UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A No.3
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended September 30, 1997
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:
Name of each exchange
Title of each class on which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
.001 par value common stock (Title of Class)
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/A No. 3 or any amendment
to this Form 10-K/A No. 3 [X]
As of January 6, 1998, 28,561,477 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 January 6, 1998 on the closing
sales price) held by non-affiliates of the Registrant, was approximately
$36,931,160.
Documents Incorporated by Reference
Location in Form 10-K/A No. 3 Incorporated Document
Part III-Items 10, 11, & 12 Definitive Proxy Statement in connection with
its annual meeting of stockholders to be held
on December 15, 1998
<PAGE>
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 Item 8 - Financial Statements
and Supplementary Date, Note 3, Discontinued Operations, and the heading "Sale
of the United Testing Group ("UTG") Discontinued Operations" in this Business
Section) and has developed a proprietary oil analysis instrument, the On-Site
Oil Analyzer ("OSA") for use in the automotive, powertrain development,
petrochemical and numerous other 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 5, 1998 the Company had four subsidiaries: Top Source
Automotive, Inc. ("TSA") located in Troy, Michigan, Top Source Instruments, Inc.
("TSI"), formerly named OSA Inc., located in Atlanta, Georgia , and Troy,
Michigan; ARCS Safety Seat, Inc. ("ARCS, Inc.") located in Troy , Michigan, and
Top Source Oil Analysis Inc. ("TSOA") formerly named UTG Inc. and currently
inactive and a discontinued operation. In fiscal 1997, the Company derived
substantially all of its revenue from sales of its OHSS at TSA. Service revenue
from UTG for the fiscal years ended September 30, 1996 and 1995 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 18, 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 which generated
approximately 98% of the Company's revenue, OSA which generated approximately 2%
of the Company's revenues; 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 royalty
agreement in May 1995. (See Item 8. - Financial Statements and Supplementary
Data, Note 17 and the heading "EFECS" in this Business Section.) . The EFECS
technology generated $50,000 in royalties (included in Other Income in the
Financial Statements) for the fiscal year ended September 30, 1997.
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. 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 obstructed by passengers or cargo. The OHSS eliminates the need for rear
speakers
<PAGE>
ITEM 1. BUSINESS (continued)
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. This OHSS unit
can be installed in less than 30 minutes and retails for around $300.
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. 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.
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 resulted in 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 gave 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. During fiscal 1997,
that number of units shipped had grown to 196,884 OHSS units, of which 2,472
units were shipped to Venezuela
In January 1996, TSA started shipments of a new Jeep(R) 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 is effective at least through year 2003. In August 1997, the Company
started shipping units for the new Grand Cherokee vehicle, a new production line
contract the Company had been awarded in 1996. The Grand Cherokee contract is
expected to run through the end of fiscal 1998.
During the fourth quarter of fiscal 1997, the Jeep(R) Cherokee contract, which
accounted for approximately 44% of TSA's fiscal 1997 revenues expired. Based on
the anticipated sales of TSA's two remaining production line contracts (Wrangler
and Grand Cherokee), TSA believes it can reduce the impact of the loss of the
Cherokee Program during 1998, excluding any additional after-market revenue that
can be generated from new programs, to a level where total 1998 TSA revenues
will approximate 70 to 75% of 1997 levels.
The Company believes it can meet additional potential demand for its OHSS from
present or new customers due to available capacity at TSA's 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 supply sources
are available for all components.
<PAGE>
ITEM 1. BUSINESS (continued)
During fiscal 1997 the Company applied for new patents covering several new
potential vehicle sound enhancement and modification devices unrelated to the
OHSS. The goal of the new designs is to open up a wider target market range of
vehicles than the truck, van and sport utility vehicle market. The Company
believes that some of the concepts submitted will receive patents and will
eventually lead to the development of one or more commercially viable products,
however; there can be no assurances that any patents will be received, and if
received, will result in the generation of a significant source of revenue in
the foreseeable future.
In addition to the new product concepts described above, in 1997 the Company
began seeking strategic alliances with several major automobile after-market
retailers. On June 23, 1997 the Company entered into an agreement with Kenwood
U.S.A.("Kenwood") to design and build custom overhead mounted enclosures to
house Kenwood's high quality speakers. At that time TSA began working with
Kenwood on a custom designed OHSS for a high volume pick-up truck. In early
January, 1998 this new after-market product will be displayed at the Consumers
Electronic Show in Las Vegas, Nevada and will appear in Kenwood's 1998 catalog.
In addition to Kenwood, the Company is in discussions with several other major
after-market retailers to produce similar type custom products.
Due to the receipt by TSA in both 1996 and 1997 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 new aftermarket contracts and developing products
that will result in significant revenues during the latter part of 1998 and for
years beyond; however, there can be no assurances that these contracts can be
obtained or that the new products developed, if any, 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.
ITEM 1. BUSINESS (continued)
All major oil companies provide oil analysis service for their industrial and
commercial lubricant customers to help them monitor the service and maintenance
needs of their equipment. These oil companies either contract with an
independent laboratory for a private label package or perform the service in
their own laboratory.
In March of 1992, the Company decided to pursue the concept of an On-Site
Analyzer 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 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.
On March 3, 1995, the Company and TJA signed a long-term OSA 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. 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, 1998, the
Company knows of no other supplier capable of developing a comparable unit in
the near term.
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.
<PAGE>
ITEM 1. BUSINESS (continued)
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 the then 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.
(See below.)
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, now called TSOA to Conam Inspection, Inc., ("Conam") a
subsidiary of Staveley Industries, plc ("Staveley") from the United Kingdom.
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 sold substantially all of UTG's assets to Conam.
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 3 - 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. On November 5, 1997, the
escrow balance of $200,000 and $ 9,620 in accrued interest was returned to the
Company.
After the transaction of October 30, 1996, UTG retained ownership of all pre
October 30th net trade accounts receivable balances amounting to $573,076 .
During fiscal 1997, the Company collected all of the outstanding receivable
balance. 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. For an additional payment of $100,000,
Conam also agreed to lease two OSA units for a three-year period with a nominal
buyout at the end of the lease. During fiscal 1997, the Company recognized
$43,333 in revenue from the lease of the database and two OSA units.
OSA Development
In July 1993, OSA Inc. ("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, TSI introduced the first OSA Beta prototype at
Chevron's national oil distributor convention in San Diego. Concurrently, TSI
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.
<PAGE>
ITEM 1. BUSINESS (continued)
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.
In December 1993, the Company signed a confidentiality agreement with Exxon
corporation ("Exxon") and began evaluating the OSA capability for use in
monitoring equipment for maintenance, such as compressors, as well as for
process control in the refining operation. Encouraged by the preliminary results
after evaluating a variety of petroleum and lube oil products, the Company and
Exxon signed a lease in July of 1994 for three OSA units, Two were designated
for process control (`refinery OSA units") and one for equipment maintenance.
All three were initially operated to evaluate durability, accuracy and
repeatability, with data compared to the internal Exxon quality control
laboratory.
The equipment maintenance unit, with enhancements, has met the requirements to
be used regularly, although revenue to date has been nominal. The Company is
working on further hardware and software enhancements to improve the economic
viability of the OSA for equipment maintenance by expanding its capability.
The process control unit project, which also started in 1994, was much more
difficult, in terms of hardware and software development, than anticipated. From
1994 through mid 1997, the Company dedicated significant resources to modify and
enhance the two refinery OSA units in order to meet Exxon's stringent and highly
technical requirements. Although significant progress was made, and certain
milestones were achieved, the refinery OSA units did not receive production
approval from Exxon in 1997. The reliability of the refinery OSA unit was
determined to be acceptable, however, accuracy had not reached required levels
in all areas. In order to achieve refinery production acceptance, all critical
test areas must generate accepted levels of accuracy.
Presently, the Company continues to believe that the OSA unit can achieve
acceptance and provide large economic benefits to the refinery industry. In
order to bolster its efforts in this area, during the latter part of 1997, the
Company hired a world recognized specialist in the hydrocarbon and oil analysis
industry. Additionally, in December 1997, the Company entered into a research
agreement with the University of Tennessee's Measurement and Control Center
Engineering Center ("MCEC") which is supported by the petroleum industry. Under
the terms of the agreement, the Company agreed to participate in the funding of
a one year feasibility study on spectroscopic methods on petroleum stream
properties. The financial commitment by the Company for this project is
estimated to be between $75,000 and $100,000. In addition to financial support,
the Company will, also, send to the MCEC one of the original two Exxon refinery
OSA units to aid in their research. All models and data derived in this study
will become the exclusive property of the Company.
The Company believes that this research study at the University of Tennessee
will ultimately result in the development of an OSA unit that will meet Exxon
and other refinery requirements. However, due to previous delays and the length
of the project, 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 success or timing of future Exxon or other refinery
OSA purchase orders.
Simultaneously with the work being done on refinery OSA units, in July 1994, the
first 15 Beta equipment maintenance OSA (the original basic 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.
<PAGE>
ITEM 1. BUSINESS (continued)
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 1995, the customers began
re-testing the OSAs in order to ensure the required reliability and performance
existed.
During 1996 and 1997, the Company has continued to send OSA units to various
test market locations in diverse industries and has generated a nominal amount
of revenue from leased OSA units. In 1997, the Company completed the first
outright sales of two OSA units in the OEM powertrain development industry. One
unit was sold to Chrysler in June 1997 for $ 149,500. The other unit was sold to
Hyundai Corporation in February 1997 for $ 145,200 In October 1997 , TSI
received an award from Chrysler verifying that the OSA unit that Chrysler
purchased had generated a $2,000,000 cost savings for Chrysler under the terms
of its Supplier Cost Reduction Program ("SCORE").
Also, based on market information obtained at test locations the Company has
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, and (5) 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.
As of January 9, 1998, the Company is generating ongoing nominal monthly lease
revenue from five leased OSA units at (1) a truck stop location, (2) automobile
dealership, (3) OEM engine development facility, (4) a municipality and (5) at a
refinery. In addition, the Company is recognizing revenue from the two OSA units
leased to Conam in connection with sale of the UTG assets (see "Sale of United
Testing Group Assets- Discontinued Operations" in this Business Section), and is
receiving nominal revenue from a Company-owned test mini-lab at its TSA facility
in Troy, Michigan.
Currently, there are OSA units at 14 different locations in a wide variety of
industries in various stages of testing. The Company anticipates receiving
purchase orders to buy or lease one or more OSA units from some of these test
locations; however, there can be no assurances as to the quantity of units and
the timing of these purchase orders.
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.
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, franchising mini-laboratories which would
encompass new and used car dealers and car "superstores", fleets,
municipalities, quick lubes, auto and truck service centers, truck stops,
industrial and marine locations, and the refinery and petrochemical industry.
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, if necessary. (See
Financial Statements and Supplementary Data, Note 10 and 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
During 1997, the Company and Conam, the acquirer of the UTG assets, entered into
two non-exclusive marketing agreements to help market and commercialize OSA in
the area of franchising, and in the refinery industry. Throughout 1997, the
companies worked together with the goal of entering into an exclusive long-term
arrangement to distribute and market OSA on an exclusive basis in North America.
On December 31, 1997, both agreements expired, however, Conam continues to
operate one pilot OSA franchise location and discussions are continuing on a
limited basis.
<PAGE>
ITEM 1. BUSINESS (continued)
Currently, the Company continues to seek strategic business partners both
domestically and internationally in synergistic industries who possess
established infrastructure and resources to help improve and accelerate OSA
commercialization.
Restructuring of TSI Operations
As a result of the sale of UTG and favorable initial interest in OSA by several
Detroit OEMs in fiscal 1996 the Company incurred a $725,000 restructuring
charge, relocated TSIs office and certain personnel from Atlanta to Troy and
made several management changes. In 1997, the intended impact of these changes
which was to increase OSA revenues thus helping to improve consolidated
operating results, did not materialize. Consequently, during fiscal 1997, the
Company initiated another Company-wide restructuring.
In a series of moves, the Company hired a new Chief Executive Officer ("CEO"),
closed its New York City investor relations office, consolidated its Farmington
Hills, Michigan TSI operations into its Troy, Michigan TSA facility and reduced
overall Company-wide personnel by approximately one-third. This restructuring
resulted in a one-time charge to 1997 earnings of approximately $416,000; and
reduced Company expenses on an annualized basis by approximately $2,000,000.
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' 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.
<PAGE>
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 17 - Sale of EFECS to
Adrenaline, Inc.) . During Fiscal 1997, the Company had received a total of
$50,000 in royalty payments.
Significant Customer Information
During 1997, approximately 97% 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 3 Discontinued Operations.) For significant customer information see Item
8. - Financial Statements and Supplementary Data, Note 16 - 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 its principal administrative and investor relations office
in Palm Beach Gardens, Florida. The Company's automotive subsidiary, TSA, and
TSI, the OSA subsidiary, share a 45,000 square foot facility in Troy, Michigan,
which includes administrative, engineering and assembly operations. TSI also has
a facility in Atlanta, Georgia. The Company employs approximately 60 full-time
and two part-time people.
<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
TSA and TSI Troy, Michigan June 2000
TSI Atlanta, Georgia September 2001
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
NONE
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, 1997.
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".
<TABLE>
<S> <C> <C>
Fiscal 1997 Fiscal 1996
----------- ------------
High Low High Low
First Quarter (December 31) 5-5/16 2-3/16 8-7/8 6-3/8
Second Quarter (March 31) 3-5/16 1-3/4 7-3/8 5
Third Quarter (June 30) 2-7/8 1-3/16 8-3/16 5-5/16
Fourth Quarter (September 30) 2-1/4 1-1/8 7-1/16 3-3/8
</TABLE>
Holders
As of January 6, 1998, there were approximately 1,263 holders of record of the
Company's common stock.
Dividend Policy
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon the earnings, capital requirements and operating and financial
condition of the Company, 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 plan to repurchase up to 400,000 shares of its common stock. From
November 12, 1996 through April 22, 1997, the Company had repurchased 378,700
shares at an average purchase price of $3.21 per share. All shares of common
stock purchased through the period ended September 30, 1997 are included in
treasury stock in the accompanying balance sheet. The Company anticipates no
further stock repurchases for the immediate future.
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, 1997, 1996, 1995, 1994 and 1993. 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.
