SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarterly Period Ended December 31, 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
incorporation or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 775-5756
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
Common stock: $.001 par value 28,461,477 shares
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996 (Unaudited)
and September 30, 1996...........................................1
Consolidated Statements of Operations for the Three
Months ended December 31, 1996 and 1995 (Unaudited).............2
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1996 and 1995 (Unaudited)....................3
Notes to Unaudited Interim Consolidated Financial Statements...4-5
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations ..................5-7
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................7
i
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TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1996
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
December 31 September 30
ASSETS 1996 1996
---------------- -----------------
Current Assets:
Cash and cash equivalents $2,302,900 $653,129
Accounts receivable trade (net of allowance of
$83,650 at December 31 and September 30) 2,282,156 4,100,672
Advances to officers 28,938 ---
Inventories 1,185,019 511,958
Prepaid expenses 405,846 325,946
Other 123,118 111,685
---------------- -----------------
Total current assets 6,327,977 5,703,390
Property and equipment, net 2,588,989 2,503,033
Manufacturing and distribution rights and patents, net 324,182 333,762
Capitalized database, net 2,442,152 2,494,860
Deferred income tax assets, net 355,000 355,000
Other assets, net 771,109 784,203
Net assets from discontinued operations --- 3,838,468
-----------------
================
TOTAL ASSETS $12,809,409 $16,012,716
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,470,356 $1,836,395
Accrued salaries 13,156 229,939
Accrued liabilities 1,365,000 1,520,099
Net liabilities from discontinued operations --- 489,558
---------------- -----------------
Total current liabilities 2,848,512 4,075,991
Senior convertible notes 3,020,000 3,020,000
---------------- -----------------
Total liabilities 5,868,512 7,095,991
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; none outstanding --- ---
Common stock-$.001 par value, 50,000,000 shares
authorized; 28,451,477 and 28,446,477 shares issued
on December 31 and September 30, respectively 28,451 28,446
Additional paid-in capital 28,726,661 28,723,853
Accumulated deficit (20,536,456) (19,703,789)
Treasury stock-at cost; 432,534 and 87,534 shares on
December 31 and September 30, respectively (1,277,759) (131,785)
---------------- -----------------
Total stockholders' equity 6,940,897 8,916,725
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,809,409 $16,012,716
================ =================
See accompanying notes to unaudited interim consolidated
financial statements.
1
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TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1996 1995
---------------- -----------------
Revenue:
Product sales $3,197,537 $3,429,796
Service revenue 26,575 3,031
---------------- -----------------
Net sales 3,224,112 3,432,827
---------------- -----------------
Cost of sales:
Cost of product sales 2,223,119 2,093,535
Cost of services 9,254 ---
---------------- -----------------
Cost of sales 2,232,373 2,093,535
---------------- -----------------
---------------- -----------------
Gross profit 991,739 1,339,292
---------------- -----------------
Expenses:
General and administrative 1,292,941 1,046,794
Selling and marketing 243,226 201,738
Depreciation and amortization 266,852 224,897
Research and development 2,334 13,207
---------------- -----------------
Total expenses 1,805,353 1,486,636
---------------- -----------------
Loss from operations (813,614) (147,344)
Other income (expense):
Interest income 38,733 40,772
Interest expense (70,447) (65,790)
Other income, net 6,161 34,238
---------------- -----------------
Net other income (25,553) 9,220
---------------- -----------------
Loss before income taxes (839,167) (138,124)
Income tax expense (18,500) (15,000)
-----------------
---------------- -----------------
Loss from continuing operations (857,667) (153,124)
---------------- -----------------
Income from discontinued operations 25,000 103,395
================ =================
Net loss $ (832,667) $ (49,729)
================ =================
Loss per weighted average common share outstanding:
Continuing operations $ (0.03) $ -
Discontinued operations - -
================ =================
Total $ (0.03) $ -
================ =================
Weighted average common shares outstanding 28,251,122 27,720,563
================ =================
See accompanying notes to unaudited interim consolidated
financial statements.
