UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A No. 1
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended September 30, 1996
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
corporation or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of Principal executive office) (zip code)
Registrant's telephone number, including area code: (561) 775-5756
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
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)
None
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 [X]
As of December 13, 1996, 28,451,477 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 13, 1996 (based upon
the closing sales price) held by non-affiliates of the Registrant, was
approximately $79,733,523.
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PART I
ITEM 1. BUSINESS
A. General Description of Business
Top Source Technologies, Inc. (the "Company") was organized in 1986 to
distribute a patented overhead mounted speaker system ("OHSS") 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 has since further expanded its product line. In addition
to the OHSS, in 1993 and 1994 the Company acquired three oil analysis
laboratories which were subsequently sold, (see United Testing Group ("UTG")
Sale of Assets in Section C.) and has developed a proprietary oil analysis
instrument, the On-Site Oil Analyzer ("OSA") for use in the petrochemical,
automotive and equipment service industries. The Company also licenses one
safety restraint technology, Acceleration Restraint Curve Safety Seat ("ARCS")
from the Massachusetts Institute of Technology ("M.I.T.").
As of January 6, 1997, the Company had four subsidiaries: Top Source Automotive,
Inc. ("TSA"), On-Site Analysis, Inc. ("OSAI") whose name was changed to Top
Source Instruments, Inc. ("TSI."), and ARCS Safety Seat, Inc. ("ARCS, Inc.") all
located in the Troy, Michigan area, and United Testing Group, Inc. ("UTG")
currently a discontinued operation. In fiscal 1996, the Company derived
substantially all of its revenue from sales of its OHSS at TSA. Service revenue
from UTG for years ended September 30. 1996, 1995 and 1994 has been reclassified
and is included in the Company's financial statements as "discontinued
operations."
B. Financial Information About Industry Segments
The Company currently has two industry segments: automotive technology, TSA and
oil analysis service, TSI. (For information on industry segments, see Item 8. -
Financial Statements and Supplementary Data, Note 17 Segment Information.)
C. Narrative Description of Business
General
The Company markets one product, an OHSS, and provides one service, oil
analysis. The Company has three proprietary technologies: OHSS; OSA, which has
generated a nominal amount of revenue; and ARCS, which is non-revenue
generating. Another technology, Engine Fuel Economy Emissions Control Reduction
System ("EFECS"), was also licensed from M.I.T. and subsequently sold pursuant
to a future royalty agreement in May 1995. (See Item 8. - Financial Statements
and Supplementary Data, Note 16 and the heading "EFECS" in this Business
Section.)
Products and Technologies
Overhead Speaker System
In 1987, the Company acquired the exclusive rights to distribute in the United
States and Canada a patented automotive overhead mounted speaker system from its
Swedish inventor. 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 sport utility 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
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ITEM 1. BUSINESS (continued)
obstructed by passengers or cargo. The OHSS eliminates the need for rear
speakers in traditional locations, reduces weight in the liftgate and because of
its fixed overhead mounting, is not subject to the 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 sound without additional expensive tooling and within relatively short
lead times, and the assembly reduces installation time in factory applications.
In 1991, a custom designed OHSS was approved by Chrysler Corporation
("Chrysler") for dealer installation on the Jeep(R) Wrangler, and a purchase
order was received. This OHSS unit can be installed in less than 30 minutes and
retails for around $300. A patent on the Wrangler OHSS was issued in 1991. In
February 1992, the Company established an engineering team that worked on
housing designs, materials, and other features, as well as audio sound 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. 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 5 1/4 inch speakers. The
unit mounted over the rear cargo area and incorporated the cargo area dome
light. In May 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, TSA focused its marketing effort on expanded production line
installation opportunities for both the Wrangler and Cherokee, and the Company
received its first production line orders for both the Wrangler and the
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 TSA
total control of quality and delivery schedules. By September 1993, the Company
was shipping significantly increased OHSS units due to the production line
purchase orders.
In 1990, the TSA shipped approximately 7,480 OHSS units. By 1996, that number
had grown to 228,731 OHSS units of which 3,400 were shipped to Venezuela.
In January 1996, TSA started shipments of a new Jeep Wrangler OHSS model
designed for the completely redesigned Wrangler. Although no formal commitments
beyond model year 1997 have been received, the Company believes that this
program will last at least through year 2000. In addition, the Company has also
received approval from Chrysler to begin tooling for an upscale OHSS to be
factory installed in the 1997 high end Grand Cherokee. The Company has designed
and presented many more custom units to domestic and foreign OEMs including a
completely new design. The new design, which a patent has been applied for,
positions small speakers in the center part of the vehicle with sound channels
distributing the sound to acoustically correct positions. The whole system will
be built as a modular assembly and attached to the ceiling of the vehicle at
assembly lines and later covered by the headliner. This new product has the
potential to eliminate the need for speakers in all doors and instrument panels
and will be incorporated both in front as well as the rear of the vehicle. This
product also opens up a wider target market range of vehicles than the earlier
truck, van and sport utility vehicle market. Also during 1996, TSA began working
with several major interior trim suppliers to provide sound systems which are
fully integrated into the interior trim on future vehicles models beginning in
the model year 2000.
The Company believes it can meet additional potential demand for its OHSS from
present or new customers due to available capacity at TSA's new plant.
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.
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ITEM 1. BUSINESS (continued)
Currently, TSA has three production line contracts with Chrysler, Jeep Cherokee,
Jeep Grand Cherokee and Jeep Wrangler. The Jeep Cherokee contract, which is
projected to account for between 33% to 40% of TSA's fiscal 1997 revenues,
expires during the Company's fiscal 1997 fourth quarter.
Based on the anticipated growth of TSA's two remaining contracts, TSA believes
it can reduce the projected impact of the loss of the Cherokee Program,
excluding any additional aftermarket revenue that can be generated, so that 1998
and 1999 TSA revenues will approximate 70% to 75% of 1997 levels. TSA is
currently seeking strategic relationships with several major aftermarket
retailers.
Due to the receipt by TSA in 1996 of Chrysler's Gold Pentastar award for
quality, performance and on-time delivery, TSA's unique patent position and due
to TSA's growing visibility in the overhead speaker market, TSA anticipates
receiving some of these aftermarket contracts; however, there can be no
assurances that these contracts can be obtained or that these contracts will
offset or exceed the loss of the profit on the Cherokee contract.
Oil Analysis
Oil analysis is a 50-year-old technology initially used by the railroad industry
to monitor the internal condition of their engines. 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 vehicle, industrial machine, defense and automotive industries. The
technology is also used for process quality control and pipe line monitoring in
the petrochemical 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 two
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 application by those presently using the
technology.
Traditionally, 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 that the oil has been in service,
indicates if wear is normal or abnormal. Other laboratory tests 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 is
generated by laboratory tests, a trained evaluator reviews the results and
generates a report, which often contains service recommendations. The report is
then sent to the end user.
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.
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 Spectro/Metrics, Inc.
("SMI"), then a privately owned oil analysis laboratory. The Company entered
into an agreement with SMI to solicit instrument manufacturers
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ITEM 1. BUSINESS (continued)
with the goal of designing and building a low cost test instrument for use on
the shop floor, which was capable of performing many of the services provided by
an oil analysis laboratory. The goal was to provide almost instant results by
eliminating the need to send a sample to a laboratory. Initially, the Company
intended to license the proprietary software and database from SMI, purchase
OSAs 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 OSA.
In order to provide present and potential users of OSAs with the oil analysis
data, 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 the physical-chemical properties of the
used oil. Other specifications for the instrument included parameters such as:
user friendly, low cost, minimal maintenance, near laboratory accuracy and
repeatability, reliability and several minute turn around time, etc. The overall
objective was to provide high volume oil analysis locations with an OSA 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, the Company 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.
In January 1993, the Company and SMI entered into an initial development
agreement with the Thermo Jarrell Ash ("TJA") Division of Thermo Instrument
Systems, Inc. to jointly develop an OSA 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 the Company
would receive exclusive distribution rights to the petrochemical and synthetic
lubricants market while TJA could pursue other markets. Under the agreement, TJA
was responsible for all hardware included in the instrument as well as software
for each individual spectrometer. The Company was responsible for the analytical
software including quantification files and database and the overall instrument
operating software.
In July 1993, the Company acquired SMI and Professional Services Inc. ("PSI") ,
another oil analysis laboratory with a broad customer base. This enabled the
Company to gain control of the extensive database, technology and software
necessary to develop the OSA. SMI and PSI were merged under the name United
Testing Group, Inc. ("UTG"). In January 1994, UTG acquired a small laboratory
located near Reno, Nevada. With this acquisition, UTG now had three laboratories
(Atlanta, Chicago, Reno) and further expanded its database.
From July 1993 through September 1996, UTG added a significant amount of new and
diverse oil analysis samples to its database. This database became essential to
the development of the computer software that operates and controls the
precision and accuracy of the OSA machines. In July 1996, (1) with TSI having
completed the majority of the OSA software development and modification, (2) the
inability of UTG to become profitable at current sales levels, and (3) the
decision by the Company to focus its resources on the proprietary OSA and OHSS
products; the Company agreed to sell its three oil analysis laboratories.
Sale of United Testing Group Assets - Discontinued Operations
On July 31, 1996, the Company entered into a non-binding Memorandum of
Understanding to sell substantially all of the assets of its wholly-owned
subsidiary, UTG, to Conam Inspection, Inc., ("Conam") a subsidiary of Staveley
Industries, plc ("Staveley") from the United Kingdom.
5
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ITEM 1. BUSINESS (continued)
On September 12, 1996, the Company agreed to the financial terms of the sale
with Conam and adopted a plan to discontinue UTG operations effective for the
Company's fiscal year ended September 30, 1996. On October 30, 1996, pursuant to
an Asset Purchase Agreement (filed by the Company on Form 8-K dated November 12,
1996) ("Agreement") the Company consummated the Agreement.
Under the financial terms of the Agreement, Conam purchased for $3,348,910 in
cash, after closing adjustments, all of UTG's property, plant and equipment,
deposits, supplies inventory, trademarks and patents, and goodwill, and agreed
to assume substantially all of UTG's liability for outstanding prepaid oil
analysis kits, and the liability for various equipment and facility leases. (See
Financial Statements and Supplementary Data, Note 2 - Discontinued Operations.)
Of this amount $200,000 was placed in an escrow account for a one-year period to
cover undisclosed liabilities not assumed by Conam.
After the transaction of October 30th , UTG retained ownership of all pre
October 30th trade accounts receivable balances amounting to $656,706, net of a
reserve for bad debts of $83,650. As of January 2, 1997, the Company has
collected $440,331 of its October 29th accounts receivable balances and
anticipates collecting the remaining balances. Also, as part of the transaction,
the Company maintained ownership of its proprietary oil analysis database used
for creating quantification files for the Company's OSA units. Conam agreed to
lease this database for a ten-year period for a cash prepayment of $100,000, and
also agreed to lease two OSA units for a three-year period with a nominal buyout
at the end of the lease for an additional payment of $100,000. Revenue from the
lease of the database and two OSA units will start to be recognized in the first
quarter of fiscal year 1997.
Also during the closing period, Conam began negotiations with the Company to
market OSA units via franchising, and to represent the Company in the
petro-chemical industry. (See TSA "Marketing and Franchise Agreements" in this
Business Section.)
OSA Development
In July 1993, OSAI was formed as a wholly-owned subsidiary of the Company to
exclusively develop the OSA program. On September 12, 1996 pursuant to the
restructuring, the name of OSAI was changed to TSI. (See "Restructuring of TSI"
in this Business Section.) The Company since 1993 has staffed TSI with
spectroscopists, instrument specialists, sales and marketing, systems and
programmer personnel as well as technicians capable of assisting in
installation, operation and training.
During August 1993, TJA and OSAI produced an Alpha developmental prototype that
appeared to be able to meet the requirements and specifications established for
the OSA. In December 1993, OSAI introduced the first OSA Beta prototype at
Chevron's national oil distributor convention in San Diego. Concurrently, OSAI
placed an order with TJA to manufacture additional Beta OSA units. The intent
was to place OSAs in the field at various locations to identify any issues yet
to be resolved before a final design was established for larger distribution.
During 1993, the Company confirmed with several oil companies that they had 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 generally takes more than six hours to get
results which determine if the product is acceptable to go on to the next
process or to be shipped. OSA has the potential to become an at, or on-line
process controller which could provide operators with almost 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 1993, the Company signed a confidentiality agreement with Exxon
Corporation ("Exxon") and began evaluating a variety of petroleum product
samples. In July 1994, the Company and Exxon signed a national lease. In the
Fall of 1994, extensive testing was commenced at Exxon on three OSA refinery
units. The purpose of the testing was to determine the durability and
operational reliability of an OSA unit in the refinery market. Based on positive
initial results, the Company and TJA began hardware and software changes to
enhance the original OSA equipment maintenance design to be usable in process
control applications required in a refinery. This project has continued
throughout 1995 to the present.
In July 1994, the first 15 Beta equipment maintenance OSA (the original design)
units were shipped to various business test sites. From July 1994 and through
mid-August 1995, the Company and TJA identified and corrected many unexpected
design flaws and made modifications necessary for the OSAs to operate reliably.