<PAGE>
<TABLE>
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance Sheet Data 1997 1996 1995 1994 1993
Total Assets $ 11,355,030 $ 16,012,716 $ 19,109,250 $ 17,855,313 $ 10,632,917
Long-term Debt 3,020,000 3,020,000 2,060,000 --- 458,368
Total Liabilities 6,870,577 7,095,991 4,704,152 2,351,143 2,784,104
Stockholders' Equity 4,484,453 8,916,725 14,405,098 15,504,170 7,848,813
Statement of Operations Data
Net Sales $16,984,123 $16,146,524 $ 13,907,354 $ 9,259,581 $ 2,536,340
Income (Loss) from Continuing
Operations (3,304,057) (4,831,786) (2,820,492) 1,840,366 (3,671,212)
Net Income (Loss) (3,235,316) (6,698,787) (3,399,796) 2,014,577 (3,610,226)
Income (loss) per Common Share
from Continuing Operations (0.12) (0.17) (0.10) 0.06 (0.18)
Net Income ( Loss) per Weighted
Average Common Share (0.12) (0.24) (0.12) 0.07 (0.18)
</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.
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 3. Discontinued Operations. Therefore, the operations
of UTG for 1996 and 1995 are excluded from the analysis below.
1997 Compared to 1996
Total revenue for the year ended September 30, 1997 was $16,984,123 compared to
$16,146,524 for the year ended September 30, 1996, an increase of 5.2%. This
nominal increase is attributable to an increase in revenues at TSA to
$16,580,270 in fiscal 1997 compared to $16,102,523 in fiscal 1996; and an
increase in revenues at TSI to $403,853 in fiscal 1997 compared to $44,001 for
fiscal 1996. The increase in revenue at TSA is attributable to increased
production line sales of OHSS. The increase in service revenue at TSI is
attributable to the outright sale of two OSA units for $294,700; and due to an
increase in operating lease revenue from the lease of OSA units.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The gross profit margin of 33.4% for the year ended September 30, 1997 was
comparable to a gross profit margin of 33.3% for the year ended September 30,
1996. This slight increase is attributable to a decrease in product sale margins
of OHSS at TSA from 33.2% in 1996 compared to 32.4% in 1997, partially offset by
service revenue margins of 73.5% on revenues of $403,853 in 1997 compared to
nominal sales in 1996.
General and administrative expenses decreased $447,770 for the year ended
September 30, 1997 compared to the year ended September 30, 1996. This decrease
is attributable to personnel reductions at the Corporate office during the year
and due to the Company-wide restructuring which occurred during the fourth
quarter of fiscal 1997.
Selling and marketing increased 40.1% for the year ended September 30, 1997
compared to the year ended September 30, 1996. The increase was primarily
attributable to the continued marketing and promotional activities in support of
the OSA.
Depreciation and amortization increased 19.3% for the year ended September 30,
1997 compared to the year ended September 30, 1996. The increase is primarily
attributable to purchases of $1,442,265 in capital assets which primarily
related to $1,055,572 in capital expenditures for the OSA. Depreciation and
amortization of $319,324 was allocated to cost of sales as it directly related
to the products and services sold during the year ended September 30, 1997
compared to $307,373 for the year ended September 30, 1996.
The restructuring expense of $415,830 for the period ended September 30, 1997 is
related to the Company-wide restructuring which took place in the forth quarter
of fiscal 1997. (See Item 8 - Financial Statements and Supplementary Data, Note
20.Restructuring)
Interest expense increased 26.7% to $350,281 for the year ended September 30,
1997 compared to $276,566 for the year ended September 30, 1996. This increase
is attributable to new borrowings in the fourth quarter under the Company's new
credit lines (See Item 8 - Financial Statements and Supplementary Data Note 10.
Debt, and "Liquidity and Capital Resources"). The increase in interest expense
was partially offset by an increase of interest income in the fourth fiscal
quarter of 1997 compared to previous quarters in 1997, due to required minimum
borrowing under the terms of the Company's new credit lines.
Other income for the year ended September 30, 1997 was $7,345 compared to other
expense of $68,099 for the year ended September 30, 1996. The increase is
primarily attributable to the inclusion in 1997 of one full year of EFECS
royalty income compared to a partial year of EFECS income in the prior year.
The pre-tax loss from operations for the period ended September 30, 1997 before
the restructuring charge was $2,182,630 compared to a pre-tax loss of $2,331,219
before the restructuring charge and loss from discontinued operations for the
period ended September 30, 1996. The losses in both periods are primarily
attributable to losses at the TSI subsidiary to develop the OSA product and
corporate expenses offset by profits generated by TSA.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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.
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.
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. In addition, tax expense increased $933,300 primarily due to a
reversal of the Company's tax asset.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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.
Liquidity and Capital Resources
Net cash flows used in operations during the current fiscal year totaled
($1,794,090). The usage of cash is primarily attributable to a net operating
loss excluding depreciation and amortization, of $1,804,521, a decrease in
accounts payable and accrued liabilities of $1,855,125, offset by a decease in
accounts receivable of $1,845,369. The decrease in accounts receivable is
primarily attributable to the loss of the patented Overhead Mounted speaker
system, OHSS, sales for the Jeep Cherokee contract which ended June 30, 1997.
Also, at September 30, 1996, there was a $575,118 receivable which related ot
the Company's oil analysis subsidiary, United Testing group, Inc., whose assets
and liabilities were sold on October 30, 1996.
Net cash provided by investing activities was $2,445,255. This source of cash
was attributable to the sale of net assets of TSOA, formerly UTG, of $3,540,579
and $361,056 related to the reimbursement of tooling costs offset by $1,442,265
expended for capital assets and $14,115 for patent costs.
Net cash provided by financing activities was $799,385 which included the
exercise of stock options and warrants (exercise prices ranged from $.5625-
$1.786) that generated approximately $20,613 in net proceeds. Also, the Company
borrowed $1,966,341 from its new Credit Facility with NationsCredit Commercial
Corporation. (See Note 10. Debt) which was offset by the repurchase of 378,700
shares of the Company's common stock at an average price of $3.21 per share for
a total of $1,217,569.
On July 1, 1997, the Company entered into a three-year $5,000,000 asset-based
financing agreement ("Credit Facility") with NationsCredit Commercial
Corporation ("Nations"). This Credit Facility replaced the Company's former
$3,750,000 facility. The new Credit Facility, which is secured by substantially
all of the assets of the Company enables the Company to borrow up to $5,000,000
based upon certain percentages of accounts receivable and inventory balances.
The Credit Facility allows for borrowing of up to 85% of accounts receivable and
50% of inventory for both TSA and TSI. The overall sub-limit of borrowing
against inventory is $1,500,000. The interest rate on this Credit Facility is
1-1/2% over the prime rate and is payable monthly with a required minimum
borrowing level of $2,500,000 for the fee calculation purposes. The Company's
effective interest rate at September 30, 1997 factoring the interest earned on
used drawn funds was 5.44%. As of September 30, 1997 and December 18, 1997, the
entire available borrowings on this Credit Facility of $1,996,341 and $1,911,771
were outstanding, respectively.
The Credit Facility calls for certain financial covenants that, if not met,
would cause a default under the Agreement and increase the interest rate by 2%
over current levels. As of September 30, 1997, the covenant requiring the
Company's fiscal year pre-tax operating loss, not to exceed certain levels, as
defined in the Agreement has not been met by the Company. Nations has agreed to
waive this covenant which is measured on an annual basis. As a result, in
January 1998 the Company paid a one-time fee to Nations of $25,000 to maintain
the current rate of prime plus 1-1/2% and avoid the 2% interest rate increase.
On June 9, 1995, the Company entered into an agreement with advisory clients of
Ganz Capital Management, Inc., now Mellon Private Asset Management (Mellon),
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 (The 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 Companys 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. The
Notes are subject to an Indebtedness to Equity ratio that cannot exceed 1.5 to
1.0. As of September 30, 1997, the Company was in compliance with the ratio.
However, due to the Companys historic losses and due to the uncertainty on the
timing of OSA revenues, there is a possibility that the Company will exceed this
ratio during fiscal 1998. In the event the ratio is not met and the Company is
unable to receive a waiver from Mellon, a Board member of the Company has agreed
to guarantee sufficient capital infusion into the Company to maintain compliance
of this ratio through October 1, 1998 or refinance the notes to the satisfaction
of Mellon. In consideration for this guarantee, the Company issued 50,000
warrants at a strike price of $2.00 per share to this Board member.
As of January 1, 1998, the Company had approximately $1,750,000 of cash on hand.
Based on this cash balance, the Credit line and its ability to further reduce
expenses, if required, the Company believes it has sufficient cash flow and
liquidity to fund its current operations and anticipated increasing OSA
commercialization.
The Company has recently completed the restructuring of top management of
corporate and the oil analysis service segment. (See Item 8 - Financial
Statements and Supplementary Data, Note 20. Restructuring.) New management has
devised a strategy to concentrate marketing activities to sell or lease OSAs to
seven specific markets. Additionally, the Company has continued to have
discussions with potential strategic partners who are interested in licensing
the OSA technology for specific industry applications both domestically and
internationally.
The Company believes that their marketing efforts will be successful. However,
if the Company is unable to meet goals or to have the necessary resources to
sustain their marketing activities it could have a material adverse effect on
the financial condition of the Company. The Company will continue to evaluate
the success of the new marketing efforts.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Forward-Looking Statements
The statements discussed above under the Business Section, Liquidity and Capital
Resources relating to the Company's expectations that it anticipates (1)
generating OSA revenue from OSA units at current test sites and from other
sources, (2) entering into strategic relationships, (3) obtaining significant
dealer installed and aftermarket OHSS programs, (4) future production line TSA
orders, (5) development of a production line ready OSA unit at Exxon or at other
refineries, (6) receipt of patent protection by TSA on new concepts submitted,
(7) the development by TSA of new sound and OHSS compatible with a larger
population of vehicles than currently being produced for, (8) the increase in
the usage of oil analysis as a preventative maintenance and process control
technology, and (9) entering into an agreement to license the ARCS technology
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) a decline in 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, and (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.
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 February 1997, the Financial Accounting Standards Board ("FASB")" issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". SFAS No. 128 supersedes the previous standard (Accounting Principles
Board Opinion No. 15), modifies the methodology for calculating earnings per
share, and is effective for periods ending after December 15, 1997; early
adoption is not permitted. Upon adoption, the Company will be required to
restate previously reported per share data to conform with the requirements of
SFAS No. 128. Had the provisions of SFAS No. 128 been applicable to the
accompanying condensed consolidated financial statements, basic and diluted
earnings per share, as calculated in accordance with the provisions of SFAS No.
128, would not have been different from the per share amounts reported herein
for all periods presented.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX Page
Report of Independent Certified Public Accountants........................18
Consolidated Balance Sheets as of September 30, 1997 and 1996.............19
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995.......................................20
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995.......................................21
Consolidated Statements of Cash Flows for the Years Ended September
30, 1997, 1996 and 1995.................................................22
Notes to Consolidated Financial Statements............................... 23
<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, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 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,
January 9 , 1998
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A NO. 3
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1997 1996
------------------ -----------------
Current Assets:
Cash and cash equivalents $ 2,103,679 $ 653,129
Accounts receivable trade (net of allowance of $83,650
in 1996) 2,255,303 4,100,672
Inventories 881,023 511,958
Advances to officers 57,919 -
Prepaid expenses 219,446 325,946
Other 155,448 111,685
------------------ -----------------
Total current assets 5,672,818 5,703,390
Property and equipment, net 2,147,403 2,503,033
Manufacturing and distribution rights and patents, net 284,562 333,762
Capitalized database, net 2,284,027 2,494,860
Deferred income tax assets, net - 355,000
Note receivable from officer 76,002 -
Other assets, net 890,218 784,203
Net assets from discontinued operations - 3,838,468
================== =================
TOTAL ASSETS $ 11,355,030 $ 16,012,716
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,996,341 $ -
Accounts payable 672,836 1,836,395
Accrued salaries 7,494 229,939
Accrued liabilities 1,050,978 1,520,099
Net liabilities from discontinued operations 122,928 489,558
------------------ -----------------
Total current liabilities 3,850,577 4,075,991
Senior subordinated convertible notes 3,020,000 3,020,000
------------------ -----------------
Total liabilities 6,870,577 7,095,991
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; none outstanding - -
Common stock-$.001 par value, 50,000,000 shares
authorized; 28,461,477 and 28,446,477 shares issued and
outstanding in 1997 and 1996, respectively 28,461 28,446
Additional paid-in capital 28,744,451 28,723,853
Accumulated deficit (22,939,105) (19,703,789)
Treasury stock-at cost; 466,234 and 87,534 shares in 1997
and 1996, respectively (1,349,354) (131,785)
------------------ -----------------
Total stockholders' equity 4,484,453 8,916,725
------------------ -----------------
================== =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,355,030 $ 16,012,716
================== =================
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
19
</TABLE>
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A NO. 3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<S> <C> <C> <C>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Product sales $16,580,270 $16,102,523 $13,893,459
Service revenue 403,853 44,001 13,895
-----------------------------------------------------
Net sales 16,984,123 16,146,524 13,907,354
-----------------------------------------------------
Cost of product sales 11,197,664 10,749,431 8,739,691
Cost of services 107,044 26,772 -
-----------------------------------------------------
Cost of sales 11,304,708 10,776,203 8,739,691
-----------------------------------------------------
Gross profit 5,679,415 5,370,321 5,167,663
-----------------------------------------------------
Expenses:
General and administrative 5,303,963 5,751,733 6,030,533
Selling and marketing 1,385,891 989,450 657,220
Depreciation and amortization 1,111,471 931,563 770,286
Restructuring expense 415,830 725,000 -
Research and development 60,720 28,794 76,151
-----------------------------------------------------
Total expenses 8,277,875 8,426,540 7,534,190
-----------------------------------------------------
Loss from operations (2,598,460) (3,056,219) (2,366,527)
Other income (expense):
Interest income 119,339 112,398 62,845
Interest expense (350,281) (276,566) (60,300)
Other income (expense), net 7,345 (68,099) 153,490
-----------------------------------------------------
Net other income (expense) (223,597) (232,267) 156,035
-----------------------------------------------------
Loss before income taxes (2,822,057) (3,288,486) (2,210,492)
Income tax expense (482,000) (1,543,300) (610,000)
-----------------------------------------------------
Loss from continuing operations (3,304,057) (4,831,786) (2,820,492)
-----------------------------------------------------
Discontinued operations:
Income (loss) from discontinued operations 68,741 (62,210) (579,304)
Loss on disposal of discontinued operations - (1,804,791) -
-----------------------------------------------------
Net loss ($3,235,316) ($6,698,787) ($3,399,796)
-----------------------------------------------------
Loss per weighted average common share
outstanding:
Continuing operations (0.12) (0.17) (0.10)
Discontinued operations:
Loss from operations - - (0.02)
Loss on disposal - (0.07) -
=====================================================
Total (0.12) (0.24) (0.12)
=====================================================
Weighted average common shares outstanding 28,065,563 28,027,959 27,249,541
=====================================================
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/A NO. 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<S> <C> <C> <C> <C> <C> <C>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
--------------------------------------------------------------------------------
----------------
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 ($1.00 per share) 40,000 40 39,960 - - 40,000
Net loss - - (6,698,787) - (6,698,787)
--------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 28,446,477 28,446 28,723,853 (19,703,789) (131,785) 8,916,725
Exercise of stock options ($.5625 to
$1.78 per share) 15,000 15 20,598 - - 20,613
Treasury stock purchases - - - - (1,217,569) (1,217,569)
Net loss - - - (3,235,316) - (3,235,316)
================================================================================
BALANCE, SEPTEMBER 30, 1997 28,461,477 $ 28,461 $ 28,744,451 $ (22,939,105) $(22,939,105) $ 4,484,453
================================================================================
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
21
</TABLE>
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K/A NO. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
-----------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (3,235,316) $ (6,698,787) $ (3,399,796)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss (income) from discontinued operations (68,741) 1,867,001 579,304
Depreciation 1,152,627 963,302 631,578
Amortization 278,168 275,634 268,946
Disposal of equipment 284,212 151,411 64,735
Deferred income taxes - (970,000) (75,000)
Decrease in deferred income tax assets, net 355,000 2,335,000 625,000
Provision for doubtful accounts - - (4,297)
Advances/notes to officers (133,921) - (45,000)
Repayment from officer - - 85,000
Decrease (increase) in accounts receivable, net 1,845,369 (610,881) (121,934)
Increase in inventories (369,065) (43,789) (111,671)
Decrease (increase) in prepaid expenses 106,500 (25,397) 7,056
Decrease (increase) in other assets (153,798) (8,561) 100,422
Increase (decrease) in accounts payable (1,163,559) 556,634 (325,561)
Increase (decrease) in accrued salaries (222,445) (88,682) 199,138
Increase (decrease) in accrued liabilities (469,121) 838,138 143,665
-----------------------------------------------------
Net cash used in operating activities (1,794,090) (1,458,977) (1,378,415)
-----------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,442,265) (1,857,004) (1,682,018)
Reimbursement of tooling costs 361,056 465,222 -
Increase in other assets - - (650,000)
Additions to patent costs, net (14,115) (42,510) (77,650)
Discontinued operations - change in net assets 3,540,579 221,847 (759,824)
-----------------------------------------------------
Net cash provided by (used in) investing activities 2,445,255 (1,212,445) (3,169,492)
-----------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 20,613 1,210,414 2,300,724
Repurchases of treasury stock (1,217,569) - -
Proceeds from borrowings 1,996,341 960,000 4,460,000
Repayments of borrowings - - (2,488,042)
-----------------------------------------------------
Net cash provided by financing activities 799,385 2,170,414 4,272,682
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,450,550 (501,008) (275,225)
Cash and cash equivalents at beginning of period 653,129 1,154,137 1,429,362
=====================================================
Cash and cash equivalents at end of period $2,103,679 $653,129 $1,154,137
=====================================================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
22
</TABLE>
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 three
wholly-owned subsidiaries: Top Source Automotive, Inc. ("TSA"), Top Source
Instruments, Inc. ("TSI"), and ARCS Safety Seat, Inc. ("ARCS, Inc."). United
Testing Group, Inc., ("UTG") was discontinued effective September 30, 1996 and
is currently inactive.
