UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended December 31, 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
incorporation or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 775-5756
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 12, 1998
Common stock: $.001 par value 28,561,477 shares
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Consolidated Balance Sheets as of December 31, 1997
(Unaudited) and September 30, 1997.............................1
Consolidated Statements of Operations for the
Three Months Ended December 31, 1997 and 1996 (Unaudited)......2
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1997 and 1996 (Unaudited).....3
Notes to Unaudited Interim Consolidated
Financial Statements..........................................4
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations...............5-7
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................8
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<CAPTION>
TOP SOURCE TECHNOLOGIES, INC.
Form 10-Q
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
December 31 September 30
ASSETS 1997 1997
---------------- -----------------
Current Assets:
Cash and cash equivalents $1,651,308 $2,103,679
Accounts receivable trade 2,118,713 2,255,303
Advances to officers 23,765 27,234
Inventories 943,543 881,023
Prepaid expenses 238,907 219,446
Other 126,301 155,448
---------------- -----------------
Total current assets 5,102,537 5,642,133
Property and equipment, net 1,961,566 2,147,403
Manufacturing and distribution rights and patents, net 270,471 284,562
Capitalized database, net 2,231,319 2,284,027
Notes receivable from officers 107,399 106,687
Other assets, net 873,223 890,218
================ =================
TOTAL ASSETS $10,546,515 $11,355,030
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $2,232,581 $1,996,341
Accounts payable 591,338 672,836
Accrued salaries 10,842 7,494
Accrued liabilities 566,197 1,050,978
Net liabilities from discontinued operations 122,786 122,928
---------------- -----------------
Total current liabilities 3,523,744 3,850,577
Senior convertible notes 3,020,000 3,020,000
---------------- -----------------
Total liabilities 6,543,744 6,870,577
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; none outstanding - -
Common stock-$.001 par value, 50,000,000 shares
authorized; 28,561,477 and 28,461,477 shares issued and
outstanding on December 31 and September 30, respectively 28,561 28,461
Additional paid-in capital 28,894,351 28,744,451
Accumulated deficit (23,570,787) (22,939,105)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
---------------- -----------------
Total stockholders' equity 4,002,771 4,484,453
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,546,515 $11,355,030
================ =================
See accompanying notes to unaudited interim consolidated financial statements.
</TABLE>
1
<TABLE>
<CAPTION>
TOP SOURCE TECHNOLOGIES, INC.
Form 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1996
---------------- -----------------
Revenue:
Product sales $3,247,035 $3,197,537
Service revenue 29,293 26,575
---------------- -----------------
Net sales 3,276,328 3,224,112
---------------- -----------------
Cost of sales:
Cost of product sales 2,130,646 2,223,119
Cost of services 9,254 9,254
---------------- -----------------
Cost of sales 2,139,900 2,232,373
---------------- -----------------
Gross profit 1,136,428 991,739
---------------- -----------------
Expenses:
General and administrative 1,045,240 1,292,941
Selling and marketing 320,390 243,226
Depreciation and amortization 260,159 266,852
Research and development 15,265 2,334
---------------- -----------------
Total expenses 1,641,054 1,805,353
---------------- -----------------
Loss from operations (504,626) (813,614)
Other income (expense):
Interest income 29,023 38,733
Interest expense (135,235) (70,447)
Other income (expense), net (2,344) 6,161
---------------- -----------------
Net other expense (108,556) (25,553)
---------------- -----------------
Loss before income taxes (613,182) (839,167)
Income tax expense (18,500) (18,500)
---------------- -----------------
Loss from continuing operations (631,682) (857,667)
Income from discontinued operations - 25,000
================ =================
Net loss $ (631,682) $ (832,667)
================ =================
Basic loss per weighted average common share outstanding:
Continuing operations ($0.02) ($0.03)
Discontinued operations - -
================ =================
Total $ (0.02) $ (0.03)
================ =================
Basic weighted average common shares outstanding 28,084,827 28,251,122
================ =================
See accompanying notes to unaudited interim consolidated financial statements.
2
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<CAPTION>
TOP SOURCE TECHNOLOGIES, INC.
