MICHAEL HARRIS, P.A.
Attorneys at Law
712 U.S. HIGHWAY ONE, SUITE 400
NORTH PALM BEACH, FLORIDA 33408
Telephone: (561) 844-3600
Facsimile: (561) 845-0108
E-Mail Address: [email protected]
Michael D. Harris
Beth J. Harris
August 27, 1998
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Stop 2 - 6
Washington, D.C. 20549
Re: Top Source Technologies, Inc.
Preliminary Proxy Statement and Form of Proxy
Dear Sirs:
Pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 (the
"Exchange Act"), enclosed please find preliminary copies of the Company's Proxy
Statement, Notice of Annual Meeting, letter to stockholders and Proxy filed on
behalf of Top Source Technologies, Inc. (the "Company"). The filing fee required
and computed pursuant to the Exchange Act Rules 14a-6(i)(1) and 0-11 in the
amount of $2,000 has been paid in accordance with the usual lock-box procedure.
Courtesy copies have been provided to the Staff currently reviewing the
Company's Registration Statement on Form S-3, File number 333-56083.
Please contact the undersigned or Beth J. Harris, Esq. within the next 10
calendar days at (561) 844-3600 or (561) 714-1122 (cell phone) with any comments
you may have concerning the enclosed materials.
Very truly yours,
Michael D. Harris
MDH:rsr
Enclosures
cc: Mr. David Natan, Top Source Technologies, Inc.
Mr. Lawrence A. Bornstein, CPA, Arthur Andersen LLP
Mr. Jeffrey Meskin, Morgan Keegan & Co., Inc. (via Federal Express)
Mr. Steven C. Duvall (via Federal Express)
Mr. Errol Sanderson (via Federal Express)
Mr. Donald Cavern (via Federal Express)
<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1998
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [ X ] Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
TOP SOURCE TECHNOLOGIES,INC.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
N/A - Asset Purchase
2) Aggregate number of securities to which transaction applies: N/A
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule
0-11 (Set forth the amount of which the filing fee is
calculated and state how it was determined): Purchase Price of
$10,000,000 of which a minimum of $7,500,000 must be paid in
cash and the balance of $2,500,000 may be in the form of a
secured promissory note - fee calculated pursuant to Rule
o-11(c)(2)
4) Proposed maximum aggregate value of transaction: $10,000,000
5) Total fee paid: $2,000
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: __________
2) Form, Schedule or Registration Statement No.: _________
3) Filing Party: _________
4) Date Filed: ___________
<PAGE>
PRELIMINARY PROXY MATERIALS FOR THE
INFORMATION OF THE
SECURITIES AND EXCHANGE COMMISSION
TOP SOURCE TECHNOLOGIES, INC.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418-3757
, 1998
Dear Stockholder:
On behalf of the Board of Directors of Top Source Technologies, Inc.
(the "Company"), I am extending you a cordial invitation to attend the annual
meeting of stockholders of the Company (the "Annual Meeting"), which will be
held at The Marriott Eastside, 252 Lexington Avenue, New York, New York, 10017,
at 12:00 Noon on __________, 1998. I look forward to greeting as many
stockholders as possible at the Annual Meeting.
At the Annual Meeting, you will be asked to consider and approve, among
other things, the agreement dated as of August 14, 1998 (the "Agreement"), by
and among the Company, Top Source Automotive, Inc. ("TSA"), a wholly-owned
subsidiary of the Company, NCT Audio Products, Inc. (the "Buyer") and the parent
company of the Buyer, Noise Cancellation Technologies, Inc., pursuant to which
TSA will sell and the Buyer will purchase 100% of the assets of TSA. Including
the $3,500,000 the Company has already received as a down payment (of which
$2,050,000 is being held in escrow), the Buyer will pay the Company a minimum of
an additional $6,500,000; the Company may also receive up to $6,000,000 in cash
or common stock of the Buyer based upon the future operations of the Buyer's
subsidiary acquiring TSA over a two-year period following the closing. Details
concerning the terms and conditions of the proposed transaction are included in
the enclosed Proxy Statement.
AT THE BOARD OF DIRECTORS' MEETINGS HELD TO CONSIDER THE PROPOSED
TRANSACTION, THE DIRECTORS OF THE COMPANY CAREFULLY CONSIDERED AND UNANIMOUSLY
APPROVED THE TERMS OF THE PROPOSED TRANSACTION AS BEING IN THE BEST INTEREST OF
THE COMPANY AND ITS STOCKHOLDERS. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" PROPOSAL NO. 1 TO APPROVE THE
PROPOSED TRANSACTION.
In addition, at the Annual Meeting, you will be asked to vote on two
other proposals: (i) to elect two directors for three-year terms ending in 2001;
and (ii) to ratify the appointment of Arthur Andersen LLP as independent
auditors for the year ended September 30, 1998, and any other matters that may
properly come before the Annual Meeting.
It is important that your shares be represented at the Annual Meeting
whether or not you are able to attend. Accordingly, you are urged to sign, date
and mail the enclosed proxy card promptly. If you later decide to attend the
Annual Meeting, you may revoke your proxy and vote in person. The Company's
Proxy Statement supersedes in all respects the Proxy Statement previously mailed
to you dated February 5, 1998 and the meeting previously scheduled for April 3,
1998 has been adjourned to __________, 1998 as set forth above. Any proxy cards
received in connection with the April 3, 1998 meeting have been destroyed by the
Company, and you are asked to submit the new proxy card which we have enclosed.
Thank you for your time and consideration.
Sincerely,
William C. Willis, Jr., Chairman,
President and Chief Executive Officer
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418-3757
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
ON __________, 1998
To All Stockholders:
The annual meeting of the Stockholders (the "Annual Meeting") of Top
Source Technologies, Inc. (the "Company") will be held at 12:00 Noon on
__________, 1998 at The Marriott Eastside, 252 Lexington Avenue, New York, New
York, 10017, for the following purposes:
1. To consider and approve the Asset Purchase Agreement entered into as of
August 14, 1998, by and among the Company, Top Source Automotive, Inc., NCT
Audio Products, Inc. and Noise Cancellation Technologies, Inc.;
2. To elect two persons to the Board of Directors of the Company to
serve three-year terms;
3. To ratify the appointment of Arthur Andersen LLP as independent
auditors for the fiscal year ended September 30, 1998; and
4. For the transaction of any other lawful business that may properly
come before the Annual Meeting.
The Board of Directors has fixed the close of business on ___________,
1998 as the record date for a determination of stockholders entitled to notice
of, and to vote at, this Annual Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" PROPOSALS NO. 1, NO. 2, AND NO. 3.
Please vote, date, sign and mail the enclosed proxy card promptly in
the enclosed return envelope. It is extremely important that you vote. If we do
not have enough proxy cards returned we will not have a quorum, resulting in
unnecessary expense to you, the stockholder. Help us help you.
By Order of the Board of Directors
Dated: _____________, 1998
By:
David Natan, Secretary
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
PRELIMINARY PROXY STATEMENT
--------------------
This proxy statement (the "Proxy Statement") is sent to the holders of
shares of common stock, par value $.001 per share (the "Common Stock") of Top
Source Technologies, Inc. (the "Company"), a Delaware corporation, in connection
with the solicitation of proxies by the board of directors (the "Board") of the
Company for use at the annual meeting of stockholders (the "Annual Meeting") to
be held at 12:00 Noon on __________, 1998 at The Marriott Eastside, 252
Lexington Avenue, New York, New York, 10017, and any adjournments thereof. This
Proxy Statement supersedes in all respects the Proxy Statement dated February 5,
1998 and the Annual Meeting previously scheduled for April 3, 1998 was
cancelled. Any proxy cards received in connection with the April 3, 1998 Annual
Meeting have been destroyed by the Company and you are asked to complete and
return the proxy card enclosed with this Proxy Statement.
At the Annual Meeting, the holders of the Company's Common Stock will
be asked to: (i) consider and approve the Asset Purchase Agreement (the
"Agreement"), a copy of which is attached as Appendix A, dated as of August 14,
1998 by and among the Company, Top Source Automotive, Inc. ("TSA"), a
wholly-owned subsidiary of the Company, NCT Audio Products, Inc. (the "Buyer"),
and Noise Cancellation Technologies, Inc. (the "Guarantor") through which the
Buyer has agreed to purchase 100% of the assets of TSA (the "Proposed
Transaction"); (ii) elect two members to the Company's Board to serve a
three-year term; (iii) ratify the appointment of Arthur Andersen LLP as the
Company's independent accountants for the year ending September 30, 1998; and
(iv) vote upon the transaction of such other matters as may properly come before
the Annual Meeting.
Included among the matters described in this Proxy Statement is the
consideration and approval of the Proposed Transaction. Upon the terms and
subject to the conditions of the Agreement, on the closing date under the
Agreement (the "Closing" or the "Closing Date"), the Buyer will purchase 100% of
the assets of TSA (the "Assets") for a minimum of $10,000,000 consisting of
$1,450,000 paid to TSA on June 11, 1998 (the "First Payment"), $2,050,000 paid
into escrow on July 31 1998 (the "Second Payment") and the balance of $6,500,000
due at the Closing. Of this $6,500,000, at least $4,000,000 must be in cash and
the balance may be in the form of a 12% secured promissory note due March 31,
1999 (the "Buyer's Note"). Additionally, TSA shall receive up to an additional
$6,000,000 payable at the option of the Company in cash or Common Stock of the
Buyer based upon the future earnings of the Buyer's subsidiary which acquires
the Assets for a two-year period following the Closing. The Guarantor shall
guarantee the Earn-Out (the "Earn-Out"). All of the consideration shall be paid
to TSA and may be transferred to the Company without any distribution to the
Buyer which shall become a minority stockholder of TSA following the Annual
Meeting. The Buyer shall assume substantially all of the liabilities of TSA. The
consummation of the Proposed Transaction is subject to the satisfaction or
waiver of certain conditions including, approval of the Company's stockholders,
the Company and the Buyer reaching an agreement upon acceptable collateral to
secure the Buyer's Note and the Buyer obtaining the necessary financing (the
"Financing"). If the Company's stockholders approve the Proposed Transaction,
the $2,050,000 in escrow shall be paid to the Company, and the Buyer will become
the owner of 20% of outstanding TSA Common Stock; if the Proposed Transaction is
not approved, the $2,050,000 will be returned to the Buyer and it will become
the owner of 14.5% of TSA's Common Stock. If the Proposed Transaction fails to
close by March 31, 1999, the Company will be free to attempt to find another
purchaser of TSA and the Buyer will be obligated to sell its TSA shares to any
such purchaser on the same terms and conditions as the Company receives for its
TSA Common Stock. However, if the Proposed Transaction fails to close by
December 31, 1998, the Buyer has a one-week option to cancel its exclusive right
to purchase the Assets of TSA and as consideration for such cancellation receive
an additional 15% of TSA Common Stock. See "Proposal No. 1 - The Proposed
Transaction - Terms and Conditions of the Agreement".
This Proxy Statement is being furnished by the Board of the Company to
holders of Common Stock in connection with the solicitation of proxies for use
at the Annual Meeting, and any adjournments thereof. Each copy of this Proxy
Statement being mailed or delivered to the Company's stockholders is accompanied
by a proxy card, the notice of Annual Meeting, the appendixes and copies of the
Company's Form 10-K for the year ended September 30, 1997 (the "Form 10-K") and
the Company's Form 10-Q for the quarter ended June 30, 1998
All properly executed proxy cards delivered pursuant to this
solicitation and not revoked will be voted at the Annual Meeting in accordance
with the directions given. In voting by proxy with regard to the election of
directors, the Company's stockholders may vote in favor of all nominees,
withhold their votes as to all nominees or withhold their votes as to specific
nominees. With regard to other proposals, the Company's stockholders may vote in
favor of each proposal or against each proposal, or in favor of some proposals
and against others, or may abstain from voting on any or all proposals.
Stockholders should specify their respective choices on the accompanying proxy
card. If no specific instructions are given with regard to the matters to be
voted upon, the shares of Common Stock represented by a signed proxy card will
be voted "FOR" Proposal Nos. 1, 2 and 3, listed on the proxy card. If any other
matters properly come before the Annual Meeting, the persons named as proxies
will vote upon such matters according to their judgment.
The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock (or __________ shares) on the record date of _________,
1998 is necessary to constitute a quorum at the Annual Meeting. Each of the
proposals set forth in this Proxy Statement will be voted upon separately at the
Annual Meeting. Because the Proposed Transaction may constitute a sale of
"substantially all" of the assets of the Company under Delaware law, which
requires the approval of a majority of the outstanding shares of the Common
Stock before such a sale may be consummated, the Board is seeking approval of
the Company's stockholders for the Proposed Transaction. A majority of
outstanding Common Stock (___________ shares) must vote in favor of Proposal No.
1 or it will be defeated. The affirmative vote of the holders of a plurality of
shares of Common Stock present in person or represented by proxy at the Annual
Meeting will be required to elect each of the directors to the Company's Board
pursuant to Proposal No. 2. The vote of the holders of a majority of shares of
Common Stock present in person or represented by proxy at the Annual Meeting
will be required to approve and adopt Proposal No. 3. For these reasons, it is
important that all shares are represented at the Annual Meeting, either in
person or by proxy.
All proxy cards delivered pursuant to this solicitation are revocable
at any time prior to the Annual Meeting at the option of the persons executing
them by giving written notice to the Secretary of the Company, by delivering a
later-dated proxy card or by voting in person at the Annual Meeting. All written
notices of revocation and other communications with respect to revocations of
proxies should be addressed to: Top Source Technologies, Inc., 7108 Fairway
Drive, Suite 200, Palm Beach Gardens, Florida, 33418-3757, Attention: Mr. David
Natan, Secretary.
Proxies will initially be solicited by the Company by mail, but
directors, officers and selected employees may solicit proxies from stockholders
personally or by telephone, facsimile or other forms of communication. Such
directors, officers and employees will not receive any additional compensation
for such solicitation. In addition, the Company has retained Morrow & Co. on its
behalf to solicit proxies on its behalf for a fee of $4,000 plus $3.00 per
soliciting telephone call, which includes the cost of the telecommunications,
directory assistance and related telephone expenses. The Company has agreed to
reimburse Morrow & Co. for all other out-of-pocket costs. The Company estimates
that the total amount paid to Morrow & Co. will be approximately $40,000. The
Company also will request brokerage houses, nominees, fiduciaries and other
custodians to forward soliciting materials to beneficial owners, and the Company
will reimburse such persons for their reasonable expenses incurred in doing so.
All expenses incurred in connection with the solicitation of proxies will be
borne by the Company.
AT THE BOARD MEETINGS HELD TO CONSIDER THE PROPOSED TRANSACTION, THE
BOARD CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE PROPOSED
TRANSACTION AS BEING IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS.
THE COMPANY'S BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
PROPOSAL NO. 1 TO APPROVE THE PROPOSED TRANSACTION.
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" PROPOSALS NO. 2 AND NO. 3.
Stockholders of the Company are not entitled to dissenters' rights of
appraisal or other dissenters' rights under Delaware law with respect to the
Proposed Transaction or any other transactions contemplated by the Agreement.
THE COMPANY'S STOCKHOLDERS
SHOULD CONSIDER CAREFULLY THE FACTORS DESCRIBED
UNDER THE HEADING "RISK FACTORS" BEGINNING ON
PAGE ___ OF THIS PROXY STATEMENT.
The Common Stock is listed on the American Stock Exchange ("AMEX")
under the symbol "TPS". On __________________, 1998, the last sale price for the
Common Stock as reported by the AMEX was $____ per share.
This Proxy Statement and the accompanying proxy card are being mailed
to the stockholders of the Company on or about ___________, 1998.
The date of this Proxy Statement is __________, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
AVAILABLE INFORMATION..................................................................................... 1
FORWARD-LOOKING STATEMENTS................................................................................
SUMMARY ................................................................................................
Business of the Company and TSA......................................................................
The Proposed Transaction.............................................................................
Financing; Acceptable Collateral................................................................
Repayment of Debt...............................................................................
Use of Proceeds......................................................................................
Reasons for the Proposed Transaction.................................................................
Recommendation of the Company's Board of Directors...................................................
Opinion of Financial Advisor.........................................................................
Interests of Certain Persons.........................................................................
Conditions to the Agreement..........................................................................
Accounting Treatment for the Proposed Transaction....................................................
Dissenter's Rights...................................................................................
Regulatory Filings and Approvals.....................................................................
Certain Income Tax Consequences......................................................................
Proxy; Change of Vote................................................................................
Equivalent Per Share Data and Summary Financial Data.................................................
SUMMARY CONSOLIDATED FINANCIAL DATA.......................................................................
The Company - Historical.............................................................................
The Company - Pro Forma..............................................................................
RISK FACTORS..............................................................................................
TRANSACTION-RELATED CONSIDERATIONS...................................................................
Change in Business of the Company...............................................................
Failure of Proposed Transaction to Close........................................................
Failure to Obtain Stockholder Approval..........................................................
Failure to Agree Upon Collateral................................................................
RISKS RELATED TO THE COMPANY'S BUSINESS
AND RELATED MATTERS................................................................................
Historical Losses...............................................................................
Reliance on On-Site Oil Analyzer................................................................
Development of OSA-II...........................................................................
Inability to Market OSA-IIs.....................................................................
Dependence on Chrysler..........................................................................
Sale of TSA.....................................................................................
Changing Technologies; Competitive Factors......................................................
Patents and Proprietary Information.............................................................
New Technology and Other Considerations.........................................................
Anti-Takeover Considerations....................................................................
Dependence on Key Personnel.....................................................................
Competition.....................................................................................
Liquidity Considerations........................................................................
INFORMATION REGARDING THE MEETING
The Annual Meeting...................................................................................
PROPOSAL NO. 1 - THE PROPOSED TRANSACTION.................................................................
General..............................................................................................
The Earn-Out.........................................................................................
Use of Proceeds......................................................................................
Background of the Proposed Transaction...............................................................
Reasons for the Proposed Transaction.................................................................
Recommendation of the Company's Board of Directors...................................................
Opinion of Financial Advisor.........................................................................
Terms and Conditions of the Agreement................................................................
The Purchase Price...................................................................................
Closing Conditions of all Parties....................................................................
The Buyer's Closing Conditions.......................................................................
The Company's and TSA's Closing Conditions...........................................................
Expenses.............................................................................................
Conduct of Business of TSA Prior to the Closing......................................................
Indemnification......................................................................................
Accounting Treatment for the Proposed Transaction....................................................
Dissenter's Rights...................................................................................
Regulatory Filings and Approvals.....................................................................
Failure of the Buyer to Pay the Balance
of the Purchase Price - Bring Along Provisions.......................................................
Guaranty.............................................................................................
Failure of the Buyer to Pay the Balance of the
Purchase Price - Bring Along Provision.............................................................
PRO FORMA CONDENSED FINANCIAL INFORMATION
OF THE COMPANY.........................................................................................
SELECTED CONSOLIDATED FINANCIAL DATA......................................................................
CERTAIN INCOME TAX CONSEQUENCES...........................................................................
INFORMATION REGARDING THE COMPANY.........................................................................
Security Ownership of Certain Beneficial Owners......................................................
INFORMATION REGARDING THE BUYER AND THE GUARANTOR.........................................................
PROPOSAL NO. 2 - ELECTION OF DIRECTORS....................................................................
Board of Directors...................................................................................
Compensation of Directors............................................................................
Board Meetings and Committees........................................................................
Current Board of Directors...........................................................................
Board of Director Resignations.......................................................................
Nominees for Election at the 1998 Annual Meeting.....................................................
Other Board Members..................................................................................
Executive Officer Compensation.......................................................................
SUMMARY COMPENSATION TABLE................................................................................
Options/SAR Grants During the Fiscal Year Ended
September 30, 1997.................................................................................
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values..............................................................
Executive Compensation Agreements....................................................................
Termination/Resignation Executive Compensation.......................................................
Retirement Salary Savings Plan.......................................................................
Repricing of Options.................................................................................
Report on Executive Compensation by the
Compensation and Stock Option Committee ...........................................................
Chief Executive Officer..............................................................................
Current Executive Officer............................................................................
Former Executive Officers............................................................................
Performance Graph....................................................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................
PROPOSAL NO. 3 - APPOINTMENT OF AUDITORS..................................................................
PROPOSAL NO. 4 - OTHER MATTERS
Proposals............................................................................................
Stockholders' Proposals..............................................................................
</TABLE>
APPENDICES
Appendix A - Asset Purchase Agreement by and among Top Source Technologies,
Inc., Top Source Automotive, Inc., NCT Audio Products, Inc. and
Noise Cancellation Technologies, Inc. dated August 14, 1998
Appendix B - Fairness Opinion Letter dated August 20, 1998
EXHIBITS
Exhibit 1 - The Company's Annual Report on Form 10-K, for the
Year Ended September 30, 1997
Exhibit 2 - The Company's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected without charge at, and copies
thereof may be obtained at prescribed rates from, the public reference
facilities of the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants (such as the Company and the Guarantor) that file
electronically with the Commission. The address of such site is:
http://www.sec.gov. In addition, the Company's Common Stock is traded on the
AMEX, and copies of reports, proxy statements and other information can be
inspected at the offices of the AMEX, 86 Trinity Place, New York, New York,
10006.
