UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[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.
Documents Incorporated by Reference
Location in Form 10-K Incorporated Document
Part III-Items 10, 11, & 12 Definitive Proxy
Statement in connection
with its annual meeting of
stockholders to be held
on May 15, 1997
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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
4
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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
Incorporated by reference from the Proxy Statement, for the annual
meeting of stockholders to be held on May 15, 1997, sections entitled
"Election of Directors".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Proxy Statement, for the annual
meeting of stockholders to be held on May 15, 1997, section entitled
"Executive Officer Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Proxy Statement, for the annual
meeting of stockholders to be held on May 15, 1997, sections entitled
"Voting Securities and Principal Holders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
34
<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................. 38
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
<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>
<PAGE>
SIGNATURES
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 to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 8, 1997
TOP SOURCE TECHNOLOGIES, INC.
By: \s\Stuart Landow
Stuart Landow, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE
\s\ Stuart Landow President , CEO and January 8, 1997
Stuart Landow Chairman of the Board of Directors
\s\ Christer Rosen Executive Vice President and January 8, 1997
Christer Rosen Director
\s\ David Natan Treasurer, VP of Finance
(Principal January 8, 1997
David Natan Financial Officer) and Director
\s\ Ronald P. Burd Director January 8, 1997
Ronald P. Burd
\s\ Carlton S. Joyce Director January 8, 1997
Carlton S. Joyce
\s\ Clinton D. Lauer Director January 8, 1997
Clinton D. Lauer
\s\ Paul F. Moore Director January 8, 1997
Paul F. Moore
\s\ Mani A. Sadeghi Director January 8, 1997
Mani A. Sadeghi
</TABLE>
<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>
<PAGE>
EXHIBIT 10.23.
MARKETING AGREEMENT
THIS MARKETING AGREEMENT entered into as of this 14th
November 1996, between On-Site
Analyzer, Inc. (the "Company") and Conam Inspection, Inc. ("Conam").
WHEREAS, the Company has developed a unique on-site oil analyzer
("OSA") that has application in petrochemical processing industry (the "Oil
Industry");
WHEREAS, Conam has relationships in the Oil Industry; and
WHEREAS, the Company and Conam wish to enter this Agreement to provide
for the marketing of the OSAs in the Oil Industry.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained in this Agreement, the parties hereto agree as follows:
<PAGE>
1. Appointment as Sales Agent. The Company appoints Conam as its sales
agent ("Sales Agent") for its OSAs solely for utilization in process control and
equipment maintenance and authorizes it to market such OSAs to the Oil Industry
throughout North America (except for the Exxon Corp. refinery located in Baton
Rouge, Louisiana) (the "Exclusive Territory") or other comparable uses in the
Oil Industry or chemical industry if approved in writing at the sole discretion
of the Company.
2. Commissions. For its services rendered pursuant to this Agreement, the
Company shall pay to Conam 10% of the revenue it receives, calculated on a cash
basis, after credits given to any user.
3. Duties of Conam. At all times, Conam shall use its best efforts to
obtain orders for purchase or lease of OSAs within its Exclusive Territory.
Conam shall promptly notify the Company whenever it has obtained any agreements
from users in the Oil Industry and shall use the Company's Equipment Lease and
Software License Agreement form (the "Lease") for the lease of OSAs within the
Exclusive Territory. Conam shall not have any authority to sign a Lease on
behalf of the Company but shall submit all such Leases to the Company's
corporate officers for execution. Conam shall be authorized to negotiate pricing
from time to time with users and as long as the pricing is consistent with the
pricing previously agreed upon by Conam and the Company, the Company shall
promptly execute any Lease submitted on its standard form, a copy of which is
annexed hereto as Exhibit A. Provided further that minor non-substantive changes
may be made from time to time by Conam as is necessary in order to secure
Leases.
4. Duties of the Company. The Company shall comply with all of its
covenants including the warranties contained within the Leases. Furthermore, the
Company shall from time to time provide service personnel to users in order to
promptly repair OSAs as may be reasonably necessary subject to the terms and
conditions of the Leases.
5. Use of Office Space. At no charge to the Company, Conam shall supply
office space and office support services including the use of telephones,
facsimile machines, copiers, etc., at Conam's facilities in the Chicago,
Illinois, Los Angeles, California, Houston, Texas and San Francisco, California
areas.
6. Term. Either the Company or Conam may terminate this
Agreement on 90 days' notice.
7. Confidential Information.
(a) Conam shall strictly abide by this Section 7 and ensure
that its officers, employees, independent contractors and agents are
advised of the confidentiality provisions of this Section 7.
(b) For so long as this Agreement remains in effect and for a
period of two years after the termination thereof (provided that in the
case of a trade secret, such period shall continue for so long as the
information, matter or thing remains a trade secret), and without
limiting any rights or protections afforded the Company by law, Conam
shall maintain in strictest confidence and safeguard as confidential
the Confidential Information, as defined (exercising at least the same
degree of care Conam would use in protecting the confidentiality of its
own similar information) and will refrain from using, disclosing,
duplicating, reproducing, copying or distributing any of the
Confidential Information in any manner to any person whatsoever except
as permitted by the express provisions of this Agreement.
(c) For purposes of this Agreement, AConfidential Information@
means all information and matters of a confidential nature, whether or
not in written form, and regardless of the media (if any) on which
stored, which pertain, or relate in any way, to the OSAs or the
Company's services, products, or business, including trade secrets,
processes, techniques, designs, specifications, drawings, know-how,
show-how, technical information, technology, research developments,
inventions, engineering concepts, software operating manuals, and
improvements, modifications and enhancements to the foregoing, and the
terms of this Agreements. All data (input and output) to and from the
OSAs in connection with the use thereof by Conam shall constitute
Confidential Information subject to all restrictions contained in this
Agreement, and all right, title and interest therein shall be vested in
the Company.
(d) Additionally, all information relating to the identity of
users and pricing of the OSAs including the prices charged to each user
shall be considered Confidential Information.
8. Non-Competition. During the term of this Agreement and for a period
of 24 months commencing on the date of termination, Conam, directly or
indirectly, and its "affiliates", as that term is defined in Rule 405
promulgated under the Securities Act of 1933, shall not compete with the Company
or any its affiliates in the offer, sale or marketing of on-site oil analyzers
or instruments which analyze petroleum and are installed at a customer's place
of business. Provided, however, nothing contained herein shall preclude Conam or
its affiliates from operating oil analysis laboratories and seeking to market
its services to the Oil Industry.
9. Severability. In the event any parts of this Agreement are found to be void,
the remaining provisions of this Agreement shall nevertheless be binding with
the same effect as though the void parts were deleted.
10. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument. The execution of this Agreement may be
by actual or facsimile signature.
11. Benefit. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their legal representatives, successors and assigns.
12. Notices and Addresses. All notices, offers, acceptance and any
other acts under this Agreement (except payment) shall be in writing, and shall
be sufficiently given if delivered to the addressees in person, by Federal
Express or similar receipted delivery, by facsimile delivery or, if mailed,
postage prepaid, by certified mail, return receipt requested, as follows:
CONAM: Conam Inspection, Inc.
1247 W. Norwood Avenue
Itasca, IL 60143
Attn: James O'Rourke
Facsimile: (630) 773-6519
with a copy to: Glenn A. Santoro, Esq.
Robinson & Cole
One Commercial Plaza
280 Trumbull Street
Hartford, CT 06103-3597
Facsimile: (860) 275-8299
The Company: On-Site Analyzer, Inc.
c/o David Natan, Chief Financial Officer
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418-3757
Facsimile: (561) 691-5220
with a copy to: Michael D. Harris, Esq.
Cohen, Chernay, Norris,
Weinberger & Harris
712 U.S. Highway One
North Palm Beach, FL 33408
Facsimile (561) 845-0108
or to such other address as either of them, by notice to the other may designate
from time to time. The transmission confirmation receipt from the sender's
facsimile machine shall be conclusive evidence of successful facsimile delivery.
Time shall be counted to, or from, as the case may be, the delivery in person or
by mailing.
13. Attorney's Fees. In the event that there is any controversy or
claim arising out of or relating to this Agreement, or to the interpretation,
breach or enforcement thereof, and any action or proceeding including an
arbitration proceeding is commenced to enforce the provisions of this Agreement,
the prevailing party shall be entitled to an award by the court or arbitrator,
as appropriate, of reasonable attorney's fees, costs and expenses.
14. Oral Evidence. This Agreement constitutes the entire Agreement
between the parties and supersedes all prior oral and written agreements between
the parties hereto with respect to the subject matter hereof. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, except by a statement in writing signed by the party or
parties against which enforcement or the change, waiver discharge or termination
is sought.
15. Additional Documents. The parties hereto shall execute such additional
instruments as may be reasonably required by their counsel in order to carry out
the purpose and intent of this Agreement and to fulfill the obligations of the
parties hereunder.
16. Governing Law. This Agreement and any dispute, disagreement, or
issue of construction or interpretation arising hereunder whether relating to
its execution, its validity, the obligations provided herein or performance
shall be governed or interpreted according to the internal laws of the State of
Delaware without regard to choice of law considerations.
17. Arbitration. Any controversy, dispute or claim arising out of or
relating to this Agreement, or its interpretation, application, implementation,
breach or enforcement which the parties are unable to resolve by mutual
agreement, shall be settled by submission by either party of the controversy,
claim or dispute to binding arbitration in New York, New York (unless the
parties agree in writing to a different location), before three arbitrators in
accordance with the rules of the American Arbitration Association then in
effect. In any such arbitration proceeding the parties agree to provide all
discovery deemed necessary by the arbitrators. The decision and award made by
the arbitrators shall be final, binding and conclusive on all parties hereto for
all purposes, and judgment may be entered thereon in any court having
jurisdiction thereof.
18. Equitable Relief. The Company and Conam recognize that the rights
granted to Conam under this Agreement are special, unique and of extraordinary
character, and that in the event of the breach by Conam of the terms and
conditions of this Agreement which is a violation of Sections 7 or 8 hereof, the
Company shall be entitled to institute and prosecute proceedings in any court of
competent jurisdiction to enjoin Conam from breaching the provisions of Sections
7 or 8. In such action, the Company shall not be required to plead or prove
irreparable harm or lack of an adequate remedy at law or post a bond as a
condition of obtaining equitable relief.
19. Section or Paragraph Headings. Section headings herein have been inserted
for reference only and shall not be deemed to limit or otherwise affect, in any
matter, or be deemed to interpret in whole or in part any of the terms or
provisions of this Agreement.
IN WITNESS WHEREOF the parties hereto have set their hand and seals as
of the date first above written.
WITNESSES: ON-SITE ANALYZER, INC.
By:
David Natan
Vice President of Finance
CONAM INSPECTION, INC.
By:
James O'Rourke
Chief Financial Officer
<PAGE>
EXHIBIT 10.24
SECOND SUBLEASE AGREEMENT
This Second Sublease Agreement ("Agreement") is made and entered into
this _ _ day of , 1996, by and between R.M. Taylor, Incorporated, a Missouri
corporation, whose address is 5135 Deramus, Kansas City, Missouri 64120
("Taylor") and Top Source Technologies, Inc., a Delaware corporation, and its
wholly owned subsidiary Top Source Industries, Inc. a Georgia corporation,
formerly known as On Site Analysis, Inc., both of whose addresses are 7108
Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33410 (collectively "Top
Source").
WITNESSETH
For and in consideration of the mutual covenants and agreements set
forth herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Second Sublease
(a) Subject to the written consent of the Lessor and Lessee
(each as hereafter defined), Taylor hereby subleases to Top Source, and Top
Source leases from Taylor, pursuant to the terms and conditions set forth
herein, the land and premises commonly known as 23400 Commerce Drive,
Farmington Hills, Michigan, as legally described in Exhibit A attached hereto
("Leased Premises"); and
(b) The Leased Premises were originally let by Kitchen
Investment, Inc:, a Michigan limited partnership, as Lessor, to John Crane,
Inc., a Delaware corporation, as Lessee, pursuant to a written lease agreement
("Lease"). The Leased Premises have been sublet to Taylor by Lessee pursuant
to a certain sublease agreement dated August 30, 1995 ("Sublease").