Due to these engineering changes, the Company was unable to generate any revenue
on these OSA units.
By the end of August 1995, the Company had retrofitted all existing Beta units
at customer sites and began shipping the newly designed units to additional
customers for evaluation and testing. In September, the customers began
re-testing the OSAs in order to ensure the required reliability and performance
existed.
During 1996, the Company continued to send OSA units to various test markets
locations in diverse industries and generated a nominal amount of revenue from
OSA units at a refinery, automobile dealership, oil distributor and
municipality. Although the commercialization by the Company of OSA units has
occurred at slower than anticipated pace, the Company believes it has gained
valuable market information from OSAs at test locations that has enabled it to
identify primary and secondary markets and to devise a strategy to help
accelerate OSA revenue growth. The Company currently believes that its primary
markets are in powertrain development locations, the refinery and petrochemical
industry and in franchising mini-laboratories which would encompass new and used
car dealers, fleets, municipalities quick lubes, auto and truck service centers,
industrial and marine locations and truck stops.
Also, based on market information obtained during 1996, the Company modified its
pricing strategy to match the economics of various OSA markets. These pricing
guidelines now offer the customer five different methods of obtaining the
benefits of OSA usage. These methods are (1) outright purchase, (2) operating
leases, (3) capital leases, (4) per click usage, (5) and several other pricing
structures whereby TSI provides for the rental of both the OSA unit and a
trained operator on hourly basis or lease basis.
Each OSA currently has the capacity to effectively analyze approximately eight
samples per hour. Software enhancements currently in process will increase the
samples per hour to 12. The Company believes that the OSA units are now user
friendly, self-calibrating, self-diagnostic, and capable of being operated by
non-technical personnel in a non-laboratory environment.
On April 9, 1996 and July 15, 1996, the Company placed two test OSA units in an
OEM's powertrain testing facility in Detroit. Based on the favorable results to
date, the Company anticipates receiving a purchase order for and recording
revenue for these units in February, 1997.
On December 11, 1996, the Company received a purchase order from Hyundai Motors,
Inc. for approximately $150,000 to buy an OSA unit for its powertrain testing
facility in Korea. The Company anticipates shipping this unit and recording
revenue in February 1997.
Based on the reliability demonstrated by the OSA units throughout the latter
part of 1995 and during 1996, and based on market information obtained during
1996, the Company anticipates generating an increasing quarterly revenue stream
from equipment maintenance OSA units.
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ITEM 1. BUSINESS (continued)
Since 1994, the Company has been working at the Exxon refinery in Baton Rouge to
develop a refinery OSA unit. This has required the Company to significantly
modify, enhance and add additional hardware and software to its standard
equipment maintenance OSA unit. The Company currently believes that it has
developed a OSA refinery unit that can meet the stringent and highly
complex technical requirements of Exxon and other refineries.
The Company believes it will receive an order for additional refinery units at
the Exxon Baton Rouge refinery and will receive orders from other refineries,
however, due to previous delays, ongoing and changing technical requirements,
and the difficulty in introducing and receiving customer acceptance for new
technology, there can be no assurances as to the quantity or timing of the
orders.
On March 3, 1995, the Company and TJA signed a long-term agreement. The
agreement provides for exclusive manufacturing rights for TJA and exclusive
distribution rights for the Company for petrochemical products and synthetics
used as lubrication. TJA is now assembling OSAs in its Grand Junction, Colorado
facility. 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 the Company's
needs given several months ramp-up time. The Company has received three patents
on various aspects of the instrument and applied for several others. The Company
believes that TJA has also applied for and received patents on the instrument.
There is presently no known technology competitive to OSA. The proprietary
nature of the OSA is also protected by trade secrets, high cost of development,
requirement of a large database and a highly complex analytical process. As of
January, 1997, the Company knows of no other supplier capable of developing a
comparable unit in the near term.
To date, the Company has used its existing cash resources to fund the
development of OSA units and the operations of TSI. Future units will continue
to be paid for with available cash and credit lines from First Union National
Bank, if necessary. (See Financial Statements and Supplementary Data, Note 9 -
Debt and Liquidity and Capital Resources in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
TSI Marketing and Franchise Agreements
In December 1995, the Company entered into a non binding Letter of Intent
("LOI") with a group interested in becoming the exclusive worldwide franchisor
of the Company's OSA units. In May 1996, the original LOI was modified to
exclude certain territories and to set specific performance guidelines for the
franchise group with the goal of reaching a binding definitive agreement by July
31, 1996.
Due to the franchise group's lack of demonstrable progress in responding to the
definitive agreement drafted by the Company, the Company allowed the original
LOI to expire on July 31, 1996. However, subsequent to that date, the Company
continued discussions with certain individuals included in the original group.
Simultaneously, upon expiration of the LOI, the Company began meaningful
discussions with Conam, the buyer of the UTG assets (see "Sale of UTG Assets" in
this Business Section) regarding joint marketing and representation for OSA
units in the refinery industry and on a franchise basis both domestically and
internationally.
On October 30, 1996 as part of the UTG transaction, Conam agreed to lease for a
total payment of $100,000 two OSA units for a three-year period. These units are
intended to be used by Conam in two pilot locations in a franchise environment.
Based on current discussion in progress, the Company believes it will sign a
definitive franchise agreement with Conam or other parties that will yield
multiple OSA sales and result in growing ongoing revenue; however, there can be
no assurances.
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ITEM 1. BUSINESS (continued)
In addition to the previously described discussions, on November 14, 1996, the
Company entered into a Marketing Agreement with Conam whereby Conam became the
Company's exclusive OSA sales agent in the petrochemical processing industry
("Oil Industry") in North America. Under the terms of the Agreement, (1) Conam
will receive a commission of 10% of the revenue generated from OSA Oil Industry
placements entered into subsequent to November 14, 1996, and (2) agreed to
provide to the Company office space and support services at Conam facilities in
Chicago, Los Angeles, Houston, and San Francisco. Either the Company or Conam
may terminate this Agreement for any reason, whatsoever, upon 90 days written
notice.
Restructuring of TSI Operations
Due to the Company's favorable OSA test location results in the OEM powertrain
market in Detroit, the sale of the UTG laboratories in Atlanta, and the need to
staff TSI with professionals with different marketing experience than currently
staffed at TSI, on September 12, 1996, the Company's Board of Directors approved
a restructuring plan. This plan included the restructuring of management, and
relocating TSI's office and certain personnel from Atlanta to the Troy, Michigan
area to be in close proximity to the Company's TSA subsidiary. As a result, the
Company recorded a restructuring charge of $725,000 in fiscal 1996 to cover the
costs of severance, lease cancellation in Atlanta and other expenses that have
no future benefit.
ARCS (Acceleration Restraint Curve Safety Seat)
Over the past seven years the Company has developed a proprietary technology
involving 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). 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.
A prototype seat was built in October 1990. The Company selected the Wayne State
University Biomechanics Department, based in Detroit, to conduct the sled tests.
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.
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
Company is unaware of any other moving seat technology that has been
successfully tested by a major automobile manufacturer. In December 1996, the
U.S. Patent Office granted patent protection for ARCS technology.
The Company believes research and development costs to the Company for the ARCS
is complete and all future development and application engineering will be paid
for by the vehicle and/or seat manufacturers. Due to the requirement to design
and build actual pre-production hardware for automaker testing, the Company is
attempting to establish a strategic partner relationship with a seat
manufacturer. The Company hopes to sell the technology and maintain a long-term
opportunity for future royalty income. Based on lead times in the automobile
industry, royalties would not be generated for a minimum of four years after a
contract is signed; however, due to the increasing regulation and scrutiny on
air bag technology, the time period for implementation of an alternate
technology could be shortened.
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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 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. It also
provides diagnostics and trouble-shooting information. In May 1995, the Company
sold the EFECS technology to Adrenaline Inc., the original inventor of EFECS,
pursuant to a future royalty arrangement to accelerate royalty payments to the
Company and to place a ceiling on the amount of total royalties payable to the
Company. This agreement was subsequently amended on February 22, 1996. (See
Financial Statements and Supplementary Data, Note 16 - Sale of EFECS to
Adrenaline, Inc.) . As of January 6, 1997, the Company had received a total of
$29,169 in royalty payments.
Significant Customer Information
During 1996, approximately 99% of the Company's revenue was derived from OHSS
sales to Chrysler Corporation. Revenue from the UTG operations has been excluded
from total revenue. (See Item 8 - Financial Statements and Supplementary Data,
Note 2 Discontinued Operations.) For significant customer information see Item
8. - Financial Statements and Supplementary Data, Note 15 - Concentration of
Credit Risk.
Government Regulation
The Company is subject to government regulations generally affecting all
businesses. UTG, while it was in operation, routinely disposed of used oil in
the ordinary course of its business and as such was subject to federal, state
and local regulations. To handle this oil disposal, UTG hired a licensed,
insured third party. The Company believes that UTG and its predecessors were in
material compliance with all rules and regulations of the federal, state and
local agencies and agreed to indemnify Conam, the purchaser of UTG, against any
compliance penalties, if any should arise .
Seasonal Information
The Company's management believes that their business is not seasonal, however,
its OHSS product sold by TSA is subject to normal periods of OEM production line
shutdown for vehicle model year changeovers. This shutdown period normally
occurs for periods of time ranging from two to six weeks and not necessarily
occurring during the same quarter or quarters during each fiscal
year.
Offices and Employees
The Company maintains principal administrative offices in Palm Beach Gardens,
Florida and handles investor relations in the New York City office. The
Company's automotive subsidiary, TSA, has a 45,000 square foot facility in Troy,
Michigan, which includes its administrative, engineering and assembly operation.
TSI was located near Atlanta, Georgia and is presently in the process of moving
its facility to a 14,900 square foot facility in Farmington Hills, Michigan. The
Company employs approximately 72 full-time and three part-time people.
10
<PAGE>
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
----- --------- ----------
Corporate Headquarters Palm Beach Gardens, Florida January 1999
Investor Relations Office New York, New York November 1999
TSA Troy, Michigan June 2000
TSI Atlanta, Georgia July 1998
Farmington Hills, Michigan August 2000
All facilities have excess capacity and the capability to accommodate
significant future growth. Each of these facilities is in good condition.
ITEM 3. LEGAL PROCEEDINGS
On April 20, 1994, the Company initiated a suit in U.S. District Court ("the
Court") in Atlanta, Georgia against PSI for failure to honor contractual
obligations relating to oil testing samples sold prior to the Company's purchase
of PSI on July 16, 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. On October 17, 1995, PSI, pursuant to a ruling made by the
Court, paid the Company an additional $56,367 in full settlement of the suit. In
January 1996, the Company filed an appeal with the court to collect additional
amounts, which the Company believes it was owed. In September 1996, the appeal
was denied resulting in no impact to the Company's Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER'S
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1996.
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. The
Company's common stock trades on the American Stock Exchange under the symbol
"TPS".
Fiscal 1996 Fiscal 1995
High Low High Low
First Quarter (December 31) 8-7/8 6-3/8 8-3/8 5-3/4
Second Quarter (March 31) 7-3/8 5 7-3/4 5-3/8
Third Quarter (June 30) 8-3/16 5-5/16 7-3/16 5-3/16
Fourth Quarter (September 30) 7-1/16 3-3/8 9-3/16 6-1/8
Holders
As of December 13, 1996, there were approximately 1,398 holders of record of the
Company's common stock.
11
<PAGE>
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(continued)
Dividend Policy
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon the earnings, capital requirements and operating and financial
condition of the Company, and any restrictions in loan agreements among other
factors. Currently, the Company intends to follow a policy of retaining future
earnings in order to finance the growth and development of its businesses.
Share Repurchase program
On November 12, 1996, the Company announced that it put into effect a stock
repurchase program. Initially, the Company intended to repurchase up to 300,000
shares of its common stock in the open market and hold the shares as treasury
stock. In December 1996, Top Source Technologies, Inc. increased its share
repurchase program by 100,000 shares. As of December 13, 1996, the Company had
repurchased 295,700 shares at an average purchase price of $3.37 per share.
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, 1996, 1995, 1994, and 1993 and as of and for the nine months ended
September 30, 1992. The selected financial data should be read in conjunction
with Item 8. Financial Statements and Supplementary Data and Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
<TABLE>
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, 1994, 1993, AND AS OF
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1992
<S> <C> <C> <C> <C> <C>
Balance Sheet Data 1996 1995 1994 1993 1992
Total Assets $ 16,012,716 $ 19,109,250 $ 17,855,313 $ 10,632,917 $ 2,353,657
Long-term Debt 3,020,000 2,060,000 --- 458,368 ---
Total Liabilities 7,095,991 4,704,152 2,351,143 2,784,104 515,997
Stockholders' Equity 8,916,725 14,405,098 15,504,170 7,848,813 1,837,660
Statement of Operations Data
Net Sales $16,146,524 $ 13,907,354 $ 9,259,581 $ 2,536,340 $ 1,826,623
Income (Loss) from Continuing
Operations (4,831,786) (2,820,492) 1,840,366 (3,671,212) (2,118,154)
Net Income (Loss) (6,698,787) (3,399,796) 2,014,577 (3,610,226) (2,118,154)
Income (loss) per Common Share
from Continuing Operations (0.17) (0.10) 0.06 (0.18) (0.12)
Net Income ( Loss) per Weighted
Average Common Share (0.24) (0.12) 0.07 (0.18) (0.12)
</TABLE>
See Notes to Consolidated Financial Statements for information on transactions
and accounting classifications which have affected the comparability of the
periods presented above. The Company has not declared cash dividends on its
common stock for any of the periods presented above.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
On October 30, 1996, the Company sold certain assets and liabilities of the
Company's oil analysis subsidiary, UTG. (See Item 8. Financial Statements and
Supplementary Data, Note 2. Discontinued Operations. Therefore, the operations
of UTG for 1996, 1995 and 1994 are excluded from the analysis below.
