UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended March 31, 1999
Commission File Number 1-11046
TOP SOURCE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-1027821
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (561) 775-5756
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Class Outstanding at May 12, 1999
Common stock: $.001 par value 29,799,031 shares
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Consolidated Balance Sheets as of March 31, 1999
(Unaudited) and September 30, 1998......................1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 (Unaudited)...2
Consolidated Statements of Operations for the
Six Months Ended March 31, 1999 and 1998 (Unaudited).....3
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1999 and 1998 (Unaudited).....4
Notes to Unaudited Interim Consolidated
Financial Statements...................................5-9
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations........10-14
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................15
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<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
------------------ -----------------
(Unaudited)
March 31, September 30,
ASSETS 1999 1998
------------------ -----------------
Current Assets:
Cash and cash equivalents $ 847,069 $ 488,899
Accounts receivable trade 1,572,926 1,656,317
Inventories 2,369,602 1,489,840
Prepaid expenses 131,336 194,482
Other 106,535 152,349
------------------ -----------------
Total current assets 5,027,468 3,981,887
Property and equipment, net 1,115,149 786,438
Manufacturing and distribution rights and patents, net 257,240 271,502
Capitalized database, net 1,967,777 2,073,194
Note receivable from officer - 26,260
Other assets, net 359,936 133,814
------------------ -----------------
TOTAL ASSETS $ 8,727,570 $ 7,273,095
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,276,943 $ 1,318,835
Accounts payable 873,581 842,903
Accrued liabilities 1,274,895 840,705
------------------ -----------------
Total current liabilities 3,425,419 3,002,443
Senior subordinated convertible notes 707,000 3,020,000
Other liabilities 263,469 429,524
------------------ -----------------
Total liabilities 4,395,888 6,451,967
Minority interest 734,677 364,157
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,500 outstanding 3,127,015 943,807
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,799,031 and 29,053,803 shares issued and
outstanding in 1999 and 1998, respectively 29,799 29,054
Additional paid-in capital 30,926,413 29,624,951
Accumulated deficit (29,136,868) (28,791,487)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
------------------ -----------------
Total stockholders' equity 3,597,005 456,971
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,727,570 $ 7,273,095
================== =================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
1
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<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
------------------ -----------------
Product sales $2,123,332 $3,172,381
Service revenue 468,332 168,057
------------------ -----------------
Net sales 2,591,664 3,340,438
------------------ -----------------
Cost of product sales 1,408,944 2,146,147
Cost of services 266,913 81,645
------------------ -----------------
Cost of sales 1,675,857 2,227,792
------------------ -----------------
Gross profit 915,807 1,112,646
------------------ -----------------
Expenses:
General and administrative 939,924 1,206,217
Selling and marketing 264,065 314,169
Depreciation and amortization 112,449 222,981
Research and development 24,286 47,175
------------------ -----------------
Total expenses 1,340,724 1,790,542
------------------ -----------------
Loss from operations (424,917) (677,896)
Other income (expense):
Interest income 23,796 23,276
Interest expense (109,824) (135,839)
Minority interest (80,850) -
Other income, net 11,314 28,573
------------------ -----------------
Net other expense (155,564) (83,990)
------------------ -----------------
Loss before income taxes (580,481) (761,886)
Income tax expense (18,750) (18,500)
------------------ -----------------
Net loss (599,231) (780,386)
Embedded dividend on preferred stock (149,379) -
Preferred dividends (81,985) -
================== =================
Net loss available to common stockholders ($830,595) ($780,386)
================== =================
Loss per common share:
Loss available to common stockholders
Basic (0.03) (0.03)
================== =================
Diluted $ (0.03) $ (0.03)
================== =================
Basic weighted average common shares outstanding 28,976,704 28,135,799
================== =================
Diluted weighted average common shares outstanding 28,976,704 28,135,799
================== =================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
2
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
---------------- ---------------
Product sales $4,141,644 $6,419,416
Service revenue 542,909 197,350
---------------- ---------------
Net sales 4,684,553 6,616,766
---------------- ---------------
Cost of product sales 2,676,905 4,276,793
Cost of services 310,443 90,899
---------------- ---------------
Cost of sales 2,987,348 4,367,692
---------------- ---------------
Gross profit 1,697,205 2,249,074
Expenses:
General and administrative 1,955,393 2,251,457
Selling and marketing 580,294 634,559
Depreciation and amortization 222,159 483,140
Research and development 112,963 62,440
---------------- ---------------
Total expenses 2,870,809 3,431,596
---------------- ---------------
Loss from operations (1,173,604) (1,182,522)
Other income (expense):
Interest income 56,249 52,299
Interest expense (276,502) (277,815)
Gain on sale of minority interest in subsidiary 1,662,870 -
Minority interest (87,807) -
Other (expense) income, net (38,490) 32,970
---------------- ---------------
Net other income (expense) 1,316,320 (192,546)
---------------- ---------------
Income (loss) before income taxes 142,716 (1,375,068)
Income tax expense (37,500) (37,000)
---------------- ---------------
Income (loss) from continuing operations 105,216 (1,412,068)
Gain on extinguishment of debt 158,745 -
---------------- ---------------
Net income (loss) 263,961 (1,412,068)
Embedded dividend on preferred stock (301,833) -
Preferred dividends (119,956) -
Value of warrants issued with preferred stock (187,549) -
================ ===============
Net loss available to common stockholders ($345,377) ($1,412,068)
================ ===============
Earnings (loss) per common share:
Loss per common share before extraordinary item:
Basic $ (0.02) $ (0.05)
================ ===============
Diluted (0.02) (0.05)
================ ===============
Extraordinary item:
Basic 0.01 -
================
Diluted 0.01 -
================
Net loss available to common stockholders
Basic (0.01) (0.05)
================ ===============
Diluted $ (0.01) $ (0.05)
================ ===============
Basic weighted average common shares outstanding 28,883,197 28,110,033
================ ===============
Diluted weighted average common shares outstanding 28,883,197 28,110,033
================ ===============
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
3
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
------------------ -----------------
OPERATING ACTIVITIES:
Net income (loss) $ 263,961 $ (1,412,068)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Gain on sale of minority interest in subsidiary (1,662,870) -
Depreciation 209,564 499,513
Amortization 184,958 139,659
Gain on extinguishment of debt (158,745) -
Disposal of equipment 3,100 127,200
Repayments from officers 26,260 5,044
Minority interest 48,987 -
Decrease (increase) in accounts receivable, net 83,391 (253,309)
Increase in inventories (879,762) (294,558)
Decrease in prepaid expenses 63,146 18,250
Decrease in other assets 45,814 720,622
Increase in accounts payable 30,678 350,203
Increase (decrease) in accrued liabilities 261,284 (504,322)
Decrease in other liabilities (166,055) -
------------------ -----------------
Net cash used in operating activities (1,646,289) (603,766)
------------------ -----------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (541,375) (176,096)
Proceeds from sale of minority interest in subsidiary, net 2,039,079 -
Additions to patent costs, net (47,443) (18,994)
Discontinued operations - change in net assets - (8,407)
------------------ -----------------
Net cash provided by (used in) investing activities 1,450,261 (203,497)
------------------ -----------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants 26,659 216,250
Preferred stock issuance, net 3,385,766 -
Redemption of preferred stock Series A (500,000) -
Repayments of Senior Convertible Notes (2,064,617) -
Purchase of certificate of deposit (251,718) -
Repayments of borrowings (41,892) (967,040)
------------------ -----------------
Net cash provided by (used in) financing activities 554,198 (750,790)
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 358,170 (1,558,053)
Cash and cash equivalents at beginning of period 488,899 2,103,679
------------------ -----------------
Cash and cash equivalents at end of period $847,069 $545,626
================== =================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
4
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Top Source Technologies, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
financial statements. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The results of operations of any interim
period are not necessarily indicative of the results of operations for the
fiscal year. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K/A No. 2
for the year ended September 30, 1998. Certain fiscal year 1998 amounts have
been reclassified to conform to current year presentation.
Comprehensive Income
For the three and six months ended March 31, 1999 and 1998, there
were no differences between net income and comprehensive income.
2. INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" during the
fiscal 1998. SFAS No. 128 establishes standards for computing and presenting
basic and diluted earnings per share. Basic earnings per share is calculated by
dividing income (loss) available to common stockholders by the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is calculated by dividing income available to common
stockholders by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. Convertible securities and common
share equivalents have not been included in the computation of diluted loss per
share in the accompanying statements of operations for the three and six months
ended March 31, 1999 and 1998 as their impact would have been antidilutive.