<PAGE>
2. Incorporation by Reference: The terms, provisions, covenants and
conditions of the Lease and Sublease are incorporated into this Second Sublease
Agreement by reference as though again fully restated. In the event of a
conflict between the provisions of this Second Sublease Agreement and the
provisions of the Lease and Sublease, taken together, the provisions of the
Lease and Sublease, taken together, shall prevail.
<PAGE>
forth:
3. Undertakings-of Taylor and Top Source. Except as specifically herein set
(a) Top Source hereby agrees to assume each and every
obligation of the Lessee under the Lease and the Sublessee under the Sublease
and agrees that Taylor shall have every right of Lessor set forth in the Lease
and those of the Sublessor under the Sublease; and
(b) Taylor hereby agrees to use its best efforts to enforce
every obligation of the Lessor under the Lease as they may be modified by the
Sublease and agrees that Top Source shall have every right of Lessee under the
Lease as they may be modified by the Sublease.
4. Changes to the Lease and Sublease:
The following although not an exhaustive listing of the same,
are changes to the rights and obligations of the parties herein as set forth
in the Lease and Sublease:
(a) The "basic rental" or "minimum net rental" as stated in
Section 3.01 of the Lease and payable by Top Source to Taylor shall be
$10,243.75 per month which amount shall be net to Taylor.
2
<PAGE>
(b) The insurance required under Section 6.01 and Section 10.01 of the
Lease shall name Lessor, Lessee, Taylor and the Lessor's mortgagee as insured
parties.
(c) Any further assignment or subletting of the demised premises by Top
Source shall be subject to the consent of Lessor, Lessee and Taylor, which
consents shall not be unreasonably withheld.
(d) The Lessor, Lessee and Taylor shall have the right to inspect the
demised premises as set forth in Section 14.01 of the Lease.
(e) Notices or demands upon the parties hereto, as provided in Section
16 01 of the Lease, shall be made as follows:
To Lessor: Kitchen Investment Company, L.L.C.
1925 Heide Street
Troy, MI 48084
6400 Oakton Street
Morton Grove, IL 60053
3
<PAGE>
To Lessee: John Crane
6400 Oakton Street
Morton Grove, IL 60053
To Subtenant\ Taylor:
R.M. Taylor, Incorporated
Attn: Mr. R.M. Taylor
5135 Deramus
Kansas City, MO 64120
To Top Source Top Source Technologies, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418
(f) The mortgage rights set forth in Section 21.01 of the Lease shall
be retained by the Lessor.
(g) The security deposit to be made by Top Source upon execution of
this Second Sublease shall be $10,243.75, to be paid and held by Taylor in an
interest bearing escrow account the principal and accrued interest of which
shall be returned to Top
Source upon the termination of this Second Sublease Agreement unless, Top
Source is in default at termination at which time the principal and interest
shall be used as provided in Section 23.01 of the Lease. All other provisions
of Section 23 of the Lease shall remain applicable to this Second Sublease
Agreement.
(h) The right to show the premises under Section 26.01 of the Lease
shall be retained by Lessor and Taylor.
(i) Section 28 relating to an option to extend the term of the Lease
is hereby deleted in its entirety, unless by written agreement before or after
the date hereof, Lessor agrees that Lessee and Taylor shall each be relieved of
all obligations under the Lease as of the end of the original term and Lessee
agrees that Taylor shall be relieved of all obligations under the Second
Sublease as of the end of the original term, and, pursuant to requirements of
the Lease and Sublease, Lessor, and all other required parties agree to the
assignment of the option.
(i) Lessor's obligations found in Exhibit B to the Lease relating to
leasehold improvements are hereby declared fulfilled with respect to Top
Source.
(k) Lessee's obligations under Section 4.01 of the Lease shall be
apportioned as between Taylor and Top Source with Top Source being responsible
for the same from the inception of the Term of this Second Sublease through
its conclusion and any extension unless the Second Sublease is terminated by
Top Source as provided in Paragraph 6 of this Second Sublease in which event
Top Source's responsibility therefore concludes at said termination.
Thereafter the responsibility for the same through the conclusion of the Term
or any extension shall be that of Taylor.
<PAGE>
4
5. Additions to the Lease: The following are additional terms to
the Second Sublease not found in the Lease or the Sublease:
(a) Top Source shall have the right to inspect the demised
premises prior to the execution of this Agreement. Taylor (or Lessor, as
determined by the Lease) shall be responsible for any repair; currently
necessary as disclosed by such inspections. Upon completion of such repairs to
the satisfaction of Top Source, Top Source shall then accept the demised
premises in an "as is" condition.
(b) Top Source shall maintain in full force and effect that
certain HVAC maintenance agreement currently maintained by Taylor and upon
expiration or termination thereof, Top Source shall obtain and maintain a
comparable maintenance agreement throughout the entire term of this Agreement.
(c) Taylor hereby represents and warrants to the best of its
knowledge and belief and having performed no independent investigations, as
follows:
(i) The Leased Premises are and have been always been
in compliance with all applicable environmental laws.
(ii) There are no pending environmental civil, criminal
or administrative proceedings, lawsuits or claims brought
by any governmental agency, private party or other
entity against Taylor, Lessor or Lessee relating to any
environmental law.
(iii) Taylor knows of no civil, criminal or administrative
proceedings, lawsuits or claims threatened against Taylor,
Lessor or Lessee by any governmental agency, private party
or other entity relating to any environmental law.
5
<PAGE>
(iv) Taylor knows of no facts or circumstances
which may give rise to any civil, criminal or administrative proceedings,
lawsuits or claims against Taylor, Lessor or Lessee by any governmental
agency, private party or other entity relating to any environmental law.
(v) The Leased Premises comply with all requirements
of the Americans With Disabilities Act.
(vi) The Leased Premises and Taylor's use of
said Leased Premises comply with the ordinances or other regulations of
the City of Farmington Hills or of any other lawful authorities, and the
Declaration of Covenants and Restrictions, recorded August 26, 1968 in Liber
5242 P. 658 Oakland County Records.
(d) Top Source intends to improve the warehouse space which
forms a portion of the Leased Premises by constructing (x) a fully enclosed
and air conditioned make-ready area containing approximately 1500 to 2000
square feet (y) a fully enclosed and air conditioned laboratory containing
approximately 500 square feet, and (z) a fenced-in and gated spare parts
storage area (collectively the "Warehouse Improvements"), Construction of the
Warehouse Improvements by or at the instance of Top Source is subject to the
following conditions precedent:
(i) all costs and expenses of construction of the
Warehouse Improvements shall be borne by Top Source including the costs of
obtaining all required building permits;
(ii) Top Source shall obtain Lessor's and
Lessee's consent to the construction of the Warehouse Improvements, Lessor's
release of Lessee and Taylor, and
<PAGE>
6
Lessee's release of Taylor such releases being on account of any liability
which results from Top Source's construction of the Warehouse Improvements;
(iii) Lessor, Lessee and Taylor, at no cost to
any of them, shall cooperate with and reasonably assist Top Source in
obtaining all required building permits. ,
6. Term. The within subletting shall commence on January 1, 1997 and
continue until August 31, 2000. An additional deposit is to be made upon
execution of this Second Sublease in the amount of $38,5OO to be paid to Taylor
and held in an interest bearing account. Top Source shall have the option to
terminate this Second Sublease as of April 1, 1998 if:
(a) Top Source is not in default of any provision of this Second Sublease;
<PAGE>
and
(a) Top Source has given written notice to Taylor of its
election to exercise this option no later than January 2, 1998.
The deposit provided in this paragraph shall be distributed by Taylor on April
1, 1998 or as soon thereafter as reasonable possible, as follows:
The entire deposit plus all accrued interest shall be paid to
Taylor if Top Source has given the notice provided in 6(b) above; otherwise
the entire deposit plus all accrued interest shall be paid to Top Source.
7. Counterparts. Two or more duplicate originals of this Agreement
may be signed by the parties, each of which shall be an original but
all of which together shall constitute one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed and entered into this Second
<PAGE>
Sublease as of the date first above written.
TAYLOR: TOP SOURCE:
R.M. TAYLOR, INCORPORATED, TOP SOURCE TECHNOLOGIES, INC.,
a Missouri corporation a Delaware corporation
By:
Its: _________________________
- --------------------------------
<PAGE>
Robert Book
By: ______________________________
Robert Book
Its: Vice President
and
TOP SOURCE INSTRUMENTS, INC.,
a Georgia corporation,
f/k/a On Site Analysis, Inc.
Robert Book
By: ________________________________
Robert Book
Its: Assistant Secretary
8
<PAGE>
CONSENT OF LESSOR AND LESSEE
Lessor, Kitchen Investment, Ltd. and/or Kitchen Investment Company,
L.L.C. and Lessee, John Crane, Inc.,
each do hereby consent to the Second Sublease Agreement of R.M. Taylor,
Incorporated to Top Source Technologies,
Inc. and Top Source Instruments, Inc. of the premises in accordance with the
provisions, conditions and covenants
of the foregoing Second Sublease Agreement upon the following basis:
1. That this consent shall in no way be construed to relieve John
Crane, Inc. of its primary liability as "Lessee" for the performance of the
provisions, conditions and covenants contained in the Lease; and
2. That this consent shall not be construed to relieve R.M.Taylor,
Incorporated of its liability as Subtenant under the Sublease.
3. That should Top Source elect to exercise its option to terminate
as provided in paragraph 6 of Second Sublease, then Lessor and Lessee herein
consent to R.M. Taylor, Incorporated being the tenant for the balance of the
Term and any extension thereof.
<PAGE>
KITCHEN INVESTMENT, LTD. a Michigan limited partnership
By: ____________________________
Its: General Partner
KITCHEN INVESTMENT COMPANY,
L.L.C. , a Michigan limited liability company
By: ________________________________
Its: Manager
JOHN CRANE, INC., a Delaware corporation
By: ____________________________________
Its: _____________________________________
9
<PAGE>
SUBLEASE
This Sublease is made and entered into this 30th day of August, 1995
by and between John Crane, Inc., a Delaware corporation ("Sublessor") and R.M.
Taylor, Incorporated, a Missouri corporation ("Subtenant").
WITNESSETH
For and in consideration of the mutual covenants and agreements set
forth herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Sublease: Subject to the written consent of the Lessor, the
Sublessor hereby subleases to the Subtenant, and the Subtenant leases from
Sublessor, pursuant to the terms and conditions set forth herein, the land and
premises commonly known as 23400 Commerce Drive, Farmington Hills, Michigan, as
legally described in Exhibit A to the Lease attached hereto, dated May 13,
1993, by and between Kitchen Investment Ltd., a Michigan Limited Partnership,
as Lessor, end Sublessor, as Lessee (the "Lease").
2. Terms and Conditions: Except as specifically set forth herein:
(a) Subtenant hereby agrees to assume each and every
obligation of the Lessee under the Lease and agrees that Sublessor shall have
every right of Lessor set forth in the Lease; SS-301.1
<PAGE>
(b) Sublessor hereby agrees to use its best efforts to enforce
every obligation of Lessor under the L ease and agrees that Subtenant shall
have every right of Lessee under the Lease;
(c) The following are exceptions to the rights and obligations of the parties
hereto as set forth in the Lease: (i) Section 1.01 of the Lease related to
construction of improvements is hereby deleted in its entirety. (ii)
Section 2.03 of the Lease relating to confirmation of commencement, is
hereby deleted. (iii) The "basic rental" or "minimum net rental" as stated
in Section 3.01 payable by Subtenant to Sublessor shall be per month which
amount shall be net to Sublessor. (iv) The insurance required under
Sections 6.01 and 10.01 of the Lease shall name ------------------------
the Lessor, the Sublessor and the Lessor's mortgagee as insured parties.
(v) Section 11.02 of the Lease relating to an option to extend, is hereby
deleted in its entirety. (vi) Any further assignment or subletting of the
demised premises by the Subtenant shall be subject to the consent of Lessor
as well as Sublessor, which consents shall not be unreasonably withheld.