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Proxy Statement constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, as amended (the "Reform Act"). Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. See the introduction to
"Risk Factors" for a summary of the forward-looking statements and the risks and
uncertainties which may cause the actual results to differ.
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE DETAILED INFORMATION IN THE
REPORTS INCLUDED ELSEWHERE IN THIS PROXY STATEMENT ANNEXED AS EXHIBITS AND
APPENDIX A and B. ALL STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT, THE
APPENDICES AND THE EXHIBITS HERETO IN THEIR ENTIRETY.
Business of the Company and TSA
The Company was organized in 1986 under Colorado law and reincorporated
in Delaware in 1992. The Company currently owns two strategic operating
companies, i.e. TSA and Top Source Instruments, Inc. ("TSI"). The Company's
predecessor was organized in 1986 for the purpose of marketing certain patented
overhead sound systems ("OHSS") to automobile original equipment manufacturers
("OEMs") and the automotive aftermarket. By 1992, the Company through TSA began
assembling the OHSS in an assembly facility in suburban Detroit, Michigan. TSA's
business grew rapidly through the fiscal year ended September 30, 1997 as a
result of its sales to Chrysler Corporation ("Chrysler) due to the factory
installation of the OHSS in the Jeep Wrangler, Cherokee and Grand Cherokee (one
high end model) vehicles. TSA no longer sells the OHSS to Chrysler for
installation in the Cherokee and sales for installation in the Grand Cherokee
will terminate in November 1998 when Chrysler discontinues that model. As a
result, TSA's net sales of approximately $16,580,000 in fiscal 1997 are expected
to be approximately $11,200,000 in fiscal 1998. As a result of this loss of
business by TSA and the Company's commitment to TSI's On-Site Oil Analyzer
("OSA") and its new second generation OSA ("OSA-II"), the Company in the first
quarter of 1998 made a strategic decision to seek to sell TSA. See "- Reasons
for the Proposed Transaction".
Development of the OSA commenced in January 1993 when the Company, and
a former subsidiary, entered into an initial development agreement with the
Thermo Jarrel Ash division of Thermo Instrument Systems, Inc. TSI, a
wholly-owned subsidiary of the Company, was responsible for developing the OSA
software and by July 1996, TSI had completed the majority of software
development. Although, TSI has only generated limited revenues from the OSA, the
OSA-II, an enhanced instrument, which is substantially smaller and less
expensive, has been completed and TSI assembled the initial seven OSA-IIs at its
facility in Atlanta, Georgia. TSI has incurred substantial operating losses in
connection with the development and marketing efforts of the OSA and OSA-II.
However, the Company remains committed to it. The Company anticipates using the
proceeds from the proposed transaction to repay indebtedness and provide working
capital to cover losses from TSI which are expected to continue for the
immediate future into fiscal 1999.
The Proposed Transaction
Pursuant to the terms of the Agreement, the Company proposes to sell
100% of TSA's Assets to the Buyer for $10,000,000, the Earn-Out and the
assumption by the Buyer of substantially all of the liabilities of TSA
(collectively the "Purchase Price").
As of June 10, 1998, the Company and TSA entered into a letter of
intent with the Buyer and on June 11, 1998 the Company received a non-refundable
$1,450,000 deposit. As of July 30, 1998, the Company, TSA, the Buyer and an
escrow agent entered into an escrow agreement and on July 31st the Buyer paid
into escrow $2,050,000. The Company has issued to the Buyer 20% of outstanding
TSA shares. The $2,050,000 and the 20% of TSA Common Stock are being held in
escrow pending approval by the Company's stockholders. If Proposal No. 1 is
approved by the holders of a majority of the outstanding shares of Common Stock,
the $2,050,000 shall be delivered to the Company and 20% of the TSA Common Stock
shall be delivered to the Buyer without regard to whether the Buyer obtains the
necessary Financing to purchase the Assets or other closing conditions are met.
If the Proposed Transaction is not approved, the $2,050,000 shall be returned to
the Buyer which shall receive 14.5% of TSA's Common Stock. The Buyer has the
exclusive right to purchase the Assets through March 31, 1999. However, if the
Proposed Transaction is not consummated by December 31, 1998, the Buyer has a
one-week option to cancel this exclusive right, and as consideration for this
cancellation, the Buyer shall receive an additional 15% of TSA Common Stock.
On August 14, 1998, the Company, TSA, the Buyer and the Guarantor
entered into the Agreement through which the Buyer agreed to purchase TSA's
Assets for a minimum of $10,000,000 and up to an additional $6,000,000
representing the Earn-Out. The Guarantor shall guarantee the Earn-Out. Of the
$10,000,000, the Buyer shall pay TSA at least $7,500,000 in cash (or $4,000,000
in addition to the $1,450,000 and $2,050,000 payments described above) and shall
pay the balance, if any, by delivering the Buyer's Note to TSA.
The Buyer's Note shall be secured. Because of the lengthy period of
time over which the Proposed Transaction was negotiated, the Company and the
Buyer elected to defer reaching an agreement on acceptable collateral securing
the Buyer's Note. The Company's reasons for doing so are explained in the
following paragraph. An important Closing condition is that the Company and the
Buyer reach an agreement on acceptable collateral securing the Buyer's Note. The
Company does not intend to proceed without receiving sufficient collateral to
secure the Buyer's Note. The Company's stockholders are being asked to vote upon
the Proposed Transaction without knowing what the collateral will be. See "Risk
Factors".
Negotiations with the Buyer began in mid-February 1998 and on June 11,
1998, the Company announced the letter of intent. With the receipt of the
$2,050,000 escrow payment on July 31, 1998, the Company's Board believed that
executing the Agreement could not be delayed substantially longer without
jeopardizing the Proposed Transaction. Because of the necessary time required by
the solicitation of proxies and the Buyer's requirement that it obtain the
Financing, the Company believes that the probability of the additional time and
the Buyer's improved financial condition once it closes on the Financing will
result in the Company receiving acceptable collateral.
As a result of the sale of TSA Assets, the Company's strategic focus
will be significantly altered. The Company will continue to operate the business
conducted by TSI. See "Risk Factors - Change in Business of the Company".
Assuming the proposed transaction had been consummated at June 30, 1998, TSA
constituted approximately 28% of the Company's total Assets as of that date. TSA
also generated approximately 97.6% of the Company's net sales for the fiscal
year ended September 30, 1997 and 96.4% of net sales for the nine months ended
June 30, 1998. The Company believes that the sale of TSA Assets will provide the
working capital necessary to allow the Company to focus on expanding the
business currently being conducted by TSI.
Financing; Acceptable Collateral
Consummation of the Proposed Transaction is subject to the Buyer
obtaining Financing on or before March 31, 1999 and the Company and the Buyer
agreeing upon acceptable collateral to secure the Buyer's Note.. There can be no
assurances that the Buyer will obtain the necessary Financing or the parties
will reach an agreement upon acceptable collateral.
Repayment of Debt
Substantially all of the Company's assets are pledged to secure a line
of credit held by the NationsCredit Commercial Funding Division of NationsCredit
Commercial Corporation ("NationsCredit"). As of the date of this Proxy
Statement, approximately $_________ is owed to NationsCredit. In order to obtain
the consent of NationsCredit to the sale of the Assets, its line of credit must
be paid in full. NationsCredit has advised the Company that it will not permit
any further borrowing under the line of credit following the Closing because
NationsCredit is relying upon the Assets to secure the line of credit. Under the
terms of a note purchase agreement entered into in 1995 with Ganz/Mellon (the
"Note Agreement"), $3,020,000 of outstanding convertible notes are repayable if
the Company sells all or substantially all of its Assets. With the proceeds from
the sale of the Assets, the Company intends to repay the outstanding notes (the
"Notes") which are convertible at $10.00 per share or substantially above the
current market price of $________.
Use of Proceeds
Following the confirmation of the Proposed Transaction, and after
repaying the NationsCredit line of credit and the Notes but prior to payment of
the Buyer's Note (assuming it is $2,500,000), the Company will have
approximately $2,000,000 in proceeds remaining. The Company intends to use the
remaining proceeds for the purpose of meeting its working capital needs and
expanding its marketing efforts on behalf of the OSA-II.
Reasons for the Proposed Transaction
The Company made a strategic decision to sell TSA and focus all of its
management's attention and efforts on TSI and the roll-out of the OSA-II because
it believed that with the development of the OSA-II, the Company had a product
that could best provide value to the Company's stockholders. Notwithstanding the
limited revenues generated by the first generation OSA, the Company believed
that the efforts of its current management in marketing the OSA and OSA-II and
seeking strategic alliances for that purpose, represented the best allocation of
the Company's capital and management efforts. Additionally, the business of TSA
had been materially reduced by the loss of the Cherokee contract; moreover,
Chrysler advised TSA that the purchase order for the Grand Cherokee would expire
in November 1998 as the result of Chrysler's discontinuing the one model using
TSA's OHSS.
Recommendation of the Company's Board of Directors
In reaching their decision to approve the Agreement, the Board of the
Company consulted with its management team and advisors, and independently
considered the material factors described elsewhere in this Proxy Statement.
Based upon its independent review of such factors and the other factors set
forth in this Proxy Statement, the Board of the Company unanimously approved the
Agreement. Accordingly, the Board recommends that the Company's stockholders
vote "For" approval and adoption of the Agreement. For a discussion of the
factors considered by the Board in reaching their decision, see "Proposal No. 1
- - - the Proposed Transaction - Background of the Proposed Transaction" and
"Reasons for the Proposed Transaction".
Opinion of Financial Advisor
On August 20, 1998, Morgan Keegan & Company, Inc. ("Morgan Keegan"),
financial advisor to the Company in connection with the Proposed Transaction,
delivered its opinion to the Board of the Company to the effect that on and as
of the date of such opinion, and based upon the procedures and subject to the
assumptions described in such opinion, the consideration to be received by the
Company in the Proposed Transaction is fair to the Company from a financial
point of view (the "Fairness Opinion"). The Fairness Opinion is enclosed in its
entirety in the section entitled "Opinion of Financial Advisor" located on page
____ to this Proxy Statement and the Company's stockholders are urged to read
this Opinion in its entirety. Morgan Keegan did not pass upon whether the Buyer
can obtain the Financing necessary to consummate the Proposed Transaction. See
"Proposal No. 1 - the Proposed Transaction - Opinion of Financial Advisor".
Interests of Certain Persons
No officer or director of the Company will receive any portion of the
Purchase Price through any bonus or other similar arrangement.
Conditions to the Agreement
Pursuant to the Agreement, the obligation of the Company, TSA, the
Buyer and the Guarantor to consummate the Proposed Transaction is subject to
various conditions, including, but not limited to: (i) approval by a majority of
outstanding shares of the Company's Common Stock; (ii) completion of the
Financing by the Buyer, (iii) reaching an acceptable agreement with the Buyer on
collateral, and (iv) certain other specified customary conditions. For a more
detailed description of the conditions to the consummation of the Proposed
Transaction, see "Proposal No. 1 - the Proposed Transaction - Terms and
Conditions of the Agreement".
Accounting Treatment for the Proposed Transaction
The Proposed Transaction will be accounted for as a sale of the Assets
of TSA.
Dissenter's Rights
The Company's stockholders are not entitled to dissenter's rights or
appraisal rights under Delaware law with respect to the Proposed Transaction.
Regulatory Filings and Approvals
In accordance with the Agreement, the parties are not required to make
any filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "Hart-Scott Act"), because of the size of the transaction is too
small to meet its threshold.
Certain Income Tax Consequences
Since at the time of the closing Buyer is expected to only own 20% of
TSA's Common Stock, the consolidated group will be able to utilize its
consolidated net operating loss ("NOL") (which exceeded $30,000,000 at September
30, 1997) to offset regular federal income taxes due from the gain on the sale
of the Assets by the Company. For federal income tax purposes, using the
alternative minimum tax ("AMT") calculation, the consolidated group will pay
approximately $150,000 of federal income tax since only 90% of the gain on the
sale of the Assets can be offset against the AMT NOL. Additionally, the Company
will incur a Michigan state income tax of approximately $200,000 with respect to
the gain on the sale of the Assets of TSA.
If the Proposed Transaction does not close by December 31, 1998, and
the Buyer exercises its election to cancel its exclusive right to purchase the
Assets, and thereby becomes the owner of 35% of TSA Common Stock, the Company
will not be able to use the NOL to offset any future gain with respect to the
sale of the Assets of TSA. The Company will be able to utilize the NOL to
shelter the gain from the sale of 35% of TSA's Common Stock to the Buyer. If in
the future the Company enters into a transaction to sell TSA and the transaction
is a sale of TSA's Common Stock, the NOL will be available to shelter the gain
on the remaining 65% of TSA's Common Stock. If such a future transaction is
structured as a sale of TSA's Assets, as mentioned above, the Company will not
be able to shelter the gain with the NOL because the Company will own less than
80% of TSA's Common Stock. Because of this, the Company would incur federal and
state income tax.
Proxy; Change of Vote
The Company's stockholders who have delivered a proxy to the Company may
revoke the proxy at any time prior to its exercise at the Annual Meeting by
giving written notice to the Secretary of the Company, by signing and returning
a later dated proxy card or by voting in person at the Annual Meeting. All
written notices of revocation and other communications with respect to
revocations of proxies should be addressed to Top Source Technologies, Inc.,
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida, 33418-3757,
Attention: Mr. David Natan, Secretary.
Equivalent Per Share Data and Summary Financial Data
The following tables set forth certain data concerning the historical
net loss, cash dividends and book value per share for the Company derived from
the audited and unaudited financial statements of the Company and for the
Company on a pro forma basis after giving effect to the Proposed Transaction and
the repayment of the NationsCredit line of credit and the Notes, as if such
repayments had occurred at the beginning of the period presented. The
information below should be read in conjunction with the unaudited Pro Forma
Financial Statements of the Company and the historical financial statements of
the Company contained elsewhere in this Proxy Statement. The unaudited pro forma
equivalent per share data shows, for each share of Common Stock, the relevant
information as if the Proposed Transaction was consummated.
<PAGE>
<TABLE>
<S> <C> <C>
- - -------------------------------------------------- ---------------------------- ------------------------------------
NINE MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------------------------------------------
The Company - Historical
- - -------------------------------------------------- ---------------------------- ------------------------------------
Net loss from continuing operations $(2,453,240) $(3,304,057)
Cash dividends declared per share --- ---
Book value per share at end of period $.12 $.16
Loss per share $(.09) $(.12)
- - --------------------------------------------------------------------------------------------------------------------
The Company - Pro Forma
- - -------------------------------------------------- ---------------------------- ------------------------------------
Net loss from continuing operations $(3,938,765) $(6,914,749)
Cash dividends declared per share --- ---
Book value per share at end of period $.34 N/A
Loss per share $(.14) $(.25)
- - -------------------------------------------------- ---------------------------- ------------------------------------
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present selected historical financial data of the
Company which are derived from the audited and unaudited financial statements of
the Company and selected unaudited pro forma financial data after giving effect
to the Proposed Transaction and the repayment of the NationsCredit line of
credit and the Notes, as if they had occurred at the beginning of the periods
presented.
The pro forma data is not necessarily indicative of the results of
operations or the financial condition that would have been reported if the
aforementioned transactions had occurred during those periods, or as of those
dates, or that may be reported in the future.
This data should be read in conjunction with the consolidated financial
statements of the Company (and the related notes thereto) and the unaudited pro
forma financial information contained elsewhere in this Proxy Statement. See
"Pro Form Consolidated Condensed Financial Information of the Company" and
"Incorporation of Certain Documents by Reference".
The Company - Historical
The following table presents selected historical financial data of the
Company which are derived from the consolidated financial statements of the
Company. The data is qualified by reference to and should be read in conjunction
with the consolidated financial statements of the Company and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition" in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997, and
in the Company's Quarterly Report on Form 10-Q for the nine months ended June
30, 1998, each of which is an exhibit to this Proxy Statement.
<TABLE>
NINE MONTHS ENDED
JUNE 30, YEARS ENDED
(UNAUDITED) SEPTEMBER 30,
- - ------------------------------------- -------------- -------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
1998 1997 1997 1996 1995
---- ---- ------- ------- ----
- - ------------------------------------- -------------- -------------- -------------- --------------- -----------------
Revenues $9,281,904 $14,236,732 $16,984,123 $16,146,524 $13,907,354
- - -------- ---------- ----------- ----------- ----------- -----------
Loss from continuing operations $(2,453,240) $(838,782) $(3,304,057) $(4,831,786) $(2,820,492)
- - ------------------------------- ------------ ---------- ------------ ------------ ------------
Loss per share $(.09) $(.03) $(.12) $(.17) $(.10)
- - -------------- ------ ------ ------ ------ ------
</TABLE>
<PAGE>
<TABLE>
The Company - Pro Forma
NINE MONTHS ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30,
---------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
- - ---------------------------------------------- ----------------- ---------------- ---------------- ----------------- --------------
- - ---------------------------------------------- ----------------- ---------------- ---------------- ----------------- --------------
Loss from continuing operations $(3,938,765) $(4,576,756) $(6,914,749) $(8,624,280) $(7,031,639)
- - ------------------------------- ------------ ------------ ------------ ------------ ------------
Loss per share $(.14) $(.16) $(.25) $(.31) $(.26)
- - -------------- ------ ------ ------ ------ ------
Total assets $11,456,099 N/A N/A N/A N/A
- - ------------ ----------- --- --- ---
Total liabilities $1,511,155 N/A N/A N/A N/A
- - ----------------- ---------- --- --- ---
- - ---------------------------------------------- ----------------- ---------------- ---------------- ----------------- ------------
</TABLE>
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROXY STATEMENT,
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING WHETHER TO
APPROVE THE PROPOSED TRANSACTION AND THE AGREEMENT.
The shares of Common Stock of the Company involve a high degree of
risk, including, but not necessarily limited to the risk factors described
below. Each prospective investor should carefully consider the following risk
factors inherent in and affecting the business of the Company and this offering
before making an investment decision. All statements, trend analysis and other
information contained in this Proxy Statement relating to the Proposed
Transaction or any other possible sale of TSA Assets, the future profitability
of TSA, TSI's future operating results, the ability of the Company to achieve
profitability, development of the Company's OSA-II the receipt of future orders
for the sale of OHSS from Chrysler, the ability of the Company to enter into
strategic alliances or develop new technologies and the Company's future
compliance with debt covenants as well as other statements including words such
as "seek", "anticipate", "believe", "plan", "estimate", "expect", "intend" and
other similar expressions constitute forward-looking statements within the
meaning of the Reform Act. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date of this Proxy
Statement. These statements are subject to risks and uncertainties that could
cause actual results to differ materially from those contemplated in such
forward-looking statements. Such risks and uncertainties include those
identified in this "Risk Factors" section as well as the following: the ability
of the Buyer to close its Financing; the ability of the Company to obtain the
required stockholder approval of the Proposed Transaction; potential changes by
Chrysler in the placement of its speakers in Jeep(R) Wranglers or decline in
production levels at Chrysler for vehicles installing OHSS; the Company's
ability to market OSA-IIs; the acceptance of the OSA/OSA-II technology by the
marketplace; a general tendency of large corporations not to change from known
technology to emerging new technology; the reliability of the OSA-II technology
over an extended period of time; the Company's ability to attract strategic
partners for OSA-II and for TSA if the Company is unable to sell it; and other
matters which may increase the Company's current losses and thereby cause it to
exceed the 1.5 to 1.0 debt to equity ratio required by the Note Agreement.
TRANSACTION - RELATED CONSIDERATIONS
Change in Business of the Company. The sale of TSA Assets will result
in a major change in the nature of the Company's business. For the fiscal year
ended September 30, 1997 and the nine months ended June 30, 1998, TSA reported
$16,580,270 and $8,952,308, respectively, in revenues or approximately 97.6% and
96.4%, respectively, of the Company's consolidated revenues. Assuming
consummation of the Proposed Transaction, the Company's sole remaining operating
subsidiary will be TSI which reported approximately $403,853 and $329,596 of
revenues in the year ended September 30, 1997 and the nine months ended June 30,
1998, respectively. Because TSA has been profitable, the Company has utilized
those profits to develop the OSA and OSA-II and to meet the Company's other
working capital needs including corporate overhead. However, as a result of the
consummation of the Proposed Transaction, the Company will lose the revenues and
income generated by TSA. There can be no assurances that TSI will generate
sufficient revenues in the future or reduce expenses to a level that will enable
the Company to achieve profitability.
Failure of Proposed Transaction to Close. There can be no assurances
that all of the conditions to the Proposed Transaction will be satisfied and
that it will be consummated. A major condition of the Agreement, in addition to
approval of the Company's stockholders, is that the Buyer complete a Financing.
While the Guarantor is a publicly-traded company whose common stock trades on
the Nasdaq National Market System under the symbol "NCTI", the Buyer has been
recently organized as a subsidiary of the Guarantor and the Company has no
access to internal information concerning its financial condition. There can be
no assurances that the Buyer will complete the necessary Financing. Similarly,
the Agreement is subject to the Company and the Buyer agreeing upon collateral
to secure the Buyer's Note. Failure to consummate the Proposed Transaction will
result in material expenses of the Company which will not be reimbursed. The
Fairness Opinion specifically disclaims passing upon the Buyer's ability to
consummate the Proposed Transaction. See "Proposal No. 1 - The Proposed
Transaction Terms and Conditions of the Agreement" and "Information Regarding
the Buyer and the Guarantor".