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 ("OSA") (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.
Revenue is currently derived primarily from sales of the OHSS for both
production line and dealership installed units and from TSI sales and leases of
the OSA.
Basis of Presentation - Certain 1996 and 1995 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) and sales of OSA units at the time the products
are shipped. Revenue from leased OSA units are recognized ratably over the lease
term. 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.
Fair value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable, accrued liability and debt
approximates fair value.
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.
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 . 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 were sold during the year. Accordingly, costs in excess
of fair value (goodwill) in the Company's consolidated financial statements have
been included in net assets from discontinued operations at September 30, 1996.
The capitalized database is being amortized over 15 years using the
straight-line method (see Note 8.). Subsequent to its acquisitions, the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
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 consolidated 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 February 1997, the Financial Accounting Standards Board ("FASB")" issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". SFAS No. 128 supersedes the previous standard (Accounting Principles
Board Opinion No. 15), modifies the methodology for calculating earnings per
share, and is effective for periods ending after December 15, 1997; early
adoption is not permitted. Upon adoption, the Company will be required to
restate previously reported per share data to conform with the requirements of
SFAS No. 128. Had the provisions of SFAS No. 128 been applicable to the
accompanying condensed consolidated financial statements, basic and diluted
earnings per share, as calculated in accordance with the provisions of SFAS No.
128, would not have been different from the per share amounts reported herein
for all periods presented.
Quarterly Information - The Company recorded an additional valuation allowance
to reduce the deferred tax assets in the amounts of $355,000, $1,365,000 and
$550,000 during the fourth quarters of the fiscal years ended September 30,
1997, 1996 and 1995, respectively. (See Note 13.)
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation plans using a fair value based method. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value based method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the corporation's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
2. OIL ANALYSIS SERVICE SEGMENT
During 1997, revenues of the oil analysis service segment were approximately
$400,000. As of September 30, 1997, identifiable assets relating to this segment
are approximately as follows:
Capitalized database, net $2,284,000
Property and equipment, net 1,584,000
Long-term deposit 650,000
Inventories 116,000
Other assets 149,000
-------
$4,783,000
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
2. OIL ANALYSIS SERVICE SEGMENT, (continued)
The Company has recently completed the restructuring of top management of
corporate and the oil analysis service segment. (See Note 20.) New management
has devised a strategy to concentrate marketing activities to sell or lease OSAs
to seven specific markets. Additionally, the Company has continued to have
discussions with potential strategic partners who are interested in licensing
the OSA technology for specific industry applications both domestically and
internationally.
The Company believes that their marketing efforts will be successful. However,
if the Company is unable to meet goals or to have the necessary resources to
sustain their marketing activities it could have a material adverse effect on
the Company's business, the carrying value of the above listed assets, as well
as the financial condition of the Company. The Company will continue to evaluate
the success of the new marketing efforts as well as the carrying value of the
related assets.
3. 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 and 1995 are
included in the consolidated statement of operations under "discontinued
operations." Revenues from such operations for the years ended September 30,
1996 and 1995 were $4,549,944 and $5,061,452, 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>
1996
Supplies inventory $ 91,422
Property, plant and equipment, net 812,197
Deposits 27,639
Trademarks and patents 5,692
Intangibles 4,642,604
---------
Total assets 5,579,554
Deferred service revenue 608,619
Long-term capital lease 56,404
Total liabilities 665,023
Net assets disposed of 4,914,531
Less allowance for discontinued
operations (1,565,621)
Net assets from discontinued
operations
$ 3,348,910
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
4. STATEMENTS OF CASH FLOWS
There were no significant non-cash investing or financing activities for the
years ended September 30, 1997, 1996 and 1995.
5. INVENTORIES
Inventories consisted of the following at September 30, 1997 and 1996:
1997 1996
----- ----
Raw materials $820,821 $398,248
Finished goods 60,202 113,710
------- --------
$881,023 $511,958
======= ========
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1997 and
1996:
<TABLE>
<S> <C> <C> <C>
Useful 1997 1996
---- ----
Life (Years)
Equipment 2-12 $ 296,028 $ 287,074
Computer equipment 3-4 1,141,000 1,021,937
On-Site Analyzers 4-5 2,184,464 1,613,014
Tooling 2 305,273 891,540
Furniture and fixtures 3-5 309,694 296,271
Vehicles and delivery equipment 3 131,124 119,103
Leasehold improvements 2-5 155,924 134,049
--------- ----------
4,523,507 4,362,988
Less: accumulated depreciation (2,376,104) (1,859,955)
--------- ----------
$2,147,403 $2,503,033
========= ==========
</TABLE>
Depreciation of tooling and production equipment incurred in manufacturing OHSS
in the amount of $319,324 and $307,373 for the years ended September 30, 1997
and 1996, respectively, has been allocated to cost of sales as it directly
relates to the products sold. Amounts relating to UTG for 1996 have been
excluded from the total above and are included in net assets from discontinued
operations (see Note 3.)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS
Manufacturing and distribution rights and patents consisted of the following at
September 30, 1997 and 1996:
<TABLE>
<S> <C> <C> <C>
Useful
Life (Years) 1997 1996
------------ ---- ----
Manufacturing rights 13 $ 58,438 $58,438
Distribution rights 13 437,501 437,501
Patents 10 258,209 244,094
------- -------
754,148 740,033
Less: accumulated amortization (469,586) (406,271)
-------- --------
$284,562 $ 333,762
======= =========
</TABLE>
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 $17,707 at September 30, 1997.
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 $85,518 at September
30, 1997. 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 $53,789 at
September 30, 1997.
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 $57,698 at September 30, 1997.
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 and minimal expenses were incurred
in fiscal years 1997, 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 $69,850.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
8. CAPITALIZED DATABASE
Capitalized database onsisted of the following at September 30, 1997 and 1996:
Useful
Life
(Years) 1997 1996
--------- ---- ----
Capitalized database 15 $3,162,500 $3,162,500
Less: accumulated amortization (878,473) (667,640)
-------- ---------
$2,284,027 $2,494,860
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,
1997, TSI has generated $403,853 in revenue.
9. OTHER ASSETS
Included in other assets at September 30, 1997 and 1996 is a $650,000
deposit which was made to the manufacturer of the OSA units.
10. DEBT
Notes payable at September 30, 1997 and 1996
are as follows:
Senior Subordinated convertible notes,
due June 2000, bearinginterest at 9% 1997 1996
----- ----
$3,020,000 $3,020,000
========= ==========
On June 9, 1995, the Company entered into an agreement with advisory clients of
Ganz Capital Management, Inc., now Mellon Private Asset Management (Mellon),
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 (The 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 Companys 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. The
Notes are subject to an Indebtedness to Equity ratio that cannot exceed 1.5 to
1.0. As of September 30, 1997, the Company was in compliance with the ratio.
However, due to the Companys historic losses and due to the uncertainty on the
timing of OSA revenues, there is a possibility that the Company will exceed this
ratio during fiscal 1998. In the event the ratio is not met and the Company is
unable to receive a waiver from Mellon, a Board member of the Company has agreed
to guarantee sufficient capital infusion into the Company to maintain compliance
of this ratio through October 1, 1998 or refinance the notes to the satisfaction
of Mellon. In consideration for this guarantee, the Company issued 50,000
warrants at a strike price of $2.00 per share to this Board member.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
10. DEBT (continued)
Prior to July 1, 1997, the Company had a $3,750,000 credit facility with First
Union Bank of Florida, ("First Union"), no amounts were outstanding on this
facility. On July 1, 1997, the Company entered into a three-year $5,000,000
asset-based financing agreement ("Credit Facility") with NationsCredit
Commercial Corporation ("Nations"). This Credit Facility replaced the facility
with First Union which was canceled by the Company as a condition of the new
Credit Facility. The Credit Facility, which is secured by substantially all of
the assets of the Company enables it to borrow up to $5,000,000 based upon
certain percentages of accounts receivable and inventory balances. The Credit
Facility allows for borrowing of up to 85% of accounts receivable and 50% of
inventory for both TSA and TSI. The overall sublimit of borrowing against
inventory is $1,500,000. The interest rate on this Credit Facility is 1-1/2%
over the prime rate and is payable monthly with a required minimum borrowing
level of $2,500,000 for fee calculation purposes. The Company's effective
interest rate at September 30, 1997 factoring the interest earned on unused
drawn funds was 5.44%. The initial maturity date is June 2000, but this date may
be automatically extended for successive additional terms of three years each
unless either party chooses to terminate. As of September 30, 1997, the entire
available borrowings of $1,996,341 was outstanding on this Credit Facility.
As part of the credit facility, Nations was granted outside of the stock option
plans options to purchase 25,000 shares of the Company's common stock at a price
of $1.50 equal to 105% of the fair market value of the Company's common stock at
the date of the closing of the Credit Facility. The options vest 100% after year
three and may convert to stock appreciation rights after year three upon the
occurrence of an adverse event as defined in the Agreement. (See Note 15. Stock
and Stock Option Plans.) The expense associated with the fair market value of
the issuance of these options is not material.
The credit facility calls for certain financial covenants that if not met would
cause a default under the Agreement and increase the interest rate by 2%. As of
September 30, 1997, the Company failed to meet the annual financial covenant
relating to the amount of pre-tax operating loss for fiscal 1997, and has
received a waiver from Nations for fiscal 1997. The Company paid a one-time fee
to Nations of $25,000 to maintain the current rate of prime plus 1-1/2% and
avoid the 2% increase.
Cash paid for interest on all debt for the years ended September 30, 1997,
1996 and 1995 was $350,281, $276,566 and $60,300, respectively.
11. 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:
1998 $386,322
1999 283,075
2000 192,702
2001 37,771
2002 -
Thereafter -
Total rental expense for continuing operations amounted to $492,011,
$479,135 and $321,293 for the years ended September 30, 1997, 1996, and 1995,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES (continued)
The Company has commitments under certain employment agreements entered into
with individuals in management positions. The base salary payments due under
these agreements aggregate $800,000 and are payable during fiscal 1998. One
executive is eligible to receive an incentive payment of one-half of his 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 14 for incentive
compensation based on revenue.)
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 1997, 1996 and
1995 was $41,637, $55,521 and $57,384, respectively.
In September, 1997, the Company entered into a commitment under a sales
representative agreement with a company to act as a non-exclusive sales and
marketing representative for the OSA. For its services to be performed under
this agreement, TSI shall pay a commission of 6% of net sales from all OSA sales
and leases derived by this company. Also, the Company granted outside of the
stock option plan, options to purchase 200,000 shares of the Company's common
stock. This Agreement expired on December 23, 1997 and was not extended;
accordingly, these options granted were canceled subsequent to September 30,
1997.
Subsequent to September 30, 1997, the Company entered into a sales and marketing
agreement with a company in which this company would act as the exclusive sales
and marketing representative for the OSA in Asia and the Pacific Rim. TSI will
pay this company a sales commission of 10% of net sales from all OSA sales and
leases derived from OSAs used within Asia and the Pacific Rim. In addition, the
Company has granted outside of the stock option plan, options to purchase
150,000 of the Company's common stock. The vesting of these options is dependent
upon future OSA sales.