<PAGE>
(vii)Both the Lessor and the Sublessor shall have the right to inspect the
demised premises under Section 14.01 of the Lease.
(viii) Notices or demands upon the parties hereto as provided in Section
16.01, shall be made as follows:
<PAGE>
To Lessor
Kitchen Investment, Ltd. COMPANY, L.L.C.
1925 Heide Street
Troy, MI 48084
To Sublessor:
John Crane, Inc.
6400 Oakton Street
Morton Grove, IL 60053
To Subtenant
R.M. Taylor, Incorporated
Attn: Mr. R.M. Taylor
5135 Deramus
Kansas City, MO 64120
(ix) The mortgage rights set forth in Section 21.01 of the L ease shall be
retained by the Lessor.
(x) The security deposit to be made by Subtenant upon execution of this
Sublease shall be , to be paid to and held by Sublessor in an interest
bearing escrow account which principal and accrued interest shall be
returned to Subtenant upon the termination of the Sublease, unless
Subtenant is in default at termination, at which time the principal and
interest shall be used as provided in Section 23.01. The terms of
Section 23 of the Lease, other than the amount of such
deposit, shall remain applicable to this Sublease.
(xi) The right to show the premises under Section 26.01 of the Lease shall be
retained by Lessor.
(xii)Section 27.01 of the Lease related to environmental laws is hereby deleted
in its entirety. (xiii) Section 28 relating to an option to extend the term
of the Lease is hereby deleted in its entirety, unless by written
agreement before or after the date hereof, Lessor agrees that Sublessor
shall be relieved of all obligations under the Lease as of the end of the
original term, and, pursuant to Section 28.04 of the Lease Lessor agrees
to the assignment of the option. (xiv) Exhibit B relating to leasehold
improvements is hereby deleted in its entirety; and
(d) The following are additional terms to the Sublease not found in the Lease:
(i) Subtenant shall have the right to inspect the demised premises prior to the
execution of this Sublease. Sublessor (or Lessor, as determined by the Lease)
shall be responsible for any repairs currently necessary as disclosed by such
inspections. Upon completion of such repairs to the satisfaction of Subtenant,
Subtenant shall then accept the demised premises "AS-IS".
<PAGE>
(ii) Subtenant shall maintain in full force and effect that certain HVAC
maintenance agreement currently maintained by Sublessor and upon expiration or
termination thereof, Subtenant shall obtain and maintain a comparable
maintenance agreement throughout the entire term hereof.
(iii) Sublessor hereby represents and warrants as follows, to the best of its
knowledge and belief and having performed no independent investigations:
(a) To the best of Sublessor's knowledge, the Leased Premises are and have
always been in compliance with all applicable environmental laws.
(b) There are no pending environmental civil, criminal or administrative
proceedings, lawsuits or claims brought by any governmental agency,
private party or other entity against Sublessor or Lessor relating to
any environmental law.
(c) Sublessor knows of no civil, criminal or administrative proceedings,
lawsuits or claims threatened against Sublessor or Lessor by any
governmental agency, private party or other entity relating to any
environmental law.
(d) Sublessor knows of no facts or circumstances which may give rise
to any civil, criminal or administrative proceedings, lawsuits or
<PAGE>
claims against Sublessor or Lessor by any governmental agency, private
party or other entity relating to any environmental law.
(e) The Leased Premises comply with all requirements of the American With
Disabilities Act.
(f) The Leased Premises and Sublessor's use of said
Leased Premises comply with the ordinances or other
regulations of the City of Farmington Hills, or of
any other lawful authorities, and the Declaration of
Covenants and Restrictions, recorded August 26, 1968
in Liber 5242 P. 658 Oakland County Records.
3. Term. This Sublease shall commence as of December 1, 1995 and
continue until August 31, 2000. Notwithstanding the above, Sublessor agrees to
allow Subtenant on and after November 20, 1995 through November 30, 1995, to
occupy a sufficient portion of the demised premises for the storage of certain
of Subtenant's furniture and equipment. In the event that Subtenant does enter
the demised premises prior to the commencement of the Sublease and use the
demised premises for the storage of its assets, Subtenant hereby agrees:
(a) That Sublessor shall have no responsibility whatsoever
for such assets of Subtenant and Subtenant shall be solely responsible for the
care, security and maintenance of such assets; and
<PAGE>
4. Lease. Nothing set forth herein shall be deemed to alter, amend or modify the
rights and obligations of the parties to the Lease.
IN WITNESS WHEREOF, the parties have executed and entered into this
Sublease as of the date first above written.
<PAGE>
(b) That Subtenant and its employees and agents shall enter
the demised premises and the sole risk of Subtenant and Subtenant hereby
indemnifies and holds Sublessor harmless from and against any damage to
property or injury to person caused by or arising out of such entry upon or
stooge within the demised premises, unless such damage is caused by the
negligence of Sublessor, its agents or employees.
Subtenant:
R.M. TAYLOR, INCORPORATED
By: William C. Cottle
Its: EXECUTIVE VICE PRESIDENT and CFO
Address:
5135 Deramus
Kansas City, MO 64120
SS-30l.1
By: Fred S. Decrisatis
Its: Vice Pres. of Finance
JOHN CRANE, INC.
Sublessor:
Address:
6400 Oakton Street
Morton Grove, IL 60053
<PAGE>
CONSENT OF LESSOR
<PAGE>
Lessor, KITCHEN INVESTMENT, LTD., and KITCHEN INVESTMENT COMPANY, L.L.C.,
hereby consent to the Sublease by Lessee, JOHN CRANE, INC., of the premises to
R.M. TAYLOR, INCORPORATED in accordance with the provisions, conditions and
covenants of this Sublease upon the following basis:
1. That this consent shall in no way be construed to relieve John Crane, Inc.,
of its primary liability as "Lessee" for the performance of the
provisions,conditions and covenants contained in the Lease; and
2. That this consent shall not be deemed an assumption by Kitchen
Investment, Ltd., of any of the obligations of John Crane, Inc., under
this Section.
KITCHEN INVESTMENT, LTD.
BY: Milton G. Kitchen
ITS: General Partner
AND
KITCHEN INVESTMENT COMPANY, L.L.C.
BY: Barbara J. Kitchen
ITS: MANAGER
BY: Milton G. Kitchen
<PAGE>
19
<PAGE>
EXHIBIT 10.7
Overpayments will be credited to your account and you will pay any
underpayments within 30 days of the date of the Landlord's final statement.
On November l, 1996, Tenant is to post a security deposit of
$21,037,50 in the form of cash. Landlord will invest same in a Certificate of
Deposit, with interest being paid to Tenant.
It is further agreed -that this lease agreement is subordinate to any
mortgages on the property. Tenant agrees to provide Estoppel Certificates, if
required by Landlord. If for any reason we find it necessary to litigate any
issue, it is agreed that both of us waive our right to a trial by jury. If, at
any time prior to the termination of this Lease, any senior interest holder or
any other person or the successors or assigns of the foregoing (collectively
referred to as "Successor Landlord") shall succeed to the rights of Landlord
under this Lease, Tenant agrees, at the election and upon request of any such
Successor Landlord, to fully and completely attorn to and recognize any such
Successor Landlord, as Tenant's Landlord under this Lease upon the then
executory terms of this Lease; provided such Successor Landlord shall agree in
writing to accept Tenant's attornment and shall assume all of Landlord's
obligations under this Lease.
Notwithstanding anything to the contrary contained herein it is agreed
that you will look only to Landlord 's interest in 450 Park Avenue (or the
proceeds thereof) for the satisfaction of Tenant's remedies for the collection
of a judgment (or other judicial process) requiring the payment of money by
landlord in the event of any default by Landlord hereunder, and no other
property or assets of Landlord or its agents, directors, officers,
shareholders, partners or principals (disclosed or undisclosed) shall be
subject to levy, execution or other enforcement procedure for the satisfaction
of Tenant's remedies under or with respect to this lease, the relationship of
Landlord and Tenant hereunder or under law or Tenant's use or occupancy of the
Subject Premises or any other liability of Landlord to Tenant.
The parties agree that neither party shall be liable to the other to
the extent of a recovery for any loss suffered which is covered by an insurance
policy carried by the party suffering the loss and for which recovery is
available. The parties agree to attempt to obtain waivers of subrogation from
the respective insurance companies. Landlord and Tenant represent that in the
negotiation of his Lease they dealt with no broker or brokers other than J.
Everett Hill of Peter Sharp & CO., Inc. (whose commission or other compensation
shall be paid by Landlord) and Alan Grossman of The Georgetown Group, Inc.
(whose commission or other compensation shall be paid by Landlord) Landlord and
Tenant hereby agree to indemnify and hold the other part; harmless from and
against any and all claims, liabilities, suits, costs and expenses including,
reasonable attorneys fees and disbursements arising out of any inaccuracy or
alleged inaccuracy of the above representation. Landlord shall have no
liability for any brokerage commissions arising out of a sublease or assignment
by Tenant. The provisions of this Article shall survive the expiration or
Sooner termination of the Lease.
- 3 -
During the term of this Lease, Landlord shall, at Landlord's expense,
provide heat, light, cleaning, water, rubbish removal and air conditioning to
the Premises in accordance with building standards.
All notices are to he sent by Certified Mail, Return Receipt
Requested. If to Landlord, such notice is
to be addressed to: 450 Park Avenue Associates c/o Peter Sharp & Co.,
Inc., 1370 Avenue of the Americas, New oYrk, New York 10019. If to
Tenant, such notice is to be addressed to:
Top Source Technologies, Inc., 450 Park Avenue,
New York, New York 10019, Attn: Stuart Landow. Landlord warrants and represents
that it is the owner of the subject premises and is free to enter into this
Lease. The submission by Landlord to Tenant of this Lease in draft form shall be
deemed submitted solely for Tenant's consideration and not for acceptance and
execution. The submission by Landlord of this Lease for execution by Tenant and
the actual execution and delivery thereof by Tenant to Landlord shall have no
binding force and effect unless and until Landlord shall have executed this
Lease and a counterpart thereof shall have been delivered to Tenant. If at a
future date it is found to be necessary, we agree to negotiate and execute a
long form Lease which is mutually agreeable to both sides.
<PAGE>
Tenant is to have the right to sublease the Premises with the
Landlord's consent which is not to he unreasonably withheld. However, any net
profits are to be shared equally between Tenant and Landlord within 5 days of
receipt by Tenant.
Should Tenant fail to vacate the Premises on the Expiration Date and
there has been no agreement as to an extension, the total amount of the Rent
and Additional Rent will double, commencing on the date following the
Expiration Date.
Tenant is responsible for the immediate bonding and/or removal of any
liens placed on the building by any of the Tenant's contractors.
- 4 -
Very truly yours,
Jerome L.Greene
General Partner
450 PARK AVENUE ASSOCIATES ("Landlord")
Jerome L.Greene
- --------------------------------------------------------------------
<PAGE>
If you are in agreement with the above, please sign each of the four
copies of this letter and return them to the undersigned for counter-signature
along with a check in the amount of $7,012.50, which represents the Rent for
the first month. We will return two fully executed copies of this letter to
you. JLG/ck Enclosures
ACCEPTED AND AGREED TO:
TOP SOURCE TECHNOLOGIES, INC. ("Tenant")
By:.
Title CFO 4/2/96
<PAGE>
LEASE
THIS LEASE is made as of the 13th day of May 1993 by and between
Kitchen Investment Ltd., A Michigan Limited Partnership, 1925 Heide St., Troy,
MI 48084 as Lessor and John Crane Inc., A Delaware Corporation, 6400 Oakton
Street, Morton Grove, Illinois 60053 as Lessee,
IN CONSIDERATION OF the rents to be paid and the mutual covenants,
promises and agreements herein set forth, Lessor and Lessee agree as follows:
Lessor hereby leases unto Lessee premises situated in the City of
Farmington Hills, County of Oakland, State of Michigan, described as set forth
on Exhibit "A" attached hereto and made a part hereof.
TO HAVE AND TO HOLD for a term of Seven (7) years and One (1) month
from and after the commencement of the term as hereinafter provided.