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1996
---------------- -----------------
Net loss ($631,682) ($832,667)
Adjustments to reconcile net loss to
net cash used in operating activities:
Income from discontinued operations - (25,000)
Depreciation 264,581 278,050
Amortization 69,733 69,404
Disposal of equipment 63,349 42,641
Repayments from (advances to) officers 2,757 (28,938)
Decrease in accounts receivable, net 136,590 1,818,516
Increase in inventories (62,520) (673,061)
Increase in prepaid expenses (19,461) (79,900)
Decrease in other assets 45,137 655
Decrease in accounts payable (81,498) (366,039)
Increase (decrease) in accrued salaries 3,348 (216,783)
Decrease in accrued liabilities (484,781) (155,099)
---------------- -----------------
Net cash used in operating activities (694,447) (168,221)
---------------- -----------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (142,093) (767,703)
Reimbursement of tooling costs - 361,056
Additions to patent costs, net (1,929) (6,110)
Discontinued operations - change in net assets (142) 3,373,910
---------------- -----------------
Net cash provided by (used in) investing activities (144,164) 2,961,153
---------------- -----------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 150,000 2,813
Repurchase of treasury stock - (1,145,974)
Proceeds from borrowings 236,240 -
-----------------
----------------
Net cash provided by (used in) financing activities 386,240 (1,143,161)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents (452,371) 1,649,771
Cash and cash equivalents at beginning of period 2,103,679 653,129
---------------- -----------------
Cash and cash equivalents at end of period $1,651,308 $2,302,900
================ =================
See accompanying notes to unaudited interim consolidated financial statements.
3
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Top Source Technologies, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
financial statements. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The results of operations of any interim
period are not necessarily indicative of the results of operations for the
fiscal year. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended September 30, 1997. Certain fiscal year 1997 amounts have been
reclassified to conform to current year presentation.
New Accounting Standard
Loss per share was calculated based upon Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", which was adopted by the Company in the current
fiscal period. Adoption of SFAS No. 128 which superseded the previous standard
(APB No. 15) had no effect on the Company's previously reported loss per share.
2. INVENTORIES
Inventories consisted of the following:
December 30, September 30,
1997 1997
Raw materials $ 739,814 $ 820,821
Finished goods 203,729 60,202
------- ------
$ 943,543 $ 881,023
============ ============
4
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenue for the three month period ended December 31, 1997 was $3,276,328
compared to $3,224,112 for the same period in 1996. The slight increase in
revenue for the three month period ended December 31, 1997 compared to the same
period in 1996 is primarily attributable to (1) an increase in sales of overhead
speaker systems ("OHSS") for the Wrangler contract at the Company's Top Source
Automotive, Inc. subsidiary ("TSA") from $1,881,280 for the three months ended
December 31, 1996 to $2,038,046 for the same period in 1997; (2) sales of
$1,109,887 of OHSS for the Company's new Grand Cherokee contract which commenced
in August 1997, (3) a nominal increase in service revenues from the lease of
On-Site Analyzers ("OSA") at Top Source Instruments, Inc. ("TSI"), (4) offset by
the loss of OHSS sales for the Cherokee contract which ended on June 30, 1997.
TSA is currently seeking to increase its revenues by entering into strategic
relationships with major suppliers to Original Equipment Manufacturers ("OEMs")
that , if successful, could result in production line orders for OHSS in fiscal
years after 1998. TSA is also attempting to increase revenues by seeking
strategic relationships with several after-market suppliers. In January 1998,
TSA's new OHSS developed by the Company for Kenwood U.S.A. ("Kenwood") was
displayed at the Consumer Electronics Show in Las Vegas, Nevada. The Company
believes that this product was well received and is anticipating receiving an
initial inventory stocking order from Kenwood in early March 1998. The Company
believes that this product will generate fiscal 1998 revenues, however, there
can no assurances that Kenwood will place an order, or that order if placed,
will be significant.
During the first fiscal quarter ended December 31, 1997, TSI generated nominal
ongoing revenue from the lease of OSA units at five different locations. In
January 1998, the Company signed OSA leases for one unit with Harley Davidson
Corporation, a manufacturer of motorcycles; and for two OSA units with Speedco,
Inc. ("Speedco") a maintenance provider for the trucking industry. Under the
terms of the lease, Speedco agreed to consider leasing OSA units at eight other
Speedco locations expressly contingent on the successful performance of the
first two leased units. In addition, on January 21, 1998, TSI sold an OSA unit
to General Motors Corp.
The gross profit margin for three months ended December 31, 1997 was 34.7%
compared to 30.8% for the same period in 1996. The increase in the gross profit
margin compared to the prior year is primarily attributable to decreased labor
and overhead costs relating to product sales at TSA.
General and administrative expenses decreased $247,701 for the three month
period ended December 31, 1997 compared to the same period in 1996. This
decrease is attributable to the Company's restructuring which took place in the
fourth quarter of fiscal 1997.
Selling and marketing increased 31.7% for the three months ended December 31,
1997 compared to the same period in 1996. The increase was primarily
attributable to the continued marketing and promotional activities in support of
the OSA.