1996 Compared to 1995
Total revenue for the year ended September 30, 1996 was $16,146,524 compared to
$13,907,354 for the year ended September 30, 1995, an increase of 16.1%. TSA
generated total revenue for the year ended September 30, 1996 of $16,102,523
compared to $13,893,459 for the year ended September 30, 1995. This increase of
15.9% is due to increased sales of the OHSS. TSI's revenue for fiscal 1996 and
1995 was nominal.
The gross profit margin for the year ended September 30, 1996 was 33.3% compared
to 37.2% for the year ended September 30, 1995. The decrease in margins below
comparable levels is primarily attributable to increased labor and overhead
costs relating to product sales at TSA.
General and administrative expenses decreased 4.6% for the year ended September
30, 1996 compared to the year ended September 30, 1995. The decrease is due to
personnel reductions and improved efficiency at the Company's corporate office
which were offset by increased expenses at the Company's subsidiaries TSA and
TSI.
Selling and marketing expense increased 50.6% for the year ended September 30,
1996 compared to the year ended September 30, 1995. This increase is primarily
due to increased salary and commission expense at TSA and TSI.
Depreciation and amortization expense increased 20.9% for the year ended
September 30, 1996 compared to the year ended September 30, 1995. The increase
is primarily due to increased depreciation at TSI which is related to the
purchase of additional OSA units during the year ended September 30, 1996.
Additional depreciation and amortization of $307,373 has been allocated to cost
of sales as it directly relates to the products and services sold during fiscal
1996.
Interest income increased $49,553 or 78.8% for the year ended September 30, 1996
compared to the year ended September 30, 1995, which was due to interest earned
on increased funds that were invested during the current fiscal year.
Interest expense increased $216,266 during the fiscal year ended September 30,
1996 as compared to the year ended September 30, 1995. The increase is due to
the interest expense on the Company's $3,020,000 nine percent (9%) Senior
Subordinated Convertible Notes which were issued in June and October of 1995.
Other income decreased $221,589 for the year ended September 30, 1996 as
compared to the same period in 1995. This decrease is due to proceeds of
$229,500 from Professional Services Industries, Inc. ("PSI") received in June of
1995. (See Item 3. Legal Proceedings)
Income tax expense increased $933,300 for the year ended September 30, 1996 as
compared to the year ended September 30, 1995. The increased tax expense was due
to a reversal of $1,365,000 of the Company's previously established tax asset as
a result of the Company not meeting expected taxable income in fiscal 1996. In
addition, TSA had increased state tax expense of $117,500 during fiscal 1996.
At September 30, 1996, the Company has net tax basis Federal operating loss
carryforwards of approximately $25,674,000, which may be used to offset future
taxable income, if any. The Company's net operating loss carryforwards begin to
expire between 2001 and 2011.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The increase of $3,298,991 in the net loss for the year ended September 30, 1996
as compared to the same period in 1995 is primarily related to the $1,804,791
loss from the disposal of UTG as well as a restructuring reserve of $725,000 set
up for TSI, Inc. In addition, tax expense increased $933,300 primarily due to a
reversal of the Company's tax asset.
The pre-tax loss from operations for the period ended September 30, 1996 before
restructuring charge was $2,331,219 compared to a pre-tax loss of $2,366,527 in
1995. The losses in both periods are primarily attributable to expenses at TSI
to develop the OSA product, and corporate expenses offset by profitability at
TSA.
1995 Compared to 1994
Total revenue for the year ended September 30, 1995 was $13,907,354 compared to
$9,259,581 for the year ended September 30, 1994, an increase of 50.2%. This is
primarily due to an increase of 51% in product sales at the Company's TSA
subsidiary which is attributable to an increased installation rate and sales of
OHSS products for Chrysler's Jeep(R) Wrangler and Jeep(R) Cherokee vehicles as
well as increased deliveries to Chrysler Venezuela for Jeep(R) Cherokee
applications.
The gross profit margin for the year ended September 30, 1995 was 37.2% compared
to 39.4% for the year ended September 30, 1994. The decrease in margins below
comparable levels is primarily attributable to increased labor and overhead
costs relating to product sales at TSA.
General and administrative expenses increased 87.3% for the year ended September
30, 1995 compared to the year ended September 30, 1994. The increase was caused
by significant general and administrative expenditures of $1,655,125 at TSI, an
increase of $1,587,207 from fiscal 1994. The majority of the expenses are
attributable to an increase in personnel and technical staff necessary to
support the anticipated rollout of the OSA units. Also, the Company incurred
additional costs of $331,050 related to payments on an employment and consulting
contract. The services have been completed and there will be no additional
expenses incurred under this agreement. In the fourth quarter of fiscal 1995,
senior management of the Company made reductions, primarily through personnel
cuts, in operating costs from the then current levels in order to reduce
expenses. Professional fees, which are included in general and administrative
expenses, increased primarily due to legal costs incurred in connection with the
PSI litigation (see Item 3. Legal Proceedings). Professional fees incurred in
fiscal 1995 relating to the PSI lawsuit were approximately $102,000.
Selling and marketing expense increased 57.2% for the year ended September 30,
1995 compared to the year ended September 30, 1994. This increase was a result
of the intensification of marketing and promotional activities in support of the
TSIs including an increase in the TSI sales force. These selling and marketing
expenses include increased salaries, benefits and travel expenses.
Depreciation and amortization increased 106.7% for the year ended September 30,
1995 compared to the year ended September 30, 1994. This increase is due to the
purchase of $1,682,018 in capital assets during fiscal 1995 of which $774,857
related to purchases by TSI. Depreciation and amortization of $130,238 was
allocated to cost of sales as it directly relates to the products and services
sold during fiscal 1995.
Research and development decreased 71.3% for year ended September 30, 1995
compared to the year ended September 30, 1994. This decrease is primarily
attributable to the elimination of research and development expenses related to
the ARCS technology. During 1995, the Company modified and enhanced the OSA.
These costs are included in general and administrative expenses. In fiscal 1995,
there were no research and development expenses related to the OSA.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Interest income increased 50.7% for the year ended September 30, 1995 compared
to the year ended September 30, 1994. This increase is due to the interest
earned on the senior subordinated convertible note proceeds of $2,060,000 which
were received in June 1995. (See Item 8. Financial Statements and Supplementary
Data, Note 9. Debt.)
Other income (expense) decreased 41.1% for the year ended September 30, 1995
compared to the year ended September 30, 1994. In fiscal 1994 Other Income
included approximately $278,000 which related to the recovery of loan fees that
had been previously written off in fiscal 1993.
Income tax expense for the year ended September 30, 1995 was $610,000 compared
to a benefit of $2,270,000 of for the year ended September 30, 1994. The
increase in tax expense was due to a reversal of a portion of the Company's
previously established tax asset, as a result of the Company not meeting
expectations of taxable income in 1995.
The net loss for the year ended September 30, 1995 compared to the year ended
September 30, 1994 is attributable to increased expenses relating to the rollout
of OSA units and an increased loss for oil analysis services at UTG. Also, the
loss was attributable to the $550,000 increase in the deferred tax valuation
allowance.
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 totaled
$1,237,130. The usage of cash is attributable to a net operating loss excluding
depreciation and amortization, of $5,459,851, an increase in accounts payable
and accrued liabilities of $1,306,090, an increase in current assets of
$688,628, an increase in the tax valuation allowance of $1,365,000, an increase
of $725,000 for accrued restructuring reserve and the loss from disposal of
discontinued operations of $1,804,791.
Net cash used in investing activities was $1,434,292 of which approximately
$1,857,004 was expended for capital assets, $42,510 for patent costs, and
$465,222 related to the reimbursement of tooling costs.
Net cash provided by financing activities was $2,170,414 which included the
exercise of stock options and warrants (exercise prices ranged from $.53 to
$6.50) that generated approximately $1,210,414 in net proceeds. Also, net
proceeds of $960,000 were generated from the issuance of 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 Bank increased
the Company's line of credit to $6,000,000 with $1,500,000 being available for
short term working capital, ("Credit Line") and $4,500,000 ("OSA Line") to be
used exclusively for the purchase of OSAs.
At September 30, 1996, the Company had not met the minimum debt service coverage
on the $4,500,000 OSA Line, and, therefore, was unable to access the line. Under
the terms of the credit facility, on December 31, 1996, the OSA Line principal
balance availability was reduced from $4,500,000 to $2,250,000 and will remain
at that level until the expiration of the facility on December 31, 1997.
Due to the current number of OSA machines already owned by the Company and based
on current cash balances and the accessibility of the $1,500,000 Credit Line,
the Company does not anticipate a need to access the OSA Line prior to its
expiration on December 31, 1997.
During fiscal 1996 through the present, the Company has not utilized its Credit
Line. The Company believes that the Credit Line will be renewed until January
31, 1998 upon its expiration on January 31, 1997.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Based on current cash balances, the Credit Line and savings generated from
expense reductions, the Company believes it has sufficient cash flow and
liquidity to fund its current operations and anticipated increasing OSA
commercialization.
Forward-Looking Statements
The statements discussed above under the Business Section, Results of
Operations, Liquidity and Capital Resources relating to the Company's
expectations that it anticipates (1) generating OSA revenue from OSA units
located in the powertrain, refinery, and other markets through franchising, (2)
entering into strategic relationships, (3) obtaining significant dealer
installed and aftermarket OHSS programs, (4)future TSA orders, and (5)
improvements in the Company's profitability and liquidity are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Important factors that could cause actual results to differ materially from the
forward-looking statements include the following: (1) the decline in current
production levels at Chrysler for vehicles installing OHSS, (2) the continued
reliability of the OSA technology over an extended period of time, (3) the
Company's ability to market OSAs, (4) the acceptance of the OSA technology by
the marketplace, (5) the general tendency of large corporations to slowly change
from known technology to emerging new technology, (6) the Company's reliance on
a third party to manufacture OSAs, (7) 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, and (8) unanticipated business or legal disagreements which
impede entry into one or more strategic alliances or impact the signing of a
definitive agreement.
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.
New Accounting Standards
In 1995 the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company
will adopt the statement in fiscal 1997. It is not expected to have material
impact on the Company's consolidated financial position or results of
operations.
In 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation.
With respect to accounting for its stock options, as permitted under SFAS No.