Failure to Obtain Stockholder Approval. The Company is relying upon the
sale of TSA Assets in order to have sufficient working capital to fund the
operations of TSI and to pay the Company's outstanding indebtedness when due.
With the loss of the Grand Cherokee Ltd. Plus contract (due to the
discontinuation by Chrysler in building this vehicle) in November 1998, TSA's
revenues and net income will be materially reduced by approximately 30-35%.
While the Company believes that over the long-term, TSA will be in a position to
obtain new OHSS contracts, the funds available from the sale of TSA Assets may
be necessary to sustain TSI and pay the Company's corporate overhead until TSI
is able to generate substantial revenues and reduce its operating losses. There
can be no assurances that TSI will be successful in expanding its revenue base
or reducing its operating losses. The Company's Board owns of record 300,550
shares of Common Stock or approximately 1% of outstanding shares. According to a
Schedule 13G filed by an institutional investor with the Securities and Exchange
Commission in February 1998, the investor beneficially owned 7.2% of the
Company's Common Stock. The Company has no more current information concerning
the investor's beneficial ownership as of a more recent date. Because the
Company is required to obtain approval from the holders of a majority of
outstanding shares under Delaware law (rather than a majority of a quorum), the
Company will require support for the Proposed Transaction from a large number of
its stockholders who own variably small positions. Obtaining this vote is
anticipated to take substantial effort and expense. For that reason, the Company
has hired Morrow & Co., a proxy solicitation firm, to assist it. There can be no
assurances that the Company will obtain the necessary majority approval.
Failure to Agree Upon Collateral. The Agreement provides that the Buyer
may close the Proposed Transaction by paying a minimum of $7,500,000 in cash
(including the First Payment and the Second Payment) and delivering the Buyer's
Note for the balance. The Agreement further provides that collateral for the
Buyer's Note must be agreed upon by the Company and the Buyer or the Company and
TSA shall not be obligated to close the Proposed Transaction. Because up to
$2,500,000 of the Purchase Price will be dependent upon payment of the Buyer's
Note, stockholders will be relying upon the Company's management to obtain
appropriate security for the Buyer's Note. In voting upon the Proposed
Transaction, stockholders will not have any information concerning the nature of
the proposed collateral and thus will be trusting the judgment of the Company's
management. There can be no assurances that the Buyer's Note will be paid when
due.
RISKS RELATED TO
THE COMPANY'S BUSINESS AND RELATED MATTERS
Historical Losses. Since inception, the Company has never reported
income from operations. As of June 30, 1998, the Company had a retained earnings
deficit of $(25,392,345). The Company has provided cash to support its
operations from the income generated by TSA, the sale of the assets of United
Testing Group, Inc. in 1996, the sale of securities pursuant to private
placements and the exercise of stock options and warrants and from borrowings
from institutional lenders. As described below, TSA has lost and is losing
substantial revenues from Chrysler and the Company is seeking to sell TSA. See
"- Sale of TSA Assets; Financing Limitations" at pages ____. TSA will remain
profitable in spite of its loss of revenues from Chrysler, unless Chrysler
discontinues or materially reduces its business relationship with the Company
beyond that described below in the risk factor on page ____ entitled "-
Dependence on Chrysler". The Company has shifted its primary focus toward the
sale of its OSA-II, of which the Company has just completed development.
However, the Company has generated only limited revenues from the sale and lease
of first generation OSAs. Revenue for TSI for the year ended September 30, 1997
was $403,853 and $329,596 for the nine months ended June 30, 1998. The
identifiable assets relating to the oil analysis services segment were
approximately $4,408,120 which includes the net value of the capitalized
database of $2,125,902 at June 30, 1998. In order to achieve profitability, for
which no assurances can be given, the Company is relying upon its ability to
market and sell OSA-IIs in sufficient numbers to pay the Company's substantial
fixed and other expenses. 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, and 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. There can be no assurances that the
Company will be profitable from operations in the future.
Reliance on On-Site Oil Analyzer. For several years, the Company has
concentrated on sale and marketing of OSAs but with only limited success. Since
June 1997, under the direction of the Company's new president, the number of
OSAs (and OSA-IIs) sold and leased in the past year has increased. Additionally,
the Company augmented its technical expertise by the hiring of Dr. John Coates
who has developed the second generation machine OSA-II. The OSA-II is
substantially smaller, quicker and less expensive than the OSA. Moreover, the
OSA-II does not require the Company to rely upon an outside corporation to
manufacture or assemble the machines. Because the Company is relying upon one
product, there is a substantially increased degree of risk to investors.
Development of OSA-II. The Company completed the development of the new
OSA-II and in August 1998 completed the assembly and shipped the first seven
OSA-IIs. However, as with the development of any new product, unforeseen delays
occur and problems may be discovered. Sophisticated computer software and
complex machines often encounter developmental difficulties or "bugs" which only
become apparent subsequent to widespread commercial use. Problems which may
arise in the operation of the OSA-IIs could have a material adverse effect upon
the Company's future operations.
Inability to Market OSA-IIs. The Company has devoted substantial
resources and different approaches to marketing the OSAs. Although the Company's
marketing efforts over approximately the last year have increased the number of
OSAs being used, the Company has only received four orders for tests or leases
of multiple machines. In July 1998, the Company announced that a leading
operating of retail tire stores has agreed to install one OSA-II unit in each of
seven locations in Jacksonville, Florida for a six-month trial. The units were
shipped in August and are expected to begin generating revenue in early
September. In August, the Company also announced a new test with a large
insurance company which has agreed to supply warranty coverage for automobiles
which are successfully evaluated using the OSA-II at the Florida sites and at
one other location. The Company also recently entered into a lease for two OSAs
to be placed in a new oil analysis center operated by a midwestern operator of
automobile auctions. The other multiple orders consist of short-term leases for
five OSAs and four OSAs, respectively, to be placed at different locations of
the two customers in the United States. Of these multiple unit orders, only the
initial orders for five and four units are currently generating revenues.
Without the receipt of numerous orders for multiple OSA-IIs and repeat orders
from the automobile manufacturers who purchased OSAs, it is not likely that the
Company can profitably market and sell OSA-IIs.
Dependence on Chrysler. Historically, the Company has derived almost
all of its revenues from the sale of OHSS to Chrysler by TSA. In 1997, Chrysler
discontinued using the OHSS on its Jeep(R) Cherokee vehicles. Although the
Company does not know for certain, management believes the contract was lost to
another vendor because of pricing which would have yielded unacceptably low
gross margins for TSA. In November 1998, Chrysler will discontinue producing its
Jeep(R) Grand Cherokee Ltd. Plus vehicle that uses the OHSS. TSA expects to
continue assembling the OHSS for the Jeep(R) Wrangler through at least model
year 2002. There can be no assurances that Chrysler will continue to order OHSSs
from TSA. If Chrysler discontinues using the OHSS on the Jeep(R) Wrangler and
the Proposed Transaction is not consummated, it will have a material adverse
effect upon the Company at least until the Company generates significant
revenues from OSA-II.
Sale of TSA. Because of uncertainties surrounding the Company's ability
to obtain the approval from holders of a majority of votes of outstanding Common
Stock required to approve the Proposed Transaction, there can be no assurances
that the Company will sell the Assets of TSA. However, if the Company does
consummate the Proposed Transaction or otherwise sell the assets of TSA in the
future it will receive substantial working capital but will also lose its only
current existing means of generating material on-going revenues. The Company
will then be relying on significant revenues from the sale of OSA-IIs or be
required to obtain additional financing. No such financing plans currently
exist, and there can be no assurances that future financing will be available to
the Company.
Changing Technology; Competitive Factors. The OSAs represent a
technological breakthrough affecting the oil analysis industry. Oil analysis is
a 50-year old technology which is widely used for diagnostic and preventative
maintenance programs for equipment by various industries. It is also used for
quality control and pipeline monitoring in the petroleum industry. Essentially,
the OSAs analyze (and the OSA-IIs are designed to analyze) oil at the end user's
location thereby avoiding the need to send petroleum samples to a central
laboratory. The OSAs and OSA-IIs utilize complex computer software. In general,
the computer industry is subject to rapid and significantly changing technology
including potential introduction of new products and technologies which may have
a material adverse impact upon the Company's ability to market and sell OSA-IIs.
Although the Company believes that it has a significant advantage over potential
competitors as a result of its experience over a five-year period with the OSAs,
the Company's proprietary database and the proprietary nature of the resulting
technology including the development of the OSA-IIs. No assurances can be given
that either a comparable or more advanced on-site oil analyzer will not be
developed in the future by one or more third parties.
Patents and Proprietary Information. Historically, the Company
generated almost all of its revenue from products subject to patents and patent
applications exclusively licensed to the Company. TSA has relied upon the sale
of its OHSS enclosures which are covered by a patent license limited to the
United States and Canada. The Company has obtained patents covering various
features of the OSAs which are applicable to the OSA-IIs. The Company has
applied for additional patents covering various features of the OSA-IIs. In
addition, steps have been taken to protect trade secrets through appropriate
confidentiality agreements. There can be no assurances that the patent
applications for the OSA-II will be granted. The failure by the Company to
obtain patents and protect its respective trade secrets could have a material
adverse effect on the Company by increasing the likelihood of competition. In
addition, other companies may independently develop equivalent or superior
technologies and may obtain patent or similar rights with respect to them.
Although the Company believes that the software for the OSAs and OSA-IIs has
been independently developed by it, and that such technology does not infringe
on the patents or violate the proprietary rights of others, there can be no
assurances that the Company will not be determined to infringe upon the patents
or proprietary rights of others, or that patents or proprietary rights of others
will not have a material adverse effect on the ability of the Company to
commercialize the OSA-IIs. Patent and technology disputes are common with high
technology products and services.
New Technologies and Other Considerations. In order to expand its
current product line, the Company may continue to seek new technologies and
products. This aspect of the Company's business involves a number of special
risks. Because of these risks, the Company will seek capital input and strategic
partners to sell equity in suitable products and technologies to these partners
in order to reduce the risks to investors. Also, the Company will seek to avoid
substantial and long-term expense associated with the necessary research and
development. Assuming that the Company is able to enter into agreements with
such partners and that those partners will be able to carry out the necessary
research and development, there is the risk that the technologies will not
perform as expected or be cost effective. Assuming successful research and
development, there remains the risks of being able to market the products and
locate industry partners or others able to manufacture the products according to
stringent quality control standards and in a viable economic manner. There can
be no assurances that the Company will be able to successfully locate such
technologies and if so, will be able to find strategic partners able to develop
and market new technologies. Finally, there is the risk that while the Company
is seeking to commercialize a new technology, a competitor will develop
technologies which are more commercially viable thereby reducing the viability
of the Company's products.
Anti-Takeover Considerations. The Company's Restated Certificate of
Incorporation (the "Certificate Provisions") contains various provisions
designed to deter a third party from launching a hostile takeover for the
Company. In addition, the Company has adopted a Shareholder Rights Plan (the
"Rights Plan"). In this Proxy Statement, the Certificate Provisions and the
Rights Plan are collectively referred to as the "Anti-Takeover Provisions". The
Certificate Provisions consist of: (i) empowering the Board, without further
action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock
in one or more series, with such designations, preferences, special rights,
qualifications, limitations and restrictions as the Board may determine; (ii)
establishing a classified Board whereby election of the directors is staggered
and each year approximately one-third of the directors are elected for a three
year term; (iii) making it difficult to remove directors for "cause" by
requiring a super-majority vote of either: (1) 75% of the stockholders or (2)
66-2/3% of the stockholders and the majority of the "disinterested directors";
(iv) providing that stockholder action taken by written consent in lieu of a
meeting is prohibited unless such consent is signed by the holders of at least
two-thirds of the stock; and (v) restricting stockholder nomination of directors
to any stockholder with the power to vote at least 15% of the outstanding voting
securities of the Company who timely complies with specific notice procedures.
In connection with the Rights Plan, the Board declared a dividend of one
Preferred Stock Purchase Right (the "Rights") for each outstanding share of the
Company's Common Stock. The Rights permit the holders (stockholders of the
Company) to purchase Series A Junior Preferred Stock. Holders of Rights have the
right to acquire stock of the Company or an "acquiring entity" at one-half of
market value. The Rights only become exercisable in the event, with certain
exceptions, an acquiring party accumulates 15 percent or more of the Company's
voting stock. These Rights may be redeemed by the Company at $.01 per Right
prior to the close of business on the 15th day after a public announcement that
beneficial ownership of ownership of 15% or more of the Company's voting stock
has been accumulated by single acquiror or group (with certain exceptions),
under specified circumstances.
The Anti-Takeover Provisions generally make it more difficult or
discourage a proxy contest or the assumption of control by a holder of a
substantial block of the Company's Common Stock because it is more difficult to
remove the incumbent Board. Thus, the Anti-Takeover Proposals have the affect
of: (i) entrenching incumbent management, and (ii) discouraging a third party
from making a tender offer at a premium over the market price or otherwise
attempting to obtain control of the Company even though such an attempt could be
desired by a substantial member of the Company's stockholders. The Anti-Takeover
Provisions were not intended to prevent a takeover of the Company on terms which
are beneficial to the stockholders and will not do so. They may, however, deter
an attempt to acquire the Company in a manner or on terms that the Board
determines not to be in the best interest of its stockholders.
Dependence on Key Personnel. The Company is currently dependent upon
the efforts of the key members of its management team consisting of Mr. William
C. Willis, Jr., the Company's President and Chief Executive Officer, and Mr.
David Natan, the Company's Chief Financial Officer. In addition, the Company is
dependent upon Dr. John Coates who is in charge of the group which developed the
OSA-II. In the event that one or more of these persons ceases to be employed by
the Company, it may have a material adverse effect upon the Company.
Competition. Competition in the automotive business and the oil
analysis business is intense. With regard to the Company's OHSS business,
interior trim suppliers have a substantial competitive advantage as a result of
their relationships with automobile manufacturers and their substantially
greater degree of financial strength, management depth and engineering
expertise. By offering automobile manufacturers the opportunity to deal with one
primary supplier, an interior trim supplier can offer alternative speaker
placement and thereby competes directly with the Company. With regard to the
OSA-II, while the Company is not aware of any other business that markets and
sells an on-site oil analysis instrument, the Company's oil analysis subsidiary,
TSI, competes with various oil analysis laboratories located throughout the
United States. These laboratories offer service through Federal Express or other
express delivery couriers and provides facsimile or other rapid delivery of oil
analysis reports to the customers.
Liquidity Considerations. In 1995, the Company issued $3,020,000 of the
Notes. If the Proposed Transaction is approved, the Company intends to pay the
Notes which are prepayable without penalty. These Notes contain a debt to equity
ratio that cannot exceed 1.5 to 1.0. As of June 30, 1998, this ratio was 1.14
which meant that the Company was in compliance with the ratio. Without the
receipt of the Buyer's non-refundable deposit of $1,450,000 the Company would
not have met this debt covenant. However, due to the Company's historical losses
and due to the uncertainty and timing of OSA-II revenues, there is a possibility
that the Company will exceed this ratio in future quarters. In the event that
the ratio is not met and the Company is unable to receive a waiver from the
representative of the noteholders, Mr. G. Jeff Mennen, a member of the Company's
Board, has agreed to guarantee to infuse a sufficient amount of money into the
Company to permit it to maintain compliance with this debt to equity ratio
through October 1, 1998 or, alternatively, he will refinance the Notes. In
consideration for this guarantee, the Company issued to Mr. Mennen 50,000
10-year warrants exercisable at $2.00 per share. Mr. Mennen has the right to
compel the Company to file a registration statement covering the shares of
Common Stock underlying such warrants or to include the shares of Common Stock
in a registration statement filed by the Company on behalf of others.
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. This 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 June 30, 1998 factoring the interest
earned on used drawn funds was approximately 11.1%. As of June 30, 1998 and
August 14, 1998, borrowings on this Credit Facility were $833,477 and $504,995,
respectively. Total unused availability for the same periods were $830,000 and
$160,000, respectively. The Company plans to repay the Credit Facility in full
upon consummation of the Proposed Transaction. Upon payment of the Credit
Facility, Nations will release the lien, which it holds on all of the assets of
the Company including TSA common stock and assets.
The Credit Facility calls for certain financial covenants that, if not
met, would cause default under the agreement and increase the interest rate by
2%. The Credit Facility requires the Company not to exceed $2,000,000 in losses
from operations (plus or minus any non-recurring items agreed upon) measured on
an annual basis each September 30, 1998.
Based on an operating loss of $2,398,088 at June 30, 1998 (which is net
of agreed upon items), and based on current operations, the Company will be in
default of this covenant as of September 30, 1998. This would require the
Company to obtain a waiver from NationsCredit (which NationsCredit provided to
the Company in fiscal 1997 for exceeding this covenant), or to pay off the loan
balance, at the time of default, which the Company intends to do with the
proceeds of the Proposed Transaction.
<PAGE>
INFORMATION REGARDING THE MEETING
The Annual Meeting
The Annual Meeting is scheduled to be held at The Marriott Eastside,
252 Lexington Avenue, New York, New York, 10017, on __________, 1998, beginning
at 12:00 Noon, New York time. The Company's stockholders will be asked to vote
upon (i) a proposal to consider and approve consummation of the Proposed
Transaction (Proposal No. 1); (ii) the election of two persons to serve
three-year terms as members of the Board (Proposal No. 2); and (iii) a proposal
to ratify the appointment of Arthur Andersen LLP as the Company's independent
accountants for the year ending December 31, 1998 (Proposal No. 3).
The Board knows of no business that will be presented for consideration
at the Annual Meeting other than the matters described in this Proxy Statement.
RECORD DATE; QUORUM. Only stockholders of record at the close of
business on __________________, 1998 are entitled to notice of, and to vote at,
the Annual Meeting. Each share of Common Stock outstanding on the record date is
entitled to one vote on all proposals. As of the close of business on
____________, 1998, there were 28,________ shares of Common Stock of the Company
outstanding. Shares cannot be voted unless a signed proxy card is returned or
other specific arrangements are made to have shares represented at the meeting.
A proxy may be revoked at any time before it is voted at the meeting by taking
one of the three following actions: (i) by giving a written notice of revocation
to the principal office of the Company; (ii) by executing and delivering a proxy
with a later date; or (iii) by voting in person at the meeting. If a stockholder
wishes to give a proxy to someone other than management, he or she may cross out
the names appearing on the enclosed proxy card, insert the name of some other
person and sign and give the proxy card to that person for use at the meeting.
A majority of the outstanding shares entitled to vote, present in
person or represented by proxy, shall constitute a quorum.
VOTE REQUIRED. Each of the proposals contained in this Proxy Statement
will be voted upon separately at the Annual Meeting. Because the Company has
been advised by its counsel that the Proposed Transaction may constitute a sale
of "substantially all" of the assets of the Company for purposes of the Delaware
General Corporation Law, consummation of the Proposed Transaction requires the
approval of a majority of the outstanding shares of Common Stock (whether or not
represented in person or by proxy at the Annual Meeting) , and, accordingly, the
Company is soliciting proxies with respect thereto. The affirmative vote of the
holders of a plurality of shares of Common Stock present in person or
represented by proxy at the Annual Meeting will be required to elect two
candidates for the Company's Board pursuant to Proposal No. 2. The affirmative
vote of the holders of a majority of shares of Common Stock present in person or
represented by proxy at the Annual Meeting will be required to approve and adopt
Proposal No. 3.
Broker non-votes occur where a broker holding stock in street name
cannot vote those street name shares on a particular matter, in this case
Proposal No. 1, approval of the sale of TSA Assets. Brokers holding stock in
street name can vote on standard matters, i.e., Proposal Nos. 2, 3 and 4. Broker
non-votes will be deemed present for quorum purposes for all Proposals to be
voted on at the meeting, including Proposal No. 1. Broker non-votes will be
treated as not entitled to vote and therefore will not be counted as either a
vote for or against Proposal No. 1. Client directed abstentions are not broker
non-votes; they are the equivalent of stock that is not "present" at the meeting
and cannot count toward a quorum. As a practical matter, both broker non-votes
and abstentions are the functional equivalent of "No" votes on Proposal No. 1.
Stockholders whose shares are in street name and do not return a proxy are not
counted for any purpose. Stockholders who sign, date and return a proxy but do
not indicate how their shares are to be voted are giving management full
authority to vote their shares as they deem best for the Company.
<PAGE>
PROPOSAL NO. 1 - THE PROPOSED TRANSACTION
General
Pursuant to the Agreement, TSA proposes to sell to the Buyer 100% of
the Assets of TSA. The Purchase Price is $10,000,000 together with the Earn-Out
described below. The $10,000,000 is comprised of at least $7,500,000 cash
(including the $3,500,000 in deposits described below and the Buyer's Note for
the balance. The Buyer's Note shall be secured. The nature of the security is
subject to future agreement of the Company and the Buyer. Without such agreement
the Proposed Transaction shall not close. See "Risk Factors". The Buyer shall
also assume substantially all of the liabilities of TSA. These liabilities were
approximately $468,300 at June 30, 1998. However, the Company has agreed the
Buyer need not assume any liabilities in excess of the value of the inventory it
purchases. At June 30th, inventory was approximately $540,000.