SECTION 1
CONSTRUCTION OF IMPROVEMENTS
1.01 Lessor agrees, prior to the commencement of the term of this
lease, at Lessor's sole cost and expense, to complete certain improvements to
the building located on the land described in Exhibit "A" in accordance with
Plans and Leasehold Improvements enumerated on Exhibit "B page 1 and 2", which
Plans and Leasehold Improvements have been approved by both parties and which
are by this reference made a part hereof. No minor change from such
specifications which may be necessary during the preparation of the premises for
Lessee shall affect, change or invalidate this Lease.
SECTION 2
TERM OF LEASE
2.01 The term of this lease shall begin August 1, 1993, and shall end
on August 31, 2000 unless sooner terminated as herein set forth. The term as
fixed by this Section 2 shall hereafter be referred to as the "original term".
2.02 If lessor shall be unable for any reason to give possession of the
premises on the date of the commencement of the term hereof, Lessor shall not be
subject to any liability for the failure to give possession on such date but the
rent to be paid herein shall not commence until one month after the premises are
ready for occupancy by Lessee. No such failure to give possession on the date of
the commencement of the term shall affect the validity of this Lease or the
obligations of Lessee hereunder. If permission is given to Lessee to enter into
possession of the premises, or to occupy premises other than the leased
premises, prior to the date specified as the commencement of the term of this
Lease, Lessee covenants and agrees that such occupancy shall be deemed to be
under all the terms, covenants, conditions and provisions of this Lease.
2.03 On the commencement date or within a reasonable time thereafter
upon request by Lessor, Lessee shall execute a written instrument confirming the
Commencement Date and the date on which the term shall end.
SECTION 3
BASIC RENTAL
3.01 In consideration of the leasing aforesaid, Lessee hereby covenants
and agrees to pay Lessor, at such place as Lessor may hereafter from time to
time designate in writing, a minimum net rental for the original term of the
lease equal in total amount to _________________________________ payable monthly
in advance on the First (1st) day of each month in equal installments of
_____________ _________________________ for months two (2) through forty nine
(49) inclusive of the lease term and
_________________________________________________ for months fifty (50) through
eighty five (85) inclusive of the lease term. Receipt of
______________________________ representing September 1993 rent is hereby
acknowledged.
3.02 Lessor and Lessee intend that the minimum net rental shall be net
to Lessor, so that this lease shall yield, net, to Lessor, not less than the
minimum net rent specified in Sect 3.01 hereof during the term of this lease,
and that all costs, expenses and charges of every kind and nature relating to
the demised premises which may be attributable to, or become due during the term
of this lease shall be paid by Lessee and that Lessor shall be indemnified and
saved harmless by Lessee from and against the same.
SECTION 4
TAXES, ASSESSMENTS AND UTILITIES
4.01 Lessee agrees to pay as additional rent for the demised premises
all taxes and assessments, general and special, and all water rates, and all
4.01 Lessee agrees to pay as additional rent for the demised premises
all taxes and assessments, general and special, and all water rates, and all
other governmental impositions which may be levied upon said premises or any
part thereof, or upon any building or improvements at any time situated thereon,
until the termination of the original term and of any extended term of this
Lease. All of such taxes, assessments, water rates, and other impositions shall
be paid by Lessee before they shall become delinquent. The property taxes and
assessments for the first and last year of the original term or any extended
term as the case may be, shall be prorated between Lessor and Lessee so that
Lessee will be responsible for any such tax or assessments attributable to the
period during which Lessee has possession of the premises in the year in which
this lease in terminated. The so-called "due date" method of proration shall be
used, it being presumed that taxes and assessments are payable in advance. In
the event that during the term of this lease (i) the real property taxes levied
or assessed against the real property shall be reduced or eliminated, whether
the cause thereof is a judicial determination of unconstitutionality, a change
in the nature of the taxes imposed, or otherwise, and (ii) there is levied,
assessed or otherwise imposed upon the Lessor, in substitution for all or part
of the tax thus reduced or eliminated, a tax (hereinafter called the "Substitute
Tax") which imposes a burden upon Lessor by reason of its ownership of the real
property, then to the extent of such burdens the Substitute Tax shall be deemed
a real estate tax for the purposes of this paragraph:
4.02 Lessee also agrees to pay all charges made against the premises
for gas, heat, electricity and all other utilities during the continuance of
this lease as the same shall become due.
4.03 In the event that payment of any or all of the foregoing taxes,
assessments and utilities are to be made from an escrowed fund required to be
established by Lessor as Mortgagor under the terms of any first mortgage on the
demised premises, then Lessor shall so notify Lessee. Lessee shall not be
required to directly pay such taxes, assessments and utilities as are paid from
such escrowed fund, but shall instead, as additional rent, pay to Lessor on the
first (1st) day of each month of the lease term an amount equal to the amount
required to be paid by Lessor under the terms of such first mortgage to the
escrowed fund on account of such charges. If the actual taxes, assessments and
utilities, when due, exceed the total amounts from time to time paid therefore
by Lessee, then the Lessee shall, upon demand, pay any deficiency to Lessor. If
such payments by Lessee, over the term of the lease, exceed the amount of taxes,
assessments and utilities paid therefrom, such excess shall be refunded by
Lessor to Lessee at the expiration of the lease term, or when such excess is
refunded by the mortgagee to Lessor, whichever first occurs.
SECTION 5
USE OF PREMISES
5.01 It is understood and agreed between the parties that the premises
during the continuance of this lease shall be used and occupied for office,
engineering, sales, warehouse, assembly and light industrial usage only and for
no other purpose without the prior written consent of Lessor. Lessee agrees that
it will not use or permit any person to use the demised premises or any part
thereof for any use or purposes, in violation of the laws of the United States,
the State of Michigan, the ordinances or other regulations of the City of
Farmington Hills, or of any other lawful authorities, or the Declaration of
Covenants and Restrictions, recorded August 26, 1968 in Liber 5242 Page 658
Oakland County Records (a copy of which is attached hereto as Exhibit "C", to
which Declaration this lease is hereby expressly made subject). During the
original term or any extended term, the Lessee will keep the demised premises
and every part thereof and all buildings at any time situated thereon in a clean
and wholesome condition and generally will comply with all lawful health and
police regulations. All signs and advertising displayed in and about the
premises shall be such only as to advertise the business carried on upon the
premises and Lessor shall control the location, character and size thereof. No
signs shall be displayed except as approved in writing by the Lessor, and no
awning shall be installed or used on the exterior of said building unless
approved in writing by Lessor. The Lessor shall not unreasonably withhold
signage approval for the building. Lessee shall conform to the City of
Farmington Hills sign ordinance requirements.
SECTION 6
LIABILITY INSURANCE AND INDEMNITY
6.01 At and after the commencement of the original term of the Lease,
Lessee agrees to defend, indemnify and save Lessor harmless from any liability
for damages, including costs and reasonable attorneys' fees of Lessor, to any
person or property upon the leased premises caused solely by the negligence of
Lessee, its agents, invitees, guests, contractors, subcontractors, successors or
assigns. Lessee further agrees that it will obtain at or prior to the
commencement of the lease term and maintain at all times thereafter until the
termination of this lease, for the mutual benefit of Lessor, Lessor's mortgagee,
and of Lessee, and naming Lessor and Lessor's mortgagee as insured parties,
general public liability insurance including blanket contractual coverage
against claims for or arising out of personal injury, death or property damage,
occurring in, on, or about the demised premises or property in, on, or about the
streets, sidewalks or premises adjacent to the demised premises, such insurance
to afford protection to the limit at the beginning of the term of not less than
Two Million and 00/100 Dollars ($2,000,000.00) with respect to injury or death
of a single person, and to the limit of not less than Two Million and 00/100
Dollars ($2,000,000.00) with respect to any one occurrence, and to the limit of
not less than Five Hundred Thousand and 00/100 Dollars ($500,000.00) with
respect to any one occurrence of property damage and thereafter in such changed
amounts as the Lessor may reasonably require. Lessee shall furnish evidence
suitable to Lessor that such insurance policy or policies are in force at or
prior to the commencement of the original term of the lease and shall continue
to provide Lessor with such evidence with respect to such policies as are from
time to time in force until the termination of this lease. Such policy or
policies shall provide for thirty (30) days' prior written notice to Lessor of
cancellation.
SECTION 7
REPAIRS
7.01 Lessee covenants and agrees at its own expense to keep the
building or buildings on the demised premises, including all structural,
electrical, mechanical and plumbing systems, at all times in good appearance and
repair except for reasonable and normal wear and tear. Lessee shall also pay all
other expenses in connection with the maintenance of the premises including
repair and upkeep of grounds, sidewalks, driveways and parking areas in a
first-class condition. Lessor shall be responsible for, and Lessee shall not be
responsible for maintenance or repair of the roof or the four outer walls.
Notwithstanding any other provision of the lease, from and after the
Lessee has taken occupancy of the demised premises any repairs, additions or
alterations to the building or any of its systems (e.g. plumbing, electrical,
mechanical) structural or non-structural, which are required by any law,
statute, ordinance, rule, regulation or governmental authority or insurance
carrier, including, without limitation, OSHA, shall be the obligation of the
Lessee. Lessor shall assign to Lessee the benefit of all guarantees and
warranties covering the building and its systems.
SECTION 8
ALTERATIONS
8.01 The parties agree that Lessee shall not make any alterations,
additions or improvements to the premises without the written consent of Lessor
and, if required by the terms of any mortgage on the premises, the written
consent of the mortgagee. All alterations, additions or improvements made by
either of the parties hereto upon the premises shall be the property of Lessor
and shall remain upon and be surrendered with the premises at the termination of
this lease, except that alterations, additions or improvements made by Lessee
shall be removed and the premises restored by Lessee if so requested by Lessor.
SECTION 9
LIENS
9.01 After the commencement of the term of the lease, the Lessee will
keep the premises free of liens of any sort and will hold the Lessor harmless
from any liens which may be placed on the premises solely as a result of
Lessee's acts.
SECTION 10
FIRE INSURANCE AND EXTENDED COVERAGE
10.01 Lessee agrees that it will at all times during the term of the
lease, at its own expense, keep the building and all other improvements on the
demised premises insured for the full replacement cost thereof and at the
beginning of the term for at lease Eight Hundred Seventy Five Thousand Dollars
($875,000.00), against loss by fire with standard extended risk coverage,
vandalism and malicious mischief and sprinkler leakage. Lessee shall also carry
"business interruption" insurance throughout the term in an amount adequate to
cover the obligations of Lessee under this Lease. Such insurance shall be
procured from an insurance company or companies reasonably satisfactory to
Lessor and shall insure Lessor, Lessor's mortgagee, and Lessee as their
interests may appear. Each such policy shall provide for thirty (30) days'
written notice to Lessor of any cancellation. Duplicate original policies
evidencing such insurance shall be delivered to Lessor together with receipts
evidencing payment of the premiums relating to such insurance. Certificates of
renewal thereof shall be delivered to Lessor at least thirty (30) days prior to
the expiration dates of the respective policies to which they relate.
10.02 Lessee shall cause each insurance policy described in Section
10.01 to be written in a manner so as to provide that the insuring company
waives all right or recovery by way of subrogation against Lessor in connection
with any loss or damage covered by any such policies.
10.03 In case Lessee shall at any time fail, neglect or refuse to
insure such buildings and improvements and to keep the same insured as
hereinbefore provided, or to carry the required "business interruption"
insurance then Lessor may at its election procure or renew such insurance, and
any amounts paid therefor by Lessor shall be so much additional rental due from
Lessee to Lessor at the next rent day after any such payment with interest at
the rate of ten (10% ) percent per annum from the date of payment thereof by
Lessor until the repayment thereof to Lessor by Lessee.
10.04 In the event of loss under any such policy or policies, the
insurance proceeds shall be paid to Lessor or Lessor's mortgagee; thereafter,
such proceeds other than the proceeds of the "business interruption" insurance
which may be used to discharge the Lessee's continuing obligations under this
Lease shall be paid out for the expense of repairing or rebuilding the buildings
or improvements which have been damaged or destroyed if it shall appear to the
satisfaction of Lessor and Lessor's mortgagee that the amount of insurance money
shall at all times be sufficient to pay for the completion of said repairs or
rebuilding.