123, the Company intends to retain the intrinsic value method currently used as
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company will provide disclosures in accordance with
SFAS No. 123 when the standard is adopted in fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX Page
Report of Independent Certified Public Accountants........................17
Consolidated Balance Sheets as of September 30, 1996 and 1995..............18
Consolidated Statements of Operations for the Years Ended
September 30, 1996, 1995 and 1994..............................19
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1996, 1995 and 1994........... ............20
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994..... .......................21
Notes to Consolidated Financial Statements.................................22
16
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Top Source Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Top Source
Technologies, Inc., (a Delaware corporation) and subsidiaries as of September
30, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1996. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, 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
West Palm Beach, Florida
December 13, 1996
17
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1996 1995
---------------- -----------------
Current Assets:
Cash and cash equivalents 653,129 1,154,137
Accounts receivable trade (net of allowance of $83,650
and $145,703 in 1996 and 1995, respectively) 4,100,672 3,489,791
Inventories 511,958 468,169
Prepaid expenses 325,946 300,549
Other 111,685 82,258
---------------- -----------------
Total current assets 5,703,390 5,494,904
Property and equipment, net 2,503,033 2,217,051
Manufacturing and distribution rights and patents, net 333,762 361,340
Capitalized database, net 2,494,860 2,705,693
Deferred income tax assets, net 355,000 1,720,000
Other assets, net 784,203 808,695
Net assets from discontinued operations 3,838,468 5,801,567
================ =================
TOTAL ASSETS 16,012,716 19,109,250
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 1,836,395 1,279,761
Accrued salaries 229,939 318,621
Accrued liabilities 1,520,099 681,961
Net liabilities from discontinued operations 489,558 363,809
---------------- -----------------
Total current liabilities 4,075,991 2,644,152
Senior subordinated convertible notes 3,020,000 2,060,000
---------------- -----------------
Total liabilities 7,095,991 4,704,152
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; none outstanding --- ---
Common stock-$.001 par value, 50,000,000 shares
authorized; 28,446,477 and 27,731,477 shares issued and
outstanding in 1996 and 1995, respectively 28,446 27,731
Additional paid-in capital 28,723,853 27,514,154
Accumulated deficit (19,703,789) (13,005,002)
Treasury stock-at cost; 87,534 shares (131,785) (131,785)
---------------- -----------------
Total stockholders' equity 8,916,725 14,405,098
---------------- -----------------
================ =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 16,012,716 19,109,250
================ =================
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
</TABLE>
18
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996,
1995 AND 1994
<S> <C> <C> <C>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Product sales $16,102,523 $13,893,459 $9,203,938
Service revenue 44,001 13,895 ---
Other --- --- 55,643
--------------------------------------------------
Net sales 16,146,524 13,907,354 9,259,581
--------------------------------------------------
Cost of product sales 10,749,431 8,739,691 5,596,167
Cost of services 26,772 --- ---
Other --- --- 10,151
--------------------------------------------------
Cost of sales 10,776,203 8,739,691 5,606,318
--------------------------------------------------
Gross profit 5,370,321 5,167,663 3,653,263
--------------------------------------------------
Expenses:
General and administrative 5,751,733 6,030,533 3,220,291
Selling and marketing 989,450 657,220 418,123
Depreciation and amortization 931,563 770,286 372,613
Restructuring reserve 725,000 --- ---
Research and development 28,794 76,151 265,330
--------------------------------------------------
Total expenses 8,426,540 7,534,190 4,276,357
--------------------------------------------------
Loss from operations (3,056,219) (2,366,527) (623,094)
Other income (expense):
Interest income 112,398 62,845 41,686
Interest expense (276,566) (60,300) (63,727)
Other income (expense), net (68,099) 153,490 260,671
--------------------------------------------------
Net other income (expense) (232,267) 156,035 238,630
--------------------------------------------------
Loss before income taxes (3,288,486) (2,210,492) (384,464)
Income tax benefit (expense) (1,543,300) (610,000) 2,224,830
--------------------------------------------------
Income (loss) from continuing operations (4,831,786) (2,820,492) 1,840,366
--------------------------------------------------
Discontinued operations:
Income (loss) from discontinued operations (net
of income tax benefit of $45,170 in 1994) (62,210) (579,304) 174,211
Loss on disposal of discontinued operations (1,804,791) --- ---
--------------------------------------------------
Net income (loss) ($6,698,787) ($3,399,796) $2,014,577
--------------------------------------------------
Income (loss) per weighted average common share
outstanding:
Continuing operations (0.17) (0.10) 0.06
Discontinued operations:
Income (loss) from operations --- (0.02) 0.01
Loss on disposal (0.07) --- ---
==================================================
Total (0.24) (0.12) 0.07
==================================================
Weighted average common shares outstanding 28,027,959 27,249,541
=================================
Weighted average common and common equivalent shares:
Primary 28,381,211
=================
Fully diluted 28,728,488
=================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
</TABLE>
19
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<S> <C> <C> <C> <C> <C> <C> <C>
DEFERRED TOTAL
ADDITIONAL ACCUMU- OFFICERS' STOCK-
PAID-IN LATED COMPENSA- TREASURY HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT TION STOCK EQUITY
-----------------------------------------------------------------------------------
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
($6.62 per share) 74,396 74 492,427 -- -- -- 492,501
Amortization of deferred
officers' compensation -- -- -- -- 13,950 -- 13,950
Net income -- -- -- 2,014,577 -- -- 2,014,577
--------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1994 26,716,395 26,716 25,214,445 (9,605,206) -- (131,785) 15,504,170
Exercise of stock options
($.28 to $6.50 per share) 1,015,082 1,015 2,299,709 -- -- -- 2,300,724
Net loss -- -- -- (3,399,796) -- -- (3,399,796)
-------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 27,731,477 27,731 27,514,154 (13,005,002) -- (131,785) 14,405,098
Exercise of stock options
($.53 to $6.50 per share) 675,000 675 1,169,739 -- -- -- 1,170,414
Exercise of warrants
($1.00 per share) 40,000 40 39,960 -- -- -- 40,000
Net loss -- -- -- (6,698,787) -- -- (6,698,787)
=====================================================================================
BALANCE, SEPTEMBER 30, 1996 28,446,477 $ 28,446 $28,723,853 $(19,703,789) $ -- $(131,785) $8,916,725
=====================================================================================
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
20
</TABLE>
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) (6,698,787) (3,399,796) 2,014,577
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Loss (income) from discontinued operations 1,867,001 579,304 (174,211)
Depreciation 963,302 631,578 273,355
Amortization 275,634 268,946 328,076
Disposal of equipment 151,411 64,735 (68,407)
Deferred income taxes (970,000) (75,000) (33,126)
Decrease (increase) in deferred income tax assets, net 2,335,000 625,000 (2,236,874)
Provision for doubtful accounts --- (4,297) 136,855
Advance to officer --- (45,000) (140,000)
Repayment from officer --- 85,000 100,000
Increase in accounts receivable, net (610,881) (121,934) (2,143,976)
Increase in inventories (43,789) (111,671) (92,974)
Decrease (increase) in prepaid expenses (25,397) 7,056 (208,269)
Decrease (increase) in other assets (8,561) 100,422 (270,776)
Increase (decrease) in accounts payable 556,634 (325,561) 498,526
Increase (decrease) in accrued salaries (88,682) 199,138 (142,428)
Increase in accrued liabilities 838,138 143,665 287,131
Discontinued operations - change in net assets 221,847 (759,824) 70,836
--------------------------------------------------
Net cash used in operating activities (1,237,130) (2,138,239) (1,801,685)
--------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,857,004) (1,682,018) (904,577)
Reimbursement of tooling costs 465,222 --- ---
Purchase of business, net --- --- (96,324)
Increase in other assets --- (650,000) ---
Additions to patent costs, net (42,510) (77,650) (136,490)
--------------------------------------------------
Net cash used in investing activities (1,434,292) (2,409,668) (1,137,391)
--------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 1,210,414 2,300,724 5,134,329
Proceeds from borrowings 960,000 4,460,000 600,000
Repayments of borrowings --- (2,488,042) (1,728,242)
--------------------------------------------------
Net cash provided by financing activities 2,170,414 4,272,682 4,006,087
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents (501,008) (275,225) 1,067,011
Cash and cash equivalents at beginning of period 1,154,137 1,429,362 362,351
==================================================
Cash and cash equivalents at end of period $653,129 $1,154,137 $1,429,362
==================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
21
</TABLE>
<PAGE>
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 has four
wholly-owned subsidiaries: Top Source Automotive, Inc. ("TSA"), Top Source
Instruments, Inc. ("TSI"), formerly On-Site Analysis, Inc. ("OSA"), ARCS Safety
Seat, Inc. ("ARCS, Inc."), and United Testing Group, Inc., ("UTG").
The Company concentrates on two industry segments: automotive technology and oil
analysis service. Within these two segments, the Company has three proprietary
technologies: an Overhead Speaker System ("OHSS"); safety restraint technology
("ARCS"); 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 eight minutes at the end-user's site. Within the oil analysis
segment, the Company has UTG consisting of three oil analysis laboratories which
sold certain assets and liabilities subsequent to year end and which is
accounted for as discontinued operations. (See Note 2.)
Revenue is currently derived primarily from sales of the OHSS for both
production line and dealership installed units.
Basis of Presentation - Certain 1995 and 1994 amounts have been reclassified to
conform to the current year presentation.
Cash Equivalents - The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition - The Company recognizes revenue from sales of its products
(Automotive Technology segment) at the time the products are shipped. The
Company recognized revenue from the performance of its oil analysis services
(oil analysis service segment) at the time the service is rendered.
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
<PAGE>
- ----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
Intangible Assets - Intangible assets primarily consisted of the cost of
acquired businesses in excess of the fair value of net tangible and identifiable
intangible assets acquired (See Note 7.) The cost in excess of the fair value of
net tangible and identifiable intangible assets was being amortized on a
straight-line basis over 40 years. All costs in excess of fair value relating to
the acquisition of UTG was sold subsequent to fiscal year ended September 30,
1996 (see Note 2.) Accordingly, costs in excess of fair value (goodwill) in the
Company's consolidated financial statements have been included in net assets
from discontinued operations. 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. When such factors, events or circumstances indicate that intangible
assets should be evaluated for possible impairment, the Company uses 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.
Use of Estimates - The preparation of the consolidating financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of assets and liabilities at the date of the
consolidating financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
New Accounting Standards
In 1995 the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company
will adopt the statement in fiscal 1997. Management does not believe adoption of
this statement will have a material impact on the Company's consolidated
financial position or results of operations.
In 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation.
With respect to accounting for its stock options, as permitted under SFAS No.
123, the Company intends to retain the intrinsic value method currently used as
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company will provide disclosures in accordance with
SFAS No. 123 when the standard is adopted in fiscal 1997.
Quarterly Information - The Company recorded an additional valuation allowance
to reduce the deferred tax assets in the amounts of $1,365,000 and $550,000
during the fourth quarters of the fiscal years ended September 30, 1996 and
1995, respectively. (See Note 12.)
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------
2. DISCONTINUED OPERATIONS
On September 12, 1996, the Company's Board of Directors approved a plan to sell
certain assets and liabilities of the Company's oil analysis subsidiary, UTG.
The sale was consummated on October 30, 1996. The provision for loss on the
disposal of UTG of $1,804,791 reflected in the consolidated statement of
operations includes a write down of the net assets of $1,565,621 and an
additional $239,170 for estimated costs to dispose of these operations.
The net losses of UTG for the years ended September 30, 1996, 1995 and 1994 are
included in the consolidated statement of operations under "discontinued
operations." Revenues from such operations for the years ended September 30,
1996, 1995 and 1994 were $4,549,944, $5,061,452 and $5,878,281, respectively,
and were not included in service revenue in the accompanying consolidated
statements of operations.
Assets and liabilities sold consisted of the following:
<TABLE>
<S> <C> <C>
1996 1995
---- ----
Supplies inventory $ 91,422 $ 136,189
Property, plant and equipment, net 812,197 1,027,672
Deposits 27,639 --
Trademarks and patents 5,692 5,425
Intangibles 4,642,604 4,768,470
--------- ---------
Total assets 5,579,554 5,937,756
---------- ---------
Deferred service revenue 608,619 499,998
Long-term capital lease 56,404 --
----- ------
Total liabilities 665,023 499,998
------- -------
Net assets disposed of 4,914,531 5,437,758
Less allowance for discontinued
operations (1,565,621) --
--------- ________
Net assets from discontinued
operations $ 3,348,910 $5,437,758
=========== ==========
</TABLE>
3. STATEMENTS OF CASH FLOWS
There were no non-cash investing activities for the years ended September 30,
1996 and 1995. Non-cash investing activities for the year ended September 30,
1994 are as follows:
Accounts receivable $ (208,484)
Intangibles 1,337,092
Liabilities assumed (539,783)
Issuance of stock in connection with the
acquisitions (492,501)
--------
Cash used in acquisitions $ 96,324
==========
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 was valued at $6.625 per share, the closing market price on
the date of the transaction. Non-cash investing activity amounts above include
the preliminary purchase price allocations for the Pro-Tech acquisition.
There were no non-cash financing activities during 1996, 1995 and 1994.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
4. INVENTORIES
Inventories consisted of the following at September 30, 1996 and 1995:
1996 1995
----- ----
Raw materials $398,248 $395,999
Finished goods 113,710 72,170
------- --------
$511,958 $468,169
======= ========
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1996 and
1995:
Useful 1996 1995
Life (Years) ---- ----
Equipment 2-12 $287,074 $174,710
Computer equipment 3-4 1,021,937 883,902
On-Site Analyzer 4-5 1,613,014 1,015,101
Tooling 2 891,540 832,891
Furniture and fixtures 3-5 296,271 245,716
Vehicles and delivery equipment 3 119,103 82,043
Leasehold improvements 2-5 134,049 76,658
------- -------
4,362,988 3,311,021
Less: accumulated depreciation (1,859,955) (1,093,970)
--------- ----------
$2,503,033 $2,217,051
========= ==========
Depreciation of tooling and production equipment incurred in manufacturing OHSS
in the amount of $307,373 and $130,238 for the years ended September 30, 1996
and 1995, respectively, has been allocated to cost of sales as it directly
relates to the products sold. Amounts relating to UTG for 1996 and 1995 have
been excluded from the total above and are included in net assets from
discontinued operations (See Note 2.)
6. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS
Manufacturing and distribution rights and patents consisted of the following at
September 30, 1996 and 1995:
Useful
Life (Years) 1996 1995
------------ ---- ----
Manufacturing rights 13 $ 58,438 $58,438
Distribution rights 13 437,501 437,501
Patents 10 244,094 210,747
------- -------
740,033 706,686
Less: accumulated amortization (406,271) (345,346)
------- --------
$333,762 $ 361,340
======= =========
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
6. 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 have a remaining net
book value of $22,201 at September 30, 1996.
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 thirteen years, is $119,172 at September
30, 1996. The Company also has patents on the OHSS relating to improvements and
perfections on the Overhead Speaker System. The value of these patents is being
amortized over ten years and have a remaining net book value of $58,347 at
September 30, 1996.
OSA (On-Site Analyzer)
TSI has been granted two patents on unique technology critical to the operations
of its On-Site Analyzer. The value of these patents is being amortized over ten
years and have a remaining net book value of $55,287 at September 30, 1996.
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. No revenues were recorded in fiscal years 1996
and 1995.