2
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TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1996 1995
---------------- -----------------
OPERATING ACTIVITIES:
Net loss ($832,667) ($49,729)
Adjustments to reconcile net loss to
net cash used in operating activities:
Income from discontinued operations (25,000) (103,395)
Depreciation 278,050 239,607
Amortization 69,404 68,728
Disposal of equipment 42,641 10,750
Advance to officer (28,938) ---
Decrease in accounts receivable, net 1,818,516 553,862
Increase in inventories (673,061) (379,302)
Decrease (increase) in prepaid expenses (79,900) 66,829
Decrease (increase) in other assets 655 (53,310)
Decrease in accounts payable (366,039) (294,561)
Decrease in accrued salaries (216,783) (251,513)
Decrease in accrued liabilities (155,099) (355,974)
---------------- -----------------
Net cash used in operating activities (168,221) (548,008)
---------------- -----------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (767,703) (365,539)
Reimbursement of tooling costs 361,056 ---
Additions to patent costs, net (6,110) (14,765)
Discontinued operations - change in net assets 3,373,910 161,372
---------------- -----------------
Net cash provided by (used in) investing activities 2,961,153 (218,932)
---------------- -----------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 2,813 356,300
Repurchase of treasury stock (1,145,974) ---
Proceeds from borrowings --- 960,000
-----------------
----------------
Net cash provided by (used in) financing activities (1,143,161) 1,316,300
---------------- -----------------
Net increase in cash and cash equivalents 1,649,771 549,360
Cash and cash equivalents at beginning of period 653,129 1,154,137
---------------- -----------------
Cash and cash equivalents at end of period $2,302,900 $1,703,497
================ =================
See accompanying notes to unaudited interim consolidated
financial statements.
3
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Top Source Technologies, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
financial statements. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The results of operations of any interim
period are not necessarily indicative of the results of operations for the
fiscal year. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K/A No.1
for the year ended September 30, 1996. Certain fiscal year 1996 amounts have
been reclassified to conform to current year presentation.
2. INVENTORIES
Inventories consisted of the following:
December 31 September 30
1996 1996
Raw materials $ 1, 122,261 $ 398,248
Finished goods 62,758 113,710
------ -------
$ 1,185,019 $ 511,958
============ ============
3. TREASURY STOCK
On November 12, 1996, the Company announced that it put into effect a
stock repurchase program. In November through December of 1996, the Company
repurchased 345,000 shares of the Company's common stock at an average purchase
price of $3.27 per share. These shares are included in treasury stock in the
accompanying balance sheet at December 31, 1996. In January 1997, the Company
repurchased an additional 6,500 shares for a total of 351,500 shares.
4
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
4. 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,
United Testing Group, Inc. ("UTG"). The sale was consummated on October 30,
1996. The net income of UTG for the three months ended December 31, 1996 and
1995 is included in the consolidated statement of operations under "discontinued
operations." Revenues from such operations for the three months ended December
31, 1996 and 1995 were $0 and $1,148,852, respectively, and were not included in
service revenue in the accompanying consolidated statements of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenue for the three month period ended December 31, 1996 was
$3,224,112, compared to $3,432,827 for the same period in 1995. The $208,715
decrease in revenues for the three-month period ended December 31, 1996 is
primarily attributable to a decrease in product sales at the Company's Top
Source Automotive, Inc. subsidiary ("TSA") for the three months ended December
31, 1996 compared to the same period in 1995 partially offset by a nominal
increase in service revenues from On-Site Analyzers ("OSA's") at Top Source
Instruments, Inc. ("TSI"), formerly named OSA, Inc., for the three month period
ended December 31, 1996, compared to the same period in 1995.
The decrease in product sales at TSA for the three months ended
December 31, 1996 compared to the same period in 1995 is attributable to a
slowdown in overhead speaker system ("OHSS") sales resulting from a planned
vehicle modification of the Chrysler Jeep(R) Cherokee. The Company anticipates
that sales of OHSS will return to or exceed historic sales levels during the
second fiscal quarter ending March 31, 1997.
During the first quarter of fiscal 1997, the Company generated nominal
revenue of $26,575 from five leased OSA units, compared to revenue of $44,001
for all of fiscal 1996. On February 7, 1997, TSI recorded revenue of $160,000 on
a sale to Hyundai Motors, Inc. in Korea of an OSA unit intended for use in
internal powertrain testing.
On January 10, 1997, the Company signed a letter agreement with
Cleveland Technical Center ("CTC"), a division of Conam Inspection, Inc. (the
purchaser of the UTG assets - see Discontinued Operations) a subsidiary of
Staveley Industries, plc. from the United Kingdom, to jointly market OSAs in
North America. Under the terms of this agreement, TSI and CTC will jointly
establish pilot mini-laboratories for the purpose of determining the value of a
North American master franchise. The Company believes it will sign a definitive
franchise agreement with Conam or other parties that will yield multiple OSA
sales.
Based on the continuing reliability demonstrated by OSA units, and
current sales and marketing initiatives in progress, the Company anticipates
generating an increasing quarterly revenue stream from OSA units, although there
can be no assurances.
5
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
The gross profit margin for three months ended December 31, 1996 was
30.7% compared to 39.0% for the same period in 1995. The decrease in margins
below comparable levels in the prior year is primarily attributable to a change
in product mix at TSA due to the start up of the Jeep(R) Wrangler. Gross margin
for OHSS for the three quarters in fiscal 1996 subsequent to December 31, 1995
was 31.7%.
General and administrative expenses increased 23.5% for the three-month
period ended December 31, 1996 compared to the same period in 1995. These
increases are attributable to increased personnel and higher levels of expense
at TSA and TSI, partially offset by a decrease in corporate personnel costs for
the comparable period.