For the three and six months ended March 31, 1999, the effect of
equivalent shares related to stock options, warrants and preferred stock were
4,443,276 and 4,595,976, respectively, and were not included in the dilutive
average common shares outstanding, as the effect would have been anti-dilutive.
For the three and six months ended March 31, 1998, the effect of equivalent
shares related to stock options was 286,738 and 335,955, respectively, and were
not included in the dilutive average common shares outstanding, as the effect
would have been anti-dilutive.
5
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consisted of the following:
March 31, September 30,
1999 1998
---- ----
Raw materials $1,633,109 $ 1,388,058
Finished goods 736,493 101,782
---- -------
$2,369,602 $ 1,489,840
========== ===========
4. DEBT
During November and December 1998, the Company restructured
substantially all of its outstanding $3,020,000 of Senior Subordinated
Convertible Notes (the "Notes"). On November 20, 1998, with a portion of the
proceeds from the sale of Series B Convertible Preferred Stock (See Note 5.
Convertible Preferred Stock), the Company prepaid an aggregate of $745,000
principal amount of Notes held by certain Noteholders agreeing to these
prepayment terms ("Group One") for $496,617 resulting in a savings of $248,383
in principal amount (not including future debt service costs). In connection
with the discounting of these Group One Notes, the Company issued to the
Noteholders warrants to purchase an aggregate of 248,383 shares of the Company's
Common Stock exercisable over a five-year period at $1.78 per share. The value
of the warrants utilizing the Black Scholes pricing model in accordance with
SFAS 123 was $71,475 and was included in reducing the value of the savings
disclosed above in determining the extraordinary gain on extinguishment of debt.
The net extraordinary gain on extinguishment of debt amounted to $158,745.
On December 15, 1998 concurrent with the approval of the sale of Top
Source Automotive, Inc. ("TSA") Assets by the Company's stockholders in which
the Company received $2,050,000 (See Note 6. Sale of Top Source Automotive,
Inc.), $2,240,000 of the remaining $2,275,000 of Noteholders ("Group Two")
agreed to redeem $1,568,000 principal amount of the Notes, which was paid with a
portion of Series B Convertible Preferred Stock, leaving $672,000 of principal
outstanding due June 2000. In connection with the Group Two redemption, the
Noteholders agreed to reduce the interest rate from 9% to 5% and reduce the
conversion price on the remaining Note balance, from $10.00 per share to $2.00
per share. The terms of the remaining Noteholder (not agreeing to accept the
terms of either the Group One or Group Two Noteholders) with a principal balance
of $35,000 stayed the same with an interest rate of 9% and principal due June
2000. In connection with the repayment of the Notes, a waiver of certain
restrictive provisions of the Note Purchase Agreement, including the requirement
that the Company maintain a 1.5 to 1 debt to equity ratio, was received (through
and including September 30, 1999).
5. CONVERTIBLE PREFERRED STOCK
On November 17, 1998, the Company sold $3,500,000 of its Series B
Convertible Preferred Stock ("Series B Preferred") to two trusts in which Mr. G.
Jeff Mennen, a director of the Company, is one of the co-trustees and sole
trustee, respectively, and the beneficiaries are members of Mr. Mennen's
immediate family (the "Mennen Trusts"). The Series B Preferred is convertible on
or after November 1, 1999 into a number of shares of Common Stock computed by
dividing the stated value of $1,000 per share (the "Stated Value") by 85% of the
closing bid price of the Common Stock on the previous trading day (the
"Conversion Price"). The Company had the option to redeem the Series B Preferred
at 110% of Stated Value plus accrued dividends at any time before May 1, 1999,
and at a price of 115% of Stated Value plus accrued dividends commencing on May
1, 1999 and expiring on October 27, 1999.