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.
12. NET INCOME (LOSS) PER SHARE
The Company utilizes the treasury stock method for computing net income (loss)
per 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 15.) have been
excluded from the net loss per share calculation for fiscal 1997, 1996 and 1995
since their inclusion would have been anti-dilutive.
13. INCOME TAXES
The income tax expense for the years ended September 30, 1997, 1996 and 1995
of $482,000, $1,543,300 and $610,000 consist of the reversal of previously
recorded deferred tax assets and state income taxes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
13. INCOME TAXES (continued)
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, 1997 will not be realized before the expiration of the underlying
net operating loss carry forwards which will begin expiring in 2001.
Accordingly, a full valuation allowance has been recorded on the potential tax
benefit generated from the operating loss carry forwards.
At September 30, 1997, the Company has net tax basis Federal operating loss
carryforwards of approximately $30,800,000, which may be used to offset future
taxable income, if any. The Company's net operating loss carryforwards expire
between 2001 and 2012.
Cash paid for state income taxes for the years ended September 30, 1997,
1996 and 1995 was approximately $124,000, $140,000 and $45,000, respectively.
14. RELATED PARTY TRANSACTIONS
In May 1997, the Company entered into an employment agreement ("Agreement") with
the new President and Chief Executive Officer (CEO) of the Company. The term of
this Agreement is three years through May 21, 2000 ("Employment Period"). The
Agreement provides for a base salary of $300,000 ("Annual Base Salary"). The
President/CEO shall also be eligible to receive a cash bonus ("Performance
Bonus") as described below for each successive period of four fiscal quarters
(prorated for any partial period) during the Employment Period, as defined in
the Agreement, in an amount of between zero and 100% of the Annual Base Salary.
The Performance Bonus, if any, for each successive four-quarter period shall be
paid within 60 days after the end of such period. The Performance Bonus shall
consist of the following two components: (A) the first component of the
Performance Bonus shall be an amount of between zero and 50% of the Annual Base
Salary based on the Company meeting earnings per share targets of between $.01
and $.05 as defined in the Agreement.
(B) The second component of the Performance Bonus shall be an amount of
between zero and 50% of the Annual Base Salary based on the Company achieving
approximately five performanced based targets for each period of four fiscal
quarters during the Employment Period. As of September 30, 1997, no bonuses were
paid. In June, 1997, the Company was authorized by the Board of Directors to
lend the President/CEO up to $30,000 evidenced by a three- year promissory note
payable to the Company bearing interest of 9% . At September 30, 1997, the note
payable balance with interest was $30,685. The accrued interest was paid in
October, 1997.
The Earnings Per Share targets and five performanced based targets for each
succeeding four quarter period during the Employment Period shall be reset and
established annually by the Compensation Committee in its sole and absolute
discretion. The Compensation Committee shall notify the President/CEO promptly
in writing upon its determination of such subsequent targets.
In addition to the payments provided above, on May 21, 1997, the Compensation
Committee granted to the President/CEO, outside of the stock option plan as
described in Note 15. Stock and Stock Option Plans, options to purchase 500,000
shares of the Company's Common Stock, with the purchase price upon exercise of
such options equal to $2.00 per share (i.e., the closing price of the Common
Stock on the American Stock Exchange on the date of such grant). The options
shall vest as follows: (a) 100,000 options will become exercisable on the first
anniversary of the date of this Agreement; (b) 100,000 options will become
exercisable on the second anniversary of the date of this Agreement; (c) 100,000
options will become exercisable on the third anniversary of the date of this
Agreement; (d) 100,000 options will become exercisable when the closing price
for the Company's common stock on the American Stock Exchange (or such other
exchange or trading system that constitutes the primary trading market for the
Company's common stock) is $7.00 per share or higher for 30 consecutive days;
and (e) 100,000 options will become exercisable when the closing price for the
Company's common stock on the American Stock Exchange (or such other
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS (Continued)
exchange or trading system that constitutes the primary trading market for the
Company's common stock) is $9.00 per share or higher for 30 consecutive trading
days; provided, however, that the vesting of such options shall be accelerated
in the event of a change in control. Such options shall be non-qualified stock
options to fullest extent permitted by applicable law and the Stock Option Plan.
In Fiscal 1993, the Former President and Chief Executive Officer (Former CEO)
and the current Chairman of the Board of Directors of the Company entered into
an employment agreement. The term of this employment agreement was five years
through August 18, 1998. (The Employment Agreement was extended until June 1,
1999 due to a breach in the terms of his original employment agreement, see
below.) 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
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 cash compensation expense for fiscal 1997, 1996 and
1995 was $178,406, $206,965, and $189,688, respectively. In the event of
termination without cause or if the Chairman 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 Chairman will also
continue to receive medical, life and disability insurance coverage during the
36 month term. As a result of the hiring of a new CEO, a breach in the terms of
the original agreement occurred, thus, the Former CEO could have requested that
the "Good Reason" clause of his contract be triggered effective July 1, 1997.
This clause has been waived by the Former CEO with the approval of the Board of
Directors as it was determined to be in the best interests of the Company to
retain the Former CEO for a minimum period of one year. This waiver is effective
until July 1, 1998 or earlier, if elected by the Former CEO at which time the
original terms of the termination agreement will remain in effect with the
exception of the incentive payments which will be calculated based on the
previous sales for the period from July 1, 1996 through July 1, 1997. The
Chairman also has a $75,000 promissory note dated June 1, 1997, with interest
payable on the last day of each calendar quarter commencing September 30, 1997,
with an interest rate of 9%. The principal and all accrued interest shall be due
and payable on August 6, 2001. This promissory note is secured by a collateral
assignment of $75,000 of the proceeds of a term life insurance policy and by
current and future employment agreement payments. The note receivable balance of
$76,002 which includes accrued interest is disclosed in the accompanying balance
sheet. The accrued interest was paid in October 1997.
15. STOCK AND STOCK OPTION PLANS
The "1990 Stock Plan", as amended, covers 3,300,000 shares of common stock and
is intended to provide: (a) officers and other employees of the Company and its
Related Corporations opportunities to purchase stock in the Company pursuant to
options granted hereunder which qualify as incentive stock options ("ISOs")
under the Internal Revenue Code of 1986, as amended; (b) directors, officers,
employees and consultants of the Company and its Related Corporations
opportunities to purchase stock in the Company pursuant to options granted
hereunder which do not qualify as ISO's ("Non-Qualified Options"); (c)
directors, officers, employees and consultants of the Company and its Related
Corporations awards of stock in the Company ("Awards"); (d) directors, officers,
employees and consultants of the Company and its Related Corporations
opportunities to make direct purchases of stock in the Company ("Purchases");
and (e) directors of the Company and its Related Corporations who are not
employees of the Company or its Related Corporations with Non-Discretionary
Options.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
15. STOCK AND STOCK OPTION PLANS (Continued)
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.
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 1997, 1996 and 1995. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. STOCK AND STOCK OPTION PLANS (Continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
OPTIONS OPTIONS OPTIONS
Outstanding,
beginning of year:
2,681,314 $3.57 3,079,450 $2.85 3,537,562 $2.07
Granted 1,148,257 $2.12 514,572 $6.66 613,750 $6.76
Expiration Dates 11/11/2006-9/25/2007 10/24/2005-6/30/2006 10/25/2004-8/31/2005
Exercised (15,000) $1.37 (715,000) $1.77 (1,015,082) $2.38
Expired or
Canceled (653,991) $5.50 (197,708) $6.78 (56,780) $6.01
--------- --------- --------
Outstanding, end
of year: 3,160,580 $2.66 2,681,314 $3.57 3,079,450 $2.85
========= ========= =========
Exercisable, end
of year: 2,089,163 $2.85 1,969,226 $2.76 2,298,700 $2.18
========= ========= =========
Weighted-average
fair value of
options granted
during the year $1.46 $5.49 N/A
===== ===== ===
Available for
grant, end of 539,561
year:
</TABLE>
Included in the above table are 725,000 options which were granted outside of
the Stock Option Plans during Fiscal 1997 with a weighted average price of
$1.95.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
15. STOCK AND STOCK OPTION PLANS (Continued)
Information about stock options in various price ranges at September 30, 1997
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-Average
Remaining
Contractual Life
Outstanding (Years) Weighted Exercisable Weighted-Average
Range of as of -Average as of Exercise Price
Exercise Prices 09/30/97 Exercise Price 09/30/97
$0.00 - $1.00 552,500 2.9 $0.53 540,000 $0.53
$1.01 - $2.00 1,108,257 8.7 $1.83 187,132 $1.69
$2.01 - $3.00 762,500 6.0 $2.12 717,500 $2.11
$3.01 - $5.00 210,200 5.9 $3.95 210,200 $3.95
$5.01 - $8.00 472,123 7.6 $6.79 379,331 $6.76
$8.01 - $10.00 55,000 7.1 $8.52 55,000 $8.52
---- ------ --- ----- ---- ------ -----
3,160,580 6.7 $2.66 2,089,163 $2.85
========= =========
</TABLE>
The Company has adopted the disclosure only provisions of statements of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for its
Stock Option Plans. Had compensation for the Company's stock-based compensation
plans been determined pursuant to FASB Statement No. 123 the Company's net loss
and loss per share would have increased accordingly. Using the Black-Scholes
option pricing model for all options granted after October 1, 1995, the
Company's pro forma net loss and pro forma net loss per share, with related
assumptions, are as follows:
1997 1996
---- ----
Proforma net loss $(3,619,598) $(6,839,341)
Pro forma net loss per share (.13) (.24)
Expected life (years) 7 7
Risk-Free interest rate 6.51% 6.08%
Expected volatility 81% 81%
Quarterly dividend none none
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
15. STOCK AND STOCK OPTION PLANS (continued)
Because FASB Statement No. 123 method of accounting has not been applied to
options granted prior to October, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
On November 12, 1996, the Company announced that it put into effect a stock
repurchase plan to repurchase up to 400,000 shares of its common stock. From
November 12, 1996 through April 22, 1997, the Company had repurchased 378,700
shares at an average purchase price of $3.21 per share. The Company anticipates
no further stock repurchases for the immediate future, and is restricted from
doing so under the terms of its NationsBank Agreement. (See Note 10. Debt)
16. CONCENTRATION OF CREDIT RISK
In fiscal 1997, the majority of the Company's overall revenue was derived in the
automotive technology segment from one customer, an OEM, which accounted for 97%
of the total business activity. That same customer accounted for 99% and 91% of
net sales in both 1996 and 1995. As of September 30, 1997 the Company's
receivable balance from this OEM customer was approximately $2,174,683. 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
1997, 1996 and 1995 were insignificant.
17. 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, 1997,
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
17. SALE OF ENGINE FUEL ECONOMY EMISSIONS CONTROL REDUCTION SYSTEM TECHNOLOGY
("EFECS") TO ADRENALINE, INC., (continued)
The Company is currently recognizing the monthly royalty payments on a cash
basis until it can readily determine the pre- dictability of payments. During
Fiscal 1997, the Company had received a total of $50,000 in royalty payments.
18. 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 1997, 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, 1997, 1996 and 1995 is as follows:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
18. SEGMENT INFORMATION, (continued)
<TABLE>
<S> <C> <C> <C> <C>
Automotive Oil Analysis Corporate
Technology Service and Other Consolidated
Revenue:
1997 $16,580,270 $ 403,853 $ - $ 16,984,123
1996 $16,102,523 $ 44,001 $ - $ 16,146,524
1995 $13,893,459 $ 13,895 $ - $ 13,907,354
Operating Income
(Loss):
1997 $ 3,091,161 $ (4,203,111) $ (1,486,510) $ (2,598,460)
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)
Depreciation and
Amortization:
1997 $ 76,573 $ 917,820 $ 117,078 $ 1,111,471
1996 $ 94,080 $ 701,510 $ 135,973 $ 931,563
1995 $ 79,085 $ 572,760 $ 118,441 $ 770,286
Identifiable
Assets:
1997 $ 3,679,544 $ 4,783,365 $ 2,892,121 $ 11,355,030
1996 $ 4,952,795 $ 2,555,431 $ 4,666,022 $ 12,174,248
1995 $ 4,336,403 $ 5,397,470 $ 3,573,810 $ 13,307,683
Capital
Expenditures:
1997 $ 357,940 $ 1,055,572 $ 28,753 $ 1,442,265
1996 $ 516,968 $ 1,190,629 $ 149,407 $ 1,857,004
1995 $ 778,804 $ 774,857 $ 128,357 $ 1,682,018
</TABLE>
19. 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. PSI was a privately owned oil analysis laboratory
acquired by the Company in July of 1993 and later merged into UTG.
20. RESTRUCTURING
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. As of
September 30, 1997, all of these restructuring costs have been paid.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
20. RESTRUCTURING , (continued)
During July 1997, the Company undertook and substantially completed another
restructuring. During this time period, the Company closed its New York investor
relations office, consolidated its Top Source Instruments operations in
Farmington Hills, Michigan into its Top Source Automotive facility in Troy,
Michigan and reduced its personnel in July 1997 by approximately one-third from
78 employees to 54 employees. The Company believes that these reductions will
not have an adverse impact on its sales, marketing and administrative
capabilities. This restructuring resulted in a one-time charge to earnings in
the fourth quarter of fiscal 1997 of approximately $416,000 which primarily
consisting of severance of $350,000 and facilities of $66,000. As of January 1,
1998, the remaining liability is approximately $217,000.
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 December 15, 1998, section 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 December 15, 1998, 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 December 15, 1998, section entitled "Voting
Securities and Principal Holders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 14. of the Consolidated Financial Statements
<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/A NO. 3........ 17
(a) (2) Financial Statement Schedules required to be filed.
Schedule II - Valuation and Qualifying Accounts............. 42
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 to 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)
10.2 First Amendment to Employment Agreement of Stuart Landow.....(8)
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)
10.9 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)
10.15 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)
10.21 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)
10.25 NationsCredit Agreement dated July 1, 1997.................(21)
10.26 Amendment to Stuart Landow Employment Agreement............(22)
10.27 Employment Agreement of William C. Willis, Jr..............(22)
10.28 Indemnification Agreement dated July 14, 1997 between
Christer Rosen and Top Source Technologies, Inc...........(22)
27.0 Financial Data Schedule....................................(22)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended
September 30, 1997.
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) Not used.
(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) Not used.
(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) Not used.
(20) Contained in documents filed with the Securities and Exchange
Commission in conjunction with September 30, 1996 Form
10-K/A No. 3.