10.05 In the event that payment of premiums relative to any insurance
required under this Section 10 is to be made from an escrowed fund required to
be established by Lessor as mortgagor under the terms of any first mortgage on
the demised premises, then Lessor shall so notify Lessee. Lessee shall not be
required to directly pay such premiums as are paid from such escrowed fund but
shall instead, as additional rent, pay to Lessor an amount equal to the amount
required to be paid by Lessor under the terms of such first mortgage to the
escrowed fund on account of such premiums. If the actual premiums, when due,
exceed the total amounts from time to time paid therefor by Lessee, then the
Lessee shall, upon demand, pay any deficiency to Lessor. If such payments by
Lessee over the term of the lease, exceed the amount of premiums paid therefrom
, such excess shall be refunded by Lessor to Lessee at the expiration of the
lease term, or when such excess is refunded by the mortgage to Lessor, whichever
first occurs.
SECTION 11
DAMAGE BY FIRE OR OTHER CASUALTY
11.01 It is understood and agreed that if the premises hereby leased by
damaged or destroyed in whole or in part by fire or other casualty during the
term hereof, the Lessor, if there are sufficient insurance proceeds, will repair
and restore the same to good tenantable condition with reasonable dispatch. The
rent herein provided for shall not abate, whether or not the entire premises are
untenantable, unless such premises are not repaired or restored within nine (9)
months following the date of the fire or other casualty. If the insurance
proceeds are insufficient to cover the cost of repairing and restoring the
premises to good tenantable condition, Lessor may cancel the lease effective as
of the date of the fire or other casualty, without further liability to Lessee.
11.02 Lessee shall have the option, exercisable by written notice to
Lessor upon restoration of the premises, to extend the original term of this
Lease (or the extension of the term during which the damage or destruction
occurred; as the case may be) for a period equal to the period, if any, during
which Lessee was deprived of the use of all or a significant portion of the
premises by reason of such damage or destruction. Lessee's option must be
exercised within twenty (20 days following completion of the work of restoration
and repair.
SECTION 12
EMINENT DOMAIN
12.01 In the event, during the term of this Lease, proceedings shall be
instituted under the power of eminent domain which shall result in the taking of
any part of the building on the leased premises, or the taking of a portion of
the parking area if the number of spaces is thereby reduced to such an extent
that Lessee's business is significantly and adversely affected and which shall
result in an eviction total or partial of the Lessee therefrom, then at the time
of such eviction, this Lease shall be void and the term above demised shall
cease and terminate; and if Lessee shall thereafter continue in possession of
the premises or by part thereof, it shall be a lease from month to month and for
no longer term, anything in this instrument to the contrary notwithstanding. If
there is only a partial taking, not including a portion of the building or
reducing parking to the extent described in the previous sentence, the Lessor
shall restore the premises to the extent necessary to permit Lessee to continue
its use of the premises. Provided, further, that the whole of any award for any
portion of the leased premises taken by reason of said condemnation proceedings
shall be solely the property of and payable to the Lessor; and provided further,
that the whole of any award for removal and relocation expenses in any such
condemnation proceedings shall be the sole property of, and be payable to the
Lessee. It is further agreed that in any such condemnation proceedings the
Lessor and Lessee shall each seek its own award and at its own expense.
SECTION 13
ASSIGNMENT
13.01 Lessee shall not assign or sublet the demised premises or any
part thereof without first obtaining the Lessor's written consent, which consent
shall not be unreasonably withheld, except that the Lessee may, without Lessor's
consent, assign or sublet all or any part of the premises to wholly or
substantially owned subsidiaries, or inter-related companies, of the Lessee, and
provided that Lessee is not at such time in default hereunder, and provided
further that such successor shall execute an instrument in writing assuming all
of the obligations and liabilities to the Lessor, and provided further that such
assignment or subletting shall not operate to release Lessee from its
obligations under the lease.
SECTION 14
INSPECTION OF PREMISES
14.01 Lessee agrees to permit Lessor and the authorized representatives
of Lessor to enter the demised premises at all reasonable times during business
hours for the purpose of inspecting the same.
SECTION 15
FIXTURES AND EQUIPMENT
15.01 All fixtures and equipment paid for by the Lessor and all
fixtures and equipment which may be paid for and placed on the premises by the
Lessee from time to time but which are so incorporated and affixed to the
buildings, other than trade fixtures and equipment, that their removal would
involve damage or structural change to the buildings, shall be and remain the
property of the Lessor.
15.02 All furnishings, equipment and fixtures other than those
specified in Section 15.01, which are paid for and placed on the premises by
Lessee from time to time (other than those which are replacements for fixtures
originally paid for by Lessor) shall remain the property of the Lessee.
SECTION 16
NOTICE OR DEMANDS
16.01 All notices to or demands upon Lessor or Lessee desired or
required to be given under any of the provisions hereof shall be in writing. Any
notices or demands form Lessor to Lessee shall be deemed to have been duly and
sufficiently given if a copy thereof has been mailed by United States Mail in an
envelope properly stamped and addressed to Lessee at the address of the demised
premises of Lessee's registered office in Michigan at such time, or at such
other address as Lessee may have last furnished in writing to the Lessor for
such purpose, and any notices or demands from Lessee to Lessor shall be deemed
to have been duly and sufficiently given if mailed by United States mail in an
envelope properly stamped and addressed to Lessor at the address last furnished
by written notice from Lessor to Lessee. The effective date of such notice shall
be one business day following the delivery of the same to the United States Post
Office for mailing.
SECTION 17
BANKRUPTCY
17.01 Lessee covenants and agrees that if any one or more of the
following events occur, namely:
(a) Lessee shall be adjudged a bankrupt or insolvent
or a trustee shall be appointed for
Lessee after a petition has been filed for Lessee's reorganization or
arrangement under the Federal Bankruptcy Laws, as now or hereafter amended, or
under the laws of any State, and any such adjudication or appointment shall not
have been vacated or stayed or set aside within thirty (30) days from the date
of the entry or granting thereof; or
(b) Lessee shall file, or consent to any petition in
bankruptcy or arrangement under the
Federal Bankruptcy Laws, as now or hereafter amended, or under the laws of any
State; or
(c) A Decree or order appointing a receiver of the property of
Lessee shall be made and such decree or order shall not have been vacated,
stayed or set aside within thirty (30) days of a receiver for Lessee; or
(d) Lessee shall make any assignment for the benefit of
creditors;
Then it shall be lawful for Lessor, at his election, to declare the term of the
lease ended, and the said premises and the buildings and improvements then
situated thereon or any part thereof, either with or without process of law, to
re-enter, and Lessee and all persons occupying in or upon the same under it to
expel, remove and put out, and the said premises and buildings and improvements
then situated thereon again to repossess and enjoy.
SECTION 18
DEFAULT, RE-ENTRY AND DAMAGES
(18.01) In case any rent shall be due and remain unpaid for more than
ten (10) days after due or if default be made in any of the other covenants,
agreements, stipulations or conditions herein contained and such default shall
continue for a period of thirty (30) days after written notice of such default,
or if the leased premises shall be deserted or vacated, Lessor, in addition to
other rights or remedies it may have, shall have the immediate right to re-entry
and may remove all persons and property from the premises; such property may be
removed and stored in any other place in the building in which leased premises
are situated, or in any other place, for the account of, and at the expense and
at the risk of Lessee. Lessee hereby waives all claims for damages which may be
caused by the re-entry of Lessor and taking possession of the premises or
removing or storing of furniture and property as herein provided, and will save
Lessor harmless from any loss, costs or damages occasioned Lessor thereby, and
no such re-entry shall be considered or construed to be a forcible entry.
(18.02) Should Lessor elect to re-enter as herein provided or should it
take possession pursuant to legal proceedings or pursuant to any notice provided
for by law, it may either terminate this lease or it may from time to time,
without terminating this lease, re-let the premises or any part thereof for such
term or terms and at such rental or rentals and upon such other terms and
conditions as Lessor in its sole discretion may deem advisable, with the right
to make alterations and repairs to the premises. Rentals received by Lessor from
such re-letting shall be applied as follows:
First, to the payment of any indebtedness, other than rent due
hereunder from Lessee to Lessor, including all damages sustained by Lessor as a
result of the default of Lessee:
Second, to the payment of rent due and unpaid hereunder;
Third, to the payment of the sum specified in Section 3.02
hereof;
Fourth, to the payment of any cost of such re-letting;
Fifth, to the payment of the cost of any alterations or
repairs to the premises; and the residue, if any, shall be held by Lessor and
applied in payment of future rent as the same may become due and payable
hereunder. Should such rentals received from such re-letting during any month be
less than that amount agreed to be paid that month by Lessee hereunder, the
Lessee shall pay such deficiency to Lessor. Such deficiency shall be calculated
and paid monthly.
No such re-entry or taking possession of the premises by
Lessor shall be construed as an election on its party to terminate this lease
unless a written notice of such intention be given to Lessee or unless the
termination thereof be decreed by a Court of Competent Jurisdiction.
Notwithstanding any such re-letting without termination, Lessor may at any time
thereafter elect to terminate this lease for such previous breach. Should Lessor
at any time terminate this lease for any breach, in addition to any other
remedy, it may recover from Lessee all damages it may incur by reason of such
breach, including the cost of recovering the premises, and including the worth
at the time of such termination of the excess, if any, of the amount of rent and
charges equivalent to rent reserved in this Lease for the remainder of the
stated term, over the then reasonable rental value of the premises for the
remainder of the stated term.
SECTION 19
SURRENDER OF PREMISES ON TERMINATION
19.01 Whenever this lease shall be terminated, whether by lapse of
time, forfeiture, or in any other way, Lessee will yield and deliver up the
demised premises, including the building and improvements thereon and the
fixtures and equipment belonging to Lessor therein contained, peaceably to
Lessor in as good repair as when taken, except for reasonable and normal wear
and tear, and except for damage or destruction resulting from causes which are
covered by insurance obtained in accordance with section 10 hereof.
SECTION 20
PERFORMANCE BY LESSOR OF THE COVENANTS OF LESSEE
20.01 Should Lessee at any time fail to do any of the things required
to be done by it under the provisions of this lease, Lessor at its option, and
in addition to any and all other rights and remedies of Lessor in such event,
may (but shall not be required to) do the same or cause the same to be done, and
the reasonable amount of any money expended by Lessor in connection therewith
shall be due from Lessee to Lessor as additional rent on or before the next
rental due date bearing interest at the rate of Eight (8%) percent per annum
from the date of payment until the repayment thereof to Lessor by Lessee. On
default in such payment, Lessor shall have the same remedies as on default in
payment of rent.
SECTION 21
RIGHTS TO MORTGAGE
21.01 Lessor reserves the right to subject and subordinate this lease
at all times, to the lien of any mortgage or mortgages now or hereafter placed
upon Lessor's interest in the said premises and on the land and buildings of
which the said premises are a part or upon any buildings hereafter placed upon
the land of which the leased premises form a part, provided in each instance
that the mortgagee shall in writing agree that Lessee's quiet possession of the
premises shall not be disturbed so long as the Lessee is not in default in the
performance of the terms and conditions of this Lease. Lessee covenants and
agrees to execute and deliver upon demand such further instrument or instruments
subordinating this lease to the lien of any such mortgage or mortgages as shall
be desired by Lessor and any mortgagees or proposed mortgagees.
SECTION 22
COVENANTS OF QUIET ENJOYMENT
22.01 Lessor covenants and agrees to and with Lessee that at all times
when Lessee is not in default under the terms of an during the term of this
lease, Lessee's quiet and peaceable enjoyment of the demised premises shall not
be disturbed or interfered with by Lessor or any person claiming by, through, or
under Lessor.
