,154,137 1,429,362
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,703,497 340,528
============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Top Source Technologies, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
financial statements. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The results of operations of
any interim period are not necessarily indicative of the results of operations
for the fiscal year. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended September 30, 1995. Certain fiscal year 1995 amounts have been
reclassified to conform to current year presentation.
2. INVENTORIES
Inventories consisted of the following:
December 31 September 30
1995 1995
Raw materials $ 513,505 $ 395,999
Finished goods 333,966 72,170
$ 847,471 $ 468,169
3. 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.
At December 31, 1995, the Company's balance sheet reflected a deferred
income tax asset of $1,720,000 and had net tax basis Federal operating loss
carryforwards of approximately $19,838,000 which may be used to offset future
taxable income, if any. The Company has determined based on projected future
taxable income that it is more likely than not that the deferred tax assets at
December 31, 1995 will be realized before the expiration of the underlying
net operating loss carryforwards which will begin expiring in 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the three month period ended December 31, 1995, was
$4,581,679 compared to $4,495,832 for the same period in 1994. The increase in
revenue for the three month period ended December 31, 1995 is primarily
attributable to an increase of approximately 9.7% in product sales of the
Overhead Sound Systems ("OHSS") at the Company's Top Source Automotive, Inc.
subsidiary ("TSA") offset by a decrease of 15.9% in oil analysis sales at
United Testing Group ("UTG").
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONT'D
The increase in the comparable sales volume of OHSS units is attributable
to additional orders on existing
contracts. The decrease in comparable sales volume for oil analysis services at
UTG is primarily attributable to the loss of several major oil analysis
customers during fiscal 1995; however, the sales level is consistent with the
fourth quarter of fiscal 1995.
The gross profit margin for the three months ended December 31, 1995 was
34.9% compared to 32.3% for the same period in 1994. The increase in margins
above comparable levels in the prior year is attributable to increased
efficiencies at UTG which were made by management in the fourth quarter of
fiscal 1995.
General and administrative expenses decreased 24.4% for the three months
ended December 31, 1995 compared to the same period ended in 1994. The decrease
is attributable to reductions, primarily through personnel cuts and operating
costs, which were made in the fourth quarter of fiscal 1995. General and
administrative expenses for OSA, Inc. were $369,985 for the three months ended
December 31, 1995 compared to $277,436 for the same period in 1994. This
increase is attributable to continued infrastructure increases to support the
rollout of OSA units ("OSAs").
Selling and marketing increased 40.2% for the three months ended December
31, 1995 compared to the same period ended in 1994. The increase was a result
of the continued marketing and promotional activities in support of the OSAs.
Depreciation and amortization increased 30.4% for the three months ended
December 31, 1995 compared to the same period in 1994. This increase is
primarily due to the additional capital assets purchased of $381,523 in the
three months ended December 31, 1995 and higher levels of fixed assets over the
comparable period in 1994. Depreciation and amortization of $159,159 was
allocated to cost of sales as it directly relates to the products and services
sold during the three months ended December 31, 1995 compared to $211,613 for
the same period ended in 1994.
Interest income increased $22,652 for the three months ended December 31,
1995 compared to the same period ended in 1994 due to the interest earned on the
senior subordinated convertible note proceeds received in October 1995.
Interest expense increased $66,314 for the three months ended December 31, 1995
compared to the same period ended December 31, 1994 due to the interest expense
incurred on the same senior subordinated convertible notes.
Other income increased $38,284 for the three months ended December 31, 1995
compared to the same period ended in 1994, which is primarily due to the receipt
of $56,367 from the PSI lawsuit. (See Part II, Item 1. Legal Proceedings)
The decrease in the net loss for the three months ended December 31, 1995
compared to the same period ended in 1994 is primarily attributable to
reductions in costs and operating efficiencies that were made in the fourth
quarter of fiscal 1995.
In January 1996, the Company began generating revenue from two equipment
maintenance OSAs at two customer sites, an oil distributor and an automobile
dealership. Based on the reliability demonstrated at these and other locations
since September 1995, and based on interest expressed in leasing OSAs from
numerous companies in diversified industries, the Company anticipates signing
numerous leases and generating an increasing quarterly revenue stream throughout
fiscal 1996 and future years.
Currently, the Company is also continuing discussions with a group
interested in acquiring the world-wide franchise rights to market equipment
maintenance OSAs in certain industries. There can be no assurance that a final
agreement will be reached.
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONT'D
RESULTS OF OPERATIONS CONT'D
In addition, to the equipment maintenance OSAs, the Company is generating a
nominal amount of revenue from its three refinery OSA units located in Baton
Rouge, Louisiana. Currently, the Company believes that it has met refinery
requirements for reliability and repeatability and that it has successfully
developed a prototype refinery OSA unit. The Company believes that it will
receive additional purchase orders for refinery OSA units from one or more oil
refineries.