(21) Contained in documents filed with the Securities and Exchange
Commission in conjunction with the June 30, 1997 Form 10-Q.
(22) Contained in documents filed with the Securities and Exchange
commission in conjunction with September 30, 1997 Form 10-K/A NO.3
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<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,
1997 $ 83,650 $ - $ - $ -
($83,650)
====================================== ---------------- ---------------- ----------------- ----------------- ==================
Year Ended September 30, 1996
$145,703 $ - $ - ($62,053) $ 83,650
- -------------------------------------- ---------------- ---------------- ----------------- ----------------- ==================
Year Ended September 30 1995
$150,000 $159,645 $ - $145,703
($163,942)
- -------------------------------------- ---------------- ---------------- ----------------- ----------------- ==================
</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/A No. 3 to be signed on its behalf by the undersigned, thereunto duly
authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: \s\William C. Willis, Jr.
William C. Willis, Jr
President and Chief Executive Officer
By: \s\David Natan
David Natan
Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
Dated: October 26, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,103,679
<SECURITIES> 0
<RECEIVABLES> 2,255,303
<ALLOWANCES> 0
<INVENTORY> 881,023
<CURRENT-ASSETS> 5,672,818
<PP&E> 2,147,403
<DEPRECIATION> 2,376,104
<TOTAL-ASSETS> 11,355,030
<CURRENT-LIABILITIES> 3,850,577
<BONDS> 0
0
0
<COMMON> 28,461
<OTHER-SE> 4,455,992
<TOTAL-LIABILITY-AND-EQUITY> 11,355,030
<SALES> 16,984,123
<TOTAL-REVENUES> 16,984,123
<CGS> 11,304,708
<TOTAL-COSTS> 11,304,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (350,281)
<INCOME-PRETAX> (2,822,057)
<INCOME-TAX> (482,000)
<INCOME-CONTINUING> (3,304,057)
<DISCONTINUED> 68,741
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,235,316)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.26
Top Source Technologies, Inc.
7108 Fairway Drive
Suite 200
Palm Beach Gardens, FL 33418
Effective as of June 1, 1997
Mr. Stuart Landow
Top Source Technologies, Inc.
450 Park Avenue, Suite 2100
New York, NY 10022-2660
Re: Employment Agreement
Dear Mr. Landow:
We refer to the Employment Agreement dated as of August 18,
1993, as amended by the letter agreement dated November 30, 1993 (as so amended,
the "Employment Agreement") between you and Top Source Technologies, Inc. (the
"Company").
Section 3 of the Employment Agreement provides that the
initial five year term of the Employment Agreement shall continue in effect
until August 18, 1998, unless earlier terminated pursuant to the Employment
Agreement, "provided, however, that the term of [the Employment Agreement] shall
automatically be extended without further action of either party for additional
one year periods unless written notice of either party's intention not to extend
shall have been provided to the other party ...
no later than one year prior to the end of the then effective term".
Section 6 of the Employment Agreement provides, inter alia,
that upon your resignation from employment with the Company for "Good Reason"
you shall be entitled to certain benefits. "Good Reason" is defined to include
"any action by the Company which results in a material diminution in [your]
position, authority, duties or responsibilities as set forth in [the Employment]
Agreement".
As you know, the Company's Board of Directors has determined
that it would best serve stockholder interests to augment top management by
retaining the services of an additional executive, as chief executive officer
(the "New Executive"), to work with you in executing the Company's business
plan. Indeed, as you know, in recent days the Company and Mr. William Willis,
Jr. have agreed on the principal terms under which Mr. Willis has assumed the
position of chief executive officer of the Company. The Company acknowledges
that the retention of Mr. Willis as the New Executive has triggered your right
to resign from employment with the Company for Good Reason.
The Company believes that it would be in the best interests of
the Company and its stockholders for you to continue your employment with the
Company for some period of time after the Company retains the New Executive,
without requiring you to waive any rights that you may have under the Employment
Agreement. This would enable you and the Company to evaluate your relationship
with the New Executive and the Company and determine whether you will continue
your employment with the Company on a longer-term basis, and if so on what
terms.
Accordingly, it has been agreed that Section 3 of the
Employment Agreement will be amended by extending the initial term so that it
expires on June 1, 1999 (rather than August 18, 1998), unless earlier terminated
pursuant to the Employment Agreement, and we have agreed that (i) during the
period from the date of this letter through June 1, 1998, you and the Company
shall negotiate in good faith in an effort to reach agreement on the terms and
conditions of a new employment agreement taking into account your duties and
responsibilities (although it is understood and acknowledged that neither you
nor the Company shall be under any legal obligation to enter into such an
agreement), and (ii) you will be able to exercise your right to terminate the
Employment Agreement for "Good Reason" based on the Company retaining the New
Executive (and any such termination shall not be treated as a breach of your
obligation under clause (i) of this sentence) only during the period commencing
on July 1, 1997 and ending on July 1, 1998; provided, however, that no matter
what date during such period you elect to exercise such right to terminate the
Employment Agreement for "Good Reason" based on the Company retaining the New
Executive, the payments that you will be entitled to receive under the
Employment Agreement will be calculated as if such termination had taken place
on July 1, 1997, except that your previously granted options on Company stock
will continue to be exercisable for one year from your actual date of
termination in accordance with the terms of the grant agreements covering such
options.
The foregoing is without prejudice to any other rights of
either party to the Employment Agreement, including either party's rights to
take any actions to which they may be entitled upon a breach of the Employment
Agreement by the other party.
To indicate your agreement with and acceptance of this
amendment to the Employment Agreement, please evidence such agreement by
executing the acknowledgment below and returning it to Weil, Gotshal & Manges
LLP, 767 Fifth Avenue, New York, NY 10153, Fax: (212) 310-8007, Attention:
Dennis J. Block.
Except as specifically amended above, the Employment Agreement
shall remain in full force and effect.
<PAGE>
This Amendment 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 Amendment may be by actual or
facsimile signature.
TOP SOURCE TECHNOLOGIES, INC.
By:__________________________
Name:
Title:
Acknowledged and Agreed:
- ------------------------
Stuart Landow
EXHIBIT 10.28
INDEMNIFICATION AGREEMENT
-------------------------
THIS EMPLOYMENT AGREEMENT entered into as of July 14, 1997, between Top
Source Technologies, Inc. and its subsidiaries (collectively the "Company") and
Christer Rosen (the "Executive").
WHEREAS, the Company desires to employ Executive and to ensure the
continued availability to the Company of the Executive's services, and the
Executive is willing to accept such employment and render such services, all
upon and subject to the terms and conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth in this Agreement, and intending to be legally bound, the
Company and the Executive agree as follows:
1. Term of Employment.
(a) Term. The Company hereby employs the Executive, and the
Executive hereby accepts employment with the Company, for a period
commencing on the date of this Agreement and ending 13 months from the
date hereof (the "Term"), unless either the Company or the Executive
has given notice to terminate this Agreement. The Company's right to
terminate this Agreement shall be as specified in Section 5 hereof.
(b) Continuing Effect. Notwithstanding any termination of this
Agreement at the end of the Term or otherwise, the provisions of
Sections 6, 7 and 8 shall remain in full force and effect.
2. Duties.
(a) General Duties. The Executive shall serve as special
assistant to the President of the Company and shall have such duties
and responsibilities as are specifically given to him by the President.
The Executive shall use his best efforts to perform his duties and
discharge his responsibilities pursuant to this Agreement competently,
carefully and faithfully.
(b) Devotion of Time. The Executive shall devote an average of
four days per month to the affairs of the Company.
3. Compensation and Expenses.
(a) Salary. For the services of the Executive to be rendered
under this Agreement, the Company shall pay the Executive a monthly
salary of $16,666.67. The Company shall pay the Executive his monthly
salary in such increments as the Company generally pays its employees.
(b) Expenses. To the extent that the Executive has received
the prior approval of the Company's President, the Company shall
reimburse him or advance funds to the Executive for all reasonable
travel, entertainment and miscellaneous expenses provided further that
the Executive properly accounts for such expenses to the Company in
accordance with the Company's practices.
4. Benefits.
(a) Health Insurance. The Company shall pay for the health
insurance coverage for the Executive under the Company's then existing
group health insurance plan. The Company shall not reimburse the
Executive for any dependent coverage or pay for or reimburse him for
any uninsured medical expenses.
(b) Other Benefits. Except as provided for in Section 4(a)
above and any rights that accrue under C.O.B.R.A., the Executive
expressly waives the right to participate in any and all employee
benefit plans that the Executive maintains for its employees. The
Company shall assign to the Executive its rights in a $900,000 term
life insurance policy insuring the life of the Executive.
5. Termination.
(a) Cause. The Company may terminate the Executive's
employment pursuant to the terms of this Agreement at any time for
cause by giving written notice of termination. Such termination shall
become effective upon the giving of such notice. Upon any such
termination for cause, the Executive shall be paid compensation through
the date of termination. For purposes of this Section 5, "cause" shall
mean: (i) the Executive is convicted of a misdemeanor related to the
business of the Company or a felony; (ii) the Executive, in carrying
out his duties hereunder, has been found in a civil action to have
committed gross negligence or willful misconduct resulting, in either
case, in material harm to the Company; (iii) the Executive
misappropriates Company funds or otherwise defrauds the Company; (iv)
the Executive materially breaches any provision of Section 6, 7 or 8
hereof; or (v) the Executive is found in a civil action to have
committed any of the following acts or omissions: (1) recruited Company
personnel including the personnel of any subsidiaries during or after
termination of employment; or (2) failed to assign any invention or
technology to the Company which was developed or used by the Company,
including any intellectual property rights to any portion or facet of
the Company's overhead sound systems or failed to use his best efforts
to cause any inventor to do so within 90 days of written request by the
Company.
(b) Continuing Effect. Notwithstanding any termination of the
Executive's employment as provided in this Section 5 or otherwise, the
provisions of Sections 6, 7 and 8 shall remain in full force and
effect.
6. Non-Competition Agreement.
(a) Competition with the Company. Until termination of his
employment and for a period of 12 months commencing on the date of date
of termination of employment, the Executive, directly or indirectly, in
association with or as a stockholder, director, officer, consultant,
employee, partner, joint venturer, member or otherwise of or through
any person, firm, corporation, partnership, association or other
entity, shall not compete with the Company or any of its affiliates in
the offer, sale or marketing of the following products or services that
are competitive with the products or services offered by the Company,
within any metropolitan area in the United States or elsewhere in which
the Company is then engaged in the offer and sale of competitive
products or services:
(i) The marketing and sale of any sound systems for
use in cars and trucks including, but not limited to, as a
part of a package offered by what is commonly referred to as
an interior trim supplier;
(ii) The marketing and sale of oil analysis
products and services; and
(iii) The marketing and sale of technology relating
to moving seats and automobiles and trucks as a means of
reducing injuries to persons.
Provided, however, the foregoing shall not prevent Executive from
accepting employment with an enterprise engaged in two or more lines of
business, one of which is the same or similar to the Company's business
as described in (i), (ii) and (iii) above (the "Prohibited Business")
if Executive's employment is totally unrelated to the Prohibited
Business; provided, further, the foregoing shall not prohibit Executive
from owning up to 5% of the securities of any publicly-traded
enterprise engaged in the Prohibited Business provided Executive is not
an employee, director, officer, consultant to such enterprise or
otherwise reimbursed for services rendered to such enterprise.
(b) Solicitation of Customers. During the periods in which the
provisions of Section 6(a) shall be in effect, the Executive, directly
or indirectly, shall not seek Prohibited Business from any Customer (as
defined below) on behalf of any enterprise or business other than the
Company, refer Prohibited Business from any Customer to any enterprise
or business other than the Company or receive commissions based on
sales or otherwise relating to the Prohibited Business from any
Customer, or any enterprise or business other than the Company. For
purposes of this Section 6(b), the term "Customer" means any person,
firm, corporation, partnership, association or other entity to which
the Company or any of its affiliates sold or provided goods or services
during the 24-month period prior to the time at which any determination
is required to be made as to whether any such person, firm,
corporation, partnership, association or other entity is a Customer.
(c) No Payment. The Executive acknowledges and agrees that no
separate or additional payment shall be required to be made to him in
consideration of his undertakings in this Section 6.
7. Nondisclosure of Confidential Information. The Executive
acknowledges that during his employment he shall learn and shall have access to
Confidential Information regarding the Company and its affiliates, including
without limitation (i) confidential or secret plans, programs, documents,
agreements or other material relating to the business, services or activities of
the Company and its affiliates and (ii) trade secrets, market reports, customer
investigations, customer lists and other similar information that is proprietary
information of the Company or its affiliates (collectively referred to as
"Confidential Information"). The Executive acknowledges that such Confidential
Information as is acquired and used by the Company or its affiliates is a
special, valuable and unique asset. All records, files, materials and
Confidential Information obtained by the Executive in the course of his
employment with the Company are confidential and proprietary and shall remain
the exclusive property of the Company or its affiliates, as the case may be. The
Executive shall not, except in connection with and as required by his
performance of his duties under this Agreement, for any reason use for his own
benefit or the benefit of any person or entity with which he may be associated
or disclose any such Confidential Information to any person, firm, corporation,
association or other entity for any reason or purpose whatsoever without the
prior written consent of the board of directors of the Company, unless such
Confidential Information previously shall have become public knowledge through
no action by or omission of the Executive.
8. Criticism of the Company and the Executive.
(a) In order to induce the Company to enter into this
Agreement and pay the compensation to the Executive provided hereunder,
as well as granting the Executive up to 12 additional months to
exercise his stock options from the date such options would otherwise
be required to be exercised in the absence of this Agreement, the
Executive agrees not to criticize or disparage the Company, its
management, its board of directors or any of its employees whether in
writing, over an electronic media including the Internet or orally. In
response to any inquiries concerning the Company, except pursuant to a
subpoena or other legal process including court order, the Executive
shall be permitted to indicate in words or in substance that pursuant
to a written employment agreement, he agreed if asked, not to comment
concerning the Company. In addition to termination of his employment
pursuant to this Agreement, violation of this Section 8 by the
Executive shall require him to promptly repay to the Company the gross
amount of compensation paid to the Executive hereunder including the
social security and medicare taxes paid by the Company pursuant to this
Agreement. For purposes of this Section 8, any prohibited criticism or
disparagement by the Executive's wife, Birgitta, shall be deemed made
by the Executive.