SECTION 23
SECURITY DEPOSIT
23.01 The Lessor herewith acknowledges the receipt of ________________
which Lessor is to retain as security for the faithful performance of all of the
covenants, conditions, and agreements of this lease, but in no event shall the
Lessor be obliged to apply the same upon rents or other charges in arrears or
upon damages for the Lessee's failure to perform the said covenants, conditions,
and agreements; the Lessor may so apply the security at its option; and the
Lessor's right to the possession of the premises for nonpayment or rent or for
any other reason shall not in any event be affected by reason of the fact that
the Lessor holds this security. The said sum if not applied toward the payment
of rent in arrears or toward the payment of damages suffered by the Lessor by
reason of the Lessee's breach of the covenants conditions, and agreements of
this lease is to be returned to the Lessee when this lease is terminated,
according to these terms, and in no event is the said security to be returned
until the Lessee has vacated the premises and delivered possession to the
Lessor.
In the event that the Lessor repossesses itself of the said premises
because of the Lessee's default or because of the Lessee's failure to carry out
the covenants, conditions, and agreements of the lease, the Lessor may apply the
said security upon all damages suffered to the date of said repossession by
reason of the Lessee's default or breach. The Lessor shall not be obliged to
keep the said security as a separate fund, but may mix the said security with
its own funds.
SECTION 24
HOLDING OVER
24.01 In the event of Lessee herein holding over after the termination
of this lease, thereafter the tenancy shall be from month to month in the
absence of a written agreement to the contrary, subject to all the conditions,
provisions and obligations of this lease insofar as the same are applicable to a
month to month tenancy.
SECTION 25
REMEDIES NOT EXCLUSIVE; WAIVER
25.01 Each and every of the rights, remedies and benefits provided by
this lease shall be cumulative, and shall not be exclusive of any other of said
rights, remedies and benefits, or of any other rights, remedies and benefits
allowed by Law.
25.02 One or more waivers of any covenant or condition by Lessor shall
not be construed as a waiver of a further or subsequent breach of the same
covenant or condition, and the consent or approval by Lessor to or of any act by
Lessee requiring Lessor's consent or approval shall not be deemed to waive or
render unnecessary Lessor's consent or approval to or of any subsequent similar
act by Lessee.
SECTION 26
RIGHT TO SHOW PREMISES
26.01 The Lessee hereby agrees that for a period commencing one hundred
and fifty (150) days prior to the termination of this Lease, the Lessor may show
the premises to prospective Lessees, and one hundred and fifty (150) days prior
to the termination of this Lease, Lessor may display about said premises the
usual and ordinary "For Lease" signs.
SECTION 27
ENVIRONMENTAL LAWS
27.01 Lessor hereby represents and warrants, to the beset of its
knowledge and belief as follows:
(a) To the best of Lessor's knowledge, the premises are and have
always been in compliance with all applicable environmental
laws.
(b) There are no pending environmental civil, criminal or
administrative proceedings, lawsuits or claims brought by any
governmental agency, private party or other entity against
Lessor relating to any environmental law.
(c) Lessor knows of no civil, criminal or administrative
proceedings, lawsuits or claims threatened against Lessor by
any governmental agency, private party or other entity
relating to any environmental law.
(d) Lessor knows of no facts or circumstances which may give rise
to any civil, criminal or administrative proceedings, lawsuits
or claims against Lessor by any governmental agency, private
party or other entity relating to any environmental law.
Lessor shall defend and indemnify Lessee from and against all
losses, claims, damages, penalties, liabilities, costs (including
cleanup costs) and expenses (including reasonable attorney's fees)
resulting from any material breach of the
foregoing warranties and representations.
27.02 Lessee, it agents, employees, invitees, sublessees or assignees,
shall not do, or cause to be done any work or activity on the Premises, which
may cause the Premises, or any parts thereof, to be in violation of any federal,
state or local environmental health or safety statute, ordinance, rule,
regulation, order or decree, relating to the environment, or imposing liability
or standards concerning or in connection with hazardous, dangerous or toxic
materials, waste or substances, including any common law theories based on
nuisance negligence or strict liability (collectively the "environmental laws").
Lessee shall defend and indemnify Lessor from and against any losses, claims,
damages, penalties, liabilities, cost (including clean-up costs) and expenses
(including reasonable attorneys' fees) resulting solely form Lessee, its agents,
employees, invitees, sublessees or assignees breach or violation of any such
environmental laws.
SECTION 28
OPTION TO EXTEND TERM
28.01 Grant of Option Lessee shall be entitled to extend the term of
this Lease for one (1) additional period of five (5) years (hereinafter from
time to time referred to as the "extension period"), at the rental rate and upon
the other terms and conditions set forth in this Section 28.
28.02 Exercise or Option. The option to extend the term granted in
Subsection 28.01 shall be exercised by written notice to Lessor given not less
than one-hundred eight (180) days prior to the expiration date of the original
term.
28.03 Adjusted Minimum Net Rental. Lessee's possession of the Premises
during the extension period, if any, shall be under and subject to all the
terms, covenants and conditions set forth in this Lease, with the exception that
the minimum net rental under Section 3 for the extension period shall be
adjusted to the fair market rental value of the Premises at the time of
commencement of the extension period. Within sixty (60) days following Lessee's
notice to Lessor of exercise of its option to extend the term for the extension
period. Lessor shall notify Lessee of Lessor's determination of the fair market
rental value for such extension period except that, upon request, Lessor shall
notify Lessee of such determination at any time during the last twelve months of
the term. Lessee shall have fifteen (15) days following receipt of Lessor's
determination in which to accept or reject such determination. If Lessee fails
to notify Lessor of its rejection of the determination within said fifteen (15)
day period, Lessee shall be deemed conclusively to have rejected the rental set
forth therein. If Lessee rejects Lessor's determination, and if Lessor and
Lessee in good faith cannot agree upon the fair market rental value within
fifteen (15) days following Lessee's rejection of Lessor's determination, then
Lessor and Lessee shall each select an MAI appraiser within the subsequent ten
(10) days period. Each appraiser must have at least ten (10) years of experience
appraising industrial properties in the Metropolitan Detroit area. The two
appraisers so selected shall have thirty (30) days in which to determine the
fair market rental value of the Premises. Their determination shall be binding;
however, if they cannot agree upon the fair market value within said thirty (30)
day period, the two appraisers promptly shall jointly select a third appraiser,
whose determination shall be made within thirty (30) days and shall be binding
upon Lessor and Lessee. In no event, however, shall the minimum net monthly
rental rate be less that which is the monthly rental rate in effect for the 85th
month of the original term. All of the cost, fees, and expenses of the appraiser
designated by Lessee shall be paid by Lessee. All of the costs, fees, and
expenses of the appraiser designated by Lessor shall be paid by Lessor. Lessor
and Lessee shall each pay one-half of the cost, fees, and expenses of the
appraiser designated by the two appraisers designated by Lessor and Lessee.
28.04 Option Personal to Lessee. The option to extend the term of this
Lease set forth in the Section 28 is personal to Lessee, and Lessee itself shall
be the occupant of the Premises at the time the option is exercised sand at the
time the option period commences. This option shall not be assigned or
transferred to any other party in any manner whatsoever.
SECTION 29
MISCELLANEOUS
29.01 This lease shall be construed and enforced in accordance
with the laws of the State of Michigan.
29.02 If any term or provision of this lease shall to any extent be
held invalid or unenforceable, the remaining terms and provision shall not be
affected thereby, but each term and provision of this lease shall be valid and
enforced to the fullest extent permitted by law.
29.03 The captions of this lease are for convenience only and are not
to be construed as part of this lease and shall not be construed as defining or
limiting in any way the scope or intent of the provisions hereof.
29.04 Whenever herein the singular member is used, the same shall
include the plural and the masculine gender shall include the feminine and
neuter genders.
29.05 This lease contains the entire agreement between the parties
hereto and previous negotiations leading thereto and it may be modified only by
an agreement in writing signed by Lessor and Lessee. Lessor and Lessee hereby
expressly declare that no representations have been made other than those
expressly set forth herein.
29.06 It is understood and agreed between Lessor and Lessee that the
month of August 1993 shall be free of all base rental charges, except that the
Lessee shall be responsible for the payment of all utilities, real estate taxes
and insurance premiums including liability insurance and indemnity and fire and
extended coverage insurance on the Premises. Lessor shall have full access to
the building during month of August 1993 to complete all leasehold improvements.
Lessee may have access to premises as of July 15, 1993 to install phone lines,
alarm wiring, etc., but in no way shall they interfere or delay the work by
Lessor of Leasehold Improvements, Section 1.01 of Lease and enumerated on
Exhibit "B" page 1 and 2.
<PAGE>
EXHIBIT "A" attached to and made a part of Lease, dated May 13, 1993 by and
between KITCHEN INVESTMENT LTD. as Lessor, and JOHN CRANE INC., as Lessee,
covering premises located at 23400 Commerce Drive, City of Farmington Hills,
Oakland County Michigan.
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LEGAL DESCRIPTION
Part of Lot #43k, "Farmington Freeway Industrial Park No.3", part of the North
1/2 of Fractional Section 30, Town 1 North, Range 9 East, City of Farmington
Hills, Oakland County, Michigan (Liber 127, Page 9, Oakland County Records),
described as beginning at the Northeast corner of Lot #43 thence S. 0 degrees 05
minutes 37 seconds West, 2446.11 feet; thence North 89 degrees 58 minutes 00
seconds West, 275.00 feet; thence North 0 degrees 05 minutes 37 seconds East,
246.40 feet to the Southerly Right-Of-Way Line of Research Drive; thence along
said line South 89 degrees 54 minutes 23 seconds East, 275.00 feet to the Point
of Beginning, containing 1.55 acres.
<PAGE>
EXHIBIT "B" Page 2 attached to and made a part of Lease, dated May 13, 1993 by
and between KITCHEN INVESTMENT LTD., as Lessor, and JOHN CRANE INC., as Lessee,
covering premises located at 23400 Commerce Drive, City of Farmington Hills,
Oakland County Michigan.
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LEASEHOLD IMPROVEMENTS
Lessor shall provide the following list of leasehold improvements at his sole
cost and expense as per the attached building plan referred as Exhibit "B Page
1",
1. Replace the existing carpeting throughout the entire facility.
A. Allowance for carpeting including all material and labor
is $13.50 per square yard
for all areas except two (2) Managers' Offices and
Conference room.
B. Allowance for carpeting in two (2) Managers' Offices and
Conference Room is
$15.50 per square yard including all material labor.
2. Replace ceiling tile where required.
3. Uniform color of fluorescent lighting throughout.
4. Additional partition walls per the attached floor plan referred to
as Exhibit "B" Page 1.
5. Install new kitchen with cabinets, kitchen sink, garbage disposal,
refrigerator with automatic ice maker, dishwasher and microwave oven as
per attached floor plan referred to as Exhibit "B" Page 1. Kitchen
cabinets to be same as those used at existing coffee stations. New
kitchen area shall have vinyl floor tile.
6. Install sound insulation in the ceilings of the two (2) Managers'
Offices and Conference
Room.
7. Install field applied vinyl wall covering over existing vinyl wall
board in two (2) Managers' Offices and Conference room. Allowance for
vinyl wall covering material is $0.70 per square foot.
8. Install cold water hook-up for Lessee's coffee machine at circled
location on the attached floor plan referred to as Exhibit "B" Page 1.
9. Box in exposed telephone equipment in existing telephone equipment
room.
10. Repair existing holes in prefab vinyl drywall.
11. Reseal floors in the warehouse area with a clear sealer.
12. Install additional door in West Wall of Men's Locker Room #33 so as to
provide handicap access to Men's Warehouse Restroom #32 from Office
area.
<PAGE>
EXHIBIT "C" attached to and made a part of Lease dated May 13, 1993 by and
between KITCHEN INVESTMENT LTD., as Lessor, and JOHN CRANE INC., as Lessee,
covering premises located at 23400 Commerce Drive, City of Farmington Hills,
Oakland County Michigan.
Covenants and restrictions recorded August 26, 1960 in Liber 5242, Page 650,
Oakland County records.