The value of the patents related to the ARCS Seat Safety Device is being
amortized over ten years and have a remaining net book value of $78,755.
7. INTANGIBLE ASSETS
Intangible assets consisted of the following at September 30, 1996 and 1995:
Useful
Life (Years) 1996 1995
----------- ---- ----
Capitalized database 15 $3,162,500 $3,162,500
Less: accumulated amortization (667,640) (456,807)
-------- ---------
$2,494,860 $2,705,693
The capitalized database contains an active library of engine and machine tests
that have a diagnosed history. The value of the capitalized database 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. The database will remain for use by TSI and will be
an integral part of TSI by developing specialized markets. As of September 30,
1996, TSI has generated a nominal amount of revenue. Costs in excess of value
relating to UTG for 1996 and 1995 have been excluded from above as they are
included in net assets from discontinued operations (see Note 2.)
8. OTHER ASSETS
Included in other assets at September 30, 1996 and 1995 is a $650,000
deposit which was made to the manufacturer of the OSA units.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
9. DEBT
Notes payable at September 30, 1996 and 1995 are as follows:
Senior Subordinated convertible notes,
due June 2000, bearing 1996 1995
------- ------
interest at 9% $3,020,000 $2,060,000
========= ==========
On June 9, 1995, the Company entered into an agreement with advisory clients of
Ganz Capital Management, Inc. ("Ganz") whereby the holders would purchase
$3,020,000 in senior subordinated convertible notes from the Company. In June
1995, the Company issued $2,060,000 of nine percent (9%) convertible notes
maturing in June 2000. After June 9, 1996, the notes can be prepaid by the
Company without penalty and can be converted by the holders into fully
registered shares of the Company's common stock at a conversion price of $10 per
share. The Company issued the remaining $960,000 in notes and received the
related proceeds on October 12, 1995.
In November 1994, the Company entered into a $5,000,000 Loan Agreement ("the
Agreement") which was subsequently amended, with First Union National Bank of
Florida (the "Bank"). Under the Agreement amounts outstanding bear interest at
the prime rate plus .85% and interest only is payable monthly. The Agreement
stipulated that $4,500,000 (OSA Line) of the proceeds could be used for the
purchase of certain OSAs. A principal payment will be required that is
sufficient to reduce the principal amount outstanding on the OSA Line, if any,
to $2,250,000 on December 31, 1996 with any remaining amounts outstanding being
due and payable on December 31, 1997. The Agreement also indicates that $500,000
would be available for short-term working capital through January 31, 1997
("Credit Line"). In April 1995, the Credit Line was increased by $250,000 and
subsequently increased by an additional $750,000 in October 1995 for an
aggregate of $1,500,000 of borrowing capacity. During the term of the loan, the
Company is required to meet certain financial covenants, including minimum debt
service coverage ratio and minimum tangible net worth, as well as pay a
commitment fee on the OSA Line unused funds. On January 31, 1996, the Company
received an amendment from the Bank waiving the minimum debt service coverage
requirement as it pertains to the $1,500,000 Line of Credit. Management's intent
is to renegotiate with the Bank in order to extend the working line of credit of
$1,500,000 until January 31, 1998.
The Bank is not required to fund any part of the OSA Line until such time as the
Company has paid to TJA $1,900,000 or purchased 31 OSAs for a total purchase
price of $1,250,000 without Bank funding. As of September 30, 1996, the Company
has paid $2,067,368 and purchased a total of 38 OSA units which satisfy the
above requirements. As of September 30, 1996, the Company has not met the
minimum debt service coverage ratio on the OSA Line. Accordingly, the Company is
not entitled to access the $4,500,000 OSA Line at this time.
The OSAs purchased with proceeds from the OSA Line are required to be leased to
the Company's customers and meet certain conditions, such as acceptable term of
lease, inspection, and credit worthiness of lessee. OSAs purchased with sources
of funds other than Bank financing do not need to be leased to the Company's
customers. The 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 a $650,000 deposit paid by the Company to TJA.
As of September 30, 1996, no amounts were outstanding under this Agreement and
at no time during the year was there any balance due on these lines of credit.
Cash paid for interest for the years ended September 30, 1996, 1995 and 1994 was
$276,566, $60,300 and $16,253, respectively.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancelable operating leases. Future
minimum rental commitments under these leases are as follows:
Fiscal Year Ending September 30:
1997 $480,907
1998 484,022
1999 326,183
2000 170,251
2001 3,225
Thereafter -
The lease commitments schedule above includes the lease for the Company's
corporate offices in Palm Beach Gardens, Florida, which can be canceled at any
time through April 15th of each lease year upon 30 days notice. (See Item 2.
Description of Property)
Total rental expense from continuing operations amounted to $ 479,135, $321,293
and $215,104 for the years ended September 30, 1996, 1995, and 1994,
respectively.
The Company has commitments under certain employment agreements entered into
with individuals in management positions. The payments due under these
agreements aggregate $369,533 and are payable during fiscal 1997. Two executives
are eligible to receive an incentive payment of half of their base salary if the
Company's net 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 for incentive
compensation based on revenue.) Also, an executive is eligible to receive an
override equivalent to 3% of pre-tax income of TSI net of any cumulative losses
and direct corporate overhead expenses. There were no amounts due related to the
incentive payments or the 3% override in fiscal 1996, 1995 and 1994.
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
were 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 on the
first 6% of the salary deferral, not to exceed 1 1/2% of the employee's total
salary eligible under the Plan. The cost the Company incurred for matching
employee contributions and administrative costs during fiscal 1996, 1995 and
1994 was $55,521, $57,384 and $42,530, respectively.
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. In fiscal 1994, fully diluted net income per common share is not
materially different from primary net income per common share. Net loss per
share is computed by dividing the net loss by the weighted average number of
common shares outstanding after reduction for treasury shares. The common stock
options and warrants (See Note 14.) have been excluded from the net loss per
share calculation for fiscal 1996 and 1995 since their inclusion would have been
anti-dilutive.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
12. INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are determined based on temporary
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect during the years in which the
differences are expected to reverse, and on available tax carryforwards. The
income tax expense (benefit) for the years ended September 30, 1996, 1995 and
1994 consists of the following components:
<TABLE>
<S> <C> <C> <C>
Current: 1996 1995 1994
------------- ---- ----
Federal $(952,000) $ (839,000) $ (27,000)
State 177,500 60,000 --
--------- -------- ----------
(774,500) (779,000) (27,000)
---------- --------- ------
Deferred:
Federal (825,000) (64,000) (28,157)
State (145,000) (11,000) (4,969)
---------- ---------- ------
(970,000) (75,000) (33,126)
---------- ----------- ------
Increase in beginning of the
year valuation allowance 3,287,800 1,464,000 (2,209,874)
--------- --------- ---------
$1,543,300 $ 610,000 $ (2,270,000)
========== =========== ===========
</TABLE>
A reconciliation of the federal income tax expense (benefit) at the statutory
rate to the Company's effective income tax benefit for the years ended September
30, 1996, 1995 and 1994 are as follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
----- ---- ----
Income tax benefit at statutory rate $ (1,753,000) $(949,000) $ (86,844)
State income tax (benefit) expense (16,500) 40,000 (15,325)
Increase (reduction) in valuation allowance, net 3,287,800 1,464,000 (2,209,874)
Non-deductible expenses 25,000 55,000 33,696
Other -- -- 8,347
----------- ---------- ------------
$1,543,300 $ 610,000 $(2,270,000)
============ ========== ============
</TABLE>
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, 1996 will be realized before the expiration of the underlying net
operating loss carryforwards which will begin expiring in 2001.
The reduction in the valuation allowance in 1994 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: (1) greater certainty regarding the Company's
OHSS units for Jeep(R) Cherokee production installation (this application began
in September 1993); (2) greater penetration in the Jeep(R) Grand Cherokee OHSS
application being attained; (3) 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(R) Cherokees but also other Chrysler models; and
(4) progress, during mid-fiscal year 1994, in gaining new vehicle applications
for the OHSS.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
12. INCOME TAXES (continued)
At September 30, 1996, the Company's Consolidated Balance Sheet contains a
deferred income tax asset of $355,000. An additional valuation allowance in the
amount of $1,365,000 and $550,000 has been established for September 30, 1996
and 1995 for a portion of the deferred income tax asset recorded at September
30, 1994 as a result of the Company not meeting expectations of taxable income
for fiscal 1996 and 1995.
The Company has recorded a deferred income tax benefit and related deferred
income tax asset based on the pre-tax loss for fiscal 1996 and recorded a full
valuation allowance in the same amount.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1996
and 1995 are as follows:
<TABLE>
<S> <C> <C>
1996 1995
---- ----
Deferred tax assets:
Book operating losses $ 6,600,000 $ 5,547,000
Expenses for book, not for tax 1,040,800 116,000
--------- -----------
7,640,800 5,663,000
---------- ----------
Deferred tax liabilities:
Capitalized database (998,000) (1,082,000)
Tax over book depreciation (184,000) (118,000)
Other, primarily deductible intangibles
amortization (188,000) (115,000)
-------- -----------
(1,370,000) (1,315,000)
--------- ---------
Net deferred assets before
valuation allowance 6,270,800 4,348,000
Less valuation allowance (5,915,800) (2,628,000)
--------- -------------
Net deferred tax assets $ 355,000 $1,720,000
=========== ===========
</TABLE>
At September 30, 1996, the Company has net tax basis Federal operating loss
carryforwards of approximately $25,674,000, which may be used to offset future
taxable income, if any. The Company's net operating loss carryforwards expire
between 2001 and 2011.
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 the following: (1) revenue (at the rate of 1%
of quarterly revenue, for quarterly revenue up to $6.25 million and descending
downward to the rate of .75% of quarterly revenue if it is between $6.25 million
to $12.5 million and .5% of quarterly revenue if quarterly revenue is over $12.5
million), and (2) 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 1996, 1995 and 1994 was $206,965,
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS (continued)
$189,688 and $151,378, respectively. In fiscal 1994, 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 price of $2.0625, under the 1993
Plan, as later defined. The 600,000 options are vested at September 30, 1996. In
the event of termination without cause or if the President/CEO resigns for "good
reason", as defined in the agreement, 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.
In January 1994, an employee, the former President of the Company's subsidiary,
UTG, was terminated. The employee was paid his monthly 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.
14. 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 four 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 four 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.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS (continued)
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. In December 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.
The Company has issued the following options and warrants to directors,
officers, employees and consultants during 1996, 1995 and 1994. All of the
following options and warrants were generally issued at 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:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Outstanding, beginning of year:
Shares 3,079,450 3,537,562 4,687,072
Price $.28125-8.75 $.28125-8.75 $.28125-4.00
Granted:
Shares 514,572 613,750 831,757
Price $5.562-7.75 $6.25-8.25 $2.9375-8.75
Expiration Dates 10/24/2005- 10/25/2004- 4/1/1994 -
6/30/2006 8/31/2005 9/1/2004
Exercised:
Shares (715,000) (1,015,082) (1,761,100)
Price $.53-6.50 $.28-6.50 $.28125-6.00
Expired or Canceled:
Shares (197,708) (56,780) (220,167)
Price $6.50-7.75 $5.75-6.50 $2.3125-6.00
Outstanding, end of year:
Shares 2,681,314 3,079,450 3,537,562
Price $.28125-8.75 $.28125-8.75 $.28125-8.75
Exercisable, end of year: 1,969,226 2,298,700 2,452,411
Available for grant, end of year: 329,327
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS (continued)
On November 12, 1996, the Company announced that it put into effect a stock
repurchase program. Initially, the Company intended to repurchase up to 300,000
shares of its common stock in the open market and hold the shares as Treasury
stock. In December 1996, the Company increased its share repurchase program by
100,000 shares. On December 13, 1996, the Company had repurchased 295,700 shares
at an average purchase price of $3.37 per share.
15. CONCENTRATION OF CREDIT RISK
In fiscal 1996, the majority of the Company's overall revenue was derived in the
automotive technology segment from one customer, an OEM, which accounted for
99.3% of the total business activity. That same customer accounted for 91% and
98% of net sales in both 1995 and 1994. Revenue from the UTG operations has been
excluded from total revenue. (See Note 2.) As of September 30, 1996 the
Company's receivable balance from this OEM customer was approximately
$3,447,434. The majority of this receivable was subsequently collected. The loss
of this customer would have a material adverse effect on the Company. Export
sales in 1996, 1995 and 1994 were insignificant.
16. SALE OF ENGINE FUEL ECONOMY EMISSIONS CONTROL REDUCTION SYSTEM TECHNOLOGY
("EFECS") TO ADRENALINE, INC.
On May 10, 1995, the Company entered into an "Agreement" with Adrenaline, Inc.
("Adrenaline"), the original inventor of the Engine Fuel Economy Emission
Control Reduction System ("EFECS") technology, to assign its interest in the
proprietary technology to Adrenaline. Under the terms of the Agreement, the
Company assigned its interest in this technology in return for future royalties.