Depreciation and amortization increased 18.7% for the three-month
period ended December 31, 1996 compared to the same period in 1995. The increase
is primarily due to purchases of $767,703 in capital assets which consist
primarily of additional OSA units and capital equipment expenditures at TSA in
the three months ended December 31, 1996. Depreciation and amortization of
$80,602 was allocated to cost of sales as it directly relates to the products
and services sold during the three months ended December 31, 1996 compared to
$83,438 for the same period ended in 1995.
The increase in net loss for the three months ended December 31, 1996
compared to the same period in 1995 is primarily attributable to reduced sales
at TSA, increased general and administrative expenses and a profit reduction
from discontinued operations. The Company anticipates a significant improvement
in operating results for the second quarter ending March 31, 1997 due to the
return of TSA revenues to historic sales levels and increasing OSA sales at TSI.
Liquidity and Capital Resources
Net cash used in operating activities was $168,221 for the three months
ended December 31, 1996. This use of cash was attributable to a decrease in
accounts receivable of $1,818,516 offset by an increase in inventories of
$673,061, a decrease in accounts payable and accrued liabilities of $737,921 and
a net operating loss excluding depreciation and amortization of $466,160.
Net cash provided by investing activities was $2,961,153. This source
of cash was attributable to the change in net assets of UTG of $3,373,910 and
reimbursement of tooling costs of $361,056, offset by $767,703 expended for
capital assets, and $6,110 for patent costs. Net cash used in financing
activities was $1,143,116 which consisted of net proceeds from sales of common
stock through exercise of stock options of $2,813, which was offset by the
repurchase of 345,000 shares of the Company's common stock at an average
purchase price of $3.25 per share.
The Company has bank financing with First Union National Bank of
Florida, ("Bank"). The Company's current credit facility is $3,750,000 with
$1,500,000 being available for short term working capital, ("Credit Line") and
$2,250,000 ("OSA Line") to be used exclusively for the purchase of OSAs. At
September 30, 1996 and December 31, 1996, the Company had not met the minimum
debt service coverage on the 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.
6
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources (Continued)
On January 31, 1997, First Union National Bank ("The Bank") renewed the
Company's Credit Line until April 30, 1997 pending the completion of its annual
due diligence. The Company anticipates renewing its Credit Line under existing
terms until January 31, 1998 or beyond with its current lender or other lenders,
prior to the expiration of the Credit Line on April 30, 1997. The Credit Line
has not been utilized since fiscal 1995 and currently no amounts are outstanding
on the Line.
Based on current cash balances, the Credit Line, and increasing TSA and
TSI sales, 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 Results of Operations and
Liquidity and Capital Resources relating to the Company's expectations that it
anticipates (1) generating increasing revenue from OSAs and receiving additional
purchase orders for OSA units, (2) signing a definitive franchise agreement, (3)
the return of TSA revenue to historic levels, and (4) improvements in the
Company's operating results 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.
As the text above discusses, the results expected by any or all of
these forward-looking statements may not occur. Important factors that could
cause actual results to differ materially from the forward-looking statements
include the following: (1) the 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 in various markets, (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
impacts the signing of a definitive franchise agreement.
7
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
Part II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.0 Financial Data Schedule
b. Reports on Form 8-K
On November 12, 1996 a Form 8-K was filed related
to the sale of United Testing Group, Inc.'s assets.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: /s/ David Natan
DAVID NATAN
Vice President and Chief Financial Officer
Dated: February 13, 1997
8
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FINANCIAL DATA SCHEDULE
Article 5 of Regulation S-X
<S> <C>
CASH $2,302,900
SECURITIES 0
RECEIVABLES 2,282,156
ALLOWANCES 83,650 key in
INVENTORY 1,185,019
CURRENT-ASSETS 6,327,977
PP&E 2,588,989
DEPRECIATION 2,074,432 key in
TOTAL-ASSETS 12,809,409
CURRENT-LIABILITIES 2,848,512
BONDS 0
COMMON 28,451
PREFERRED-MANDATORY 0
PREFERRED 0
OTHER-SE 6,912,446
TOTAL-LIABILITY-AND-EQUITY 12,809,409
SALES 3,224,112
TOTAL-REVENUES 3,224,112
CGS 2,232,373
TOTAL-COSTS 2,232,373
OTHER-EXPENSES 0
LOSS-PROVISION 0 key in
INTEREST-EXPENSE (70,447)
INCOME-PRETAX (839,167)
INCOME-TAX (18,500)
INCOME-CONTINUING (857,667)
DISCONTINUED 25,000
EXTRAORDINARY 0
CHANGES 0
NET INCOME (832,667)
EPS- PRIMARY (0.03)
EPS- DILUTED 0
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