FARMINGTON FREEWAY INDUSTRIAL PARK #3 RESTRICTIONS:
1. Purposes: These restrictions are imposed upon the property to insure
proper use and appropriate development and improvement of each building _______
thereof, to protect the owners of building ____ against such improper use of
surrounding building sites as will depreciate the value of their property, to
guard against the erection thereon of structures built of improper or unsuitable
materials to insure adequate and reasonable development of said property; to
encourage the erection of attractive improvements thereon, with appropriate
locations thereof on building silos to prevent haphazard inharmonious
improvements on building sites; to secure and maintain proper setbacks from
streets; and in general to provide adequately for a high type of quality of
improvement in said property and for the orderly development and efficient
maintenance thereof.
2. Property covered: These restrictions cover all the lots or parcels
of property within that part of the North Fractional 1/2 of Section 30, Town 1
North Range 9 East, Farmington Township, Oakland County, Michigan described as
beginning at the North 1/4 corner of said Section 30, Thence proceeding North 89
degrees 56 minutes 15 seconds East along the north line of said Section 30,
94.95 feet to a point on the westerly line of the "Farmington Freeway Industrial
Park No.1" (recorded in Liber 120, Page 34, Oakland County Records); thence
South 00 degrees 05 minutes 37 seconds West along said westerly boundary 2009.60
feet; thence South 00 degrees 08 minutes 25 seconds East continuing along said
boundary 559.63 feet to a point on the east-west 1/4 line of Section 30; thence
South 89 degrees 59 minutes 45 seconds West along said 1/4 line 95.19 feet to
the center of Section 30, Town 1 North, Range 9 West; thence North 89 degrees 58
minutes 00 seconds West continuing along said east-west 1/4 line 1539.12 feet;
thence North 01 degrees 22 minutes 30 seconds East 785.96 feet thence North 06
degrees 01 minutes 07 seconds East 802.64 feet; thence North 01 degrees 22
minutes 30 seconds East 390.75 feet; thence North 89 degrees 47 minutes 30
seconds East 638.74 feet; thence North 05 degrees 11 minutes 49 seconds East
201.68 feet; thence North 01 degrees 13 minutes 25 seconds East 459.79 feet to a
point on the North line of Section 30; thence North 89 degrees 47 minutes 30
seconds East along said north line 762.81 feet to the point of beginning, said
point also being the North 1/4 corner of Section 30 Town 1 North, Range 9 Esat,
Farmington Township, Oakland County, Michigan. Said parcel of land containing
85.377 acres more or less and subject to easements of record, lying East of the
East right-of-way line of proposed I-275 expressway.
3. Plan and Site Approvals:
A. No construction of any kind shall be commenced upon any of
the lots or parcels of land included within the property covered by these
restrictions until a site plan has been submitted and real outlining of any and
all buildings and structures including walls and screens and those plans have
been approved in writing to Grantor. Further no construction of any kind shall
be commenced until plans and specifications of all buildings have been submitted
to and approved in writing by the Grantor. Grantor shall have the right to
refuse to approve any such plans or specifications, regarding plans, material or
color scheme that is not suitable or desirable in their opinion for aesthetic or
other reasons.
B. In passing upon such plans, specifications, or grading
Grantor shall have the right to take into consideration the suitability of the
proposed building or other structure to be built on the site upon which it is
proposed to erect the name and the harmony as planned in view of the outlook
from the adjacent or neighboring properties.
C. In reviewing said plans, specifications, grading plans and
site plans, Grantor shall, among other things, determine that said plans and
specifications meet the minimum express requirements of these restrictions and
in addition shall approve or disapprove the proposed location of parking lot,
loading and unloading facilities, proposed areas for the storage of materials,
location of driveways, and other means of access and landscaping plans in order
that said subdivision shall develop in conformity and harmony with other
existing structures and uses in the Subdivision and that ultimately the
Subdivision will develop into an efficient and attractive industrial park. If a
disagreement on the question of suitability and harmony shall arise, the
decision of the Grantor shall be final.
D. In the event that Grantor has failed to approve or
disapprove said plans and specifications within sixty (60) days after they have
been submitted, the approval of the Grantor shall not be required; provided,
however, that lack of approval by the Grantor shall not waive any express
restriction contained herein.
E. Grantors, their successors or assigns, shall not be liable
in damages to any person submitting plans for approval or to any owner or owners
of land covered by this instrument by reason of mistake in judgment, negligence
or nonfeasance of itself, its agents or employees arising out of or in
connection with the approval or disapproval or failure to approve any plans or
specifications.
4. Uses permitted:
A. It is understood that the property covered herein is to be
developed for industrial for industrial use and may, upon written approval of
the Grantor of specific parcels, be used for commercial, business, office or
retail use. No building for such use or uses shall be constructed without
approval in writing by Grantor.
B. Recognizing the necessity for the removal of scrap and
trash from an industrial subdivision, the Grantor may designate a trash
collection station upon a lot or parcel within the area covered by these
restrictions to serve this industrial subdivision and the Farmington Freeway
Industrial Park Subdivisions No. 1 and 2 which adjoin this subdivision upon the
east. Grantor may also designate a weigh station for trucks upon any parcel or
lot contained within said property.
C. The Grantor reserves the power to approve a location or
locations for Helipads or Heliport use. Which use shall allow construction of
storage of (inside or outside), repair and maintenance of, servicing with
petroleum products, fuel and other activities connected with aircraft. Such use
shall require the written approval of Grantor.
D. The Grantor hereby reserves the right and authority to
permit or deny the owner(s) or assigns of the property covered herein the right
to use parcels for public or private streets or highways. Permission for such
use must, prior to commencement of construction of such streets or highways, be
obtained in writing from Grantor.
E. No noxious or offensive trade or activity shall be carried
on, nor shall anything be done on property located in the subdivision which may
be or borders on annoyance or nuisance to the said area hereby restricted by
reason of noxious, offensive, unhealthy and harmful odors, (fumes, dust, smoke,
waste, noise or vibration beyond that normally and reasonably expected in a
light industrial area.
F. The following specifications uses shall not be
permitted:
(1) Asphalt or tar manufacturing or refining.
(2) Manufacture of gas, coke, or coal tar
products.
(3) Slaughtering of animals for the reduction
or recovering of products
from dead animals or animals of offal or garbage.
(4) Blast Furnaces.
(5) Petroleum refining or other similar
factories or uses.
(6) Auto wrecking, salvage yards, junk yards,
storage or baling of waste or
scrap paper, rags, scrap metals, bottles or junk except as provided in
paragraph
4-B hereof.
(7) Central mixing plant for asphalt, mortar,
plaster or concrete, except as
may be required in connection with paving of roads or other reconstruction
within the subdivision.
(8) Heavy stamping plant or foundry, unless
designed to the satisfaction of
and approved in writing by Grantor.
G. All manufacturing operations shall be carried on within
fully enclosed buildings and no outside activities shall be carried on except
the parking of motor vehicles, the loading or unloading of motor vehicles and
the storage of materials within the restrictions provided for herein, without
the approval of the Grantor.
5. Building Construction: All buildings shall have exterior facing of
Architectural approved materials such as: face brick, concrete block,
architectural concrete, steel or aluminum factory finished panels, and glass.
All exterior treatment must be approved by the Grantor. All sides of any
building facing upon a public street or a public highway must be treated with
finished material. Finished materials are defined as face brick, glass,
ornamental stone or other decorative material and shall not include concrete or
cinder block, unless such blocks are designed or arranged with appointments and
specifically approved in writing by Grantor, Metal or preengineered buildings
shall have a masonry wainscot to a minimum of 5 minutes 0 seconds above finished
grade, unless otherwise approved in writing by Grantor. In the event of dispute
as to whether or not a particular material qualifies as "finish material" the
decision of the Grantor shall be final. All exposed concrete block or metal must
be painted or varnished within sixty (60) days from the date of occupancy except
those materials not normally painted or those materials which have been
pre-finished. All buildings shall be constructed in accordance with applicable
codes and ordinances of local governmental bodies but shall in addition be
constructed with high quality materials and in a manner so as to have the
ability to withstand the normal causes of deterioration with normal maintenance
procedures. No used material shall be incorporated within any building without
the express permission of the Grantor. No structure, covering garage, barn or
other outbuilding of a temporary nature shall be situated, erected or maintained
on any parcel of the subject property, but this shall not apply to construction
building or storage facilities used in the course of construction of any
permanent building.
6. Building setbacks and greenbelts:
A. No building shall be located nearer to any front street
right-of-way line that fifty (50) feet therefrom; provided, however, that this
setback may be reduced to not less than thirty-live feet (35) by the Grantor.
This setback shall be primarily maintained as a greenbelt. If a disagreement
arises as to the definition of "front street" the decision of the Grantor shall
prevail. No uses shall be made of said property except for driveways, walks, or
other means of access to the interior of the property and for a minimum amount
of parking for visitors. The amount of such parking and its location and the
location and specifications for driveways, walks, or other permitted
improvements must be approved by the Grantor prior to commencement of
construction. The front yard setback can be used for public utility purposes
which shall be placed underground. However, parking shall be allowed on side
street setbacks provided it is approved in writing by the Grantor and provided
that a greenbelt shall be maintained between the road right-of-way and the
parking surface. The width of such greenbelt shall be set by the Grantor in the
site plan approvals.
B. No building shall be located nearer to any side street
right-of-way line than twenty-five (25) feet therefrom; provided, however, that
this setback requirement may be reduced to not less than fifteen (15) feet by
written approval of Grantor.
C. The portion of the described setback not occupied by
permitted improvements constructed in accordance with plans approved by the
Grantor, must be landscaped with lawn, shrubbery, trees bushes, vines or
suitable plants, detailed plans of which must be approved by the Grantor. All
owners, lessees, tenants or users of any parcel in this subdivision must
maintain such landscaping in a condition so as to prevent a pleasing appearance.
D. No building shall be constructed nearer than ten (10) feet
from any side or rear property line. The area within side and rear setbacks may,
however, be used for loading and unloading or the parking of motor vehicles and
for open storage if approved in writing by Grantor.
7. Fence: No fence of any kind shall be constructed within the setback
described in Paragraph 6A. Where fences are erected they shall be of the
"Cyclone" or other metal type and shall not be higher than eight (8) feet unless
approved in writing by the Grantor. Fences shall not be of the obscuring "wall"
type unless required by these restrictions or unless specifically approved by
the Grantor.
In the case of open storage, the Grantor is hereby granted the power to
require an obscuring type fence to shield any open storage. The type of material
for such fence shall be set by the Grantor.
8. Signs:
A. The number, location, size, construction and lighting of
all signs whether temporary or permanent, to be erected upon any lot or parcel
within area covered by the restrictions must have, prior to erection, written
approval of the Grantor. No billboards or other advertising signs other than
those identifying the names, business and products of the person or persons
occupying the premises shall be permitted without the specific written approval
of the Grantor.
B.. No signs of any kind shall be erected within forty (40)
feet of the east right-of-way line of the I-275 Freeway bordering the westerly
boundary of this property, without the express prior written approval of the
Grantor. The Grantor reserves the right to erect signs of his own, or his
assigns, within said forty (40) foot area and reserves an easement over said
area for said purpose and an easement over all parcels adjoining the proposed
I-275 Freeway for reasonable access to that forty (40) foot area for the purpose
of constructing, removing , repairing or maintaining any signs erected thereon.
This paragraph shall not apply to that parcel adjoining proposed I-275 Freeway
and conveyed by the Grantor to the Minnesota Mining and Manufacturing Company.
C. The Grantor reserves the right to standardize all signs to
be erected within the area covered by these restrictions by any contractors or
sub-contractor and/or to indicate the name of the proposed occupant of a
building under construction and/or to indicate a building which is for sale,
rent or lease. The Grantor shall have the right to specify the size, shape,
color and design of all such signs and to limit the information appearing on
such signs. The Grantor has the right to remove signs, which in his opinion are
in poor repair, from lots owned by others than the Grantor.
9. Parking areas and loading zones:
A. Each owner must provide adequate off street parking
facilities so as to eliminate any necessity for the parking of vehicles upon the
public streets within this Subdivision. No parking shall be permitted within the
setback provided in Paragraph 6A, except visitor parking or as approved in
writing by the Grantor. Grantor has authority to consider topography and other
hardships in limiting or granting front yard parking.