On June 11, 1998, the Buyer paid the Company the First Payment
representing a $1,450,000 non-refundable deposit. On July 31, 1998, the Buyer
paid the Company the Second Payment of $2,050,000 which funds are being held in
escrow pending a vote on the Proposed Transaction. The escrow agent is also
holding two stock certificates which in the aggregate reflect that the Buyer is
the owner of 20% of the TSA shares of Common Stock. If the Proposed Transaction
is approved by a majority of the outstanding shares of Common Stock of the
Company, the $2,050,000 will be delivered to the Company and both TSA stock
certificates shall be delivered to the Buyer. If the Company's stockholders fail
to approve the Proposed Transaction by the requisite majority, the escrow agent
shall return the $2,050,000 to the Buyer and also deliver to the Buyer one stock
certificate for 14.5% of the TSA Common Stock; the Company will receive back the
stock certificate for 5.5% of TSA Common Stock. In either event during the
escrow period, the Company and the Buyer shall split equally the income earned
on the $2,050,000. On the date the TSA stock certificates are released from
escrow, the Buyer will be a stockholder of TSA owning 14.5% if the Proposed
Transaction is defeated or 20% if the Proposed Transaction is approved. However,
if the Buyer consummates the purchase of TSA's Assets, it will deliver back to
the Company the shares of TSA, and the Buyer not receive any part of the
Purchase Price by virtue of its ownership of TSA Common Stock.
Furthermore, if the Proposed Transaction is not consummated by December
31, 1998, the Buyer has a one-week option to cancel its exclusive right to
purchase the Assets (which right exists through March 31, 1999) and as
consideration for such cancellation receive an additional 15% of TSA Common
Stock.
The Earn-Out
Initial discussions and a draft of the letter of intent provided for a
$16,000,000 purchase price. As described below, based upon its results of its
due diligence and the change in the nature of TSA's business, the Buyer reduced
its offer to a minimum of $10,000,000 which offer the Company accepted because
of the inclusion of the Earn-Out. The Company believes that the current
after-market and other OEM production line initiatives in process for OHSS will
result in additional revenues that will enable the Company to achieve the full
$6,000,000 Earn-Out over the two-year period following the Closing. However, no
assurances can be given. If earned, for the first year following the Closing
("Year One"), the Buyer shall pay TSA an Earn-Out of up to $3,000,000 and a
cumulative amount of up to $6,000,000 for Year One and the 12-month period
subsequent to Year One ("Year Two").
The Earn-Out in Year One shall be equal to the amount by which the
product of four and one-half times EBITDA, as defined, for Year One exceeds
$8,000,000. As used in the Agreement, "EBITDA" means income before interest,
taxes, depreciation and amortization of the Buyer's subsidiary acquiring the
Assets ("New TSA"). The Agreement further provides that EBITDA shall be based
solely upon the operations of New TSA based upon operations consistent with the
historical operations of TSA and excluding items of income or expense such as
non-recurring items, extraordinary items, intercompany items and other items of
income and expense which are not consistent with such past practice.
In effect, to the extent that in Year One the cash flow of New TSA
times four and one-half exceeds $8,000,000, the Buyer shall pay the Earn-Out up
to the maximum of $3,000,000. The Year Two Earn-Out shall be equal to the amount
by which the product of four and one-half times EBITDA for Year Two exceeds the
greater of: (i) Year One EBITDA times four and one-half, or (ii) $8,000,000. The
maximum Year Two Earn-Out calculated using this formula is $6,000,000 minus the
Year One Earn-Out.
The Company has the option to accept the Earn-Out in cash or in shares
of the Buyer's Common Stock. Such decision will only be made after the Earn-Out
is achieved and the Company considers all relevant information including
reviewing audited financial statements of the Buyer.
Based Upon an anticipated Closing Date between November 5, 1998 and
December 31, 1998, and assuming no changes to TSA's revenues and expenses after
the Closing; no Earn-Out payment if calculated on a pro-forma basis would have
been earned by the Company. The Company believes that current after-market and
other OEM production line initiatives in process for OHSS, will result in
additional revenues that will enable the Company to achieve the full $6,000,000
Earn-Out over a two-year period after closing. However, no assurances can be
given.
Use of Proceeds
In order to consummate the Proposed Transaction, the Company must
obtain the consent of NationsCredit which will not provide such consent unless
its line of credit is paid in full. As of the date of this Proxy Statement,
approximately __________ was owed to NationsCredit. Upon payment of its line of
credit, NationsCredit will release the lien which it holds on all of the assets
of the Company including the TSA Common Stock and Assets. After repaying
NationsCredit and the $3,020,000 of Notes, the Company will be debt free. The
Company intends to use the remaining net proceeds of approximately 1,800,000
(including the $1,450,000 deposit and the $2,050,000 currently held in escrow)
to meet the Company's working capital needs including providing TSI with working
capital to support the marketing of the OSA-IIs. The foregoing working capital
estimate is prior the payment of the Buyer's Note and assumes it is for
$2,500,000.
Background of the Proposed Transaction
In 1992, TSA received the first production line orders for both the
Wrangler and the Cherokee from Chrysler. As a result of these orders, the
business of TSA grew substantially. Its revenues were approximately $16.6
million for the fiscal year ended September 30, 1997. However, during the fourth
quarter of fiscal 1997, the Cherokee contract, which accounted for approximately
44% of TSA's revenues in fiscal 1997, expired. In January 1998, the Company's
Board began discussing the possibility of selling TSA in order to maximize its
investment and provide substantial working capital to support TSI. As a
consequence, management began informal discussions and inquiries seeking to find
a purchaser. On February 9, 1998, the Company retained Morgan Keegan for the
purpose of using its resources and contacts to seek a purchaser of TSA. At a
meeting of the Board on March 25, 1998, the Board discussed the fact that by
November 1998, Chrysler would discontinue buying OHSS for the Grand Cherokee
which would amount to an annual loss of approximately $3.5 million in sales. The
Board was also advised of the fact that management anticipated a reduction
during the balance of calendar 1998 of orders from Chrysler for both the
Wrangler and the Grand Cherokee. At this meeting, the Board devoted substantial
attention to discussing the possibility of selling TSA.
In about mid-February 1998, management began discussing with the Buyer
the possibility of the Buyer acquiring TSA. These discussions arose after
initial discussions with the Buyer concerning a proposed strategic alliance
between the two companies. The Company and the Buyer began exchanging letters of
intent beginning in early April 1998 which negotiations continued periodically
over the next several weeks until an initial letter of intent was signed on
April 17, 1998. The Buyer agreed to pay $16 million subject to completion of due
diligence. The Company supplied the Buyer with substantial documentation, and
the Buyer's representatives made two trips to Troy, Michigan to review TSA's
operations. As the discussions with the Buyer became more serious and as the
Buyer conducted its due diligence, the Company and its financial advisor, Morgan
Keegan, continued preliminary discussions with a number of potential purchasers,
none of which ultimately led to more serious negotiations. During the course of
these discussions, the Company and Morgan Keegan contacted approximately 135
third parties. Several of those third parties visited TSA's facility, and
conducted varying levels of due diligence. However, no definite offers were
received to purchase TSA.
As a result of its investigation, the Buyer focused on the changes to
the business of TSA and reduced its Purchase Price to a base of $10 million cash
with a potential Earn-Out of $6 million. This reduced offer was presented to the
Company in June 1998 and approved by the Company's Board on June 16th.
Previously, the Buyer signed the non-binding letter of intent on June 9th and
the Company received a non-refundable deposit on June 11th. On June 16th, the
Board also directed management to pay for and obtain the Fairness Opinion from
Morgan Keegan. Its approval of the Proposed Transaction was subject to its
review of and satisfaction with the Fairness Opinion. Subsequent to the June
16th Board meeting, the Company retained Morgan Keegan to evaluate the Proposed
Transaction and determine whether, in its opinion, the consideration to be
received by the Company and the Proposed Transaction was fair to the Company
from a financial point of view.
Although legal counsel for the Company and the Buyer did not
participate in the negotiations for the letter of intent, they did participate
in the review of it. Moreover, commencing on June 3rd, counsel for the Company
and the Buyer commenced periodic negotiations of the terms and provisions of
letter of intent and the Agreement. On June 20th, the Company submitted to the
Buyer and the Guarantor, the first draft of the Agreement. After receiving
comments, the Company's counsel submitted a second draft of the Agreement on
July 12th; additional comments were received on July 22nd and corrected pages
provided to the Buyer's counsel on July 23rd.
On July 30th, the Escrow Agreement was executed and on July 31st the
Buyer paid $2,000,050 into escrow. Also on July 31st, the Buyer advised the
Company that it would not be in a position to complete the Proposed Transaction
unless it had the option to pay up to $2,050,000 by issuing the Buyer's Note.
The parties did not agree to the terms of any security. On August 4th, the
Company supplied another draft of the Agreement to the Buyer. On August 6th, the
Buyer's counsel supplied comments on the latest draft of the Agreement. Because
the Escrow Agreement required the escrow agent to return the $2,050,000 if
requested by the Buyer on August 7th, the parties amended the Escrow Agreement
to extend the Buyer's time to request a return of the escrow deposit until
August 13th. The parties continued to discuss the issue of security for the
Buyer's Note through August 11th when they agreed to defer the type of security
until a later date. Additionally, management of the Company and the Buyer agreed
upon additional changes to the Agreement on August 11th. Their discussions
continued on August 12th at which time the Buyer agreed to modify the Escrow
Agreement to maximize the federal income tax consequences to the Company. The
final changes to the Agreement were made on August 12th and August 13th, agreed
upon by the Buyer on August 13th and the parties executed the Agreement on
August 14, 1998.
As these discussions progressed, the Company's management kept its
Board fully apprised of all developments and the major issues as they arose. On
July 27th, the Company's Board met by telephone and fully discussed the Proposed
Transaction. A representation from Morgan Keegan was also present at this
telephone Board meeting. He answered various questions concerning the Fairness
Opinion and advised the Board that Morgan Keegan would be able to issue its
Fairness Opinion including that the Proposed Transaction was fair to the
Company's stockholders from a financial point of view. At this Board meeting,
the Board again unanimously approved the proposed transaction. Thereafter, on
August 11th and 12th, each member of the Board provided a written consent to the
execution of the Agreement. Finally, on August 13th, the Company's Board again
unanimously approved the Agreement including the recent changes. On August 20th,
Morgan Keegan issued its Fairness Opinion.
Reasons for the Proposed Transaction
In reaching its decision to recommend and approve the Agreement, the
Company's Board consulted with its advisors and considered the material factors
described below. Based upon its review of such factors, the Board of the Company
approved the Agreement.
The Company's Board considered the following factors in reaching the
conclusion to approve the Agreement and the transactions contemplated thereby:
o TSA's business will continue to be materially reduced as a
result of loss of a Cherokee contract and the loss of the
Grand Cherokee contract with the last deliveries under this
latter contract expected in November 1998.
o TSA does not anticipate receipt of any new contracts from OEMs during
calendar 1998.
o TSI continues to incur substantial operating losses and such
losses are expected to continue through the balance of
calendar 1998 although the Company is hopeful that the losses
in the last six months of calendar 1998 will be less than in
the first six months.
o As TSA's revenues and net income continue to be materially
reduced, the Company's working capital including its ability
to borrow under the NationsCredit line of credit will be
reduced. Thus, the Board determined, in its judgment, that the
business of TSI and the OSA-II offer the best long-term
potential for growth and profitability relative to the
prospects of TSA.
o The consideration to be paid by the Buyer to TSA consists of a
minimum of $10 million in cash and the Buyer's Note and up to
$6 million from the Earn-out (which Earn-Out the Company may
accept in cash) enabling the Company to repay all of its
outstanding long-term indebtedness and at the same time
providing substantial working capital for TSI.
o The Buyer shall also acquire substantially all of the
liabilities of TSA which will not be required to use its
working capital to satisfy such liabilities.
o Morgan Keegan, the Company's financial advisor, opined that
the consideration to be received by the Company and the
Proposed Transaction was fair to the Company from a financial
point of view.
The Board also considered the following risks and uncertainties
associated with consummation of the Proposed Transaction:
o Following consummation of the Proposed Transaction, the
Company's sole operating business will be TSI which is capital
intensive; its OSA-II has just been developed, and the Company
has recently commenced marketing the OSA-II.
o If the Company does not begin to demonstrate that TSI can
generate material revenues from the OSA-II, the Company may
reach a point, which is not currently possible to determine
due to numerous variables, where it lacks sufficient working
capital to continue its operations.
In analyzing the Proposed Transaction and its deliberations regarding
approval of Agreement, the Company's Board also considered a number of other
factors, including (i) its knowledge of the business, operations, assets,
financial condition and operating results of TSA; (ii) judgments as to the
Company's future prospects with and without TSA; (iii) the terms of the
Agreement, and the business terms which were similar to the letter of intent and
which terms were the product of extensive arm's-length negotiations; and (iv)
the potential for enhanced stockholder value due to the resulting cash infusion
and elimination of the NationsCredit indebtedness and the Notes. The Board did
not find it practical to and did not quantify or attempt to attach relative
weight to any of the specific factors considered by it. In the final analysis,
the Board concluded that the opportunities for the Company to streamline its
operations by concentrating its attention on TSI were compelling.
Notwithstanding the Company's expectation regarding the benefits to be
realized from the Proposed Transaction, no assurances can be given that the
Company will be able to realize such benefits. See "Risk Factors".
Recommendation of the Company's Board of Directors
At the meetings of the Board held to consider the Proposed Transaction
(as well by written consent), the Board each time unanimously approved the
Proposed Transaction as being in the best interests of the Company and its
stockholders. FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF THE COMPANY
UNANIMOUSLY APPROVED THE PROPOSED TRANSACTION AND RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF THE PROPOSED TRANSACTION.
Opinion of Financial Advisor
The Company initially engaged Morgan Keegan to act as its financial
advisor and investment banker and use its resources and contacts in order to
attempt to find a purchaser for TSA. Morgan Keegan has advised the Company and
its Board that they conducted an exhaustive search for a proposed purchaser and
were unable to contact any proposed purchaser which had a serious interest. The
Company engaged Morgan Keegan based upon its qualifications, expertise and
reputations as well as the prior experience of the Company's president and chief
executive officer with Morgan Keegan. The Company did not request Morgan Keegan
to recommend the amount of consideration to be received by the Company and in
conducting its negotiations with the Buyer, the Company did not rely upon any
resistance or advice from Morgan Keegan. However, Morgan Keegan was requested to
evaluate, from a financial point of view, the fairness of the consideration to
be received by the Company and provided a written opinion to the Board. On
August 20, 1998, Morgan Keegan rendered the Fairness Opinion to the effect that,
as of such date, and based upon and subject to the assumptions, limitations and
qualifications set forth in such opinion the Purchase Price was fair to the
Company from a financial point of view. Morgan Keegan did not pass upon the
ability of the Buyer to pay the Buyer's Note or of the Guarantor to meet its
obligations as described in this Proxy Statement.
THE FULL TEXT OF THE MORGAN KEEGAN FAIRNESS OPINION IS SET FORTH IN
APPENDIX B TO THIS PROXY STATEMENT AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY
FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND
LIMITATIONS OF THE REVIEW BY MORGAN KEEGAN. THE MORGAN KEEGAN FAIRNESS OPINION
WAS PREPARED FOR THE COMPANY'S BOARD AND ADDRESSES ONLY THE FAIRNESS OF THE
PURCHASE PRICE TO THE COMPANY FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF THE COMPANY AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE ANNUAL MEETING. THE SUMMARY OF THE MORGAN KEEGAN
FAIRNESS OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
Fairness Opinion
The Board of the Company retained Morgan Keegan as its financial
advisor to render an opinion to the Company's Board concerning the fairness,
from a financial point of view, to the Company's stockholders of the
consideration (the "Transaction Consideration") to be paid pursuant to that
certain Agreement dated August 14, 1998 among the Company and its subsidiary,
TSA, and the Buyer and the Guarantor. Morgan Keegan was retained by the
Company's Board on the basis of, among other things, its experience, expertise
and familiarity with manufacturing companies, the automotive OEM industry and
the Company. As part of its investment banking business, Morgan Keegan is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for various
purposes.
On July 27, 1998, at a meeting of the Board of the Company held to
evaluate the proposed purchase of TSA's common stock pursuant to the terms and
conditions of the Proposed Transaction, Morgan Keegan made an oral presentation
to the Board of the Company regarding the Proposed Transaction and its ability
to render its opinion that the Transaction Consideration is fair, from a
financial point of view, to the Company's stockholders assuming satisfaction of
Morgan Keegan's due diligence investigation and the veracity of various
assumptions. On August 20, 1998 at a meeting of the Board of the Company, held
to evaluate the terms of the Proposed Transaction, Morgan Keegan made an oral
presentation to the Board of the Company regarding the Proposed Transaction and
rendered its oral opinion that the Transaction Consideration is fair, from a
financial point of view, to the Company's stockholders. Morgan Keegan
subsequently confirmed its oral opinion in writing on August 20, 1998.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN KEEGAN, WHICH SETS FORTH
THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY
REFERENCE. THE COMPANY'S STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY
IN ITS ENTIRETY. MORGAN KEEGAN'S OPINION IS DIRECTED ONLY TO THE FAIRNESS TO THE
COMPANY'S STOCKHOLDERS, FROM A FINANCIAL POINT OF VIEW, OF THE TRANSACTION
CONSIDERATION TO BE PAID AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE
TRANSACTION OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE COMPANY'S ANNUAL
MEETING. THE SUMMARY OF THE OPINION OF MORGAN KEEGAN SET FORTH AS APPENDIX B TO
THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In arriving at its fairness opinion, Morgan Keegan reviewed the
Agreement and held discussions with certain senior officers, directors and other
representatives and advisors of TSA concerning the business, operations and
prospects of TSA. Morgan Keegan examined certain publicly available business and
financial information relating to TSA as well as certain financial forecasts and
other data for TSA, which was provided to Morgan Keegan by or otherwise
discussed with the management of TSA. Morgan Keegan reviewed the financial terms
of the Proposed Transaction as set forth in the Agreement in relation to, among
other things, the historical earnings and operating data of TSA. Morgan Keegan
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose businesses
Morgan Keegan considered relevant in evaluating those of TSA. In addition to the
foregoing, Morgan Keegan conducted such other analyses and examinations and
considered such other financial, economic and market criteria as Morgan Keegan
deemed appropriate to arrive at its fairness opinion. Morgan Keegan noted that
its fairness opinion was necessarily based upon information available, and
financial, stock market and other conditions and circumstances existing and
disclosed to Morgan Keegan as of the date of its fairness opinion.
In conducting its review and rendering its fairness opinion, Morgan
Keegan assumed and relied, without independent verification, upon the accuracy
and completeness of all financial and other information publicly available or
furnished to or otherwise reviewed by or discussed with Morgan Keegan. With
respect to financial forecasts and other information provided to or otherwise
reviewed by or discussed with Morgan Keegan, the management of TSA advised
Morgan Keegan that such forecasts and other information were reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
management of TSA as to the future financial performance of TSA and the
strategic and financial implications and operational consequences anticipated
from the Proposed Transaction. Morgan Keegan did not express any opinion as to
what the price at which the Company's Common Stock will trade subsequent to the
Proposed Transaction. In addition, Morgan Keegan did not make or obtain an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of TSA nor did Morgan Keegan make a physical inspection of the
properties or assets of TSA. Morgan Keegan was not asked to consider, and its
opinion does not address, the relative merits of the Transaction as compared to
any alternative business strategies that might exist for the Company or the
effect of any other transaction in which the Company might engage. In addition,
although Morgan Keegan evaluated the Transaction Consideration from a financial
point of view, Morgan Keegan was not asked to and did not recommend the specific
consideration payable in the Proposed Transaction, which was determined by the
Company and the Buyer through arms-length negotiations. Further, Morgan Keegan
was not asked to and did not render any opinion whatsoever concerning the
contingent additional payments of up to $6,000,000 contemplated in the
Agreement, the security of the potential Buyer's note totaling $2,500,000
million as part of the total Transaction Consideration as contemplated in the
Agreement, the likelihood of the Buyer completing financing or the fulfillment
of any of the conditions contained in the Agreement. No other limitations were
imposed by the Company on Morgan Keegan with respect to the investigations made
or procedures followed by Morgan Keegan in rendering its fairness opinion.
The following is a summary of the financial and comparative analyses
presented orally by Morgan Keegan to the Company's Board on August 20, 1998 (the
"Morgan Keegan & Company Report") in connection with its opinion:
Comparable Company Analysis: Morgan Keegan reviewed and compared
certain financial information relating to TSA to corresponding financial
information, ratios and public market multiples for eight publicly traded
companies that it deemed to be comparable to TSA. The companies which Morgan
Keegan used for purposes of this analysis were Donnelly Corp., Durakon
Industries, Inc., Excel Industries, Inc., JPE, Inc., Phoenix Gold International,
Inc., Recoton Corp., Selas Corp. of America, and Standard Motor Products, Inc.
No company used in Morgan Keegan's analysis was deemed to be identical to TSA.
Accordingly, Morgan Keegan considered the market multiples for the composite of
comparable companies to be more relevant than the market multiples of any single
company.