6
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. CONVERTIBLE PREFERRED STOCK ( Continued )
The Series B Preferred pays a dividend of 9% per annum in cash or, if
the Company is unable to pay cash, in shares of Common Stock. The number of
shares of Common Stock to be issued in such event shall equal to the sum of: (A)
the amount of the dividend divided by the Conversion Price plus (B) 25% of the
amount obtained in clause (A). As additional consideration, the Company issued
to the Mennen Trusts 350,000 warrants to purchase the Company's Common Stock
exercisable over a 10-year period at a price of $1.94 per share (which was
equivalent to $1.00 above the closing price on the day of consummation of the
Series B Preferred sale transaction). Additionally, since the Series B Preferred
had not been redeemed or converted into Common Stock on or before May 1, 1999
(which conversion would have required the Company's consent), the Company issued
to the Mennen Trusts an additional 50,000 10-year warrants exercisable at a
price of $1.75 which was $.50 per share above the closing price of the Company's
Common Stock on April 30, 1999. In the event the Series B Preferred has not been
redeemed by October 27, 1999, the Company has agreed to file a registration
statement to cover the public sale of the shares of Common Stock issuable on
conversion of the Series B Preferred and exercise of the warrants not later than
November 30, 1999. The Company consummated this transaction after diligently and
actively seeking alternative financing sources and concluding that the proposal
was superior to competing offers available in strict arms-length transactions.
The Board of Directors voted unanimously to approve the sale of the Series B
Preferred with Mr. Mennen abstaining.
On November 8, 1998, the Company redeemed one-half or $500,000 Stated
Value of the existing Series A Preferred Stock ("Series A Preferred") by paying
the holders an aggregate purchase price of $600,000. The holders also agreed not
to convert $350,000 Stated Value of Series A Preferred until after March 31,
1999 (and the Company retained the right to redeem $350,000 Stated Value of
Series A Preferred Stock at a 20% premium above Stated Value at any time before
or after March 31, 1999). The remaining $150,000 Stated Value of Series A
Preferred was converted into an aggregate of 387,554 shares of Common Stock
(including accrued dividends) in accordance with the terms of the Series A
Preferred. As consideration for the delay in converting $350,000 Stated Value of
the Series A Preferred, the Company issued to the two holders thereof, five-year
warrants to purchase an aggregate of 25,000 share of Common Stock exercisable at
$.8937 per share commencing in April 1999.
On March 30, 1999, the Company and the holder of the Series A Preferred
agreed to modify the conversion terms of the remaining $350,000 of Series A
Preferred resulting in the conversion of the Series A Preferred into Common
stock at $1.00 per share, or into 350,000 shares. The holder agreed to restrict
public sale of these 350,000 shares of Common Stock until October 1, 1999 and
thereafter 70,000 shares, on a cumulative basis, may be sold each month. The
$1.00 price was substantially higher than the price permissible and occurred as
the result of the Company agreeing not to redeem the $350,000 Series A
Preferred.
As discussed above, the issuance of the Series B Preferred and the
redemption of one-half of the Series A Preferred includes the issuance of Common
Stock warrants. The value of these warrants utilizing the Black Scholes Option
Pricing Model in accordance with SFAS No. 123 is approximately $188,000. The
value of these warrants have been deducted from amounts available to common
stockholders for purposes of calculating income per share for the six months
ended March 31, 1999.
Additionally, in connection with the issuance of the Series B Preferred
Stock, the conversion feature calls for a 15% discount. The intrinsic value of
the beneficial conversion feature of the Series B Preferred is approximately
$618,000 and will be amortized as an embedded dividend in the statement of
operations in fiscal 1999 over the earliest conversion date of the Series B or
(November 1, 1999). The Company recorded approximately $246,000 of the
conversion feature during the six months ended March 31, 1999.
7
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. SALE OF TOP SOURCE AUTOMOTIVE, INC.
On August 14, 1998, the Company executed a Asset Purchase Agreement
("Agreement") with NCT Audio Products Inc., (the "Buyer"), a subsidiary of the
NCT Group, Inc. of Stamford, Connecticut ("NCTI") to purchase substantially all
of the assets and liabilities of TSA.
Under the terms and subject to the conditions of the Agreement, on the
closing date (the "Closing" or the "Closing Date"), the Buyer agreed to purchase
100% of the assets (the "Assets") and assume substantially all of the
liabilities of TSA for a minimum of $10,000,000. The purchase consideration of
$10,000,000 consists of $1,450,000 paid to TSA on June 10, 1998 ("Step I"),
$2,050,000, which was paid into escrow on July 30, 1998 and released to the
Company (and became non-refundable) on December 15, 1998 as a result of an
affirmative stockholder approval ("Step II") and the balance of $6,500,000 due
at the Closing, which was to occur by March 31, 1999 ("Step III").