In order to facilitate and accelerate the commercialization of EFECS by
Adrenaline and Edward Van Duyne (the founder of Adrenaline, Inc.) and to
maximize the opportunity for the Company, on February 22, 1996, the Company
agreed to amend the original terms stated in the Agreement to items 1 and 2
below:
1. On June 1, 1996, the Company began receiving monthly royalty
payments in the amount of $4,167 per month as a minimum royalty payment
up to a maximum of $400,000 instead of annual payments of $50,000
annually (originally scheduled to commence in January, 1997);
2. Commencing on the first anniversary of the date on which
Adrenaline's patent revenues for the prior 12 months exceed $2,500,000,
Adrenaline will pay to the Company an annual royalty payment equal to
two percent (2%) of all patent revenues. Patent revenue royalty
payments shall not exceed $150,000 in any 12 month period and
$1,500,000 during the entire term of the Agreement unless Adrenaline
consummates an initial public offering or sells substantially all of
the assets or capital stock of Adrenaline. As of September 30, 1996,
Adrenaline had not received any revenue relating to the EFECS patent.
The timing of the commencement of EFECS revenues, if any, is
indeterminable.
Additionally, the Company was granted 45,000 options, or not less than an amount
equal to 3% of the Company's shares on a fully diluted basis, on Adrenaline's
common stock at a price of $1.20 per share. These option shares are not
exercisable until Adrenaline either consummates a successful initial public
offering or sells substantially all of the assets or capital stock of
Adrenaline. The option agreement is subject to the Company's approval.
The Company is currently recognizing the monthly royalty payments on a cash
basis until it can readily determine the predictability of payments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
17. SEGMENT INFORMATION
The Company currently classifies its operations into the following segments: (1)
automotive technology which primarily consists of the Overhead Speaker System,
and (2) Oil Analysis Service which primarily consists of TSI operations. Items
below exclude amounts from UTG operations. Corporate and other includes general
corporate assets consisting primarily of cash and cash equivalents, property and
equipment, deferred income tax assets, and corporate expenses. The material
components of corporate general and administrative expenses are salaries and
benefits; travel and entertainment; consulting; and proxy, printing and transfer
costs. In fiscal 1996 and 1995, corporate expenses (salaries, benefits and
general and administrative expenses) have been allocated to the segments. In
1996, management changed certain assumptions on these allocations. If these
assumptions were used in 1995, corporate expenses would have been reallocated
from the Corporate and Other segment into the Automotive Technology segment and
the Oil Analysis Service segment in the amount of $779,165 and $658,727,
respectively. Financial information about the Company's operations by segments
for the years ended September 30, 1996, 1995 and 1994 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Automotive Oil Analysis Corporate
Technology Service and Other Consolidated
Revenue:
1996 $16,102,523 $ 44,001 $ -- $ 16,146,524
1995 $13,893,459 $ 13,895 $ -- $ 13,907,354
1994 $ 9,203,938 $ -- $ 55,643 $ 9,259,581
Operating Income
(Loss):
1996 $ 3,093,833 $ (4,605,624) $ (1,544,428) $ (3,056,219)
1995 $ 4,008,392 $ (2,565,929) $ (3,808,990) $ (2,366,527)
1994 $ 2,821,308 $ (521,167) $(2,923,235) $ (623,094)
Depreciation and
Amortization:
1996 $ 94,080 $ 701,510 $ 135,973 $ 931,563
1995 $ 79,085 $ 572,760 $ 118,441 $ 770,286
1994 $ 66,647 $ 211,118 $ 94,848 $ 372,613
Identifiable
Assets:
1996 $ 1,373,326 $ 60,571 $10,740,351 $ 12,174,248
1995 $ 4,336,403 $ 5,397,470 $ 3,573,810 $ 13,307,683
1994 $ 1,737,336 $ 4,335,409 $ 6,525,330 $ 12,598,075
Capital
Expenditures:
1996 $ 516,968 $ 1,190,629 $ 149,407 $ 1,857,004
1995 $ 778,804 $ 774,857 $ 128,357 $ 1,682,018
1994 $ 323,723 $ 460,262 $ 120,592 $ 904,577
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------
18. OTHER INCOME
Included in Other Income in fiscal 1996 and 1995 is $56,367 and $229,500,
respectively, which relates to the recovery of funds from the Professional
Services Inc. ("PSI") lawsuit. (See Item 3. - Legal Proceedings) PSI was a
privately owned oil analysis laboratory acquired by the Company in July of 1993
and later merged into UTG. Included in Other Income in fiscal 1994 is
approximately $278,000 related to the recovery of loan fees that had been
previously written-off in fiscal 1993.
19. RESTRUCTURING RESERVE
On September 12, 1996, the Board of Directors approved a restructuring plan
which included the restructuring of management, relocating the TSI office and
laboratories as well as certain personnel. The Company has recorded $725,000 of
restructuring charges in fiscal 1996 which consist primarily of severance costs,
lease cancellation costs and other expenses that have no future benefit.
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
BOARD OF DIRECTORS
The Company's by-laws provide that the Board of Directors shall consist of
no less than three and no more than nine members, with the actual number to be
established by resolution of the Board of Directors. The current Board of
Directors has by resolution established the number of directors at nine. There
is currently one vacancy with the resignation of Arthur Kirsch in December 1996.
The Company's Directors serve three-year terms with three Directors elected each
year.
<TABLE>
Board of Directors
<S> <C> <C> <C> <C> <C>
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Name Age Position with
Company Since Term Ending
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Stuart Landow(1) (4) 50 President (Chief 1990 Three Years 1997
Executive Officer) and
Chairman of the Board of
Directors
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Christer Rosen(4) 45 Executive Vice President, 1987 Three Years 1997
Secretary and Director
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
David Natan 43 Vice President of Finance 1995 Three Years 1997
(Chief Financial
Officer), Treasurer and
Director
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Ronald P. Burd(2)(3) 50 Director 1992 Three Years 1999
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Carlton S. Joyce 66 Director 1993 Three Years 1998
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Paul F. Moore(1)(3)(4) 70 Director 1993 Three Years 1999
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Mani A. Sadeghi(1)(3) 33 Director 1993 Three Years 1998
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
Clinton D. Lauer(2)(3) 70 Director 1994 Three Years 1999
- ---------------------------- -------- --------------------------- ---------------- ----------------- ---------------
(1) Member of the Nominating Committee
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Executive Committee.
</TABLE>
34
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
Stuart Landow - Mr. Landow has been President, Chief Executive Officer and a
member of the Board of Directors of the Company since July 27, 1990, and
Chairman of the Board of Directors since October 2, 1991. As Chairman, President
and Chief Executive Officer of the Company, Mr. Landow is responsible for the
overall management of the business, with an emphasis on business strategy and
long term planning. Mr. Landow introduced the oil analysis concept to the
Company and devotes a significant amount of time to project management of
On-Site Analysis, Inc., whose name changed to Top Source Instruments, Inc.
("TSI"), and to the development and marketing of On-Site Analyzers. In addition,
Mr. Landow introduced the licensing through MIT of the ARCS technology, and of
the EFECS Technology which was subsequently sold by the Company in 1995.
Presently, Mr. Landow's primary efforts are being concentrated on the
development of contractual relationships for the marketing of the Company's
present products and technologies with industrial partners, and on
communications with analysts, brokers and others. Additionally, Mr. Landow
concentrates on utilizing his contacts with the automobile industry and others
for the purpose of learning about and obtaining new technologies for the
Company.
In December 1996, the Board of Directors determined that it would best serve
stockholder interests to augment top management by retaining the services of an
additional executive as Chief Executive Officer, or in some other capacity, to
work with Mr. Landow in executing the Company's business plan. The Company's
search for this executive is continuing. For a discussion of certain payments
and other benefits to which Mr. Landow may be entitled if his responsibilities
and duties are materially diminished if and when such a new executive is
retained, see "Executive Compensation Agreements" in this section.
Christer Rosen - Mr. Rosen has been Executive Vice President and Secretary of
the Company and a director since 1987. From 1995 to September 1996, Mr. Rosen
was appointed President of Top Source Automotive, Inc. ("TSA") and in September
1996 was appointed officer in charge of both the TSI and TSA subsidiaries. Mr.
Rosen was responsible for bringing the Overhead Sound System to the Company. Mr.
Rosen is the only original member of the management team which founded the
Company.
David Natan - Mr. Natan joined the Company in June of 1995 and brings nearly 20
years of management and analytical experience to his responsibilities as Vice
President and Chief Financial Officer of the Company. Prior to joining the
Company, from November 1992 through June 1995, Mr. Natan was Chief Financial
Officer of MBf USA, Inc., which is a NASDAQ listed subsidiary of MBf Holdings
Berhad, a four-billion-dollar multi-national conglomerate. From August 1987
through October 1992, Mr. Natan was Treasurer and Controller for Jewelmasters,
Inc., an American Stock Exchange listed company. Mr. Natan is a Certified Public
Accountant licensed in the State of Florida since 1987. In January 1996, Mr.
Natan became a Director of IMX Corporation ("IMX") in Boca Raton, Florida. IMX
is a NASDAQ listed distributor of pharmaceutical products.
Ronald P. Burd - Mr. Burd has been a director of the Company since March 1992.
From 1984 through the present, Mr. Burd has been President and Chief Executive
Officer of the Devereux Foundation. Devereux, founded in 1912, is a nationwide,
private, not-for-profit organization that treats individuals of all ages who
have a wide range of emotional disorders and/or developmental disabilities.
Headquartered in Devon, Pennsylvania, Devereux operates residential, day and
community-based treatment programs located in 13 states and the District of
Columbia.
Carlton S. Joyce - Mr. Joyce was appointed a director of the Company in
September 1993. From 1974 to 1993, Mr. Joyce was Chairman of a major oil
analysis laboratory, Spectro/Metrics, Inc. ("SMI") in Atlanta, Georgia, which
the Company acquired in July 1993. Mr. Joyce is now Director of Technology
spearheading for concept and development of the On-Site Analyzer for broader
application.
Clinton D. Lauer - Mr. Lauer was appointed a director of the Company in March
1994. From January 1992 to present, Mr. Lauer has been President of Lauer and
Associates, a consulting firm working with automotive supplier companies. From
1987 to January 1992, Mr. Lauer held the position of Vice President, Purchasing
and Supply with Ford Motor Company. In January 1992 he retired from the Ford
Motor Company after 36 years with that company.
35
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
Paul F. Moore - Mr. Moore was appointed a director of the Company in September
1993. Currently, Mr. Moore is President and CEO of P.F. Moore & Associates, a
consulting engineering company. From 1991 to 1994, Mr. Moore was President of
Advanced Vehicle Concepts, a Michigan based company which builds prototype
vehicles. From 1986 through 1991, Mr. Moore was chief executive officer of
American Professional Services which was later acquired by First Technology PLC
of Great Britain. Mr. Moore spent 25 years as a senior executive with Chrysler
Corporation and retired from Chrysler in 1981.
Mani A. Sadeghi - Mr. Sadeghi was appointed a director of the Company in
September 1993. Mr. Sadeghi is currently group president for a specialty
financial service business at AT&T Capital Corporation. From October 1994 to
October 1996, Mr. Sadeghi was Vice President of Corporate Development for AT&T
Capital Corporation. From 1992 to October 1994, Mr. Sadeghi had been Director of
Strategic Planning and Business Development at G.E. Capital Corp. From 1988 to
1992, Mr. Sadeghi was a management consultant with Bain & Company located in San
Francisco where he provided strategic consulting services to his clients. Mr.
Sadeghi is the brother-in-law of Mr. Charles Ganz, the President of Ganz Capital
which is the beneficial owner of approximately 10.2% of the Company's common
stock.
Non-Director Executive Officers
Richard J. Ragan - Mr. Ragan was appointed Chief Executive Officer of Top Source
Instruments, Inc. ("TSI") in October, 1996, which consists of the Company's
On-Site Analyzer (OSA) product line. Mr. Ragan is responsible for the day to day
leadership of the TSI staff, setting the direction of the company, providing the
vision for the future and overall profitability of the group. Prior to joining
TSI, Mr. Ragan was employed by AVL North America, Inc. from 1992 to 1996 and
from 1993 to 1996, Mr. Ragan was President and Chief Executive Officer. From
1986 to 1992, Mr. Ragan was the Marketing Manager for Sverdrup Technology, Inc.,
a subsidiary of the Sverdrup Corporation responsible for business development
and customer advocacy primarily in the automotive markets.
Dennis K. Littleworth - Mr. Littleworth was appointed Vice President and General
Manager of Top Source Automotive, Inc. ("TSA"), in April 1996, and was promoted
to President in October 1996. Mr. Littleworth is responsible for directing the
overall operations of TSA. Prior to joining the Company in 1996, Mr. Littleworth
was employed by United Technologies Corporation for twenty-one years in a
variety of managerial positions. From October 1994 through February 1996, Mr.
Littleworth was Director of Manufacturing Interiors for United Technologies
Automotive, Inc. (UTA). From December 1989 through September 1994, Mr.
Littleworth was General Manager of UTA's Engineered Elastomer Products unit.
ITEM 11. EXECUTIVE COMPENSATION
Executive Officer Compensation
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid to the Chief Executive Officer and
the other four most highly compensated executive officers of the Company whose
combined salary and bonus for the fiscal year ended September 30, 1996 exceeded
$100,000 (collectively, the "Named Executive Officers") for the years indicated.