Morgan Keegan calculated a range of market multiples for the comparable
companies by dividing adjusted market value (market value based on the closing
price per share on August 17, 1998 plus third-party debt less cash) by each such
company's latest 12 months ("LTM") reported sales, EBITDA, and earnings before
interest and taxes ("EBIT"); and by dividing market value as of August 17, 1998
by each such company's LTM reported net income and latest reported book value.
This analysis indicated that the median trading multiple for sales was 0.4x, for
EBITDA was 5.8x, for EBIT was 11.4x, for net income was 13.8x and for book value
was 1.0x. Based upon the comparable median trading multiples, and a 30% size and
liquidity discount, the implied median equity value was $3.4 million with
respect to sales, $10.0 million with respect to EBITDA, $17.0 million with
respect to EBIT, $12.3 million with respect to net income and $1.6 million with
respect to book value.
No company or transaction used in the comparable companies analysis for
comparative purposes is deemed to be identical to TSA. Accordingly, an analysis
of the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors. Mathematical analysis (such as determining the
average or median) is not, in itself, a meaningful method of using comparable
company data.
Discounted Cash Flow Analysis: Morgan Keegan performed a discounted
cash flow analysis of the projected free cash flow of TSA for fiscal years 1998
through 2002, based on operating projections provided by TSA management. Using
this information, Morgan Keegan calculated a range of equity values for TSA
based on the sum of (i) the present value of the free cash flows of TSA and (ii)
the present value of the estimated terminal value for TSA at the end of fiscal
year 2002. In performing its discounted cash flow analysis, Morgan Keegan
assumed, among other things, discount rates of 32.5% to 42.5% and terminal
multiples of EBITDA of 3.5x to 5.0x. Those discount rates and terminal multiples
reflect Morgan Keegan's qualitative judgments concerning the specific risk
associated with such an investment and the historical and projected operating
performance of TSA. This analysis resulted in a range of equity values for TSA
of $7.8 million to $13.2 million.
Merger & Acquisition Transactions Analysis: In order to assess market
pricing for automotive OEM parts and automotive sound products manufacturers
acquisitions, Morgan Keegan identified 77 acquisition transactions in this
sector completed since January 1, 1993 or currently pending. Morgan Keegan
calculated a range of multiples for the comparable transactions by dividing
adjusted market value (purchase price plus third-party debt less cash) by each
such company's LTM reported sales, EBITDA and EBIT; and by dividing purchase
price by each such company's LTM reported net income and latest reported book
value. This analysis indicated that the median multiple for sales was 0.7x, for
EBITDA was 7.8x, for EBIT was 11.0x, for net income was 15.4x and for book value
was 2.6x. Morgan Keegan also calculated ranges of implied equity values for TSA
based upon the comparable transaction multiples and TSA LTM financial
information. The median equity values were $8.3 million with respect to sales,
$19.4 million with respect to EBITDA, $23.3 million with respect to EBIT, $19.6
million with respect to net income and $5.8 million with respect to book value.
In arriving at its conclusion, Morgan Keegan also considered the
financial terms of the Transaction in relation to the Company's existing credit
agreements. Under the Company's existing credit agreements, the Company is
required to maintain a total debt-to-equity ratio of no greater than 1.5 to 1.0
at each fiscal quarter's end. As of June 30, 1998, the Company is in compliance
with the covenants of its Credit Agreement, after including the down payment of
$1.45 million it received from the Buyer pursuant to the terms of the proposed
transaction. If the Company did not receive the $1.45 million down payment from
the Buyer, the Company would have been in violation of its credit agreement with
the holders of the notes as of June 30, 1998. If the Company violates its
covenants, the outstanding notes could be called and all principal and interest
due thereon would immediately require payment. To the extent that the Proposed
Transaction is consummated, the Company will insulate itself against a default
situation by applying the Transaction Consideration received to pay.
Morgan Keegan also considered the lack of any additional bona fide
offers for TSA in its analysis. Morgan Keegan conducted a thorough sale process,
contacting approximately 135 potential buyers for TSA. Eleven potential buyers
contacted by Morgan Keegan executed a confidentiality agreement and requested
descriptive marketing materials. Several of those third parties visited
facilities, and conducted varying levels of due diligence. However, no definite
offers ere received to purchase TSA.
The summary of the Morgan Keegan fairness opinion set forth above does
not purport to be a complete description of the presentation by Morgan Keegan of
the Morgan Keegan fairness opinion to the Company Board or of the analyses
performed by Morgan Keegan. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description. Morgan
Keegan believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or of the above summary, without considering all
factors and analyses, would create an incomplete view of the process underlying
the analyses set forth in the Morgan Keegan fairness opinion. In addition,
Morgan Keegan may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to represent the actual
value of TSA or the combined company.
In performing its analyses, Morgan Keegan made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of TSA. The analyses
performed by Morgan Keegan are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of Morgan
Keegan's analysis of the fairness, from a financial point of view, of the
purchase price to be received by the Company and were discussed with the Company
Board at its August 20, 1998 meeting. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. In addition, as described above, Morgan Keegan's presentation to
the Company's Board and its fairness opinion were two of many factors taken into
consideration by the Board in making its determination to approve the Agreement.
The Company has agreed to pay Morgan Keegan a fee of $75,000 for
providing the fairness opinion to the Company Board pursuant to an engagement
letter between the Company and Morgan Keegan. This portion of Morgan Keegan's
fee is not contingent upon the closing of the Proposed Transaction. In addition,
upon the closing of the Proposed Transaction, Morgan Keegan will receive an
additional financial advisory fee of $250,000 from the Company. The Company also
has agreed to reimburse Morgan Keegan for its reasonable out-of-pocket expenses
including reasonable legal fees and expenses and to indemnify Morgan Keegan
against certain liabilities, including liabilities under the federal securities
laws.
Terms and Conditions of the Agreement
Set forth below is a description of the material terms and conditions
of the Agreement. The description is qualified in its entirety by reference to
the Agreement.
The Purchase Price
As described in this Proxy Statement, the Purchase Price consists of:
o A minimum of $10,000,000 of which at least $7,500,000
is to be paid in cash (including $3,500,000 paid to date).
o The balance of not more than $2,500,000 represented by the
Buyer's Note paying annual interest of 12% and due March 31,
1999.
o The Earn-Out if any, of up to $6,000,000.
o Assumption of substantially all of TSA's liabilities.
The Guarantor has been made a party solely for the purpose of its
acting as a Guarantor of the Buyer's obligation to pay the Earn-Out to the
extent that the Earn-Out is achieved. There can be no assurances that New TSA
shall produce sufficient cash flow to require payment of any portion of the
Earn-Out.
Closing Conditions of all Parties
Closing of the Proposed Transaction is subject to the compliance with
certain conditions which are applicable to all parties. These conditions are:
1. The Company's stockholders have voted to approve the Proposed
Transaction by a vote of a majority of outstanding shares of
Common Stock or 14,475,559 shares;
2. The Company and the Buyer shall reach an agreement on the
collateral securing payment of the Buyer's Note; and
3. No injunction or temporary restraining order shall have been
granted restraining or prohibiting the consummation of the
Proposed Transaction, and no action, suit or other proceeding
by any federal, state, or local governmental authority seeking
such an injunction or order shall be pending or threatened.
The Buyer's Closing Conditions
The Buyer's obligation to consummate the Proposed Transaction is
subject to the satisfaction or waiver of certain conditions, including the
following:
1. The Buyer shall have completed a Financing;
2. The Company and TSA shall have performed in all material
respects all agreements, and satisfied in all material
respects all conditions on their part to be performed or
satisfied hereunder at or prior to the Closing Date;
3. All representations and warranties of the Company and TSA
herein shall have been true and correct in all material
respects when made, shall have continued to have been true and
correct in all material respects at all times subsequent
thereto, and shall be true and correct in all material
respects on and as of the Closing Date as though made on, as
of and with reference to such date;
4. All consents, approvals, certificates and authorizations
required to be obtained by the Company, TSA and/or the Buyer
in connection with the sale of the Assets, including without
limitation, all approvals by and clearances from all
governmental authorities, lenders, and other third parties,
shall have been obtained and no such consent, approval or
authorization shall be subject to any condition which is
unduly burdensome;
5. TSA shall have executed and delivered to the Buyer all
documents necessary to convey title to the Assets to the Buyer
as contemplated by the Agreement;
6. TSA shall have provided to the Buyer a complete and accurate
schedule including an aging schedule for all of TSA's accounts
receivable as of a date not more than two business days prior
to the Closing Date;
7. Certain persons including management of the Company and key
employees of TSA have executed an agreement not to compete
which agreement shall be in form and substance reasonably
satisfactory to the Buyer; and
8. Counsel to the Company and TSA shall deliver an opinion
addressed to the Buyer and dated the Closing Date in substance
similar to that as provided in a schedule to the Agreement.
The Company's and TSA's Closing Conditions
1. The Buyer shall have paid the balance of the Purchase Price
including delivery of the Buyer's Note and executed an
agreement assuming TSA's liabilities as provided by the
Agreement, and the Guarantor shall have executed a guarantee
in form and substance satisfactory to the Company and TSA;
2. The Buyer shall have performed in all material respects all
other agreements, and satisfied in all material respects all
other conditions on its part to be performed or satisfied
hereunder at or prior to the Closing Date;
3. All of the representations and warranties of the Buyer herein
shall have been true and correct in all material respects when
made, shall have continued to have been true and correct in
all material respects at all times subsequent thereto, and
shall be true and correct in all material respects on and as
of the Closing Date as though made on, as of and with
reference to such date;
4. The Company and TSA shall have obtained all consents and
approvals required to be obtained in connection with the sale
of the TSA Assets in connection with the consummation of the
Proposed Transaction contemplated by this Agreement; and
5. The Buyer's counsel shall have delivered an opinion addressed
to the Company and TSA and dated the Closing Date, in
substance similar to that contained on except as provided in a
schedule to the Agreement.
Expenses
The Agreement provides that each party will bear their own expenses
incurred in connection with the preparation, execution and performance of the
Agreement and the transactions contemplated thereby.
Conduct of Business of TSA Prior to the Closing
The Company and TSA covenant that, except as otherwise consented to in
writing by the Buyer, from and after the date hereof until the Closing or the
earlier termination of this Agreement:
1. Except as set forth in the Agreement, TSA shall not engage in any
practice, take any action or enter into any transaction outside the
ordinary course of business. Without limiting the generality of the
foregoing:
a. TSA will not authorize or effect any change in its Articles
of Incorporation or By-Laws; and
b. TSA shall not issue any note, bond or other debt security or
create, incur, assume or grant any indebtedness or borrow
money or capitalize lease obligations outside the ordinary
course of business. Nothing contained herein shall prevent TSA
from engaging in any transaction permitted by the agreement
with NationsCredit.
2. All real property, machinery and equipment and other operating
properties used in the business of TSA will be kept and maintained in
good repair and working order (ordinary wear and tear excepted) on a
basis consistent with past practices.
3. TSA will use its best efforts to maintain in full force and effect in
all material respects all insurance coverages.
Finally, the Agreement requires and TSA and the Buyer are currently
engaged in jointly marketing and selling the Buyer's products through TSA and
its employees but only through OEMs. In order to accommodate this joint
marketing effort, TSA is providing the Buyer with the use of its receptionist,
one existing office, a products display area and the common areas located at
TSA's facility in Troy, Michigan. The Buyer is paying all incremental marketing
and sales expenses.
Indemnification
The Company and TSA shall indemnify the Buyer from any liability
resulting from any breach of any representations, warranties, covenants and
agreements made by the Company or TSA, any claim arising out of the failure to
comply with any applicable bulk sales laws, fraudulent conveyance or other laws
for the protection of creditors or any other matters relating to the conduct of
TSA's business; provided, however, no indemnification shall be required unless
and until the aggregate amount of the damages exceeds $100,000. The Buyer shall
indemnify the Company and TSA for damages incurred as a result of the breach of
any of the representations, warranties, covenants or agreements made by the
Buyer and as a result of the Buyer's operation of TSA after the Closing Date.
Accounting Treatment for the Proposed Transaction
The Proposed Transaction will be accounted for as a sale of TSA's
Assets.
Dissenters' Rights
The Company's stockholders are not entitled to dissenters' rights or
appraisal rights under Delaware law with respect to the Proposed Transaction.
Regulatory Filings and Approvals
In accordance with the Agreement, the parties are not required to make
any filings under the Hart-Scott Act because of the size of the transaction is
too small to come within its requirement.
Failure of the Buyer to Pay the Balance of the Purchase Price - Bring Along
Provisions
If the Buyer fails to pay the balance of the Purchase Price by March
31, 1999 (or if the Buyer elects its right to cancel its exclusive right to
purchase TSA after January 7, 1999), the Company and TSA shall have the right to
find a third party purchaser for 100% of TSA Common Stock or Assets. In such
event, the Buyer shall sell its TSA Common Stock to a third party purchaser (or
the Buyer shall consent to the sale of the Assets) in consideration for the
receipt by the Buyer of the pro-rata share of the consideration to be paid by
the purchaser to the Company or TSA.
<PAGE>
PRO FORMA CONDENSED FINANCIAL
INFORMATION OF THE COMPANY
The following unaudited pro forma condensed financial statements were
prepared to reflect the estimated effects of the potential sale of 100% of TSA
for $10,000,000. The sale is structured to occur in three separate steps as
follows: (i) The Company has received a $1,450,000 non-refundable deposit which
gave the Buyer a minimum of a 14.5% equity interest in TSA ("Step 1"),(ii) the
Second Payment of $2,050,000 was received by the Company and is in escrow until
the requisite stockholder approval is obtained which would give the Buyer an
additional 5.5% of TSA Common Stock ("Step 2"), and (iii) the receipt of the
remaining proceeds of $4,000,000 and a note receivable of $2,500,000 to complete
the ultimate sale of 100% of TSA ("Step 3"). If the Company's stockholders fail
to approve the Proposed Transaction by the requisite majority, the escrow agent
shall return the $2,050,000 to the Buyer and also deliver to the Buyer one stock
certificate for 14.5% of the TSA Common stock; the Company will receive back the
stock certificate for 5.5% of TSA Common Stock. On the date the TSA stock
certificates are released from escrow, the Buyer will be a stockholder of TSA
owning 14.5% if the Proposed Transaction is defeated or 20% if the Proposed
Transaction is approved. However, if the Buyer consummateS the purchase of TSA's
Assets, it will deliver back to this Company the shares of TSA, and Buyer will
not receive any part of the Purchase Price by virtue of its ownership of TSA
Common Stock.
Furthermore, if the Proposed Transaction is not conummated by December 31,
1998, the Buyer has a one-week option to cancel its exclusive right to purchase
the Assets (which right exists through March 31, 1999) and as consideration of
such cancellation receive an additional 15% of TSA Common Stock.
The unaudited pro forma condensed balance sheet as of June 30, 1998
gives effect to the above transactions as if they had occurred on June 30, 1998.
The unaudited pro forma condensed statements of operations for the years ended
September 30, 1997 and 1996 and 1995 and nine months ended June 30, 1998 and
1997 give effect to the pro forma transactions as if they had occurred as of
October 1, the first day of the Company's respective fiscal year. Upon the sale
of 100% of the TSA Assets (Step 3), this segment will be treated as a
discontinued operation as defined in Accounting Principals Board Opinion
No. 30, accordingly the pro forma statements of income have been presented
for all the same periods as the historical financial statements.
The unaudited pro forma condensed financial statements were also prepared
to show the effects of the use of the net proceeds from the sale to pay
NationsCredit and the Notes as described in the notes to the unaudited pro forma
condensed financial statements.
The unaudited pro forma condensed financial statements were prepared
utilizing the accounting principles of the Company as outlined in its historical
financial statements included in the Company's Form 10-K for the year ended
September 30, 1997, a copy of which is included as Exhibit A. The pro forma
adjustments are based upon available information and contain assumptions that
the Company believes are reasonable under the circumstances. The unaudited pro
forma condensed financial statements do not reflect the potential corporate
overhead savings as a result of the sale of TSA.
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
<S> <C> <C> <C> <C>
Adjustments Adjustments
for Deposit for Pro Forma for 100% Sale Pro Forma
Historical 20% of TSA Total of TSA Total
----------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $1,962,287 (a) - $1,962,287 $591 (g) $3,917,627
6,050,000 (g)
(4,503,477) (h)
408,226 (j)
Restricted cash - 2,050,000 (d) 2,050,000 (2,050,000) (g) -
Accounts receivable, net 1,861,502 - 1,861,502 (1,663,844) (g) 197,658
Advances to officer 5,839 - 5,839 - 5,839
Note receivable - 2,500,000 (g) 2,500,000
Inventories 1,303,150 - 1,303,150 (540,251) (g) 762,899
Prepaid expenses and
other current assets 357,353 - 357,353 (74,629) (g) 282,724
-----------------------------------------------------------------------------------------------
Total current assets 5,490,131 2,050,000 7,540,131 126,616 7,666,747
Property and equipment-net 1,601,100 - 1,601,100 (288,898) (g) 1,312,202
Manufacturing & distribution
rights & patents-net 262,922 - 262,922 (144,966) (g) 117,956
Capitalized database, net 2,125,902 - 2,125,902 - 2,125,902
Notes receivable from officers 27,395 - 27,395 - 27,395
Other assets, net 205,897 - 205,897 - 205,897
---------------------------------------------------------------------------------------------
TOTAL ASSETS $9,713,347 $2,050,000 $11,763,347 ($307,248) $11,456,099
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $833,477 - $ 833,477 ($833,477) (h) -
Accounts payable 711,254 711,254 (435,314) (g) 275,940
Accrued liabilities 1,362,442 (b) 1,535,750 (e) 2,898,192 (1,662,977)(g,h) 1,235,215
-----------------------------------------------------------------------------------------------
Total current liabilities 2,907,173 1,535,750 4,442,923 (2,931,768) 1,511,155
Senior convertible notes 3,020,000 - 3,020,000 (3,020,000) (h) -
-----------------------------------------------------------------------------------------------
Total liabilities 5,927,173 1,535,750 7,462,923 (5,951,768) 1,511,155
-----------------------------------------------------------------------------------------------
Minority interest 325,337 (b) 123,404 (e) 448,741 (448,741) (g) -
Stockholders' equity 3,460,837 (c) 390,846 (f) 3,851,683 6,093,261 (g) 9,944,944
TOTAL LIABILITIES AND
-----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY $9,713,347 $2,050,000 $11,763,347 ($307,248) $11,456,099
===============================================================================================
</TABLE>
See notes to unaudited pro forma condensed financial statements.
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
<S> <C> <C> <C> <C> <C>
Record 20% Adjustments
Minority Interest Pro Forma for 100% Sale Pro Forma
Historical in Income of TSA Total of TSA Total
-----------------------------------------------------------------------------------------------
Net sales $9,281,904 - $9,281,904 ($8,952,308) (j) $329,596
Cost of sales 6,143,141 - 6,143,141 (6,010,274) (j) 132,867
Selling, general and
administrative expenses 6,252,384 (1,085,587)(i) 5,166,797 (925,751) (j) 4,241,046
----------------------------------------------------------------------------------------------
Loss from operations (3,113,621) 1,085,587 (2,028,034) (2,016,283) (4,044,317)
Interest expense, other
income (expense) net 701,623 (1,030,435)(i) (328,812) 26,213 (j) 105,627
408,226 (k)
Minority interest in
income of TSA - (389,781)(i) (389,781) 389,781 (j) -
-----------------------------------------------------------------------------------------------
Loss before income
taxes and minority interest (2,411,998) (334,629) (2,746,627) (1,192,063) (3,938,690)
Income tax expense (41,242) (41,242) 41,167 (j) (75)
===============================================================================================
Loss from continuing operations ($2,453,240) (334,629) ($2,787,869) ($1,150,896) ($3,938,765)
==============================================================================================
Loss from continuing operations per
common share: ($0.14)
================
Basic ($0.09) ($0.14)
=============== ================
Diluted ($0.09)
===============
Weighted average common shares
Outstanding:
Basic 28,164,897 28,164,897
=============== ================
Diluted 28,164,897 28,164,897
=============== ================
</TABLE>
See notes to unaudited pro forma condensed financial statements.
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
<S> <C> <C> <C> <C> <C>
Record 20% Adjustments
Minority Interest Pro Forma for 100% Sale Pro Forma
Historical in Income of TSA Total of TSA Total
------------------------------------------------------------------------------
Net sales $14,236,732 - $14,236,732 ($13,859,582) (m) $377,150
Cost of sales 9,229,164 - 9,229,164 (9,081,447) (m) 147,717
Selling, general and
administrative expenses 5,708,025 - 5,708,025 (760,508) (m) 4,947,517
-------------------------------------------------------------------------
Loss from operations (700,457) - (700,457) (4,017,627) (4,718,084)
Interest expense, other
income (expense) net (99,051) - (99,051) 36,529 (m) 141,328
203,850 (n)
Minority interest in income of TSA - (788,365)(l) (788,365) 788,365 (m) -
------------------------------------------------------------------------------------
Loss before income taxes (799,508) (788,365) (1,587,873) (2,988,883) (4,576,756)
Income tax expense (39,274) - (39,274) 39,274 (m) -
============================================================================================
Loss from continuing operations ($838,782) ($788,365) ($1,627,147) ($2,949,609) ($4,576,756)
============================================================================================
Loss from continuing operations per
common share:
Basic ($0.03) ($0.16)
=============== ================
Diluted ($0.03) ($0.16)
=============== ================
Weighted average common shares
Outstanding:
Basic 28,089,261 28,089,261
=============== ================
Diluted 28,089,261 28,089,261
=============== ================
</TABLE>
See notes to unaudited pro forma condensed financial statements.