B. Location and adequacy of all parking areas shall be
determined and approved by Grantor in connection with its review of the site
plans. The Grantor shall take into consideration the intended use of the
premises, and their suitability for other uses in determining the adequacy of
the proposed parking arrangements. In general, each premises shall provide off
street parking for its employees (at least one space for every two employees in
the largest expected working shift) and adequate parking for visitors.
C. Loading and unloading areas shall be afforded and designed
in such a manner as to permit the pickup and delivery of materials from the site
by motor vehicles consisting of normal tractor and semi-trailer types without
the necessity of any maneuvering being done on public streets. No loading or
unloading docks shall face any public street without the express approval of the
Grantor. A suitable screening or obscuring well shall be provided so that said
operations are not readily visible from the public thorough fare if required by
Grantor.
D. All driveways, walks, parking areas and loading
areas shall be paved with concrete,
asphalt or other hard surface material.
10. Outdoor Storage:
A. Outdoor storage of equipment, raw materials, semi-finished
or finished products may be permitted by the Grantor under such conditions as it
shall deem necessary to prevent nuisance or other adverse conditions, only when
such outdoor storage is necessary and incidental to the operations being carried
on in the building located upon the site. No storage shall be permitted on the
setback required by Paragraph 6 and all storage shall be shielded by fence or
landscaping so as to effectively screen the view of such storage area from
public streets and adjoining properties.
B. No waste materials, rubbish, or discarded matter of any
kind shall be permitted to be stored in open areas except in containers approved
by the Grantor, and beyond a time reasonably required to arrange for removal..
11. Maintenance of property-maintenance fees:
A. All owners of property in this subdivision shall maintain
all buildings, landscaping, fences, drives, parking lots, or other structures
located upon said property in good and sufficient repair and shall keep such
premises painted, lawns cut, shrubbery trimmed, windows glazed and otherwise
maintain the property in an aesthetically pleasing manner and in the condition
approved by the Grantor, reasonable wear and tear excepted.
B. Any structure, planting or driveway or parking lot service
which is damaged by the elements, by vehicles or from fire or any other cause
shall be repaired as promptly as the extent of damage will permit.
C. Buildings within this subdivision which should happen to be
vacant for any reason, shall be kept locked and the windows shall be glazed in
order to prevent the entrance thereto by vandals.
D. In the event of the violation of any of the restrictions
set forth in this paragraph, the Grantor or its succumbers of interest shall
have the right to go upon the property to eliminate nuisance conditions, to mow
lawns or trim shrubbery or to remove signs or do anything necessary to maintain
the aesthetic standards of the subdivision for the benefit of other property
owners and the cost of any such work shall be enforceable in the manner provided
by law.
E. Each lot owner of any parcel or lot heretofore or hereafter
sold, transferred or conveyed by the Grantor within the area covered by these
restrictions, shall pay to the Grantor or its successor in interest an annual
maintenance charge which charge shall become due and payable annually in advance
on the first day of January in each year, beginning with January 1, 19______.
The maintenance fund may be used for improving and maintaining roadways and
entranceways to the subdivision, for planting trees and shrubbery and the care
of garbage, ashes and rubbish, for employing watchmen, for caring for vacant
property, insurance, maintenance of helio area, or for doing any other thing
necessary or advisable in the opinion of the Grantor for keeping this property
neat or in good order.
F. The maintenance charge shall be computed at the rate of
Twenty Five ($25.00) dollars for each acre or part thereof included within the
property owned by each lot owner. The amount of the maintenance charge may be
adjusted from time to time by the Grantor or its successor in interest, as the
needs of the subdivision may require, but shall not be increases in excess of
Fifty ($50.00) dollars per acre or part thereof without the consent in writing
of the property owners of not less than fifty-one (51%) percent of the total
area of all lots included within the subdivision.
12. Easements:
A. Easements and rights-of-way are hereby reserved by the
Grantor in an over a strip of land ten feet in width along all rear, front and
side lot lines, wherever it may be deemed necessary for the installation or
maintenance of telephone or electric poles, lines or conduits or sewer, gas
lines or water mains, for drainage purposes, or for the use of any other public
utility deemed necessary or advisable by the Grantor. The use of all or a part
of such easements and right-of-way may be granted or assigned at any time
hereafter by the Grantor to any person, firm, governmental unit or agency or
corporation furnishing any such service or such easements may be released by the
Grantor to the property owner involved should Grantor determine the easement is
necessary.
B. There shall be no access to or from the property covered by
these restrictions from the property adjacent and South or Southerly from said
property without the specific written approval of the Grantors herein, which
approval the Grantor reserves the power to give or deny. No public or private
road shall be constructed or allowed to exist from the properties covered hereby
to properties to south or southerly of this property without such written
approval. No owner of any parcel shall have the right to dedicate or grant to
any public body any easement or road-way from this property to the area to the
south or southerly of this property without such specific written approval.
13. Grantor may at any time assign all or part of its rights and
responsibilities hereunder to an association, incorporated or unincorporated, of
the lot owners of said subdivision. At such times as the Grantor no longer has
interest in any property contained within the subdivision, Grantor shall upon
request of the majority of the acreage owners make such assignment. Any such
assignment shall be in writing and shall be recorded in the office of the
Register of Deeds of Oakland County, Michigan.
14. Each of the conditions, covenants, restrictions, and reservations
set forth above shall continue and be binding upon the Grantor and upon their
successors and assigns and upon each of them and all parties claiming under them
until January 1, 1980, and shall automatically be continued thereafter for
successive periods of ten (10) years each. From and after January 1, 1980 the
owners of seventy-five (75%) per cent of the fee simple of the property
subjected to this restrictive covenant, based on the number of square feet owned
as compared to the total area restricted, may release all or any part of the
land so restricted from any one or more of said restrictions or may change or
modify any one or more of said restrictions by executing and acknowledging an
appropriate agreement or agreements in writing for such purposes and filing the
same for record in the office of the Register of Deeds, Oakland County,
Michigan. Any change in restrictions shall not operate to prohibit any use
theretofore carried on lawfully and in accordance with these restrictions with
respect to any party not joining in the execution of said amendment.
15. It is specifically provided, and the acceptance by any person of
title on any of the lots included within the subdivision shall constitute the
agreement of such person, that in the event of disagreement is to the precise
meaning of any term contained herein that the interpretation of the Grantor, or
its successor in interest, including the association provided for in Paragraph
13 hereof, shall be final. It is specifically provided and agreed that the usual
rule requiring such documents shall not apply to the restriction..
16. The covenants set forth herein shall run with the land and bind the
present owner, its successors and assigns and all parties claiming by, through
or under it shall be taken to hold, agree and covenant with the owner of said
building site, its successors and assigns and with each of them to conform to
and observe said restrictions as to the use of building sites and the use and
construction of improvements thereon. Grantor or the owner or owners of any of
the above land shall have the right to sue for the observance of the
restrictions above set forth, in addition to ordinary legal action for damages,
and the failure of Grantor and the owner of any other lot or lots or building
site restricted hereby to enforce any of the restrictions deemed to be a waiver
of the right so to do as to any subsequent violation.
<PAGE>
EXHIBIT 10.7
Overpayments will be credited to your account and you will pay any
underpayments within 30 days of the date of the Landlord's final statement.
On November l, 1996, Tenant is to post a security deposit of
$21,037,50 in the form of cash. Landlord will invest same in a Certificate of
Deposit, with interest being paid to Tenant.
It is further agreed -that this lease agreement is subordinate to any
mortgages on the property. Tenant agrees to provide Estoppel Certificates, if
required by Landlord. If for any reason we find it necessary to litigate any
issue, it is agreed that both of us waive our right to a trial by jury. If, at
any time prior to the termination of this Lease, any senior interest holder or
any other person or the successors or assigns of the foregoing (collectively
referred to as "Successor Landlord") shall succeed to the rights of Landlord
under this Lease, Tenant agrees, at the election and upon request of any such
Successor Landlord, to fully and completely attorn to and recognize any such
Successor Landlord, as Tenant's Landlord under this Lease upon the then
executory terms of this Lease; provided such Successor Landlord shall agree in
writing to accept Tenant's attornment and shall assume all of Landlord's
obligations under this Lease.
Notwithstanding anything to the contrary contained herein it is agreed
that you will look only to Landlord 's interest in 450 Park Avenue (or the
proceeds thereof) for the satisfaction of Tenant's remedies for the collection
of a judgment (or other judicial process) requiring the payment of money by
landlord in the event of any default by Landlord hereunder, and no other
property or assets of Landlord or its agents, directors, officers,
shareholders, partners or principals (disclosed or undisclosed) shall be
subject to levy, execution or other enforcement procedure for the satisfaction
of Tenant's remedies under or with respect to this lease, the relationship of
Landlord and Tenant hereunder or under law or Tenant's use or occupancy of the
Subject Premises or any other liability of Landlord to Tenant.
The parties agree that neither party shall be liable to the other to
the extent of a recovery for any loss suffered which is covered by an insurance
policy carried by the party suffering the loss and for which recovery is
available. The parties agree to attempt to obtain waivers of subrogation from
the respective insurance companies. Landlord and Tenant represent that in the
negotiation of his Lease they dealt with no broker or brokers other than J.
Everett Hill of Peter Sharp & CO., Inc. (whose commission or other compensation
shall be paid by Landlord) and Alan Grossman of The Georgetown Group, Inc.
(whose commission or other compensation shall be paid by Landlord) Landlord and
Tenant hereby agree to indemnify and hold the other part; harmless from and
against any and all claims, liabilities, suits, costs and expenses including,
reasonable attorneys fees and disbursements arising out of any inaccuracy or
alleged inaccuracy of the above representation. Landlord shall have no
liability for any brokerage commissions arising out of a sublease or assignment
by Tenant. The provisions of this Article shall survive the expiration or
Sooner termination of the Lease.
- 3 -
During the term of this Lease, Landlord shall, at Landlord's expense,
provide heat, light, cleaning, water, rubbish removal and air conditioning to
the Premises in accordance with building standards.
All notices are to he sent by Certified Mail, Return Receipt Requested. If to
Landlord, such notice is to be addressed to: 450 Park Avenue Associates c/o
Peter Sharp & Co., Inc., 1370 Avenue of the Americas, New York, New York 10019.
If to Tenant, such notice is to be addressed to: Top Source Technologies, Inc.,
450 Park Avenue, New York, New York 10019, Attn: Stuart Landow. Landlord
warrants and represents that it is the owner of the subject premises and is free
to enter into this Lease.
The submission by Landlord to Tenant of this Lease in draft form shall
be deemed submitted solely for Tenant's consideration and not for acceptance
and execution. The submission by Landlord of this Lease for execution by Tenant
and the actual execution and delivery thereof by Tenant to Landlord shall have
no binding force and effect unless and until Landlord shall have executed this
Lease and a counterpart thereof shall have been delivered to Tenant.
If at a future date it is found to be necessary, we agree to negotiate
and execute a long form Lease which is mutually agreeable to both sides.
<PAGE>
Tenant is to have the right to sublease the Premises with the
Landlord's consent which is not to he unreasonably withheld. However, any net
profits are to be shared equally between Tenant and Landlord within 5 days of
receipt by Tenant.
Should Tenant fail to vacate the Premises on the Expiration Date and
there has been no agreement as to an extension, the total amount of the Rent
and Additional Rent will double, commencing on the date following the
Expiration Date.
Tenant is responsible for the immediate bonding and/or removal of any
liens placed on the building by any of the Tenant's contractors.
- 4 -
Very truly yours,
Jerome L.Greene
General Partner
450 PARK AVENUE ASSOCIATES ("Landlord")
Jerome L.Greene
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<PAGE>
If you are in agreement with the above, please sign each of the four
copies of this letter and return them to the undersigned for counter-signature
along with a check in the amount of $7,012.50, which represents the Rent for
the first month. We will return two fully executed copies of this letter to
you. JLG/ck Enclosures
ACCEPTED AND AGREED TO:
TOP SOURCE TECHNOLOGIES, INC. ("Tenant")
By:.
Title CFO 4/2/96
<PAGE>