Additionally, under the terms of the Agreement, TSA could receive up to
an additional $6,000,000 payable to the Company in cash based expressly
contingent upon the future earnings of the Buyer's subsidiary acquiring the
assets for a two-year period following the Closing. If earned, for the first
year following the Closing ("Year One"), the buyer shall pay TSA in cash an
amount of up to $3,000,000 and a cumulative amount of up to $6,000,000 for Year
One and 12-month period subsequent to Year One ("Year Two"). The amount in Year
One shall be equal to the amount by which the product of four and one-half times
income before interest, taxes, depreciation and amortization for Year One
exceeds $8,000,000.
The consummation of the proposed transaction is subject to the
satisfaction or waiver of certain conditions including the Buyer obtaining the
necessary financing. As a result of the completion of Steps I and II of the
transaction, the Buyer became a 20% owner of the Common Stock of TSA. Since Step
III of the transaction failed to close by December 31, 1998, the Buyer had a one
week option to cancel its exclusive right to purchase the Assets of TSA and as
consideration for such cancellation would have received an additional 15% of TSA
Common Stock.
On January 7, 1999, the Buyer of TSA's Assets by virtue of not
exercising its right to receive an additional 15% minority stake in TSA,
maintained its exclusive right to complete the remainder of the transaction by
March 31, 1999.
On March 30, 1999, the Company granted the Buyer an extension until May
28, 1999 to complete the purchase of TSA. As consideration for this extension,
the Company received a non-refundable fee from the Buyer of $350,000. This
extension fee consisted of $20,685 in cash, $125,000 of the Buyer's minority
interest in TSA earnings and a $204, 315 note payable due on April 30, 1999 (the
"Note") from the Buyer to TSA. Additionally, due to the Buyer's failure to close
the transaction by March 31, 1999, the Company received a penalty premium of
$100,000 of the Buyer's convertible preferred stock.
Under the terms of the extension, the Buyer was required to pay the
Note no later than April 30, 1999. The Note was not paid on April 30, 1999, and
remains unpaid. As a result none of the $350,000 extension fee can be applied
against the $6,500,000 due to be paid by the Buyer to TSA at closing. Therefore,
in order to close the transaction, the Buyer must now pay TSA, $6,500,000 plus
the Note balance of $204,315 along with accrued interest on the Note since April
16, 1999 at the rate of approximately 17%.
8
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. SALE OF TOP SOURCE AUTOMOTIVE, INC. ( Continued )
The Buyer is a subsidiary of NCTI, whose common stock trades on the
over-the-counter bulletin board having been delisted from the NASDAQ Small Cap
Market. NCTI's audited financial statements for the year ended December 31, 1998
report a net loss attributable to common shareholders of approximately
$17,868,000 on reported net revenues of approximately $3,324,000. Based upon the
review of these public filings by the Company, and due to the Buyer being newly
organized and having minimal working capital, management of the Company believes
there is substantial doubt that the Buyer will be able to complete a financing
of at least $6,500,000 to complete the acquisition of TSA. This belief is
reinforced by the events that have occurred in 1999 as described in the previous
paragraph. In the event that Step III is not completed, it is unlikely that the
Company will be able to secure a new buyer. This may have an adverse effect on
the Company's ability to finance OSA-IIs ,as well as have an adverse effect on
the short-term financial condition of the Company. If Step III is ultimately
completed, TSA will be accounted for as a discontinued operation. Pending
completion of the proposed transaction, the Company is actively seeking to
improve TSA's business.
If the transaction fails to close by May 28, 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.
Upon the sale of 100% of TSA's Assets, this transaction will be treated
as a discontinued operation, as defined under Accounting Principles Board No.
30. However, due to the substantial doubt that the Company may not receive the
final payment from the Buyer, the gain on the equity interest has been treated
as part of continuing operations on the March 31, 1999 Consolidated Statement of
Operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenue for the three and six months ended March 31, 1999 was $2,591,664
and $4,684,553 compared to $3,340,438 and $6,616,766 for the same periods in
1998. The decrease in revenue for the three and six month period ended March 31,
1999 compared to the same periods in 1998 is primarily attributable to the loss
of the patented Overhead Mounted Speaker System ("OHSS") sales for the Grand
Cherokee(TM) contract which expired in October 1998 partially offset by an
increase in OSA service revenues.
For the three and six months ended March 31, 1999, the Jeep Grand Cherokee(TM)
sales were $0 and $11,718 compared to $1,075,268 and $2,173,007 in sales for the
three and six months ended March 31, 1998. Wrangler sales remained relatively
unchanged for the three months March 31, 1999 and declined 4% for the six months
ended March 31, 1999 compared to the same periods in 1998.