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<S> <C> <C> <C> <C> <C>
Record 20%
Minority Adjustments
Interest in Pro Forma for 100% Sale Pro Forma
Historical Income of TSA Total of TSA Total
---------------------------------------------------------------------------
Net sales $16,984,123 - $16,984,123 ($16,580,270) (m) $403,853
Cost of sales 11,304,708 - 11,304,708 (11,197,664) (m) 107,044
Selling, general and administrative
expenses 8,277,875 - 8,277,875 (1,257,671) (m) 7,020,204
----------------------------------------------------------------------------
Loss from operations (2,598,460) - (2,598,460) (4,124,935) (6,723,395)
Interest expense, other income
(expense) net (223,597) - (223,597) 5,595 (m) 123,798
341,800 (n)
Minority interest in income of TSA - (790,498)(l) (790,498) 790,498 (m) -
-------------------------------------------------------------------------
Loss before income taxes (2,822,057) (790,498) (3,612,555) (2,987,042) (6,599,597)
Income tax expense (482,000) - (482,000) 166,848 (m) (315,152)
============================================================================
Loss from continuing operations ($3,304,057) ($790,498) ($4,094,555) ($2,820,194) ($6,914,749)
============================================================================
Loss from continuing operations per
common share:
Basic ($0.12) ($0.25)
=============== ================
Diluted ($0.12) ($0.25)
=============== ================
Weighted average common shares
Outstanding:
Basic 28,065,563 28,065,563
=============== ================
Diluted 28,065,563 28,065,563
=============== ================
</TABLE>
See notes to unaudited pro forma condensed financial statements.
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<S> <C> <C> <C> <C> <C>
Record 20% Adjustments
Minority Interest Pro Forma for 100% Sale Pro Forma
Historical in Income of TSA Total of TSA Total
------------------------------------------------------------------------------
Net sales $16,146,524 - $16,146,524 ($16,102,523)(m) $44,001
Cost of sales 10,776,203 - 10,776,203 (10,749,431)(m) 26,772
Selling, general and administrative expenses 8,426,540 - 8,426,540 (1,159,258)(m) 7,267,282
------------------------------------------------------------------------------
Loss from operations (3,056,219) - (3,056,219) (4,193,834) (7,250,053)
Interest expense, other income (expense) net (232,267) - (232,267) (45,460)(m) (5,927)
271,800(n)
Minority interest in income of TSA (812,859)(l) (812,859) 812,859(m) -
------------------------------------------ -----------------------------------
Loss before income taxes (3,288,486) (812,859) (4,101,345) (3,154,635) (7,255,980)
Income tax expense (1,543,300) - (1,543,300) 175,000(m) (1,368,300)
==============================================================================
Loss from continuing operations ($4,831,786) ($812,859) ($5,644,645) ($2,979,635) ($8,624,280)
==============================================================================
Loss from continuing operations
per common share:
Basic ($0.17) ($0.31)
Diluted =============== ============
($0.17) ($0.31)
=============== ============
Weighted average common shares
Outstanding:
Basic 28,027,959 28,027,959
=============== ================
Diluted 28,027,959 28,027,959
=============== ================
</TABLE>
See notes to unaudited pro forma condensed financial statements.
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C>
Record 20% Adjustments
Minority Interest Pro Forma for 100% Sale Pro Forma
Historical in Income of TSA Total of TSA Total
----------------------------------------------------------------------------
Net sales $13,907,354 - $13,907,354 ($13,893,459) (m) $13,895
Cost of sales 8,739,691 - 8,739,691 (8,739,691) (m) -
Selling, general and administrative
expenses 7,534,190 - 7,534,190 (824,539) (m) 6,709,651
-------------------------------------------------------------------------------------
Loss from operations (2,366,527) - (2,366,527) (4,329,229) (6,695,756)
Interest expense, other income (expense) net 156,035 - 156,035 (2,218) (m) 214,117
60,300 (n)
Minority interest in income of TSA - (854,289)(l) (854,289) 854,289 (m) -
-------------------------------------------------------------------------------------
Loss before income taxes (2,210,492) (854,289) (3,064,781) (3,416,858) (6,481,639)
Income tax expense (610,000) - (610,000) 60,000 (m) (550,000)
====================================================================================
Loss from continuing operations ($2,820,492) ($854,289) ($3,674,781) ($3,356,858) ($7,031,639)
====================================================================================
Loss from continuing operations per
common share:
Basic ($0.10) ($0.26)
=============== ================
Diluted ($0.10) ($0.26)
=============== ================
Weighted average common shares
Outstanding:
Basic 27,249,541 27,249,541
=============== ================
Diluted 27,249,541 27,249,541
=============== ================
See notes to unaudited pro forma condensed financial statements.
</TABLE>
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statements of Operations
For the Nine Months Ended June 30, 1998
(a) Includes the receipt of a $1,450,000 non-refundable deposit.
(b) Includes 14.5% of the estimated accrued liabilities relating to legal,
accounting and investment banking fees for the sale of TSA in the amount of
$94,250 and the recording of a 14.5% minority interest.
(c) Includes the gain on 14.5% of the equity in TSA of $1,030,435. This gain is
not included on the Unaudited Pro Forma Condensed Consolidated Statement of
Operations for all periods presented since it is a non-recurring item.
(d) Represents the receipt of the additional deposit of $2,050,000 on Step 2 of
the sale of TSA which is recorded in restricted cash since the funds are being
held in escrow.
(e) Represents the additional 5.5% of the estimated accrued liabilities relating
to the costs of the transaction in the amount of $35,750 and $1,500,000 of
deferred gain relating to the additional 15% the buyer will receive if the
proposed transaction does not close by December 31, 1998, and the recording of
the additional 5.5% minority interest.
(f) Represents the additional 5.5% of the gain on the TSA sale (see Note (c)
above).
(g) Represents the receipt of the remaining proceeds and the note receivable for
Step 3 of the sale of TSA, the elimination of the minority interest and the
elimination of the respective TSA assets, liabilities and equity.
(h) Represents the repayment of the Notes and NationsCredit with the proceeds
from the TSA sale, and payment of $650,000 of estimated legal, accounting and
investment banking fees for the sale of TSA.
(i) To record the 20% minority interest in TSA and to eliminate two
non-recurring items: (1) 14.5% of the gain on the sale of TSA, $1,030,435, and
(2) severance expense for the former chairman of the Company, $1,085,587.
(j) Represents the elimination of the minority interest and the respective TSA
results of operations.
(k) Represents the reduction in interest expense resulting from the
repayment of debt as discussed in Note (h) above.
(l) To record the 20% minority interest in TSA.
(m) Represents the elimination of the minority interest and the respective TSA
results of operations.
(n) Represents the reduction in interest expense resulting from the repayment of
Notes.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data presented below as of
and for the nine months ended June 30, 1998 and June 30, 1997 are derived from
the unaudited consolidated financial statements of the Company. The selected
consolidated financial data presented below as of and for the years ended
September 30, 1997, September 30, 1996 and September 30, 1995 have been derived
from financial statements audited by Arthur Andersen LLP, independent certified
public accountants. The unaudited consolidated financial statements as of June
30, 1998 and June 30, 1997 are included in the Company's Quarterly Report on
Form 10-Q for the nine months ended June 30, 1998 (Exhibit 2 to this Proxy
Statement). 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. The consolidated financial
statements as of September 30, 1997, September 30, 1996 and September 30, 1995
together with the report of Arthur Andersen LLP, are included in the Company's
Annual Report on Form 10-K, as amended, for the year ended September 30, 1997.
(Exhibit 1 to this Proxy Statement).
<TABLE>
NINE MONTHS ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30,
- - --------------------------------------- ------------------------------ --------------- --------------- -----------------
UNAUDITED
- - --------------------------------------- -------------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
- - --------------------------------------- -------------- --------------- --------------- --------------- -----------------
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . $9,281,904 $14,236,732 $16,984,123 $16,146,524 $13,907,354
Net Loss from Continuing Operations (2,453,240) (838,782) (3,304,057) (4,831,786) (2,820,492)
Loss Per Share . . . . . . . . . . . . (.09) (.03) (.12) (.17) (.10)
Net Loss Per Share . . . . . . . . . . (.09) (.03) (.12) (.24) (.12)
Weighted Average Common Stock
Outstanding . . . . . . . . . . . . 28,164,897 28,089,261 28,065,563 28,027,959 27,249,541
- - --------------------------------------- -------------- --------------- --------------- --------------- -----------------
BALANCE SHEET DATA (AT END OF PERIOD):
Total Assets . . . . . . . . . . . .
. . $9,713,347 $12,041,569 $11,355,030 $16,012,716 $19,109,250
Total Debt . . . . . . . . . . . . . 3,853,477 3,020,000 5,016,341 3,020,000 2,060,000
- - --------------------------------------- -------------- --------------- --------------- --------------- -----------------
</TABLE>
<PAGE>
CERTAIN INCOME TAX CONSEQUENCES
Since at the time of the closing Buyer is expected to only own 20% of
TSA's Common Stock, the consolidated group will be able to utilize its
consolidated net operating loss ("NOL") (which exceeded $30,000,000 at September
30, 1997) to offset regular federal income taxes due from the gain on the sale
of the Assets by the Company. For federal income tax purposes, using the
alternative minimum tax ("AMT") calculation, the consolidated group will pay
approximately $150,000 of federal income tax since only 90% of the gain on the
sale of the Assets can be offset against the AMT NOL. Additionally, the Company
will incur a Michigan state income tax of approximately $200,000 with respect to
the gain on the sale of the Assets of TSA.
If the Proposed Transaction does not close by December 31, 1998, and
the Buyer exercises its election to cancel its exclusive right to purchase the
Assets, and thereby becomes the owner of 35% of TSA Common Stock, the Company
will not be able to use the NOL to offset any future gain with respect to the
sale of the Assets of TSA. The Company will be able to utilize the NOL to
shelter the gain from the sale of 35% of TSA's Common Stock to the Buyer. If in
the future the Company enters into a transaction to sell TSA and the transaction
is a sale of TSA's Common Stock, the NOL will be available to shelter the gain
on the remaining 65% of TSA's Common Stock. If such a future transaction is
structured as a sale of TSA's Assets, as mentioned above, the Company will not
be able to shelter the gain with the NOL because the Company will own less than
80% of TSA's Common Stock. Because of this, the Company would incur federal and
state income tax.
<PAGE>
INFORMATION REGARDING THE COMPANY
The Company was organized in 1986 under Colorado law and reincorporated
in Delaware in 1992. The Company currently owns two strategic operating
companies, i.e. TSA and TSI. The Company's predecessor was organized in 1986 for
the purpose of marketing OHSS to OEMs and the automotive aftermarket. By 1992,
the Company through TSA began assembling the OHSS in an assembly facility in
suburban Detroit, Michigan. TSA's business grew rapidly through the fiscal year
ended September 30, 1997 as a result of its sales to Chrysler Corporation
("Chrysler) due to the factory installation of the OHSS in the Jeep Wrangler,
Cherokee and Grand Cherokee (one high end model) vehicles. TSA no longer sells
the OHSS to Chrysler for installation in the Cherokee and sales for installation
in the Grand Cherokee will terminate in November 1998 when Chrysler discontinues
the high-end model that installs the OHSS. As a result, TSA's net sales of
approximately $16,580,000 in fiscal 1997 are expected to be approximately
$11,400,000 in fiscal 1998. As a result of this loss of business by TSA and the
Company's commitment to its new second generation OSA-II, the Company in the
first quarter of 1998 made a strategic decision to seek to sell TSA. See "-
Reasons for the Proposed Transaction".
For Information concerning the business of the Company, see the Form
10-K for the year ended September 30, 1997 (Exhibit 1 to this Proxy Statement).
Security Ownership of Certain Beneficial Owners
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of August 3, 1998 by (i) owners of more than
5% of the Company's Common Stock, (ii) by each director, and (iii) all directors
and named executive officers and former executive officers of the Company as a
group.
<PAGE>
<TABLE>
- - ------------------------- ------------------------------------------------------------- ------------------ ----------------------
<S> <C> <C> <C>
Amount and
Nature of
Title of Beneficial
Class Name and Address of Beneficial Owner Ownership Percent of Class
- - ------------------------- ------------------------------------------------------------- ------------------ -----------------------
Common Stock WILLIAM C. WILLIS, JR.(1) 275,000 *
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418
------------------------
- - ------------------------- ------------------------------------------------------------- ------------------
Common Stock DAVID NATAN(2) 65,383 *
and Vested 7108 Fairway Drive, Suite 200
Options Palm Beach Gardens, FL 33418
- - ------------------------- ------------------------------------------------------------- ------------------ ------------------------
Common Stock RONALD P. BURD(3),(4) 193,000 *
and Vested 251 Linden Lane
Options Merion Station, PA 19066
- - -------------------------
------------------------------------------------------------- ------------------ ------------------------
Common Stock G. JEFF MENNEN(5) 115,833 *
TMF Investments
25B Hanover Road
Florham Park, NJ 07932
- - ------------------------- ------------------------------------------------------------- ------------------ ------------------------
Common Stock L. KERRY VICKAR(6) 18,020 *
19010 Mary Ardrey Circle
Cornelios, NC 28031
- - ------------------------- ------------------------------------------------------------- ------------------ ------------------------
Common Stock MELLON BANK CORPORATION(7) 2,079,700 7.2%
and Vested 2875 N.E. 191st Street, Penthouse I
Options N. Miami Beach, FL 33130
- - -----------------------------------------------------------------------------------------------------------------------------------
Former Executive Officers
- - ------------------------- ------------------------------------------------------------- ------------------ ------------------------
Common Stock and Vested Stuart Landow(8)(9) 771,311 2.6%
Options 338 River Edge Road
Jupiter, FL 33477
- - ------------------------- ------------------------------------------------------------- ------------------ ------------------------
Common Stock and Vested Christer Rosen(8)(10) 115,800 *
Options 205 Commodore Drive
Jupiter, FL 33477
- - ------------------------- ------------------------------------------------------------- ------------------ ------------------------
Common Stock and Vested Richard Ragan(8) 0 *
Options 8510 Pine Cove Road
Commerce Township, MI 48382-----------------------------------------------------------------------------
All Directors and Named Executive Officers and Former Executive Officers of the 1,554,347 5.2%(11)
Company as a group (8 persons)(1)(2)(3)(4)(5)(6)(8)(9)(10)
*Less than 1% of class
- - --------------------------------------------------------------------------------------- ------------------ -----------------------
</TABLE>
(1) Includes 200,000 vested options held by Mr. Willis at approximately
$2.00 per share and 75,000 shares held by Mr. Willis.
(2) Includes 37,500 vested options held by Mr. Natan exercisable at
approximately $3.00 per share, 7,000 vested options exercisable at
approximately $1.56 per share and 8,333 vested options at approximately
$1.38 per share, 11,550 shares held by Mr. Natan and 1,000 shares held
by Mr. Natan's wife.
(3) Includes 25,000 vested options exercisable at approximately $3.38 per
share, 40,000 vested options exercisable at approximately $1.78 per
share and 30,000 vested options exercisable at approximately $6.25,
2,500 vested options exercisable at approximately $1.75 and 5,000
options exercisable at approximately $1.31 per share held by Mr. Burd.
(4) Includes 87,000 shares held jointly by Mr. Burd and his wife and 3,500
shares gifted by Mr. Burd to the Devereux Foundation, of which Mr. Burd
is President and Chief Executive Officer.
(5) Includes 5,000 vested options exercisable at approximately $1.38 and
833 vested options exercisable at approximately $2.00 per share and
110,000 shares held indirectly by Mr. Mennen in the name of Wilmington
Trust Company and George Jeff Mennen co-trustee for Christina M. Andrea
and John Henry Mennen.
(6) Includes 12,500 shares held by Mr. Vickar and 5,520 vested options
exercisable at approximately $1.13 per share.
(7) Mellon Bank Corporation ("Mellon") formerly Ganz Capital Management,
Inc. beneficially owns 2,079,700 shares of common stock of the Company
as of December 31, 1997. This represents beneficial ownership of 7.3%
of the Company's outstanding shares.
(8) Former executive officers. The numbers included are to the best of the
Company's knowledge. However, Messrs. Landow, Ragan and Rosen are no
longer required to report their stock transactions to the Company.
(9) Includes 400,000 vested options exercisable at $2.06 per share and
200,000 vested options exercisable at $3.56 per share.
(10) Includes 5,500 shares held by Mr. Rosen and 110,300 vested options
exercisable at $.53 per share.
(11) Excluding the former executive officers' beneficial ownership of the
Company's Common Stock, as a group, the Company's officers and
directors own 2.3% of the Company's Common Stock.
<PAGE>
INFORMATION REGARDING THE BUYER AND THE GUARANTOR
The Company has no access to information concerning the financial
condition of the Buyer. The Buyer is a subsidiary of the Guarantor which is
publicly-held and files reports with the Commission. On August 4, 1998, the
Guarantor issued a press release that the Buyer completed a private placement
raising approximately $5.2 million in net proceeds for the purpose of acquiring
three undisclosed audio companies. The Company understands TSA is one of these
acquisition targets. The Guarantor did not disclose the cost of these other
acquisitions, their status, or whether any or all are subject to completion of a
Financing. But the Guarantor has advised the Company that it must complete a
Financing to acquire TSA. The Company is not in a position to verify this
information. Further information concerning the Guarantor may be obtained from
the Commission's Website. See "Available Information". There can be no
assurances that if the Buyer does not pay the Earn-out, the Guarantor will be
able to pay the guaranteed sum due. See "Risk Factors".
The Company's financial advisors have not conducted any due diligence
concerning the Buyer's ability to obtain the Financing and their Fairness
Opinion specifically disclaims passing upon such likelihood.
<PAGE>
PROPOSAL 2. ELECTION OF DIRECTORS
Board of Directors
The business of the Company is managed under the direction of the
Board. It has responsibility for establishing broad corporate policies and for
the overall performance of the Company. It is not, however, involved in the
operating details on a day-to-day basis. The Board is kept advised of the
Company's business through regular written communications and discussions with
management.
The Company has a classified Board which provides for three classes of
directors each of which serves a three-year term. One class is elected each
year. One director was elected at the 1997 Annual Meeting and the person elected
will hold office until his term expires in the year 2000 and until his successor
has been elected and qualified. Two directors are up for election at the 1998
Annual Meeting. The Company's by-laws provide that the Board shall consist of no
less than three and no more than nine members, with the actual number to be
established by resolution of the Board. The current Board has by resolution
established the number of directors at seven. There are currently two vacancies
on the Board. The Company does not intend to fill them at this time.
Compensation of Directors
Prior to June 25, 1997, the Company's outside directors each received a
fee of $2,500 per Board meeting attended. In order to reduce the Company's
expenses, effective June 25, 1997, the outside directors agreed to receive a
reduced fee of $1,000 per Board meeting attended, and each year on June 25th
they receive 7,500 options ("Options"). They are also reimbursed for expenses
incurred in attending such meetings. Except as otherwise disclosed in this Proxy
Statement, all Options vest semi-annually over a three-year period subject to
continued service with the Company. Once vested, Options are exercisable for 10
years from the date of grant.
All outside directors automatically receive grants of 30,000 Options
upon election or appointment to the Board and an additional grant every
three-year anniversary thereafter.
Board Meetings and Committees
The Board held six meetings during the fiscal year ended September 30,
1997. All directors were present at each of the meetings. On several occasions
throughout the year, the Board took action by unanimous consent in lieu of
holding a meeting.
The Board has a Compensation Committee comprised of Messrs. Willis,
Mennen and Vickar; an Audit Committee comprised of Messrs. Burd, and Vickar; and
a Nominating Committee comprised of Messrs. Willis, Mennen, and Vickar, which
met two, one and one times, respectively, during the year ended September 30,
1997.
<TABLE>
Current Board of Directors
<S> <C> <C> <C> <C> <C> <C>
- - --------------------------------- ------- ----------------------------------------- --------- ---------- ------------ ------------
NAME AGE POSITION WITH COMPANY SINCE TERM ENDING CLASS
---- --- --------------------- ----- ---- ------ -----
- - --------------------------------- ------- ----------------------------------------- --------- ---------- ------------ ------------
William C. Willis, Jr.(11)(12) 46 President, Chief Executive Officer and 1997 One 1998 A
Chairman of the Board of Directors Year
- - --------------------------------- ------- ----------------------------------------- --------- ---------- ------------ ------------
Ronald P. Burd(12)(13) 52 Director 1992 Three 1999 B
Years
- - --------------------------------- ------- ----------------------------------------- --------- ---------- ------------ ------------
David Natan 45 Vice President, Chief Financial 1995 Three 1999 B
Officer, Secretary and Director Years
- - --------------------------------- ------- ----------------------------------------- --------- ---------- ------------ ------------
G. Jeff Mennen(11)(12) 57 Director 1998 Two 2000 C
Years
- - --------------------------------- ------- ----------------------------------------- --------- ---------- ------------ ------------
L. Kerry Vickar(11)(12)(13) 41 Director 1998 One 1998 A
Year
- - --------------------------------- ------- ----------------------------------------- --------- ---------- ------------ ------------
</TABLE>
(11) Member of the Nominating Committee
(12) Member of the Compensation Committee.