5
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations - (Continued)
Interest income decreased 25.1% for the three months ended December 31, 1997
compared to the same period in 1996. The decrease is attributable to a
decline in on hand cash balances due to operating losses and due to the use of
cash from January 1, 1997 to December 31, 1997 to purchase capital equipment of
$816,655 which included $468,650 in OSA units.
Interest expense increased 91.8% for the three months ended December 31, 1997
compared to the same period in 1996. The increase is due to the increased
borrowings with NationsCredit.
Net Loss Analysis
In order to reduce its operating losses, the Company is focusing its efforts on
increasing revenues of both OHSS units, and OSA units The Company believes that
the OSA orders received in January 1998 and the pending order from Kenwood will
help to reduce its operating losses, and establish additional credibility for
both the OSA technology and the Company's new after-market initiative. The
Company must generate significant additional ongoing revenue in future months in
order to avoid future material operating losses.
Liquidity and Capital Resources
Net cash used in operating activities was ($694,447) for the three months ended
December 31, 1997. This usage of cash was attributable to a net loss of $297,368
which excludes depreciation and amortization, an increase in inventories of
$62,520 and a decrease in accounts payable and accrued liabilities of $566,279.
This was partially offset by a decrease in accounts receivable of $136,590 and
other assets of $45,137 and disposal of equipment of $63,349.
Net cash used by investing activities was ($144,164). This use of cash was
attributable to $142,093 which was expended for capital assets.
Net cash provided by financing activities was $386,240 which consisted of net
proceeds from sales of common stock through exercise of stock options of
$150,000 and funds of $236,240 from the Company's Credit 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 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 December 31, 1997 factoring the interest earned on
used drawn funds was 5.44%. As of December 31, 1997 and February 6, 1998, the
entire available borrowings on this Credit Facility of $2,232,581 and $1,367,709
were outstanding, respectively.
6
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
In 1995, the Company entered into an agreement with advisory clients of Ganz
Capital Management, Inc., now Mellon Private Asset Management ("Mellon"), to
purchase $3,020,000 in 9% Senior Subordinated convertible notes from the Company
("Notes"). These Notes are subject to an Indebtedness to Equity ratio that
cannot exceed 1.5 to 1.0. As of December 31, 1997, the Company was in compliance
with the ratio. However, due to the Company's 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 G. Jeff Mennen,
a new 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 ten-year warrants at a strike
price of $2.00 per share to Mr. Mennen.
As of February 1, 1998, the Company had approximately $1,313,015 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. 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.
During the last eight months, the Company initiated and completed a major
restructuring. This restructuring included the hiring of a new CEO and a
reduction in approximately one-third of the Company's work force. The primary
strategy of the new Company management has been to concentrate marketing
activities to sell or lease OSA to seven specific markets. 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.
Forward-Looking Statements
The statements discussed above relating to the Company's expectations that it
anticipates (1) generating additional and increasing OSA revenue (2) entering
into strategic relationships, (3) obtaining a purchase order from Kenwood for an
after-market OHSS developed by TSA (4) future production line TSA orders, and
(5) the adequacy of cash flow and liquidity, are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934.
Important factors that could cause actual results to differ materially from the
forward-looking statements include the following: (1) 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, (7) potential future competition from third parties
that may develop proprietary technology which either does not violate the
Company's proprietary rights or is claimed not to violate the Company's
proprietary rights, and (8) an inability to attain joint venture agreements with
large OEM and aftermarket suppliers.
7
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.0 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended December 31, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: /s/ DAVID NATAN
David Natan
Vice President and Chief Financial Officer
Dated: February 13, 1998
8
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,651,308
<SECURITIES> 0
<RECEIVABLES> 2,118,713
<ALLOWANCES> 0
<INVENTORY> 943,543
<CURRENT-ASSETS> 5,102,537
<PP&E> 1,961,566
<DEPRECIATION> 2,603,902
<TOTAL-ASSETS> 10,546,515
<CURRENT-LIABILITIES> 3,523,744
<BONDS> 0
0
0
<COMMON> 28,561
<OTHER-SE> 3,974,210
<TOTAL-LIABILITY-AND-EQUITY> 10,546,515
<SALES> 3,276,328
<TOTAL-REVENUES> 3,276,328
<CGS> 2,139,900
<TOTAL-COSTS> 2,139,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (135,235)
<INCOME-PRETAX> (613,182)
<INCOME-TAX> ( 18,500)
<INCOME-CONTINUING> (631,682)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (631,682)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
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