For the three and six months ended March 31, 1999, On-Site Oil Analyzer ("OSA")
sales were $468,332 and $542,909 compared to $168,057 and $197,350 for the same
periods in 1998. The increase in OSA sales for the three and six month periods
of 179% and 175% is primarily the result of the sale of 5 second generation
("OSA II") machines during the three months ended March 31, 1999 compared to the
sale of 2 first generation ("OSA I") machines during the three months ended
March 31, 1998. In addition, monthly revenue increased as a result of 18 OSA I
and 33 OSA II machines generating various levels of revenue (some of which were
nominal) for the six months ended March 31, 1999 compared to 19 OSA I units in
1998.
As of May 12, 1999, Top Source Instruments, Inc. ("TSI") had approximately 58
OSA units generating various levels of revenue (in some cases nominal monthly
revenue) through lease and revenue generating tests in a variety of industries
including automobile dealerships, mini labs, truck lube centers, truck stops,
and a motorcycle development laboratory.
The gross profit margin for three and six months ended March 31, 1999 was 35.3%
and 36.2% compared to 33.1% and 34.0% for the same periods in 1998. The slight
increase in the gross profit margin compared to the prior year is primarily
attributable to the sale of the 5 OSA-II machines during the six months ended
March 31, 1999.
General and administrative expenses were $939,924 and $1,955,393 for the three
and six months ended March 31, 1999 compared to $1,206,217 and $2,251,457 for
the same period in 1998. This decrease is attributable to a reduction in
expenses at TSA and corporate offset partially by increases in expenses at TSI
as a result of the growth and expansion of the business.
Depreciation and amortization was $112,449 and $222,159 for the three and six
months ended March 31, 1999 compared to $222,981 and $483,140 for the same
periods in 1998. This decrease is primarily attributable to the write-down of
the original OSA I machines in September 1998.
Interest income increased 7.6% for the six months ended March 31, 1999 compared
to the same period in 1998. The increase is attributable to interest on the
$2,050,000 escrow deposit released to the Company in December 1998 in connection
with the sale of TSA. This increase was offset by a decline in on hand cash
balances due to operating losses and purchases of capital equipment and
inventory.
Interest expense decreased $26,015 for the three months ended March 31, 1999
compared to the same period in 1998. The decrease is due to a decrease in
interest as a result of the restructuring of the senior subordinated convertible
notes in November and December 1998 offset by an increase in amortization of
loan fees on its credit facility and interest on accrued severance agreement.
The gain on sale of the minority interest in TSA represents the gain on the sale
of the additional 5.5% equity interest in TSA in December 1998. ( See Note 6.
Sale of Top Source Automotive, Inc. )
10
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Gain on extinguishment of debt represents the gain from restructuring of a
portion of the outstanding $3,020,000 of Notes. (See Note 4. Debt)
The Company's strategy since March 1998 has been to divest substantially all of
TSA's assets and focus its resources on the commercialization of OSA-IIs in a
number of diverse market segments.
Despite the fact that the Company has received $3,500,000 toward the $10,000,000
purchase price, the Company believes that there is substantial doubt that the
Buyer will be able to complete a financing of at least $6,500,000 to complete
the acquisition of TSA. This belief is reinforced by the events that occurred in
1999 as described in Note 6. Sale of Top Source Automotive, Inc. to the
unaudited Interim Consolidated Financial Statements. If Step III is not
completed it is unlikely that the Company will be able to secure another
purchaser. This may have an adverse effect on the Company's ability to finance
OSA-IIs, as well as have an adverse effect on the short-term financial condition
of the Company. If Step III is ultimately completed, TSA will be accounted for
as a discontinued operation. Pending completion of the proposed transaction, the
Company is actively seeking to improve TSA's business.
Since October 1998, OSA II activity at various customer locations has increased.
The Company intends to eventually replace all OSA I's previously purchased and
leased with OSAII's by the end of calendar 1999. The terms of the replacements
are not currently ascertainable.
In August 1998 the Company announced that it had entered into an agreement with
Speedco Inc. ("Speedco"), to lease OSAII's to be placed at various Speedco truck
oil quick-change service centers. Previously, the Company had leased four
OSA-Is to Speedco on a test basis. To date, the Company has delivered 14 OSA-IIs
to Speedco including three, which replaced OSA-Is. The remaining OSA-I will be
replaced in the future.