During fiscal 1995, the Company experienced technical problems with OSA
units which delayed their commercialization and use. Although the Company has
experienced four months of reliable performance from the OSA units, there are no
assurances that other technical problems will not develop, or that expectations
will be met in any of the markets described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was ($370,242) for the three month
period ended December 31, 1995. This usage of cash is attributable to an
increase in inventories of $379,302 due to model year changeovers on both the
Chrysler Jeep(R) Wrangler and Jeep(R) Cherokee, a decrease in accounts payable
and accrued liabilities of $883,426 and an increase in current assets of
$47,256. This is offset by a decrease in accounts receivable of $553,862 and
net operating income of $375,130 after excluding depreciation and amortization
of $424,859.
Net cash used in investing activities was ($396,698) of which $381,523 was
expended for capital assets. Net cash provided by financing activities was
$1,316,300 which consisted of net proceeds from sales of common stock through
exercise of stock options of $356,300 and net proceeds of $960,000 from the
remaining senior subordinated convertible notes.
The Company has bank financing with First Union National Bank of Florida
("the Bank"). On October 12, 1995, the Company increased its line of credit
with the Bank to $6,000,000 with $1,500,000 being available for short term
working capital and $4,500,000 to be used exclusively for the purchase of OSAs.
The entire facility bears interest at .85% over the prime rate, is governed by
specific financial covenants and ratios limiting accessibility, and is secured
by substantially all of the assets of the Company. On January 31, 1996, the
working capital line of credit of $1,500,000 was renewed until January 31,
1997. The $4,500,000 line expires on December 31, 1997. The Company has
expanded its credit facility with the Bank in order to be able to finance the
roll-out of the OSAs and purchase OSAs from TJA based on anticipated orders from
customers. As of the date of this report, no amounts were outstanding on either
line.
Based on current cash balances, current bank lines, anticipated exercise of
stock options and future cash flows from operations, the Company believes it has
sufficient cash flow to fund its current operations and finance the deployment
of a substantial number of OSA units.
FORWARD-LOOKING STATEMENTS
The statements discussed above under Results of Operations relating to the
Company's expectations that it anticipates signing numerous OSA leases,
generating increasing revenue from OSAs and receiving additional purchase orders
for refinery OSA units are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. As the text above
discusses, the results expected by any or all of these forward-looking
statements may not occur. Important factors that could cause actual results to
differ materially from the forward-looking statements include the following: (1)
the continued reliability of the OSA technology over an extended period of time,
(2) the Company's ability to market OSAs to both refineries and third parties
that use oil analysis for equipment maintenance, (3) the acceptance of the OSA
technology by the marketplace, (4) the general tendency of large corporations to
slowly change from known technology to emerging new technology, (5) the
Company's reliance on a third party to manufacture OSAs and (6) potential future
competition from third parties that may develop proprietary technology which
either does not violate the Company's proprietary rights or is claimed not to
violate the Company's proprietary rights.
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1994, the Company filed an action against Professional Services
Industries, Inc. ("PSI") in federal court alleging breach of contract in
connection with the Company's acquisition of assets from PSI in 1993. On June
26, 1995, PSI paid the Company $229,500 without any conditions attached, in
anticipation of the Company dismissing the lawsuit against PSI. After a trial
on the merits, the Court ruled in favor of the Company and awarded it additional
damages of $56,367 after crediting PSI for the voluntary payment of $229,500
made to the Company prior to the trial. The amount received of $56,367 is
recorded in the quarter ended December 31, 1995. The total amount of damages
collected to date are $285,867. The Company and its counsel believe it should
have been awarded an additional $378,000 plus interest and legal fees and has
filed an appeal in the United States Court of Appeals in Atlanta, Georgia. In
addition to any out-of pocket costs incurred by its attorneys (located in
Atlanta), the Company's maximum exposure for legal fees will be $7,500. The
balance of any legal fees owed will be recovered by the Company's counsel on a
contingency fee basis in the event the Company is successful in its appeal.
The amount of $56,367 has been classified in the Company's financial
statements for the quarter ended December 31, 1995 as "Other Income." Due to
the nature and length of time of the appeals process, the Company has not
recorded any receivables or income related to the potential recovery of
additional amounts in this suit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.23 Amendment dated January 31, 1996 to the loan
agreement dated October 12, 1995 between Top
Source Technologies, Inc. and On-Site Analysis,
Inc. and the First Union National Bank of Florida.
27.0 Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1995.
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: /s/ David Natan February 14, 1996
David Natan Date
Vice President and Chief
Financial Officer
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<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,703,497
<SECURITIES> 0
<RECEIVABLES> 2,935,929
<ALLOWANCES> 99,032
<INVENTORY> 847,471
<CURRENT-ASSETS> 6,061,992
<PP&E> 3,290,519
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<CURRENT-LIABILITIES> 1,896,915
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<COMMON> 27,970
0
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<OTHER-SE> 14,683,699
<TOTAL-LIABILITY-AND-EQUITY> 19,628,584
<SALES> 4,581,679
<TOTAL-REVENUES> 4,581,679
<CGS> 2,983,212
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,314
<INCOME-PRETAX> (34,729)
<INCOME-TAX> 15,000
<INCOME-CONTINUING> (49,729)
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