(b) The Company agrees that it shall not criticize or
disparage the Executive whether in writing, over an electronic media
including the Internet or orally. In response to any inquiries
concerning the Executive, except pursuant to a subpoena or other legal
process including court order, the Company shall be permitted to
indicate in words or in substance that the Executive was employed by
the Company for a period of time, that he was an officer and director
for certain periods of time and what his compensation was while
employed by the Company. Beyond that, the Company shall not comment
further in response to any such inquiries.
9. Acknowledgement. The Executive represents to the Company that
nothing has come to his attention during the course of his employment with the
Company prior to execution of this Agreement that would lead him to believe that
the Company or any of the Company's officers, directors or employees have
engaged in any act or omission involving a violation of any law, rule or
regulation or which if reported to Chrysler Corporation might cause it to
terminate its business relationship with the Company.
10. Absence of Certain Liabilities. In consideration for the Company's
agreeing to employ the Executive pursuant to this Agreement, the Executive
hereby acknowledges that except as required pursuant to this Agreement or for
previous services rendered from the date of the Company's last payroll which
services were rendered at the same rate previously paid, the Company, its
officers and its directors have no liability pursuant to any written or oral
agreement or arising under any law, rule or regulation. Except as provided in
the previous sentence, the Executive acknowledges that as of the execution of
this Agreement neither the Company nor any of its officers or directors are
indebted to the Executive. At the conclusion of the final Term of this
Agreement, the Company and the Executive shall each exchange mutual releases.
Such releases shall exclude any obligations under separate written stock option
and indemnification agreements, any breach of any covenant of this Agreement and
any unknown past or any future actions or any failure to act of the Executive.
11. Equitable Relief. The Company and the Executive recognize that the
services to be rendered under this Agreement by the Executive are special,
unique and of extraordinary character, and that in the event of the breach by
the Executive of the terms and conditions of this Agreement or if the Executive,
without the prior consent of the board of directors of the Company, shall leave
his employment for any reason or take any action in violation of Section 6, 7 or
8 hereof, the Company shall be entitled to institute and prosecute proceedings
in any court of competent jurisdiction to enjoin the Executive from breaching
the provisions of Section 6, 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. Nothing contained in this Section 11 shall be construed to prevent the
Company from seeking such other remedy in case of any breach of this Agreement
by the Executive, as the Company may elect.
12. Assignability. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Company, provided that such successor or assign shall acquire all
or substantially all of the assets and business of the Company. The Executive's
obligations hereunder may not be assigned or alienated and any attempt to do so
by the Executive shall be void.
13. Entire Agreement. 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.
14. 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.
15. 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.
16. 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:
Executive: Christer Rosen
205 Commodore Drive
Jupiter, FL 33477
with a copy to: Daryl B. Cramer, Esq.
One Clearlake Centre
250 Australian Avenue South
West Palm Beach, FL 33401
Facsimile: (561) 659-0701
The Company: Top Source Technologies, Inc.
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.
17. 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.
18. 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.
19. 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.
20. 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
Florida without regard to choice of law considerations.
21. 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.
22. Loan. The Executive acknowledges that he currently owes the Company
$25,000. The Executive agrees to repay the Company the sum of $500 per month
commencing in August 1997 with the final payment of principal and 9% per annum
accrued interest due on July 31, 2000. Provided, however, 25% of the proceeds
from the sale of shares of common stock of the Company shall be applied as a
pre-payment of the loan, except for common stock pledged to serve any currently
existing margin loans, which proceeds may be paid to pay the margin loans.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date and year first above written.
TOP SOURCE TECHNOLOGIES, INC.
By:
William C. Willis, Jr., President
By:
Christer Rosen, Executive
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 21st day of May, 1997, by and
between Top Source Technologies, Inc., a Delaware corporation (the "Company"),
and William Willis, Jr. (the "Executive").
W I T N E S S E T H T H A T
WHEREAS, the Company wishes to provide for the employment by
the Company of the Executive, and the Executive wishes to serve the Company, in
the capacities and on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive,
and the Executive shall serve the Company, on the terms and conditions set forth
in this Agreement. The term of this Agreement shall commence on the date of this
Agreement and, unless earlier terminated in accordance with Section 5 hereof,
shall continue through the third anniversary of such date (such three-year term
shall be referred to herein as the "Employment Period").
2. POSITION AND DUTIES. (a) During the Employment Period, the
Executive shall serve as President and Chief Executive Officer of the Company
with such duties and responsibilities as are customarily assigned to such
positions, and such other duties and responsibilities not inconsistent therewith
as may from time to time be assigned to him by the Board of Directors of the
Company (the "Board"). The Executive shall be a member of the Board on the first
day of the Employment Period, and the Board shall propose the Executive for
re-election and shall use all reasonable efforts to have the Executive
re-elected to the Board and for positions specified above throughout the
Employment Period.
(b) During the Employment Period, the Executive shall report
directly to the Board. All other executive officers of the Company shall report
to the Executive.
(c) During the Employment Period, the Executive shall devote
substantially all of his time and attention to the business and affairs of the
Company and shall perform, faithfully and diligently his duties and
responsibilities hereunder. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic, social or
charitable boards or committees, so long as such activities do not interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
3. COMPENSATION. (a) BASE SALARY. The Executive's compensation
during the Employment Period shall be determined by the Board upon the
recommendation of the committee of the Board having responsibility for approving
the compensation of senior executives (the "Compensation Committee"), subject to
the next sentence and the other provisions of this Section 3. During the
Employment Period, the Executive shall receive an annual base salary ("Annual
Base Salary") of $300,000. The Annual Base Salary shall be payable on the first
and fifteenth day of each calendar month (or, if any such date is not a business
day, on the next business day following such date) during the Employment Period.
(b) PERFORMANCE BONUS. Executive also shall be eligible to
receive a cash bonus ("Performance Bonus") for each successive period of four
fiscal quarters (prorated for any partial period) during the Employment Period
in an amount of between zero and 100% of the Annual Base Salary, to be
determined on an annual basis in accordance with the provisions of this Section
3(b). The Performance Bonus, if any, for each successive four-quarter period
shall be paid within 60 days after the end of such period.
The Performance Bonus shall consist of the following two
components:
(A) The first component of the Performance Bonus shall be an
amount of between zero and 50% of the Annual Base Salary based on the Company
achieving certain earnings per share targets. For the first four fiscal quarters
immediately following the date of this Agreement (i.e., the four fiscal quarters
commencing on July 1, 1997), Executive shall receive an amount equal to 5% of
Annual Base Salary if the Company achieves $.01 Earnings Per Share (as defined
below) for such four quarters, 10% of Annual Base Salary if the Company achieves
$.02 Earnings Per Share, 15% of Annual Base Salary if the Company achieves $.03
Earnings Per Share, 20% of Annual Base Salary if the Company achieves $.04
Earnings Per Share and 25% of Annual Base Salary if the Company achieves $.05
Earnings Per Share; for each additional full $.01 of Earnings Per Share above
$.05, the Executive shall receive an additional 1% of the Annual Base Salary;
provided, however, that in no event shall this component of the Performance
Bonus for any year exceed 50% of the Annual Base Salary for such year.
The Earning Per Share targets for each succeeding four quarter
period during the Employment Period shall be reset and established annually by
the Compensation Committee in its sole and absolute discretion. The Compensation
Committee shall notify the Executive promptly upon its determination of such
subsequent targets.
For purposes of the foregoing, "Earnings Per Share" shall mean
the Company's net income from continuing operations, inclusive of the
Performance Bonus to be paid for such period, after income taxes but without
giving effect to results of discontinued operations and any extraordinary tax
accounting adjustments, divided by fully-diluted shares of the Company's common
stock, determined in accordance with generally accepted accounting principles
and as reported in the Company's financial statements included in its periodic
filings with the Securities and Exchange Commission.
(B) The second component of the Performance Bonus shall be an
amount of between zero and 50% of the Annual Base Salary based on the Company
achieving approximately five targets for each period of four fiscal quarters
during the Employment Period. The targets for the first four fiscal quarters
immediately following the date of this Agreement shall be established within 60
days after the date of this Agreement based on the mutual written agreement of
the Executive and the Compensation Committee (and with respect to which
Executive and the Company agree to negotiate in good faith and as expeditiously
as possible) and the targets for each succeeding four quarter period during the
Employment Period shall be reset and established annually by the Compensation
Committee in its sole and absolute discretion. Each target shall be given equal
weight (so that, by way of illustration, if the Executive and the Compensation
Committee agree upon five targets, the Executive shall be eligible to receive an
amount of up to 10% of the Annual Base Salary upon meeting each such target),
and the Executive's success in achieving each target shall be graded on a scale
of 1-10 (so that, by way of illustration, if the Executive achieves a score of 5
for a target representing a maximum award of 10% of the Annual Base Salary, the
Executive would receive an amount equal to 5% of the Annual Base Salary with
respect to such target). The Compensation Committee, acting in its sole
discretion, shall evaluate and determine the degree and/or quality of the
Executive's achievement of the targets, and shall report its determinations to
the Executive promptly in writing.
(c) STOCK OPTIONS. In addition to the payments provided above,
on May 21, 1997, the Compensation Committee granted to the Executive, subject to
the execution of this Agreement, options to purchase 500,000 shares of the
Company's Common Stock pursuant to the Company's 1993 Stock Option Plan (the
"Stock Option Plan"), with the purchase price upon exercise of such options
equal to $2.00 per share (i.e., the closing price of the Common Stock on the
American Stock Exchange on the date of such grant). The options shall vest as
follows: (A) 100,000 options will become exercisable on the first anniversary of
the date of this Agreement; (B) 100,000 options will become exercisable on the
second anniversary of the date of this Agreement; (C) 100,000 options will
become exercisable on the third anniversary of the date of this Agreement; (D)
100,000 options will become exercisable when the closing price for the Company's
common stock on the American Stock Exchange (or such other exchange or trading
system that constitutes the primary trading market for the Company's common
stock) is $7.00 per share or higher for 30 consecutive trading days; and (E)
100,000 options will become exercisable when the closing price for the Company's
common stock on the American Stock Exchange (or such other exchange or trading
system that constitutes the primary trading market for the Company's common
stock) is $9.00 per share or higher for 30 consecutive trading days; provided,
however, that the vesting of such options shall be accelerated in the event of a
Change in Control (as defined herein). Such options shall be incentive stock
options to fullest extent permitted by applicable law and the Stock Option Plan.
The grant of the options has been made by the Compensation Committee pursuant to
the grant agreements attached hereto as Annexes A (with respect to incentive
stock options) and B (with respect to non-qualified stock options),
respectively.
The Compensation Committee shall consider making further
grants of options to the Executive on an annual basis during the Employment
Period, although the Committee shall be under no obligation to make any such
additional grants.
(d) AUTOMOBILE ALLOWANCE. During the Employment Period, the
Company shall either (x) make available to the Executive a Company-owned car, or
(y) pay the Executive $600 per month as an automobile allowance, and also shall
reimburse the Executive for up to $400 per month for expenses such as insurance
premiums, parking, fuel and similar expenses relating to the maintenance of an
automobile.
(e) REIMBURSEMENT OF EXPENSES AND ADMINISTRATIVE SUPPORT. The
Company shall reimburse the Executive, upon the presentation of appropriate
documentation, for 50% of the Executive's out-of-pocket expenses incurred in
relocating in connection with his acceptance of employment with the Company,
including, without limitation, real estate commission and related brokerage and
legal expenses, moving expenses and similar items, up to a maximum of the sum of
(i) $45,000, plus (ii) the amount, if any, of any federal income taxes payable
by the Executive with respect to such reimbursement. The Company also shall pay
or reimburse the Executive, upon the presentation of appropriate documentation
of such expenses, for all reasonable travel and other expenses incurred by the
Executive in accordance with the Company's expense policies in performing his
obligations under this Agreement. The Company further agrees to furnish the
Executive with office space and administrative support in existing Company
facilities whenever possible, and any other assistance and accommodations as
shall be reasonably required by the Executive in the performance of his duties
under this Agreement. The Executive shall review the foregoing expenses and
other matters with the Compensation Committee on a quarterly basis.
(f) VACATION. Executive shall be entitled to four (4) weeks
paid vacation in each calendar year.
(g) DEDUCTIONS. All payments made under this Agreement shall
be subject to such deductions at the source as from time to time may be required
to be made pursuant to any law, rule, regulation or order.
(h) CHANGE IN CONTROL. For purposes of this Agreement, a
"Change in Control" of the Company shall be deemed to have occurred upon any of
the following events:
(A) A person or entity or group of persons or
entities, acting in concert, shall become the direct or
indirect beneficial owner (within the meaning of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended), of
securities of the Company representing more than fifty percent
(50%) of the combined voting power of the issued and
outstanding common stock of the Company; or
(B) The majority of the Board is no longer comprised
of the incumbent directors who constitute such board on the
date of this Agreement and any other individual(s) who becomes
a director subsequent to the date of this Agreement whose
initial election or nomination for election as a director, as
the case may be, was approved by at least a majority of the
directors who comprised the incumbent directors as of the date
of such election or nomination; or
(C) The Board shall approve a sale of all or
substantially all of the assets of the Company; or
(D) The Board shall approve any merger,
consolidation, or like business combination or reorganization
of the Company the consummation of which would result in the
occurrence of any event described in clause (A) or (B) above,
and such transaction shall have been consummated.
4. PARTICIPATION IN BENEFIT PLANS. The Executive shall be
entitled to participate, during the term of this Agreement, in the Company's
benefit programs, including but not limited to the Company's 401K plan (for
which the Executive shall be eligible to participate commencing 30 days after
the date of this Agreement and with respect to which the Company, shall make the
maximum matching contribution (presently $2,500 annually) permitted under the
term of such plan and applicable law) and any other qualified or non-qualified
pension plans, supplemental pension plans, group hospitalization, health, dental
care, death benefit, post-retirement welfare plans, or other present or future
group employee benefit plans or programs of the Company for which key executives
are or shall become eligible (collectively, the "Benefit Plans"), on the same
terms as other key executives of the Company. In addition to and without
limiting the generality of the foregoing, during the Employment Period, (x) the
Company shall reimburse the Executive for all medical expenses incurred by him
and the members of his immediate family in connection with reasonable medical
care (not including cosmetic surgery or procedures) to the extent not covered by
the foregoing insurance up to a maximum of $10,000 per year, and (y) the Company
shall obtain and maintain a term life insurance policy in the amount of
$1,000,000, which policy shall be owned by the Executive, from a
nationally-recognized insurance carrier reasonably acceptable to the Executive.
5. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Executive's employment shall
terminate automatically upon the Executive's death during the
Employment Period. The Company shall be entitled to terminate the
Executive's employment because of the Executive's Disability during the
Employment Period. "Disability" means that the Executive has been
unable, for a period of not less than (x) 90 consecutive business days,
or (y) 180 days within any 12 month period, to perform the Executive's
duties under this Agreement, as a result of physical or mental illness
or injury. A termination of the Executive's employment by the Company
for Disability shall be communicated to the Executive by written
notice, and shall be effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), unless the
Executive returns to full-time performance of the Executive's duties
before the Disability Effective Date.
(b) BY THE COMPANY. (i) The Company may terminate the
Executive's employment during the Employment Period for Cause or
without Cause. "Cause" means (x) the conviction of the Executive for
the commission of a felony related to the Executive's performance of
his duties with the Company, (y) gross negligence or willful misconduct
by the Executive that results in material and demonstrable monetary
damage to the Company, or (z) continued failure or refusal by the
Executive to substantially perform his duties hereunder (other than by
reason of death or disability) after written notification and a 30-day
cure period.
(ii) A termination of the Executive's employment for Cause
shall be effected in accordance with the following procedures. The
Company shall give the Executive written notice ("Notice of Termination
for Cause") of its intention to terminate the Executive's employment
for Cause, setting forth in reasonable detail the specific conduct of
the Executive that it considers to constitute Cause and the specific
provision(s) of this Agreement on which it relies, and stating the
date, time and place of the Special Board Meeting for Cause. The
"Special Board Meeting for Cause" means a meeting of the Board called
and held specifically for the purpose of considering the Executive's
termination for Cause, that takes place not less than ten and not more
than twenty business days after the Executive receives the Notice of
Termination for Cause. The Executive shall be given an opportunity,
together with counsel, to be heard at the Special Board Meeting for
Cause. The Executive's termination for Cause shall be effective when
and if a resolution is duly adopted at the Special Board Meeting for
Cause.
(iii) A termination of the Executive's employment without
Cause shall be effected by giving the Executive written notice of the
termination.
(c) GOOD REASON. (i) The Executive may terminate
employment for Good Reason or without Good Reason. "Good Reason" means:
A. failure by the Company to re-elect the Executive
as a director and Chief Executive Officer, or the assignment
to the Executive of any duties or responsibilities materially
inconsistent with those customarily associated with the
positions to be held by the Executive pursuant to this
Agreement, or any other action by the Company that results in
a material diminution in the Executive's position, authority,
duties or responsibilities, other than an isolated,
insubstantial and inadvertent action that is not taken in bad
faith and is remedied by the Company promptly after receipt of
notice thereof from the Executive;
B. any failure by the Company to comply with any
provision of Section 3 of this Agreement, other than an
isolated, insubstantial and inadvertent failure that is not
taken in bad faith and is remedied by the Company promptly
after receipt of notice thereof from the Executive;
C. any requirement by the Company not agreed to by
the Executive that the Executive's services be rendered
primarily at a location or locations more than 50 miles
distant from the Company's present executive offices in Palm
Beach Gardens, Florida; or
D. any other material breach of this Agreement by the
Company that either is not taken in good faith or is not
remedied by the Company promptly after receipt of notice
thereof from the Executive.
(ii) A termination of employment by the Executive for Good
Reason shall be effectuated by giving the Company written notice
("Notice of Termination for Good Reason") of the termination, setting
forth in reasonable detail the specific conduct of the Company that
constitutes Good Reason and the specific provision(s) of this Agreement
on which the Executive relies. A termination of employment by the
Executive for Good Reason shall be effective on the fifth business day
following the date when the Notice of Termination for Good Reason is
given, unless the notice sets forth a later date (which date shall in
no event be later than 30 days after the notice is given).
(iii) A termination of the Executive's employment by the Executive
without Good Reason shall be effected by giving the Company written
notice of the termination.
(d) NO WAIVER. The failure to set forth any fact or
circumstance in a Notice of Termination for Cause or a Notice of Termination for
Good Reason shall not constitute a waiver of the right to assert, and shall not
preclude the party giving notice from asserting, such fact or circumstance in an
attempt to enforce any right under or provision of this Agreement.
(e) DATE OF TERMINATION. The "Date of Termination" means the
date of the Executive's death, the Disability Effective Date, the date on which
the termination of the Executive's employment by the Company for Cause or
without Cause or by the Executive for Good Reason is effective, or the date on
which the Executive gives the Company notice of a termination of employment
without Good Reason, as the case may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) DEATH. If the Executive's employment is terminated by
reason of the Executive's death during the Employment Period, the Company shall
continue to pay to the Executive's designated beneficiaries (or, if there is no
such beneficiary, to the Executive's estate or legal representative), the Annual
Base Salary provided for in Section 3(a) as in effect on the Date of Termination
through the end of the month in which the Executive's death occurs. The Company
also shall pay to the Executive's designated beneficiaries (or, if there is no
such beneficiary, to the Executive's estate or legal representative), in a lump
sum in cash within 30 days of the Date of Termination (or, in the case of the
amount referred to in clause (i) below, as soon as practicable after the
calculation period in which the Date of Termination occurs), the sum of the
following amounts (the "Accrued Obligations"): (i) any accrued but unpaid
Performance Bonus, vacation pay or other monetary payments to which Executive
was entitled on the Date of Termination, and (ii) a pro rata portion of the
Performance Bonus for the year in which the Date of Termination occurs, based on
the number of days of such year prior to the Date of Termination. With respect
to medical insurance coverage, the Company shall continue to provide the spouse
and dependents of the Executive, at the expense of the Company, with the medical
insurance then provided generally to dependents of employees of the Company, for
a period of one year following the termination of the employment of the
Executive, which medical insurance coverage shall be included as part of any
required continuation of coverage under Part 6, Subtitle B of Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any
similar state or local law ("COBRA Coverage"); provided, however, that the COBRA
Coverage shall terminate with respect to such spouse and/or dependents as of the
date that the spouse and/or dependents receive equivalent coverage and benefits
under any plans, programs and/or arrangements of a subsequent employer. The
rights and benefits of the estate or other legal representative of the Executive
under the benefit plans and programs of the Company shall be determined in
accordance with the provisions of such plans and programs. The rights and
benefits of the estate or other legal representative of the Executive with
respect to the options referred to in Section 3(c) shall be determined in
accordance with the provisions of the plans and grant agreements governing such
options. Except as otherwise specified in this Agreement, neither the estate or
other legal representative of the Executive nor the Company shall have any
further rights or obligations under this Agreement.
(b) DISABILITY. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, the Company
shall pay to the Executive, in a lump sum in cash within 30 days of the Date of
Termination (or, in the case of any Performance Bonus, as soon as practicable
after the end of the calculation period in which the Date of Termination
occurs), the Accrued Obligations. The Company shall continue to provide the
Executive and the spouse and dependents of the Executive, at the expense of the
Company, with the medical insurance then provided generally to dependents of
employees of the Company, for a period of one year following the termination of
the employment of the Executive, which medical insurance coverage shall be
included as part of any required COBRA Coverage; provided, however, that the
COBRA Coverage shall terminate with respect to the Executive, the spouse and/or
dependents of the Executive as of the date that any such individual receives
equivalent coverage and benefits under any plans, programs and/or arrangements
of a subsequent employer. The rights and benefits of the Executive under the
benefit plans and programs of the Company shall be determined in accordance with
the provisions of such plans and programs. The rights and benefits of the
Executive with respect to the options referred to in Section 3(c) shall be
determined in accordance with the provisions of the plans and grant agreements
governing such options. Except as otherwise specified in this Agreement, neither
the Executive nor the Company shall have any further rights or obligations under
this Agreement.
(c) BY THE COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY,
OR BY THE EXECUTIVE FOR GOOD REASON. If, during the Employment Period, the
Company terminates the Executive's employment, other than for Cause, death or
Disability, or the Executive terminates employment for Good Reason, the Company
shall, continue to pay to the Executive, until the expiration of 12 months after
the Date of Termination, the Annual Base Salary provided for in Section 3(a).
The Company also shall pay to the Executive, in a lump sum in cash within 30
days of the Date of Termination (or, in the case of any Performance Bonus, as
soon as practicable after the end of the calculation period in which the Date of
Termination occurs), the Accrued Obligations. The Company shall continue to
provide the Executive and the spouse and dependents of the Executive, at the
expense of the Company with the medical insurance then provided generally to
dependents of employees of the Company, for a period of one year following the
termination of the employment of the Executive, which medical insurance coverage
shall be included as part of any required COBRA Coverage; provided, however,
that the COBRA Coverage shall terminate with respect to the Executive, the
spouse and/or dependents of the Executive as of the date that any such
individual receives equivalent coverage and benefits under any plans, programs
and/or arrangements of a subsequent employer. The rights and benefits of the
Executive under the benefit plans and programs of the Company shall be
determined in accordance with the provisions of such plans and programs. The
rights and benefits of the Executive with respect to the options referred to in
Section 3(c) shall be determined in accordance with the provisions of the plans
and grant agreements governing such options. Except as otherwise specified in
this Agreement, neither the Executive nor the Company shall have any further
rights or obligations under this Agreement. The payments and benefits provided
pursuant to this paragraph (c) of Section 6 are intended as liquidated damages
for a termination of the Executive's employment by the Company other than for
Cause or Disability or for the actions of the Company leading to a termination
of the Executive's employment by the Executive for Good Reason.
(d) BY THE COMPANY FOR CAUSE; BY THE EXECUTIVE OTHER THAN FOR
GOOD REASON. If the Executive's employment is terminated by the Company for
Cause during the Employment Period, or if the Executive voluntarily terminates
employment during the Employment Period, other than for Good Reason, the Company
shall pay to the Executive in a lump sum in cash within 30 days of the Date of
Termination any portion of the Executive's Annual Base Salary through the Date
of Termination that has not yet been paid plus any accrued but unpaid vacation
pay to which Executive was entitled on the Date of Termination, and the Company
shall have no further obligations under this Agreement, except as otherwise
specified in this Agreement. The rights and benefits of the Executive under the
benefit plans and programs of the Company shall be determined in accordance with
the provisions of such plans and programs. The rights and benefits of the
Executive with respect to the options referred to in Section 3(c) shall be
determined in accordance with the provisions of the plans and grant agreements
governing such options.
(e) The Company's obligation to deliver the liquidated damages
payments described in paragraph (c) of this Section 6 shall be contingent on the
Executive delivering to the Company, on or about the Date or Termination, a
legal release in a form acceptable to counsel to the Company, releasing the
Company, its affiliates, and the current and former directors, officers and
employees of the Company from any obligations relating to his employment
hereunder, subject to the Company's continuing obligations under this Agreement
and subject to the Executive's continuing rights under the terms and conditions
of the compensation and benefit plans in which the Executive is a participant,
as such plans may be amended from time to time.
(f) The respective obligations of the Company and the
Executive under Sections 9, 10, 11, 12 and 13 shall survive any termination of
Executive's employment.
(g) Notwithstanding any other provision of this Agreement, to
the extent the Company reasonably determines that the Executive would be subject
to the excise tax under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), on any payments under Section 6 of this Agreement and such
other amounts or benefits the Executive receives from the Company, any person
whose actions result in a change of ownership covered by Section 280G(b)(2) of
the Code or any person affiliated with the Company or such person, required to
be included in the calculation of parachute payments for purposes of Sections
280G and 4999 of the Code, the amounts provided under this Agreement shall be
automatically reduced to an amount one dollar less than that which, when
combined with such other amounts, would subject the Executive to such excise
tax.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies for which the Executive may qualify, nor, subject to paragraph (f) of
Section 16, shall anything in this Agreement limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Vested benefits and other amounts
that the Executive is otherwise entitled to receive under the Stock Option Plan,
or any other plan, policy, practice or program of, or any contract of agreement
with, the Company or any of its affiliated companies on or after the Date of
Termination shall be payable in accordance with the terms of each such plan,
policy, practice, program, contract or agreement, as the case may be.
8. NO OFFSET, ETC. The Company's obligation to make the
payments provided for in, and otherwise to perform its obligations under, this
Agreement shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action that the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement, and such amounts
shall not be reduced, regardless of whether the Executive obtains other
employment.
9. INVENTIONS. Any and all inventions, innovations or
improvements ("inventions") made, developed or created by the Executive (whether
at the request or suggestion of the Company (which, as used in this Section 9,
shall be deemed to include the Company and each of its subsidiaries) or
otherwise, whether alone or in conjunction with others, and whether during
regular hours of work or otherwise) during the period of his employment with the
Company which may be directly or indirectly useful in, or relate to, the
business of the Company, shall be promptly and fully disclosed by the Executive
to the Board and shall be the Company's exclusive property as against the
Executive, and the Executive shall promptly deliver to an appropriate
representative of the Company as designated by the Board all papers, drawings,
models, data and other material relating to any inventions made, developed or
created by him as aforesaid. The Executive shall, at the request of the Company
and without any payment therefor, execute any documents necessary or advisable
in the opinion of the Company's counsel to direct issuance of patents or
copyrights to the Company with respect to such inventions as are to be the
Company's exclusive property as against the Executive or to vest in the Company
title to such inventions as against the Executive. The expense of securing any
such patent or copyright shall be borne by the Company.
10. CONFIDENTIAL INFORMATION. The Executive shall hold all
secret or confidential information, knowledge or data relating to the Company or
any of its affiliated companies and their respective businesses that the
Executive obtains during the Executive's employment by the Company or any of its
affiliated companies and that is not public knowledge (other than as a result of
the Executive's violation of this Section 10) ("Confidential Information") in
strict confidence. The Executive shall not communicate, divulge or disseminate
Confidential Information at any time during or after the Executive's employment
with the Company, except with the prior written consent of the Company or as
otherwise required by law or regulation or by legal process. If the Executive is
requested pursuant to, or required by, applicable law or regulation or by legal
process to disclose any Confidential Information, the Executive will provide the
Company, as promptly as the circumstances reasonably permit, with notice of such
request or requirement and, unless a protective order or other appropriate
relief is previously obtained, the Confidential Information, subject to such
request, may be disclosed pursuant to and in accordance with the terms of such
request or requirement, provided that the Executive shall use his best efforts
to limit any such disclosure to the precise terms of such request or
requirement.