36
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
----------- ================================================= ---------------------------------
Long Term Compensation
Annual Compensation Awards Payouts
---------------------------------------
===================== ----------- ---------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
==================== ----------- --------------- ---------------- ---------------- ---------------- --------------- ------==
Securities
Other Annual Underlying All Other
Name and Principal Compensation Restricted Option/SARS LTIP Compensation
Position Year Salary($) Bonus($) ($)(1) Stock (#) ($)(2)
Awards(s)($) Payouts($)
=============== ----------- --------------- ---------------- ---------------- ---------------- --------------- -------------
Stuart Landow 1996 $211,200 $238,5356) $14,300 $ 0 (3) $0 $0 $33,002
President 1995 $202,794 $189,688(5) $ 7,200 0 $0 $0 $14,213
(CEO) 1994 $218,000 $151,378(4) $ 7,550 $ 0 $0 $0 $21,105
=================== ------- --------- ----------- ------- ---------------- --------------- ------------- --------------
Christer Rosen 1996 $200,560 $ 25,000 $19,592 $ 0(7) $0 $0 $ 7,837
Executive VP 1995 $180,940 $ 25,000 $14,064 $ 0 $0 $0 $ 4,419
1994 $177,733 $ 0 $11,538 $231,250(8) $0 $0 $ 3,039
- ---------------------------- ----------- --------------- -------- --------------- --------------- -------------- ---------------
David Natan 1996 $125,000 $ 25,000 $10,914 $ 0 $ 10,000 $0
Vice President of 1995 N/A N/A N/A N/A N/A N/A $5,448
Finance and Treas. 1994 N/A N/A N/A N/A N/A N/A N/A
(CFO) N/A
- ---------------------------- ----------- --------------- -------- ---------------- ---------------- ------------- --------------
Carlton S. Joyce 1996 $216,612 $ 0 $11,649 $ 0 $0 $0 $4,000
Director - Product 1995 $200,000 $ 0 $ 9,811 $ 0 $0 $0 $ 0
Technology 1994 $207,692 $ 0 $ 385 $ 0 $0 $0 $4,667
--------------------------- ----------- --------------- -------- -------------------------------- ------------- --------------
Steven Ludmerer(9) 1996 $103,266 $ 0 $ 8,500 $ 0 $100,000 $0 $ 617
President 1995 N/A N/A N/A N/A N/A N/A
Petrochemical Group 1994 N/A N/A N/A N/A N/A N/A
--------------------------- ----------- --------------- ---------- ---------- ------------------ ------------- ---------------
</TABLE>
37
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
(1) Amounts consist principally of automobile allowances paid by the Company. In
the case of Mr. Rosen, the amounts for 1996, 1995 and 1994 also include $8,792,
$4,407 and $4,338 in club membership dues paid by the Company, respectively.
(2) These amounts, as follows, represent group term life insurance premiums paid
by the Company, the Company's match of the Retirement Salary Saving Plan -
401(k) and reimbursement of out-of-pocket medical, dental, etc. expenses not
covered by the Company's insurance:
(a) The 1996 group term life insurance
premiums was as follows: Mr. Landow $7,239, Mr. Rosen
$5,066, and Mr. Joyce $4,000.
(b) The 1996 employer match of the Retirement Salary Savings
Plan - 401(K) was as follows: Mr. Landow $2,840,
Mr. Rosen $1,556 and Mr. Natan $1,782.
(c) The 1996 reimbursement of out-of pocket medical, dental,
etc. not covered by the Company's insurance was as
follows: Mr. Landow $22,923, Mr. Rosen $1,215 and
Mr. Natan $3,666.
(3) At September 30, 1996, Mr. Landow owned 481,300 shares of restricted stock.
The value of the restricted stock is $2,256,094, based on $4.6875, the closing
stock price of the Company's common stock on the American Stock Exchange at
September 30, 1996. Although the Company does not anticipate declaring a
dividend, if one is declared, dividends will be paid on restricted stock. Also
in prior years, Mr. Landow had deferred vesting of 100,000 shares that were
granted to him in 1990. In July 1996, Mr. Landow agreed to the full vesting of
the 100,000 shares.
(4) In fiscal 1994, Mr. Landow was paid $151,378 in incentive compensation
equaling 1% of net sales.
(5) In fiscal 1995 , Mr. Landow was awarded, an incentive compensation payment
of 1% of net sales. This amount totaled $189,688 of which $163,037 had been paid
at fiscal year-end and $26,651 was accrued.
(6) In fiscal 1996, Mr. Landow was paid $238,535 in incentive compensation
payments which are based on a % of net sales as defined in his employment
agreement, included in these payments is $27,568 which is directly related to
the sale of the United Testing Group, Inc. assets .
(7) At September 30, 1996, Mr. Rosen had an aggregate of 340,000 shares of
restricted stock. The value of the restricted stock is $1,593,750 based on
$4.6875, the closing stock price of the Company's common stock on the American
Stock Exchange at September 30, 1996. Although the Company does not anticipate
declaring a dividend, if one is declared, dividends will be paid on restricted
stock.
(8) The aggregate value of these shares of restricted stock was based on the
closing sales price of the Company's common stock on the date of vesting (50,000
shares at $4.625). The 50,000 shares vested on January 1, 1994.
(9) Mr. Ludmerer resigned in December 1996.
38
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
OPTION/SAR GRANTS IN LAST FISCAL YEAR
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
Individual Grants for Option Term (1)
______________________________________________________________________________________ ________________________________________
(a) (b) (c) (d) (e) (f) (g)
- ------------------------ ----------------- --------------------- ---------------------- -------------------- ---------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) are Expiration Date 5% ($) 10% ($)
- ------------------------ ----------------- --------------------- ---------------------- -------------------- ----------------------
Stuart Landow 0 N/A N/A N/A N/A N/A
Christer Rosen 0 N/A N/A N/A N/A N/A
David Natan 10,000 1.94 7.75 12/13/2005 48,739(2) $123,515(3)
Carlton S. Joyce 0 N/A N/A N/A N/A N/A
Steven Ludmerer 100,000 19.4 6.4375 1/31/2006(6) 404,851(4) $1,025,972(6)
- ------------------------ ----------------- --------------------- ---------------------- -------------------- ---------------------
(1) The values shown are based on indicated assumed annual rates of
appreciation compounded annually through the applicable expiration
date. Actual gains realized, if any, on stock option exercises and
common stock holdings are dependent on the future performance of the
common stock and overall market conditions. There can be no assurance
that the values shown on this table will be achieved.
(2) Represents an assumed market price per share of common stock of $12.62.
(3) Represents an assumed market price per share of common stock of $20.10.
(4) Represents an assumed market price per share of common stock of $10.49.
(5) Represents an assumed market price per share of common stock of $16.70.
(6) Mr. Ludmerer resigned in December 1996 and the 100,000 options which
were granted to him had not vested.
Therefore, these options have expired.
</TABLE>
39
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
The following table sets forth certain information with respect to the exercise
of options to purchase common stock and SARs during the fiscal year ended
September 30, 1996, and the unexercised options held and the value thereof at
that date, by each of the Named Executive Officers.
<S> <C> <C> <C> <C> <C>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END(1) OPTION/SAR VALUES
- -------------- ------------------- ---------------- ----------------------------------------- ------------------------------------
(a) (b) (c) (d) (e)
- ------------- ------------------- --------------- ----------------------------------------- -------------------------------------
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at Options/SARS
Fiscal Year End (#) at Fiscal Year End ($) (2)
- -------------- ------------------- --------------- ---------------- ------------------------ --------------- ----------------------
Shares Acquired
on Exercise Value Realized
Name (#)(1) ($) Exercisable Unexercisable Exercisable Unexercisable
- ----
- -------------- ------------------- ---------------- ---------------- ------------------------ --------------- ---------------------
Stuart Landow 300,000 $1,653,500(3) 600,000 0 $1,575,000 $ 0
Christer Rosen 0 N/A 500,000 0 $2,078,750 $ 0
David Natan 0 N/A 36,250 67,500 $ 0 $ 0
Carlton S. Joyce 0 N/A 100,000 70,000 $318,750 $157,535
Steven Ludmerer 0 N/A 0 100,000 $ 0 $ 0
- ----------------- --------------- --------------------- ---------------- ------------------------ --------------- -------------
(1) All options were granted at 100% of fair market value.
(2) Based on the difference between the closing market price of the
Company's stock on the American Stock Exchange at
September 30, 1996 of $4.6875 and the option exercise price.
(3) Includes 100,000 shares exercised at fair market value of $7.00;
100,000 shares exercised at fair market value of $4.625; and 100,000
shares exercised at fair market value of $6.50 all with exercise
prices of $.53.
</TABLE>
40
<PAGE>
Executive Compensation Agreements
Effective August 18th, 1993, the Company entered into a five-year employment
agreement with its president and chief executive officer, Mr. Stuart Landow. The
agreement provides for a base annual salary of $200,000 per year with an annual
cost of living increase. The Company's Compensation Committee reviews the base
salary annually during the term and may increase, but not decrease, the base
salary. Currently Mr. Landow receives a salary of $211,200. Additionally, Mr.
Landow receives incentive compensation payments based upon both the revenue at
the rate of 1% of 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 operating income is 8% of net sales, up to a rate of twice the
incentive amount based on revenue if net operating 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. Mr.
Landow is not eligible to receive a profitability incentive payment for fiscal
year 1996 since the Company had a net operating loss. However, Mr. Landow did
receive incentive compensation payments based on revenue. Mr. Landow also
receives an automobile allowance of $600 per month and an automobile maintenance
allowance of $400 per month. In August 1993, the Company granted Mr. Landow
non-qualified options to purchase 600,000 shares of common stock exercisable at
$2.0625 per share under the 1993 Plan. The 600,000 options were fully vested as
of September 30, 1996. In the event Mr. Landow is terminated without cause or if
he resigns for "good reason" as defined in the agreement (which includes a
material diminution of his duties or responsibilities), the Company agreed to
pay Mr. Landow 36 consecutive monthly payments equal to his base and incentive
compensation. He will also continue to receive medical, life and disability
insurance coverage during the 36 month term.
Mr. Christer Rosen, Executive Vice President and Secretary, currently receives
an annual salary of $200,560 per year pursuant to an oral agreement. Mr. Rosen
also receives an automobile allowance of $600 per month and an automobile
maintenance allowance of $400 per month. Additionally, Mr. Rosen participates in
a profit sharing incentive program whereby he is eligible to receive an
incentive payment of half of his base salary if the Company's net operating
income, as a percentage of net sales, exceeds 8%. According to the formula
utilized the incentive payment may be as high as twice the base salary if the
percentage is 20% or greater. Mr. Rosen received a performance-based bonus
payment of $25,000 in December 1996.
Mr. David Natan, Vice President and Chief Financial Officer, receives an annual
salary of $125,000 pursuant to an employment agreement and a car allowance of
$600 per month and an automobile maintenance allowance of $400 per month. Mr.
Natan received a performance bonus of $25,000 in December 1996. In 1995, Mr.
Natan was granted 10,000 options exercisable at $7.75 per share under the
Company's 1993 Stock Option Plan.
Mr. Carlton S. Joyce entered into a four year employment agreement on July 17,
1993 and was appointed Chairman of UTG (the Company's subsidiary). Mr. Joyce is
currently the Director of Technology for TSI. Under his employment agreement, as
amended, Mr. Joyce receives a base salary of $200,000 per year adjustable each
year for increases in the cost of living. Mr. Joyce's current salary is
$218,154. Mr. Joyce also receives an automobile allowance of $600 per month and
an automobile maintenance allowance of $400 per month. Mr. Joyce is eligible to
receive an override equivalent to 3% of pre-tax income of TSI, net of any
cumulative losses and direct corporate overhead expenses. Due to the losses
incurred by TSI, no amounts have been paid, as an override, since the
inception of the agreement.
41
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
Mr. Richard J. Ragan entered into an employment agreement on October 1, 1996 and
was appointed CEO of TSI. Mr. Ragan receives an annual salary of $200,000. Mr.
Ragan received a grant of 25,000 stock options which vest in six month
increments over a three-year period beginning June 30, 1997. In addition, Mr.
Ragan is eligible to receive additional stock options and an incentive bonus if
certain targets and objectives are met as defined in his contract.
Mr. Dennis K. Littleworth entered into an employment agreement on April 12, 1996
and was appointed Vice President and General Manager of TSA. In October 1996 he
was appointed President of TSA. Mr. Littleworth currently receives an annual
salary of $140,000. Mr. Littleworth received 70,000 stock options vesting in six
month increments over a three-year period beginning December 31, 1996. Also, Mr.
Littleworth will be eligible to receive certain program incentives if certain
target and profit goals are met as defined in his contract.
Additionally, effective in October 1993, the Company began providing each of
Messrs. Landow and Rosen with a $950,000 term life insurance policy.