(13) Member of the Audit Committee.
Board of Director Resignations
Mr. Mani Sadeghi, who served on the Company's Board from September 1993 to
January 1998 resigned effective January 26, 1998 due to the time constraints of
his employment with AT&T Capital Corp. Mr. Vickar, a current nominee, was
appointed to fill Mr. Sadeghi's position on the Board. See "Certain
Relationships and Related Transactions". Mr. Clinton Lauer, who served on the
Company's Board since 1994, resigned effective March 25, 1998 for personal
reasons. Mr. Paul Moore, who served on the Company's Board since 1993 resigned
effective March 25, 1998 for personal reasons. Mr. David Natan, the Company's
Chief Financial Officer since June 1995, was appointed to the Board in April
1998 to fill Mr. Moore's position on the Board. Mr. Stuart Landow, the former
Chairman of the Board, resigned effective June 30, 1998.
The nominees for the election are set forth below. The proxy holders
intend to vote all proxies received by them for the nominees for directors
listed below unless instructed otherwise. In the event a nominee is unable or
declines to serve as a director at the time of the Annual Meeting, the proxies
will be voted for any nominee who shall be designated by the present Board to
fill the vacancy. In the event that additional persons are nominated for
election as directors, the proxy holders intend to vote all proxies received by
them for the nominees listed below unless instructed otherwise. As of the date
of this Proxy Statement, the Board is not aware that any nominee is unable or
will decline to serve as a director.
Nominees for Election at the 1998 Annual Meeting
<TABLE>
<S> <C> <C> <C> <C> <C>
- - ---------------------------- --------- ---------------------------------------- ----------- ---------------- ---------------------
POSITION WITH THE COMPANY
NAME AGE SINCE NEW TERM TERM ENDING
- - ---------------------------- --------- ---------------------------------------- ----------- ---------------- ---------------------
William C. Willis, Jr. 46 President, Chief Executive Officer and 1997 Three Years 2001
Chairman of the Board of Directors
- - ---------------------------- --------- ---------------------------------------- ----------- ---------------- ---------------------
L. Kerry Vickar 40 Director 1998 Three Years 2001
- - ---------------------------- --------- ---------------------------------------- ----------- ---------------- ---------------------
</TABLE>
WILLIAM C. WILLIS, JR. - Mr. Willis has been President, Chief Executive
Officer and a member of the Board since May 1997. Since July 1, 1998, Mr. Willis
has served as Chairman of the Board. As President and Chief Executive Officer of
the Company, Mr. Willis is responsible for the overall management of the
business, with an emphasis on business strategy and long-term planning. Mr.
Willis also actively supervised the marketing of the Company's OSAs and
currently actively supervises the marketing of the Company's OSA-IIs. Prior to
joining the Company, Mr. Willis was Chairman of Willis & Associates, a
management consulting firm assisting small and medium sized technology, health
care and consumer products companies. From 1994 to 1995, Mr. Willis was
President and Chief Operating Officer of MBf USA, Inc., a marketer and
distributor of latex products whose common stock is traded on Nasdaq. From 1990
to 1994, Mr. Willis was President and Chief Executive Officer of Insituform
Technologies, Inc., a state of the art provider of technologies for the
reconstruction of pipelines and infrastructure. From 1985 to 1990, Mr. Willis
was President of The Paper Art Company, Inc., a subsidiary of The Mennen
Company.
L. KERRY VICKAR - Mr. Vickar was appointed a director of the Company in
January 1998. Mr. Vickar has a Bachelor of Law degree from the University of
Manitoba and has extensive experience with divestitures, acquisitions,
operations and financial re-structuring. Currently, Mr. Vickar is Chairman and
Chief Executive Officer of Vickar Industries LLC, which recently acquired two
printing companies. In 1994, Mr. Vickar negotiated the sale of Gravure
International Corp. to ACX Technologies, Inc., where he remained until 1995 as
Executive Vice President and Chief Operating Officer of Flexible Division of
Graphic Packaging (a subsidiary of ACX Technologies, Inc.). From 1983 through
1994, Mr. Vickar held various positions, including President and Chief Operating
Officer with Gravure International Corp.
Other Board Members
RONALD P. BURD - Mr. Burd has been a director of the Company since
March 1992. From 1984 through the present, Mr. Burd has been President and Chief
Executive Officer of the Devereux Foundation. Devereux, founded in 1912, is a
nationwide, private, not-for-profit organization that treats individuals of all
ages who have a wide range of emotional disorders and/or developmental
disabilities. Headquartered in Devon, Pennsylvania, Devereux operates
residential, day and community-based treatment programs located in 13 states and
the District of Columbia.
G. JEFF MENNEN - was appointed a director of the Company in October
1997. Currently, Mr. Mennen is President of Peak Management, a consulting firm
which he founded in 1989. Also, Mr. Mennen is a Managing Partner of TMF
Investment Holdings, a family investment firm. From 1981 until 1992, Mr. Mennen
was Vice Chairman of The Mennen Company where he served until that company was
sold to Colgate-Palmolive. From 1977 until 1981, Mr. Mennen was President of
Mennen International. Mr. Mennen is a director of Corbin, Ltd. and MBf USA, Inc.
DAVID NATAN - was appointed a director of the Company on April 16, 1998
in order to fill a current vacancy. Currently, Mr. Natan, a CPA, has been Vice
President and Chief Financial Officer of the Company since June 1995 and
Secretary from August 1997. Mr. Natan previously served on the Company's Board
from June 1995 to January 1997. Mr. Natan brings nearly 20 years of management
and analytical experience to his responsibilities. Prior to joining the Company,
from November 1992 through June 1995, Mr. Natan was Chief Financial Officer of
MBf USA, Inc., which is a NASDAQ listed subsidiary of MBf Holdings Berhad, a
multi-national conglomerate. From August 1987 through October 1992, Mr. Natan
was Treasurer and Controller for Jewelmasters, Inc., an AMEX listed company.
Since January 1996, Mr. Natan has been a director of IMX Corporation, a
distributor pharmaceutical products whose common stock trades on the Bulletin
Board.
Executive Officer Compensation
The following table sets forth certain summary information concerning
the compensation awarded to, earned by, or paid to the Chief Executive Officer
and the other four most highly compensated current and former executive officers
of the Company whose combined salary and bonus for the fiscal year ended
September 30, 1997 exceeded $100,000 (collectively, the "Named Executive
Officers") for the years indicated.
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C> <C>
- - ---------------------------- ---------------------------------------------------------------------- ------------------------------
Annual Compensation Long-Term Compensation
Awards
- - ---------------------------- ------------- ----------------- ------------------- ------------------ ------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (i)
- - ---------------------------- ------------- ----------------- ------------------- ------------------------------------------------
Securities
Other Annual Restricted Underlying All Other
Name and Principal Compensation Stock Option/SARs Compensation
Position Year Salary($) Bonus($) ($)(14) Award(s)($) (#) ($)(15)
- - ---------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- - ----------------------------------------------------- ------------------- ------------------ ------------------- ----------------
William C. Willis, Jr. 1997 $109,231(16) $0 $4,369 $0 500,000 $569
President and Chairman of 1996 N/A N/A N/A $0 N/A N/A
the Board 1995 N/A N/A N/A N/A N/A N/A
- - ---------------------------- ------------- ----------------- ------------------- ------------------ ------------------- ----------
David Natan 1997 $125,000 $25,000 $11,298 $0 7,000 $3,511
Vice President of Finance, 1996 $125,000 $25,000 $10,914 $0 10,000 $5,448
Secretary and Director 1995 N/A N/A N/A N/A N/A N/A
- - ----------------------------------------------------------------------------------------------------------------------------------
FORMER EXECUTIVE OFFICERS
- - ---------------------------- ------------- ----------------- ------------------- ------------------ ------------------- ----------
Stuart Landow 1997 $211,200 $178,405(17) $15,600(18) $0 0 $22,132
Former Chairman of the 1996 $211,200 $238,535(17) $14,400(18) $525,000(19) 0 $33,002
Board and President 1995 $202,794 $189,688(17) $ 7,200 $0 0 $14,213
- - ---------------------------- ------------- ----------------- ------------------- ------------------ ------------------- ----------
Christer Rosen 1997 $200,000 $25,000 $ 9,454 $0 0 $2,496
Former Executive Vice 1996 $200,560 $25,000 $19,592(20) $0 0 $7,837
President 1995 $180,940 $25,000 $14,064(20) $0 0 $4,419
- - ---------------------------- ------------- ----------------- ------------------- ------------------ ------------------- -----------
Richard Ragan 1997 $194,951 $0 $14,285 $0 0 $0
Former President of Top 1996 N/A N/A N/A N/A N/A N/A
Source Instruments, Inc. 1995 N/A N/A N/A N/A N/A N/A
- - ---------------------------- ------------- ----------------- ------------------- ------------------ ------------------- -----------
</TABLE>
<PAGE>
(14) Amounts consist principally of automobile allowances paid by the
Company. The Company's policy is to provide executive officers with an
automobile allowance of $600 per month and a maintenance allowance of
$400 intended to cover the cost of all other expenses of operating the
vehicle such as insurance, maintenance, repairs and gasoline costs.
(15) These amounts, as follows, represent group term life insurance premiums
paid by the Company, the Company's match of the Retirement Salary
Saving Plan - 401(k) and reimbursement of out-of-pocket medical,
dental, etc. expenses not covered by the Company's insurance:
(a) The 1997 group term life insurance premiums were as follows: Mr. Landow
$7,919 and Mr. Willis $413.
(b) The 1997 employer match of the Retirement Salary Savings Plan - 401(K) was
as follows: Mr. Landow $1,980, Mr. Natan $2,012 and Mr. Rosen $1,378
(c) The 1997 reimbursement of out-of pocket medical and dental expenses not
covered by the Company's insurance was as follows: Mr. Landow $12,233, Mr.
Willis $156, Mr. Natan $1,499 and Mr. Rosen $1,118.
(16) Mr. Willis' salary is only for the partial year from May 21, 1997 through
September 30, 1997.
(17) Pursuant to an employment agreement in fiscal 1995, Mr. Landow received an
incentive compensation payment of 1% of net sales totaling $189,688, of
which $163,037 had been paid at fiscal year-end and $26,651 was accrued. In
fiscal 1997 and 1996, Mr. Landow was paid $178,405 and $238,535,
respectively, in incentive compensation payments based on a percentage of
net sales as defined in his employment agreement. Included in the fiscal
1996 payments was $27,568 relating to the sale of the United Testing Group,
Inc. assets .
(18) Represents $3,600 attributable to the usage of two Company-owned vehicles
which Mr. Landow purchased in December 1997.
(19) In prior years Mr. Landow deferred vesting of 100,000 shares that were
granted to him in 1990. In July 1996, Mr. Landow agreed to the full vesting
of the 100,000 shares, which was valued at $525,000 based on $5.25 per
share, the closing stock price of the Company's Common Stock on the AMEX at
July 17, 1996, the date of vesting.
(20) Represents $8,792, and $4,407, respectively, in club membership dues paid
by the Company on behalf of Mr. Rosen.
<PAGE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
ENDED SEPTEMBER 30, 1997
<S> <C> <C> <C> <C>
Potential Realizable
Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term(21)
- - --------------------------- -------------------------------------------------------------------- ---------------------------------
(a) (b) (c) (d) (e) (f) (g)
- - --------------------------- ------------------------ -------------------- ---------------------------------------------- ----------
Number of securities % of Total
Underlying Options/SARs Exercise
options/SARs granted Granted to employees or Base Expiration
Name (#) in Fiscal Year Price ($/Share) Date 5%($) 10%($)
- - -----------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- - --------------------------- ------------------------ ---------------------- --------------------- ---------------------------------
William C. Willis, Jr. 500,000 54.2% $2.00 5/21/2007 628,895(22) 1,593,742(23)
- - --------------------------- ------------------------ ---------------------- --------------------- ------------------------ --------
David Natan 7,000 .8% $1.5625 7/15/2007 6,879(24) 17,432(25)
FORMER EXECUTIVE OFFICERS
- - --------------------------- ------------------------ ---------------------- --------------------- ------------------------ --------
Stuart Landow 0 N/A N/A N/A N/A N/A
- - --------------------------- ------------------------ ---------------------- --------------------- ---------------------------------
Christer Rosen 0 N/A N/A N/A N/A N/A
- - --------------------------- ------------------------ ---------------------- --------------------- ---------------------------------
Richard Ragan 0 N/A N/A N/A N/A N/A
- - --------------------------- ------------------------ ---------------------- --------------------- ---------------------------------
</TABLE>
(21) The values shown are based on indicated assumed annual rates of
appreciation compounded annually through the applicable expiration
date. Actual gains realized, if any, on stock option exercises and
Common Stock holdings are dependent on the future performance of the
Common Stock and overall market conditions. There can be no assurances
that the values shown on this table will be achieved.
(22) Represents an assumed market price per share of Common Stock of $3.26.
(23) Represents an assumed market price per share of Common Stock of $5.19.
(24) Represents an assumed market price per share of Common Stock of $2.55.
(25) Represents an assumed market price per share of Common Stock of $4.05.
The following table sets forth certain information with respect to the
exercise of Options to purchase Common Stock and SARs during the fiscal year
ended September 30, 1997, and the unexercised Options held and the value thereof
at that date, by each of the Named Executive Officers and former officers.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<S> <C> <C> <C>
- - ------------------------------------------------ ---------------- ----------------------------------- ----------------------------
(a) (b) (c) (d) (e)
- - ------------------------------------------------ ---------------- ----------------------------------- ----------------------------
Value of Unexercised
Number of Securities Underlying In-the-Money
Unexercised Options/SARs at Options/SARs
Fiscal Year End (#) at Fiscal Year End ($)(26)
- - ----------------------- ------------------------ -------------- ---------- ------------------------ ------------------
Shares Acquired
on Exercise Value Realized
Name (#)(27) ($) Exercisable Unexercisable Exercisable Unexercisable
- - -----------------------------------------------------------------------------------------------------------------------------------
- - --------------------------- -------------------------------------------------------------------------- ----------------------------
William C. Willis, Jr. 0 N/A 0 500,000 $0 $0
- - --------------------------- ----------------------------------------------------------------------- -------------------------------
David Natan 0 N/A 88,125 22,625 $0 $3,063
- - -----------------------------------------------------------------------------------------------------------------------------------
FORMER EXECUTIVE OFFICERS
- - --------------------------- -------------------------------------------------------------------------------------------------------
Stuart Landow 0 N/A 600,000 0 $0 $0
- - --------------------------- -------------------------------------------------------------------------------------------------------
Christer Rosen 0 N/A 500,000 0 $735,000 $0
- - --------------------------- -------------------------------------------------------------------------------------------------------
Richard Ragan 0 N/A 0 0 $0 $0
- - --------------------------- -------------------------------------------------------------------------------------------------------
</TABLE>
(26) Based on the difference between the closing market price of the
Company's Common Stock on the AMEX at September 30, 1997 of $2.00 and the
Option exercise price.
(27) All Options were granted at 100% of fair market value.
<PAGE>
Executive Compensation Agreements
WILLIAM C. WILLIS, JR.
In May 1997, the Company entered into an employment agreement with
William C. Willis, Jr., its then new President and Chief Executive Officer of
the Company. The term of this employment agreement is three years through May
21, 2000 ("Employment Period"). The employment agreement provides for a base
salary of $300,000 ("Annual Base Salary"). Effective July 1, 1998 Mr. Willis'
Annual Base Salary increased to $315,000. Mr. Willis receives an automobile
allowance of $600 per month and an automobile maintenance and gasoline allowance
of $400 per month. Mr. Willis 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 employment 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 annual earnings per share targets of
between $.01 and $.05 as defined in the employment 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 five annual performance based targets
for each period of four fiscal quarters during the Employment
Period. As of September 30, 1997, Mr. Willis had not earned
any Bonuses. In June 1998, the Company granted Mr. Willis
100,000 Options initially exercisable over a three-year term
at $.875 per share in exchange for his waiving his earned
Performance Bonus of approximately $127,500.
The earnings per share targets and five performance based targets for
each succeeding four quarter period during the Employment Period shall be reset
and established annually by the Compensation Committee.
In addition to the payments provided above, on May 21, 1997, the
Compensation Committee granted to Mr. Willis Options to purchase 500,000 shares
of the Company's Common Stock exercisable at $2.00 per share vesting annually in
equal increments of 100,000 Options over a three-year term commencing in May
1998. Additionally, 100,000 Options will become exercisable if the closing price
for the Company's Common Stock is $7.00 per share or higher for 30 consecutive
trading days and 100,000 Options will become exercisable if the closing price
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.
Also, under the terms of the employment agreement, Mr. Willis was given
a one-time $45,000 moving allowance to cover his out-of-pocket expenses
associated with the sale of his home and his relocation to the Florida area. In
addition, the Company agreed to pay Mr. Willis' federal income tax liability
associated with any reimbursement he would receive from the Company. For the
period from October 1, 1997 through December 31, 1997, Mr. Willis was reimbursed
$45,000 by the Company for out-of-pocket expenses and was credited with $26,942
in federal income tax paid on his behalf by the Company.
In the event Mr. Willis' employment is terminated by the Company for
other than cause, death or disability or Mr. Willis terminates his employment
for good reason, all as defined in his employment agreement, the Company is
obligated to pay Mr. Willis (1) his annual base salary for 12 months, (2) a lump
cash sum paid within 30 days equal to accrued obligations consisting of any owed
but unpaid Performance Bonus, vacation pay and other monetary payments Mr.
Willis was entitled to on the date of his termination, and (3) continued medical
coverage for Mr. Willis and his dependents for 12 months following termination.
Effective in August 1997, the Company began providing Mr. Willis with a
$1,000,000 life insurance policy.
DAVID NATAN
Mr. David Natan, Vice President and Chief Financial Officer, joined the
Company on June 30, 1995 at an annual salary of $125,000. In August 1998, Mr.
Natan's salary was increased to $135,000. He also receives pursuant to an
employment agreement, a car allowance of $600 per month and an automobile
maintenance and gasoline allowance of $400 per month. Mr. Natan received
performance based bonuses of $25,000 in December 1996 and August 1997,
respectively. In January 1997, Mr. Natan's employment agreement was amended to
provide for 12 months of severance benefits which include salary, medical and
dental benefits in the event of a qualifying termination of Mr. Natan, defined
as (1) a material adverse change to his job duties and responsibilities; (2) a
material reduction in his salary, compensation or eligibility to participate in
Company benefit programs; or (3) an unwilling relocation to a location greater
than 50 miles away from his current work location. In July 1997, Mr. Natan was
granted 7,000 Options to purchase the Company's Common Stock exercisable at
$1.5625 per share, all of which are vested and exercisable. In January 1998, in
order to compensate Mr. Natan, the Company granted him new Options in exchange
for cancellation of higher priced mostly vested Options as follows:
<TABLE>
<S> <C> <C> <C>
- - ---------------------------------- ------------------------- ----------------------- -------------------------------
Number of Number Vested or
Options Exercise Price Vesting Period
- - ---------------------------------- ------------------------- ----------------------- -------------------------------
Cancelled Options 93,750 $6.94 78,175
10,000 $7.75 10,000
- - ---------------------------------- ------------------------- ----------------------- -------------------------------
New Grant 75,000 $3.00 37,500(28)
50,000 $1.375 8,333(29)
- - ---------------------------------- ------------------------- ----------------------- -------------------------------
</TABLE>
(28) The balance vest on December 31, 1998 subject to continued employment
with the Company.
(29) The Options vest in accordance with the Company's standard policy of
equal semi-annual vesting over a three-year period.
Also, in July 1998 Mr. Natan was granted 50,000 Options exercisable at
$1.00 per share. Effective in December 1997, the Company began providing Mr.
Natan with a $1,000,000 life insurance policy.
Termination/Resignation Executive Compensation
Effective June 30, 1998, Mr. Stuart Landow resigned as Chairman of the
Board and as an employee. Pursuant to a 1993 employment agreement, as modified,
he is receiving Severance, as defined, of 30 months compensation. He waived six
months of Severance or approximately $195,000. In exchange for this waiver and
Mr. Landow agreeing to increase the exercise price of 200,000 Options, the
Company extended the term of all 600,000 Options held by Mr. Landow for two
years. See "Certain Relationships and Related Transactions" and "Report on
Executive Compensation by the Compensation and Stock Option Committees - Former
Executive Officers".
Mr. Richard Ragan acted as President of TSI from October 1996 through June
1997. Pursuant to his employment agreement Mr. Ragan received severance
compensation of $83,333. See "Report on Executive Compensation by the
Compensation and Stock Option Committees - Former Executive Officers".
Retirement Salary Savings Plan
In October 1993, the Company established a 401(k) Retirement Salary
Savings Plan (the "Plan"). All current employees, including executive officers,
were eligible to participate as of October 1, 1993. Any individuals employed
thereafter must complete three months of service to meet the eligibility
requirements. Employees may voluntarily contribute from 1% to 15% of their pay
each plan year although certain requirements may limit the contribution levels
of highly compensated employees. During fiscal 1997, the Company contributed
matching dollars equal to 25% of every dollar invested in the Plan on the first
6% of salary savings. The cost the Company incurred for matching employee
contributions and administrative costs during fiscal 1997 was approximately
$41,637. The Plan provides that the Company's matching contribution may change
from year to year and that the Company may declare additional matching dollars
at year-end. All employees hired after October 1, 1993 vest ratably over a
five-year term. Any forfeited non-vested amounts contributed are used to reduce
required Company matching contributions.