11. NON-COMPETITION. The Executive acknowledges that the
services to be rendered by him to the Company (which, as used in this Section 11
shall be deemed to include the Company and each of its subsidiaries) are of a
special and unique character. In consideration of his employment hereunder, the
Executive agrees, for the benefit of the Company, that he will not, during the
term of this Agreement and thereafter until the earlier to occur of (x) the
expiration of a period of twelve (12) months commencing on the date of
termination of his employment with the Company or (y) a Change in Control, (a)
engage, directly or indirectly, whether as principal, agent, distributor,
representative, consultant, employee, partner, stockholder, limited partner or
other investor (other than an investment of not more than (i) two percent (2%)
of the stock or equity of any corporation the capital stock of which is publicly
traded or (ii) two percent (2%) of the ownership interest of any limited
partnership or other entity) or otherwise, within the United States of America,
in any business which is competitive with the business now, or at any time
during the term of this Agreement, conducted by the Company, (b) solicit or
entice to endeavor to solicit or entice away from the Company any person who was
an officer, employee or sales representative of the Company, either for his own
account or for any individual, firm or corporation, whether or not such person
would commit any breach of his contract of employment by reason of leaving the
service of the Company, and the Executive agrees not to employ, directly or
indirectly, any person who was an officer, employee or sales representative of
the Company or who by reason of such position at any time is or may be likely to
be in possession of any confidential information or trade secrets relating to
the businesses or products of the Company, or (c) solicit or entice or endeavor
to solicit or entice away from the Company any customer or prospective customer
of the Company, either for his own account or for any individual, firm or
corporation. In addition, the Executive shall not, at any time during the term
of this Agreement or at any time thereafter, engage in the business which uses
as its name, in whole or in part, "Top Source" or any other tradename or
trademark or corporate name used by the Company or any of its subsidiaries.
12. INDEMNIFICATION. (a) The Company shall indemnify the
Executive to the fullest extent permitted by Delaware law in effect as of the
date hereof against all costs, expenses, liabilities and losses (including,
without limitation, attorneys' fees, judgments, fines, penalties, ERISA excise
taxes, penalties and amounts paid in settlement) reasonably incurred by the
Executive in connection with a Proceeding. For the purposes of this Section 12,
a "Proceeding" shall mean any action, suit or proceeding, whether civil,
criminal, administrative or investigative, in which the Executive is made, or is
threatened to be made, a party to, or a witness in, such action, suit or
proceeding by reason of the fact that he is or was an officer, director or
employee of the Company or is or was serving as an officer, director, member,
employee, trustee or agent of any other entity at the request of the Company,
whether or not the basis of such Proceeding arises out of or in connection with
the Executive's alleged action or omission in an official capacity.
(b) The Company shall advance to the Executive all reasonable
costs and expenses incurred by him in connection with a Proceeding within 20
days after receipt by the Company of a written request for such advance. Such
request shall include an itemized list of the costs and expenses and an
undertaking by the Executive to repay the amount of such advance if it shall
ultimately be determined that he is not entitled to be indemnified against such
costs and expenses.
(c) The Executive shall not be entitled to indemnification
under this Section 12 unless he meets the standard of conduct specified in the
Delaware General Corporation Law. Any indemnification under subsection (a)
(unless ordered by a court) shall be made by the Company only as authorized in
the specific case upon a determination that indemnification of the Executive is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware Corporation Law. Such determination shall be
made (1) by the Board by a majority vote of a quorum consisting of directors who
were not parties to such Proceeding, or (2) if such a quorum is not obtainable,
or, even if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the stockholders.
(d) The Company shall not settle any Proceeding or claim in
any manner which would impose on the Executive any penalty or limitation without
his prior written consent. Neither the Company nor the Executive will
unreasonably withhold its or his consent to any proposed settlement.
(e) The indemnification in this Section 12 shall inure to the
benefit of the Executive's heirs, executors and administrators.
(f) The Company agrees to use its best efforts to obtain,
continue and maintain an adequate directors and officers' liability insurance
policy and shall cause such policy to cover the Executive to the extent the
Company provides such coverage for its other executive officers.
13. SUCCESSORS; BENEFICIARIES. (a) This Agreement is personal
to the Executive and, without the prior written consent of the Company, shall
not be assignable by the Executive otherwise than by will or the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
(d) The Executive shall be entitled, to the extent permitted
under any applicable law, to select and change the beneficiary or beneficiaries
to receive any compensation or benefit payable hereunder following the
Executive's death by giving the Company written notice thereof. In the event of
the Executive's death or a judicial determination of his incompetence, reference
in this Agreement to the Executive shall be deemed, where appropriate, to refer
to his beneficiary, estate or other legal representative.
14. MISCELLANEOUS. (a) This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified except by a written agreement executed
by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications under this Agreement
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Mr. William Willis, Jr.
5200 North Ocean Drive
20A Singer Island
Florida 33404
If to the Company:
Top Source Technologies, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Garden, Florida 33418
Attention: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 14. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement. If any provision of this Agreement shall be held
invalid or unenforceable in part, the remaining portion of such provision,
together with all other provisions of this Agreement, shall remain valid and
enforceable and continue in full force and effect to the fullest extent
consistent with law.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provisions of, or to assert, any right under, this
Agreement (including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to paragraph (c) of Section 5 of
this Agreement) shall not be deemed to be a waiver of such provision or right or
of any other provision of or right under this Agreement.
(f) The Executive and the Company acknowledge that this
Agreement supersedes any other agreement between them concerning the subject
matter hereof.
(g) The rights and benefits of the Executive under this
Agreement may not be anticipated, assigned, alienated or subject to attachment,
garnishment, levy, execution or other legal or equitable process except as
required by law. Any attempt by the Executive to anticipate, alienate, assign,
sell, transfer, pledge, encumber or charge the same shall be void. Payments
hereunder shall not be considered assets of the Executive in the event of
insolvency or bankruptcy.
(h) This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and said counterparts shall
constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization of the Board of Directors,
the Company has caused this Agreement to be executed in its name on its behalf,
all as of the day and year first above written.
William Willis, Jr.
TOP SOURCE TECHNOLOGIES, INC.
By:
David Natan
Vice President and CFO
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
TO: William Willis, Jr.
As referenced in your employment agreement with Top Source
Technologies, Inc. (the "Company") dated as of May 21, 1997 (the "Employment
Agreement"), pursuant to the Company's 1993 Stock Option Plan, as amended (the
Plan"), you have been granted non-qualified stock options for the purchase of
500,000 shares (the "Option") of the Company's Common Stock at various exercise
prices as outlined in the attached Schedule A-1, the closing price of the
Company's Common Stock on the American Stock Exchange on May 20, 1997. Please
sign and return to the Company the acceptance and Acknowledgement attached to
this Stock Option Agreement. The terms of the Plan, including, without
limitation, those relating to withholding taxes, are incorporated into this
Agreement by reference. This Option is not intended to qualify as an "incentive
stock option" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended.
The terms of the Option are set forth in the Plan and in this
Agreement. Certain of the terms set forth in the Plan are summarized below;
however, reference should be made to the Plan for the complete terms.
Term: This Option shall terminate ten years from date of grant
unless sooner terminated in accordance with the terms of the Plan and this
Agreement.
.
Exercise: During your lifetime only you can exercise the
Option. The Plan also provides for exercise of the Option by the personal
representative of your estate or the beneficiary thereof following your death.
You may use the Notice of Exercise in the form attached to this Agreement when
you exercise the Option.
Notices: All notices sent in connection with this Option shall
be in writing and, if to the Company, shall be delivered personally to the
Secretary of the Company or mailed to its principal office, addressed to the
attention of the Secretary and, if to the Optionee, shall be delivered
personally or mailed to the Optionee at the address noted on the attached
Acceptance and Acknowledgement. Such addresses may be changed at any time by
notice from one party to the other.
Payment for Shares: The Option may be paid for by delivery
to the Company of the following together with the Notice of Exercise:
<PAGE>
(a) Bank certified or cashier's checks; or
(b) Unless the Committee (as defined in the Plan) in its sole
discretion determines otherwise, shares of the capital stock of the Company held
by you having a fair market value at the time of exercise, as determined in good
faith by the Plan Administrator, equal to the exercise price.
Upon receipt of written notice of exercise and payment and
delivery of any other required documentation, the Company shall deliver to the
person exercising the Option a certificate or certificates for such shares. It
shall be a condition to the performance of the Company's obligation to issue or
transfer Common Stock upon exercise of this option that the Optionee pay, or
make provision satisfactory to the Company for the payment of, any taxes which
the Company is obligated to collect with respect to the issue or transfer of
Common Stock upon exercise.
Termination: If your employment by the Company is terminated
for Cause, as defined in the Employment Agreement, the Option will terminate as
of the first discovery by the Company of any reason for termination for Cause.
If your employment stops because of your Death or Disability, as defined in the
Employment Agreement, the Option shall terminate 12 months after your employment
stops. Otherwise the Option will terminate three months after your employment
with the Company ends.
Nothing in the Plan or in this Agreement shall confer on you any right
to continue in the employ of the Company or any parent or subsidiary of the
Company or interfere in any way with the right of the Company or any parent or
subsidiary of the Company to terminate your employment at any time.
Transfer of Option: The Option is not transferable except by will or
by the applicable laws of descent and distribution.
Vesting: The Option is vested as outlined in Schedule A-1:
Notwithstanding the foregoing, the vesting of such Options shall be
accelerated in the event of a Change in Control, as that term is defined in the
Employment Agreement.
Date of Grant: The date of grant of the Option is May 21, 1997.
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 15 OF THE PLAN WHICH
DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES
LAWS THAT MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE
COMPANY CAN ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER
THE SHARES THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF SUCH
SHARES ARE NOT REGISTERED, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS AN
EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS FROM
REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND MIGHT
BE UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY, YOU
MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON SUCH
EXERCISE. IN ADDITION, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR CONCERNING THE
RAMIFICATIONS TO YOU OF HOLDING OR EXERCISING YOUR OPTIONS OR HOLDING OR SELLING
THE SHARES UNDERLYING SUCH OPTIONS.
You understand that, during any period in which the shares
which may be acquired pursuant to your Option are subject to the provisions of
Section 16 of the Securities Exchange Act of 1934 (and you are also so subject),
in order for your transactions under the Plan to qualify for the exemption from
Section 16(b) provided by Rule 16b-3, a total of six months must elapse between
the grant of the Option and the sale of the Option (other than upon exercise or
conversion) or the shares underlying the Option.
All decisions or interpretations made by the Committee with
regard to any question arising hereunder or under the Plan shall be binding and
conclusive on the Company and you.
This Agreement shall bind and inure to the benefit of the
parties hereto and the successors and assigns of the Company and, to the extent
provided in the Plan, your executors, administrators, legatees, and heirs.
Please execute the Acceptance and Acknowledgement set forth
below on the enclosed copy of this Agreement and return it to the undersigned.
Very truly yours,
TOP SOURCE TECHNOLOGIES, INC.
Dated: As of May 21, 1997
By:_/s/David Natan
DAVID NATAN
<PAGE>
INSTRUCTION: PLEASE COMPLETE THE INFORMATION REQUESTED BELOW, DETACH THIS PAGE
AFTER SIGNING WHERE INDICATED AND RETURN TO THE COMPANY.
ACCEPTANCE AND ACKNOWLEDGEMENT
I, a resident of the State of Florida, accept the non-qualified stock option
described in the Non-Qualified Stock Option Agreement dated as of May 21, 1997
and in the Top Source Technologies, Inc. 1993 Stock Option Plan, as amended, and
acknowledge receipt of a copy of this Agreement. I have read and understand all
the provisions and limitations of the Plan, particularly those relating to
non-qualified stock options and the provisions of Section 15 of the Plan
relating to securities regulations.
Dated: As of May 21, 1997
/s/William C. William
- ------------------------------
Signature
Name: William Willis, Jr.
Address:
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION
------------------------------
(Name, please print)
------------------------------
(Date)
TOP SOURCE TECHNOLOGIES, INC.
7108 Fairway Drive
Suite 200
Palm Beach Garden, Florida 33418
Gentlemen:
I hereby exercise my right to purchase _______________ shares of Common Stock of
Top Source Technologies, Inc., a Delaware corporation (the"Company"), pursuant
to, and in accordance with, the Top Source Technologies, Inc. 1993 Stock Option
Plan and the Non-Qualified Stock Option Agreement ("Agreement") dated as of ,
1997. As provided in that Agreement, I hereby: [check one]
[ ] deliver herewith a certified or bank cashier's
check in the amount of the aggregate option exercise
price; or
[ ] undertake to deliver shares of the capital stock of
the Company held by me having a fair market value at
the time of exercise, as determined in good faith by
the Plan Administrator, equal to the aggregate option
exercise price.
Please deliver to me stock certificates representing the
subject shares registered as follows:
Name:___________________________________________
Address:_________________________________________
------------------------------------------------
Social Security Number ____________________________
The aggregate exercise price is $ _________ (total number of
shares to be purchased x $--------).
(1) Tax Implications. I understand that there are certain tax
implications to my exercise of my right to purchase shares of Common Stock under
the Agreement. I further understand that it is my obligation to confer with my
own tax advisor with respect to such tax implications.
(2) Securities Regulation. I hereby represent and acknowledge that (i)
the shares of Common Stock I propose to purchase (i) are being purchased for
investment and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel satisfactory to the Company, may be made
without violating the registration provisions of the Securities Act of 1933, as
amended (the "Act")), (ii) I have been advised and understand that (A) such
shares have not been registered under the Act and are "restricted securities"
within the meaning of Rule 144 under the Act and are subject to restrictions on
transfer and (B) the Company is under no obligation to register such shares
under the Act or to take any action which would make available to me any
exemption from such registration, and (iii) such shares may not be transferred
without compliance with all applicable federal and state securities laws.
Very truly yours,
------------------------------
Name:
<PAGE>
SCHEDULE A - 1
OF
EMPLOYMENT AGREEMENT
BETWEEN
TOP SOURCE TECHNOLOGIES, INC.
AND
WILLIAM C. WILLIS, JR.
MAY 21, 1997
============================================================================
On May 21, 1997, the Company granted to William C. Willis, Jr. 300,000
non-qualified stock options at a price of $2.00 per share which vest in three
equal increments of 100,000 options each on May 21, 1998, 1999 and 2,000,
subject to Mr. Willis' continued employment with the Company.
Additionally, on May 21, 1997, the Company granted to William C.
Willis, Jr. 200,000 non-qualified stock options at a price of $2.00 per share
which become exercisable, if at all, in two 100,000 increments if the closing
price of the Company's common stock on the American Stock Exchange is or exceeds
$7.00 and $9.00, respectively, for at least 30 consecutive trading days and Mr.
Willis is employed by the Company at the end of such period. All 500,000 options
become immediately exercisable in the future upon certain unusual contingencies.
The above information was filed with the Securities and Exchange
Commission on a Form 3 dated May 27, 1997.