Retirement Salary Savings Plan
In October 1993, the Company established a 401(k) Retirement Salary Savings
Plan (the "Plan"). All current employees, including executive officers, were
eligible to participate as of October 1, 1993. Any individuals employed
thereafter must complete three months of service to meet the eligibility
requirements. Employees may voluntarily contribute from 1% to 15% of their pay
each plan year although certain requirements may limit the contribution levels
of highly compensated employees. During fiscal 1996 the Company contributed
matching dollars equal to 25% of every dollar invested in the Plan on the first
6% of salary savings. The cost the Company incurred for matching employee
contributions and administrative costs during fiscal 1996 was approximately
$55,521. The Plan provides that the Company's matching contribution may change
from year to year and that the Company may declare additional matching dollars
at year-end. Any forfeited non-vested amounts contributed are used to reduce
required Company matching contributions. All participants employed with the
Company who enrolled on or before October 1, 1993 were immediately 100% vested
for all future employer matching contributions. All employees hired after
October 1, 1993 vest ratably over a five-year term.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Securities and Principal Holders
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of December 31, 1996 by (i) owners of more
than 5% of the Company's common stock, (ii) by each director and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<S> <C> <C> <C>
- --------------------- ---------------------------------------- ----------------------- ------------------------
Name and Address of Beneficial Owner Amount and Nature of
Beneficial Ownership Percent of
Title of Class Class
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock STUART LANDOW(1) 1,081,300 3.7%
and Vested 450 Park Avenue, Suite 2100
Options New York, New York 10022
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock CHRISTER ROSEN(2) 840,000 2.9%
and Vested 7108 Fairway Drive, Suite 200
Options Palm Beach Gardens, FL 33418
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock DAVID NATAN(3) 60,225 *
and Vested 7108 Fairway Drive, Suite 200
Options Palm Beach Gardens, FL 33418
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock and *
Vested Options CARLTON S. JOYCE(4) 218,500
3125 Presidential Parkway
Atlanta, GA 30340-3907
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock RONALD P. BURD(5),(6) 170,500 *
and Vested 251 Linden Lane
Options Merion Station, PA 19066
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock CLINTON D. LAUER(7) 33,000 *
and Vested 4053 Hidden Woods Drive
Options Bloomfield Hills, MI 48301
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock PAUL F. MOORE(8) 36,000 *
and Vested 325 N. Cliften Rd.
Options Bloomfield Hills, MI 48301
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock MANI A. SADEGHI(9) 55,000 *
and Vested 35 Manor Drive
Options Morris Township, NJ 07960
- --------------------- ---------------------------------------- ----------------------- ------------------------
Common Stock GANZ CAPITAL MGMT., INC.(10) 2,917,554 10.2%
and Vested 2875 N.E. 191st Street
Options Penthouse I
N. Miami Beach, FL 33130
- -------------------------------------------------------------- ----------------------- ------------------------
All directors and existing officers of the Company as a
group (9 persons)(1)(2)(3)(4)(5)(6)(7)(8)(9) 2,494,525 8.4%
*Less than 1% of class
- -------------------------------------------------------------- ----------------------- ------------------------
</TABLE>
42
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A No. 1
(1) Includes 600,000 options all of which are vested options exercisable at
approximately $2.0625 per share held by Mr. Landow.
(2) Includes 500,000 options all of which are vested options exercisable at
approximately $.53 per share.
(3) Includes 46,875 vested options held by Mr. Natan exercisable at
approximately $6.9375 per share and 10,000 vested options at approximately $7.75
per share, 2,350 shares held by Mr. Natan and 1,000 shares held by Mr. Natan's
wife.
(4) Includes 100,000 vested options held by Carlton S. Joyce exercisable at
approximately $1.50 per share.
(5) Includes 25,000 vested options exercisable atapproximately $3.38 per share,
50,000 vested options exercisable at approximately $1.78 per share and 20,000
vested options exercisable at approximately $6.25 held by Mr. Burd.
(6) Includes 72,000 shares held jointly by Mr. Burd and his wife and 3,500
shares gifted by Mr. Burd to the Devereux Foundation, of which Mr. Burd is
President and Chief Executive Officer.
(7) Includes 30,000 vested options exercisable at approximately $8.75 per share
and 3,000 shares held by Mr. Lauer.
(8) Includes 30,000 vested options exercisable at approximately $3.125 per share
and 5,000 vested options at approximately $7.125 per share. and 1,000 shares
held by Mr. Moore.
(9) Includes 30,000 vested options exercisable at approximately $3.125 per share
and 5,000 vested options at $7.125 per share held by Mr. Sadeghi and 20,000
shares held by Mr. Sadeghi.
(10) Ganz Capital Management, Inc. ("Ganz Capital") is a registered investment
advisor. Based on information provided to the Company by Ganz Capital, the
Company believes that at December 31, 1996, Ganz Capital held beneficial
ownership of 2,917,554 shares of common stock and 22,100 warrants. Of these
warrants, 8,100 are exercisable at $4.00 per share and 14,000 are exercisable at
$1.00 per share. This represents beneficial ownership of 40.1% and 68.3% of each
class of warrants outstanding, respectively.
43
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
44
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
(a) (1) Financial Statements. See Item 8 of Form 10-K..................... 16
(a) (2) Financial Statement Schedules required to be filed.
Schedule II - Valuation and Qualifying Accounts................. 46
All other schedules have been omitted because the required
information is shown in the consolidated financial statements
or notes thereto or they are not applicable.
(a) (3) Exhibits
3.0 Amended and Restated Certificate of Incorporation.....(1)
3.1 Amendment of Certificate of Incorporation... .........(8)
3.2 Bylaws of Registrant.................................(2)
3.3 Amendment to Bylaws of Registrant...................(8)
3.4 Amendment to the Amended and Restated Certificate
of Incorporation...................................(10)
4.0 1990 Stock Plan......................................(3)
4.1 1993 Stock Option Plan..............................(4)
10.0 Employment Agreement Between Registrant and Mr.
Stuart Landow.......................................(5)
10.1 Employment Agreement of Carlton S.Joyce............(6)
10.2 First Amendment to Employment Agreement of
Stuart Landow......................................(8)
10.3 First Amendment to Employment Agreement of
Carlton S. Joyce.................................(9)
10.4 Master License Lease Agreement - Exxon...............(10)
10.5 Equipment Purchase Agreement - Thermo Jarrell
Ash Corporation.......................................(10)
10.6 First Amendment to Lease of On-Site Analysis, Inc.,
Atlanta, Georgia.................................(10)
10.8 Shareholder Rights Plan...........................(7)
10.7 Lease Agreement between Hospitality Franchise Systems,
Inc. and Top Source Technologies, Inc.
dated April 2, 1996 (New York Office Lease)............(20)
10.9 Note Purchase Agreement dated as of June 9, 1995
Regarding 9% Senior Subordinated
Convertible Notes Due June 9, 2000 by and
among Top Source Technologies, Inc.
Purchasers and Ganz Capital Management, Inc.........(11)
10.10 Agreement by and between Top Source Technologies,
Inc., dated May 10, 1995, Adrenaline, Inc.
and Edward Van Duyne (EFECS Technology) ................(11)
10.11 First Amendment to Shareholder Rights Plan..............(12)
10.12 Second Amendment to Shareholder Rights Plan............(13)
10.13 Loan Agreement dated November 24, 1994 between Top
Source Technologies, Inc. and On-Site
Analysis, Inc. and First Union National Bank of Florida..(14)
10.14 Loan Agreement dated April 13, 1995 between Top
Source Technologies, Inc. and On-Site
Analysis, Inc. and First Union National Bank of Florida...(14)
10.15 Lease Agreement dated February 10, 1995 for Michigan
facility, Troy, MI............................... ..(14)
10.16 Employment Agreement of David Natan.......................(15)
10.17 Master Purchase Agreement - Thermo Jarrell Ash
Corporation.............................................(16)
10.18 Lease of Office Space dated December 20, 1995 of Top
Source Technologies, Inc.,
Palm Beach Gardens, FL.....................................(16)
10.19 Loan Agreement dated October 12, 1995 between Top
Source Technologies, Inc. and On-Site
Analysis, Inc and First Union National Bank of Florida.....(16)
10.20 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...................................(17)
(a) (3) Exhibits (continued)
(a) (3) Exhibits (continued)
10.21 Asset Purchase Agreement between Top Source Technologies,
Inc., Conam Inspection, Inc. and
United Testing Group, Inc. dated October 30, 1996.............(18)
10.22 Amendment No. 1 to the Agreement between Adrenaline
Research, Inc., Top Source
Technologies, Inc. and Edward Van Duyne dated February 22, 1996.(20)
10.23 Marketing Agreement between On-Site Analysis, Inc. and
Conam Inspection, Inc.dated November 14, 1996..................(20
10.24 Lease Agreement between Top Source Technologies, Inc.
and R. M. Taylor, Inc. dated January 1, 1997
(Farmington Hill, Michigan Lease).........................(20)
11.0 Statement Re: Computation of Net Income Per Share................(10)
27.0 Financial Data Schedule..........................................(20)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended
September 30, 1996.
Exhibit Index
(1) Contained in the Form 8-A dated July 10, 1993.
(2) Contained in the documents previously filed with the
Securities and Exchange Commission in conjunction with the
Form 8-B on 11/16/92.
(3) Contained in the documents previously filed with the
Securities and Exchange Commission in conjunction with the
12/31/90 Form 10-K.
(4) Contained as an exhibit to the Proxy Statement dated January 11, 1994.
(5) Contained in Amendment No. 1 to the Registration Statement on Form S-3
filed on November 16, 1993.
(6) Contained in the Form 8-K/A No. 3 dated November 13, 1993.
(7) Contained in Form 8-K dated January 5, 1995.
(8) Contained in the documents filed with the Securities and
Exchange Commission in conjunction with the 9/30/93 Form 10-K.
(9) Contained in Amendment No. 3 to the Registration Statement on Form S-3
filed on January 10, 1994.
(10) Contained in the documents filed with the Securities and Exchange
Commission in conjunction with
the 9/30/94 Form 10-K.
(11) Contained in documents filed with the Securities and Exchange
Commission in conjunction with the 6/30/95 Form 10-Q.
(12) Contained in the Form 8-A/A No. 1 dated July 17, 1995.
(13) Contained in the Form 8-A/A No. 2 dated December 5, 1995
(14) Contained in Amendment No. 1 to the Registration Statement on Form S-3
filed May 4, 1995.
(15) Contained in Amendment No. 3 to the Registration Statement on Form S-3
filed September 27, 1995.
(16) Contained in documents filed with the Securities and Exchange Commission
in conjunction with the September 30, 1995 Form 10-K.
(17) Contained in documents filed with the Securities and Exchange
Commission in conjunction with the December 31, 1995 Form 10-Q.
(18) Contained in the Form 8-K dated November 12, 1996.
(19) Financial Date Schedule Attached
(20) Contained in documents filed with the Securities and
Exchange Commission in conjunction with
September 30, 1996 Form 10-K
45
<PAGE>
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<S> <C> <C> <C> <C> <C>
====================================== ---------------- ---------------- ----------------- ----------------- =======================
Balance at Charged to Additions
Beginning of Costs and Charged to Balance at End of
Period Expenses Other Accounts Period
Description Deductions
====================================== ---------------- ---------------- ----------------- ----------------- =======================
Deducted from Accounts Receivable -
Allowance for Doubtful Accounts
====================================== ---------------- ---------------- ----------------- ----------------- =======================
Year Ended September 30, 1996
$145,703 $ - $ - ( $62,053) $ 83,650
====================================== ---------------- ---------------- ----------------- ----------------- =======================
Year Ended September 30 1995
$150,000 $159,645 $ - $145,703
($163,942)
====================================== ---------------- ---------------- ----------------- ----------------- =======================
Year Ended September 30,
1994 $ 13,145 $136,855 $ - $ $150,000
-
====================================== ================ ================ ================= ================= =======================
====================================== ================ ================ ================= ================= =======================
</TABLE>
46
<PAGE>
SIGNATURE
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Registrant's report on Form
10-K/A No.1 to be signed on its behalf by the undersigned, thereunto duly
authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: \s\Stuart Landow
Stuart Landow, President and
Chief Executive Officer
Dated: January 28, 1997
47
<PAGE>
<TABLE>
FINANCIAL DATA SCHEDULE
Article 5 of Regulation S-X
<S> <C>
CASH 653,129
SECURITIES 0
RECEIVABLES 4,100,672
ALLOWANCES 83,650
INVENTORY 511,958
CURRENT-ASSETS 5,703,390
PP&E 2,503,033
DEPRECIATION 1,859,955
TOTAL-ASSETS 16,012,716
CURRENT-LIABILITIES 4,075,991
BONDS 0
COMMON 28,446
PREFERRED-MANDATORY 0
PREFERRED 0
OTHER-SE 8,888,279
TOTAL-LIABILITY-AND-EQUITY 16,012,716
SALES 16,146,524
TOTAL-REVENUES 16,146,524
CGS 10,776,203
TOTAL-COSTS 10,776,203
OTHER-EXPENSES 0
LOSS-PROVISION 0
INTEREST-EXPENSE (276,566)
INCOME-PRETAX (3,288,486)
INCOME-TAX (1,543,300)
INCOME-CONTINUING (4,831,786)
DISCONTINUED (1,867,001)
EXTRAORDINARY 0
CHANGES 0
NET INCOME (6,698,787)
EPS- PRIMARY (.24)
EPS- DILUTED 0
</TABLE>
48
<PAGE>