Repricing of Options
In September 1997, on a one-time basis the Company offered its
non-management employees holding less than 1,500 Options and those holding more
than 1,500 Options the right to cancel higher priced Options and receive fewer
new Options exercisable at $2.00 per share, at a ratio of 1-to-2 and 1-to-4,
respectively. At the time the Board granted the repriced Options the Company's
stock was selling at $1.875 per share; accordingly the Options were repriced at
a premium of $.125 over market price. The new Options vested 50% on March 25,
1998 and the remainder vest September 25, 1998, subject to the employee's
continued employment with the Company on the vesting dates. The Company also
cancelled 103,750 Options above fair market value held by its Chief Financial
Officer, Mr. David Natan and regranted to Mr. Natan 75,000 new Options
exercisable at $3.00 per share which was $1.625 above market value as of the
date of the action taken by the Board and 50,000 new Options exercisable at
$1.375 per share. Mr. Natan's $3.00 Options were priced at a premium over market
price of $1.625.
Report on Executive Compensation by the Compensation and Stock Option Committees
The primary objective of the compensation policy of the Company is to
align executive compensation in a way that will encourage enhanced stockholder
value, while concurrently allowing the Company to attract, retain and
satisfactorily reward all employees who contributed to the Company's long-term
growth and economic success. The main principles of the compensation program are
(1) the development of incentive plans, (2) the attainment of both the Company's
short-term and long-term growth operational goals and strategic initiatives (3)
the development of competitive compensation packages that will enable the
Company to attract retain and motivate high caliber employees without depleting
the Company's resources, and (4) to provide incentives to the Company's
executives and other employees to share in appreciation of the price of the
Company's Common Stock, thereby aligning their interests with those of the
Company's stockholders. The compensation program for Company's executives
includes an annual based salary, appropriate fringe benefits, some of which are
standard Company policy for all employees and some of which may be negotiated
for management, the potential for an annual cash bonus and grants of long-term
stock option incentives, which in the case of the Company's Chief Executive
Officer, are in large part performance based.
During fiscal 1997, the Company initiated a company-wide restructuring
which included number of executive management changes, the most significant of
which was naming William C. Willis, Jr. as President and Chief Executive Officer
on May 21, 1997 after an extensive search by the Company's Board. Mr. Stuart
Landow, the Company's former President and Chief Executive Officer remained with
the Company as its Chairman of the Board and devoted his time to special
projects until his resignation effective June 30, 1998.
Chief Executive Officer
WILLIAM C. WILLIS, JR.
Mr. Willis' compensation negotiated package was finalized after
extensive discussions by the Compensation Committee with the assistance of
Korn/Ferry International, a leading international search firm which specializes
in the placement of high level senior executives. Mr. Willis' package meets the
Company's compensation goals as stated above. The Compensation Committee
believes that Mr. Willis' initial base salary at $300,000 (now $315,000), his
bonus and Option incentives represent compensation commensurate to attract an
executive of Mr. Willis's experience and background. At the same time his
agreement ties a large portion of any future bonus payment or Option
appreciation to performance. The number of Options granted to Mr. Willis
(500,000) was not based on any formula or general Company policy. However, the
terms of the grant, which provides for automatic vesting of 300,000 of the
Options over a three-year period and vesting of the remaining 200,000 Options
based on the Company's Common Stock reaching and remaining at a specific price,
is in accordance with the Company's goal of creating a financial incentive for
executives to increase stockholder value. Similarly, a large portion of his
Performance Bonus is tied to future profitability. By meeting certain
performance targets, Mr. Willis was entitled to a $127,500 bonus through May
1998. At his suggestion, the Compensation Committee agreed to issue him 100,000
Options exercisable at $.875 per share which was the fair market value of the
Company's Common Stock. No compensation has been accrued relating to these
options for the period ended June 30, 1998 as the amount is not material. See
"Executive Compensation Agreements". Issuance of the Options conserved the
Company's cash and furthered the goal of creating a long-term equity incentive.
Current Executive Officer
DAVID NATAN
In July 1997, Mr. Natan, the Company's Chief Financial Officer, was
granted 7,000 Options at $1.56 per share all of which vested and became
exercisable on July 15, 1998. Additionally, in August 1997 Mr. Natan received a
discretionary bonus of $25,000. Mr. Natan was awarded this bonus in recognition
of his efforts in the securing of the NationsCredit financing for the Company on
favorable terms in July 1997, his successful financial and management
restructuring of the Company and to compensate him for additional
responsibilities undertaken by him upon completion of the restructuring.
Former Executive Officers
STUART LANDOW
As previously described, on July 1, 1997, Mr. Landow agreed to waive a
potential breach in his employment contract until July 1, 1998, which could have
been triggered with the hiring of Mr. Willis. Under this standstill agreement,
the Company continued the terms of Mr. Landow's employment agreement except that
it modified the measuring year for Mr. Landow's benefit. As described above, in
June 1998, Mr. Landow entered into a modified agreement. See
"Termination/Resignation Executive Compensation" and "Certain Relationships and
Related Transactions".
CHRISTER ROSEN
In July 1997 as part of the Company-wide restructuring, Mr. Christer
Rosen resigned as Executive Vice President and Secretary of the Company.
Concurrent with his resignation, the Company and Mr. Rosen entered into a
13-month agreement to ensure Mr. Rosen's availability to provide consulting
services and work for the Company and work on special projects as assigned by
Mr. Willis. The intent of this consulting agreement was to ensure that Mr.
Rosen's long established contacts in the Detroit, Michigan OEM market continued
to benefit the Company. The consulting agreement expired on August 14, 1998. The
Company paid Mr. Rosen monthly compensation of $16,667.
RICHARD RAGAN
Mr. Richard Ragan resigned as President of TSI in June 1997 to pursue
other interests. In order to attract qualified individuals to work for the
Company and to create a competitive compensation package with the marketplace,
the Company's long established policy is to provide for severance payments to
its executive officers in the event of termination, or in some cases for
resignations. During fiscal 1997, Mr. Ragan received $50,000 in severance and an
additional $33,333 was paid for the period October 1, 1997 through December 15,
1997.
This report is submitted by the following Compensation Committee
members.
William C. Willis, Jr.
G. Jeff Mennen
L. Kerry Vickar
Performance Graph
The following Performance Graph assumes that $100 was invested in the
Company, the AMEX Market Index and the Peer Group Index on October 1, 1992.
Information on prices at which the Company's Common Stock traded prior to that
date are not readily available. The Performance Graph further assumes all
dividends were reinvested. However, the Company has never paid any dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
<PAGE>
TOP SOURCE TECHNOLOGIES, INC. - PEER GROUP - BROAD MARKET
COMPANY 1992.....1993 1994 1995 1996 1997
------- ---- ---- ---- ---- ---- ----
Top Source
Technologies, Inc..........100 200.00 430.77 542.31 288.46 123.08
Peer Group ......... 100 165.91 149.30 187.72 228.85 310.13
Broad Market ......... 100 117.39 119.64 144.16 150.03 182.45
The Broad Market Index chosen was:
American Stock Exchange
The Peer Group is made up of the following securities:
Gentex Corp.
Johnson Controls, Inc. Source: Media General Financial Services
Magna Internat Inc. P. O. Box 85333e
Richmond, VA 23293
Phone: 1-800-446-7922
Fax: 1-804-649-6097
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1993, Mr. Stuart Landow, the former President and Chairman of the
Company entered into a five-year employment agreement with the Company. Pursuant
to that employment agreement, if Mr. Landow were terminated without cause or if
he resigned for "good reason", as defined in the agreement, the Company was
obligated to pay Mr. Landow base and incentive compensation together with
medical, life and disability insurance benefits for three years (the
"Severance"). When Mr. Willis became President in May 1997, Mr. Landow could
have evoked the good reason clause of his employment agreement. However, in
order to provide continuity and stability to the Company, Mr. Landow entered
into a one-year standstill agreement with the Company effective July 1, 1997.
Pursuant to that agreement, Mr. Landow remained employed with the Company for
the same compensation as his 1993 employment agreement except that the incentive
payments were calculated based on the revenues of the Company for the 12-month
period beginning July 1, 1996 (a higher 12-month period than anticipated for the
next 12 months). In June 1998, the Company and Mr. Landow modified the
standstill agreement with Mr. Landow agreeing to resign as an employee and
Chairman of the Board effective June 30, 1998. Pursuant to this modified
agreement, Mr. Landow waived approximately $195,000 of the total compensation he
was entitled to during the three-year period ending June 30, 2001 by reducing
the 36-month term of the Severance to 30-months. At the same time, the Company
increased the exercise price of 200,000 of Mr. Landow's Options from $2.06 to
$3.56 per share in exchange for extending the exercise period of all 600,000 of
Mr. Landow's vested Options for two years until July 1, 2001. Additionally, the
modified agreement provides that Mr. Landow shall repay the Company
approximately $105,000 he previously borrowed, together with 9% per annum
interest, over the 30-month term that Mr. Landow receives Severance payments.
The Company is entitled to deduct the monthly installments from Mr. Landow's
monthly Severance compensation payments.
During fiscal 1997, Mr. Landow borrowed $75,000 from the Company. He
issued the Company a three-year 9% promissory note. In addition, during fiscal
1997, Mr. Landow was allowed to borrow and partially repay varying amounts from
the Company as long as this indebtedness to the Company did not exceed a cap of
$30,000. Mr. Landow paid interest on these borrowings at the rate of 9% per
annum. Both of these loans comprise the $105,000 Mr. Landow is repaying monthly
over the 30-month term of his Severance payments.
In December 1997, Mr. Landow purchased two used vehicles from the
Company for $30,000 which approximated their fair market value at the date of
this transaction.
On June 9, 1995, the Company sold $3,020,000 in Notes to advisory
clients of Mellon. The Notes are subject to an indebtedness to equity ratio that
cannot exceed 1.5 to 1.0. As of June 30, 1998, the Company was in compliance
with the ratio as the result of receiving the initial payment of $1,450,000 from
the Buyer. 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 in the future. In order to assure it would not
violate the covenant, in January 1998, G. Jeff Mennen, a director of the
Company, agreed to infuse sufficient capital into the Company to maintain
compliance of this ratio through October 1, 1998 or refinance the Notes. In
consideration for this guarantee, the Company issued to Mr. Mennen 50,000
10-year warrants exercisable at $2.00 per share and agreed to register the
underlying shares of Common Stock at its sole expense.
In June 1997, the Company lent its President, Mr. William C. Willis, Jr.,
$30,000 evidenced by a three-year 9% promissory note. Interest has been paid
quarterly through June 30, 1998. On June 6, 1998, Mr. Willis voluntarily repaid
$5,000 of his loan.
<PAGE>
PROPOSAL 3. APPOINTMENT OF AUDITORS
Arthur Andersen LLP ("Arthur Andersen"), independent public
accountants, currently acts as the independent auditors of the Company. Unless
directed to vote no, proxies being solicited will be voted in favor of the
election of Arthur Andersen as independent auditors for the Company's fiscal
year ended September 30, 1998. Arthur Andersen acted as auditors for the Company
for the fiscal year ended September 30, 1997. A representative of Arthur
Andersen will be present at the meeting, be available to respond to appropriate
questions, and have the opportunity to make statements should they desire to do
so.
Ratification of the appointment of Arthur Andersen as the Company's
independent accountants for fiscal 1998 will require the affirmative vote of at
least a majority of the shares of the Company's Common Stock represented in
person or by proxy at the annual meeting and entitled to vote. Proxies solicited
by management will be voted for the proposal unless instructed otherwise.
<PAGE>
PROPOSAL 4. OTHER MATTERS
Proposals
The Board has no knowledge of any other matters which may come before
the meeting and does not intend to present any other matters. However, if any
other matters shall properly come before the meeting or any adjournment thereof,
the persons soliciting proxies will have the discretion to vote as they see fit
unless directed otherwise.
If you do not plan to attend the meeting, in order that your shares may
be represented and in order to assure the required quorum, please sign, date and
return your proxy promptly. In the event you are unable to attend the meeting,
at your request, the Company will cancel the proxy.
Stockholders' Proposals
Any stockholder of the Company who wishes to present a proposal to be
considered at the 1999 Annual Meeting of the stockholders of the Company and who
wishes to have such proposal presented in the Company's proxy statement for such
meeting must deliver such proposal in writing to the Company no later than
October 31, 1998. In addition, the Company's by-laws preclude a stockholder from
otherwise introducing business unless less than 75 days notice is given to the
Company of the meeting (or prior public disclosure of the date of the meeting)
(collectively the "Notice Date") in which event notice must be given to the
Company within 15 days of such Notice Date.
The Company will furnish, without charge to any stockholder submitting
a written request a copy of the Company's annual report on Form 10-K as filed
with the Commission including financial statements and schedules thereto. Such
written request should be directed to Maggie DeLutri, Corporate Communications
Coordinator, 7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida, 33418.
By the Order of the Board of Directors
David Natan, Secretary
<PAGE>
APPENDIX A
Asset Purchase Agreement by and among Top Source Technologies, Inc.,
Top Source Automotive, Inc., NCT Audio Products, Inc. and Noise Cancellation
Technologies, Inc.
Incorporated by reference to Exhibit No. 10.1 - 10-Q June 30, 1998
<PAGE>
APPENDIX B
FAIRNESS OPINION LETTER
Board of Directors
Top Source Technologies, Inc.
August 26, 1998
August 20, 1998
Board of Directors
Top Source Technologies, Inc.
7108 Fairway Dr., Suite 200
Palm Beach Gardens, FL 33418
Gentlemen:
The Board of Directors of Top Source Technologies, Inc., ("Top Source" or the
"Parent"), has requested our opinion as to the fairness, from a financial point
of view, to the Top Source stockholders, of the consideration to be paid in
connection with the proposed sale of its wholly-owned subsidiary, Top Source
Automotive ("TSA" or the "Company"), to NCT Audio Products, Inc. ("NCT Audio" or
the "Acquiror").
You have advised us that, pursuant to that certain Agreement, dated August 14,
1998 (the "Agreement") by and among Top Source, TSA, NCT Audio and Noise
Cancellation Technologies, Inc. (the "Guarantor") NCT Audio will purchase 100%
of the assets (the "Assets") and assume substantially all of the liabilities of
TSA for a total of $10.0 million consisting of a non-refundable deposit of $1.45
million paid to TSA on June 10, 1998, $2.05 million paid into escrow on July 30,
1998 and the balance of $6.5 million due by March 31, 1999. Of this $6.5 million
at least $4.0 million must be in cash and the balance may be in the form of a
12% secured promissory note due March 31, 1999 (the "Buyer's Note"). If the
Company's stockholders approve the proposed transaction, the $2.05 million in
escrow shall be paid to the Company, and the Buyer will become the owner of 20%
of the outstanding common stock; if the proposed transaction is not approved,
the $2.05 million will be returned to the Buyer and it will become the owner of
14.5% of TSA's common stock. If the proposed transaction fails to close by March
31, 1999, the Company will be free to attempt to find another purchaser of TSA
and the Buyer will be obligated to sell its TSA shares to any such purchaser on
the same terms and conditions as the Company receives for its TSA Common Stock.
However, if the proposed transaction does not close by December 31, 1998, the
Buyer has a one week option to cancel its exclusive right to purchase the Assets
of TSA and as consideration for such cancellation receive an additional 15% of
TSA Common Stock. The total payment of $10.0 million for the foregoing
transactions contemplated by the Agreement is hereinafter referred to
collectively as the "Transaction Consideration," and the transactions
contemplated by the Agreement are hereinafter collectively referred to as the
"Transaction."
<PAGE>
Morgan Keegan & Company, Inc. ("Morgan Keegan"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for various purposes.
In our review and analysis and in arriving at our opinion, we have (1) held
discussions with various members of management and representatives of Top
Source, TSA and NCT Audio concerning historical and current operations,
financial condition and future prospects; (2) reviewed historical consolidated
financial and operating data that was publicly available or furnished to us by
TSA; (3) reviewed internal financial analyses, financial and operating
forecasts, reports and other information prepared by officers and
representatives of TSA; (4) reviewed certain publicly available information with
respect to certain other companies that we believe to be comparable to TSA and
the trading markets for such other companies' securities; (5) analyzed the value
of projected cash flows of TSA; (6) reviewed certain publicly available
information concerning the terms of certain other transactions that we deemed
relevant to our inquiry; and (7) reviewed the Agreement.
In our review and analysis and in arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have assumed and relied
upon the accuracy and completeness of the representations and warranties
contained in the Agreement. We have not been engaged to, and have not
independently attempted to, verify any of such information. With respect to the
financial and operational forecasts made available to us by the management of
TSA as used in our analysis, we have assumed that such financial and operational
forecasts, including those relating to the acquisition of additional contracts
with automobile original equipment manufacturers, and new after market
opportunities have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of TSA's and Top Source's management
as to the matters covered thereby. We have not been engaged to assess the
achievability of such projections or the assumptions on which they were based
and express no view as to such projections or assumptions. In addition, we have
not conducted a physical inspection or appraisal of any of the assets,
properties or facilities of TSA nor have we been furnished with any such
evaluation or appraisal.
It should be noted that this opinion is based on economic and market conditions
and other circumstances existing on, and information made available as of, the
date hereof and does not address any matters subsequent to such date, including
the prices at, or trading range within which, the Top Source shares may trade
following the date of this letter. In addition, our opinion is, in any event,
limited to the fairness, as of the date hereof, from a financial point of view,
of the Transaction Consideration to be paid pursuant to the Agreement and does
not address the underlying business decision to effect the Transaction or any
other terms of the Transaction. We have also assumed that the conditions
precedent to the parties' obligations to consummate the Transaction as set forth
in the Agreement would be satisfied and that the Transaction would be
consummated on a timely basis in the manner contemplated by the Agreement. We
express no opinion whatsoever as to the contingent additional payments of up to
$6.0 million contemplated by the Agreement (the "Earn-Out") and we have not
included the Earn-Out in the Transaction Consideration for purposes of our
delivery of this opinion.
Our services in connection with the Transaction have included providing
financial advisory services to Top Source in connection with rendering this
opinion to the Board of Directors of Top Source. We will receive a fee for our
financial advisory services and for rendering this opinion, and Top Source has
also agreed to indemnify us under certain circumstances.
It is understood that this opinion is not to be quoted or referred to, in whole
or in part (including excerpts or summaries), in any filing, report, document,
release or other communication used in connection with the Transaction (unless
required to be quoted or referred to by applicable regulatory requirements), nor
shall this opinion be used for any other purposes, without our prior written
consent, which consent shall not be unreasonably withheld. Our opinion is
directed to the Board of Directors of Top Source and does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote at any proposed Stockholders' meeting held in connection with the
Transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the
Transaction Consideration to be paid in connection with the Transaction is fair,
from a financial point of view, to the Company's stockholders.
Yours very truly,
MORGAN KEEGAN & COMPANY, INC.
/acs
<PAGE>
EXHIBIT 1
Incorporated by reference to the Company's annual report on Form 10-K For
The Year Ended September 30, 1997
<PAGE>
EXHIBIT 2
Incorporated by reference to the Company's quarterly report on
Form 10-Q For The Quarter Ended June 30, 1998
<PAGE>
PRELIMINARY COPIES
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF
TOP SOURCE TECNOLOGIES, INC.
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON ________ _, 1998
The undersigned hereby appoints William C. Willis, Jr. and David Natan as
my proxy with power of substitution for and in the name of the undersigned to
vote all shares of common stock of Top Source Technologies, Inc. (the "Company")
which the undersigned would be entitled to vote at the annual meeting of
stockholders of the Company to be held at The Marriott Eastside, 252 Lexington
Avenue, New York, New York on ________, 1998 at 12:00 Noon, and at any
adjournment thereof, upon such business as may properly come before the meeting,
including the items set forth below:
Each share of common stock outstanding on the record date is entitled to
one vote on all proposals.
1. I hereby approve the Asset Purchase Agreement entered into as of August
14, 1998, by and among the Company, Top Source Automotive, Inc., NCT Audio
Products, Inc. and Noise Cancellation Technologies, Inc.
Yes____ No____ Abstain____
2. I hereby elect the following individuals to serve on the board of
directors of the Company for a three year term until the Company's annual
meeting in 2001.
Name Yes No
a) William C. Willis, Jr.
b) Ronald P. Burd
3. I hereby ratify the appointment of the Arthur Andersen LLP as
independent auditors for the fiscal year ended September 31, 1998.
Yes _____ No _____ Abstain _____
4. I hereby authorize the transaction of any other lawful business that
may properly come before the annual meeting of stockholders.
Yes _____ No _____ Abstain _____
(Shares cannot be voted unless this proxy is signed and returned, or
specific arrangements are made to have the shares represented at the meeting).
If no direction is indicated, this Proxy will be voted as recommended
by the board of directors for all proposals.
Dated: , 1998
Signature of Stockholder
Typed or Printed Name of Stockholder
Number of Shares Owned