In November 1998, the Company entered into a strategic alliance with Flying J
Inc. ("Flying J") a billion dollar revenue company engaged in various facets of
highway-related products and services including the operation of large truck
stop centers. Under the terms of the agreement, Flying J agreed to purchase and
market OSA-II's in their truck stop service centers. The initial order by Flying
J. was for the outright purchase of 10 OSA-II units for approximately $700,000.
The agreement covers the potential purchase of up to 100 OSA-II's, payment of
per sample technology licensing fees, and provides financial incentive to Flying
J for meeting certain performance milestones. In January 1999, Flying J. paid
the Company in full for all 10-OSAII units covered in the initial purchase
order. Originally, the Company anticipated recording revenue on the sale of 10
units to Flying J. However, since 6 units remained in storage in a segregated
area at our Atlanta facility, revenue on these units could only be recorded upon
shipment to Flying J locations. Accordingly, approximately $420,000 has been
recorded as deferred revenue at March 31, 1999 and is included as accrued
liabilities in the accompanying balance sheet. All 6 of these units were shipped
to Flying J locations subsequent to March 31, 1999, therefore, the deferred
revenue of $420,000 will be recognized as revenue in the third fiscal quarter.
There can be no assurances that Flying J. will decide to purchase any additional
OSAII's units.
In February 1999, the Company entered into an agreement with CTC Analytical
Services ("CTC") and Conam Inspection ("Conam"), U.S. based affiliates of
Stavely plc ("Stavely"), a $500 million revenue UK based company. Under the
terms of the strategic alliance, equipment purchase and lease, and software
license agreement, CTC and Conam will receive the exclusive rights to sell and
lease OSA-IIs in certain markets and the right to purchase OSA-IIs for use in
their own laboratories. In return and in order to maintain their exclusivity,
CTC and Conam will be required to achieve significant ongoing OSA-II performance
milestones through purchases and leases of the OSA-II. CTC and Conam combined
are the largest independent suppliers in the world of traditional laboratory oil
analysis services.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
In March 1999, the Company and Service Solutions, a unit of SPX Corporation a
billion dollar revenue company, entered into an exclusive distribution agreement
for the OSA-II. Under this exclusive agreement, the OSA-II will be available to
Service Solutions' entire network of trucking, agricultural, construction
franchise and independent service locations. Service Solutions provides
specialty service tools and equipment, electronics diagnostics, emissions
testing equipment and technical information services for the global motor
vehicle industry. SPX Corporation is a global provider of industrial products
and services, technical products and systems, service solutions and vehicle
components.
Net Loss Analysis
In order to avoid current, material, ongoing operating losses, and an increase
in this operating loss after the projected sale of TSA Assets ( See Note 6. Sale
of Top Source Automotive, Inc. ), if it occurs, the Company must generate new,
material ongoing OSA or other revenues in future months. The Company believes
that the recent OSA activity described in the MD&A section will improve OSA
visibility in the marketplace that which will lead to significant increases in
future OSA revenues. However, no assurances can be given.
Liquidity and Capital Resources
Net cash used in operating activities was $1,646,289 for the six months ended
March 31, 1999. This usage of cash was attributable to a net loss of $1,163,132,
which excludes depreciation, amortization, gain on sale of minority interest in
subsidiary and gain on extinguishement of debt and an increase in inventories of
$879,762. This was partially offset by a decrease in accounts receivable of
$83,391 and prepaid and other assets of $108,960 and an increase in accounts
payable, accrued liabilities and accrued liabilities of $125,907. The decrease
in accounts receivable is primarily attributable to the loss of the Grand
Cherokee(TM) contract which expired in October 1998. The increase in inventories
is primarily the result of the build-up of OSA-II units in anticipation of
future OSA-II orders.
Net cash provided by investing activities was $1,450,261. This increase in cash
was attributable to the release of the $2,050,000 escrow deposit in connection
with the sale of TSA to the Company on December 15, 1998 offset by expenditures
for capital assets.
Net cash provided by financing activities was $554,198, which consisted of net
proceeds from sales of common stock through exercise of stock options of
$26,659, net proceeds from the sale of Series B Preferred stock of $3,385,766
offset by the redemption of 50% or $500,000 of the Series A Preferred stock, the
repayment of the Notes of $2,064,617, repayments of $41,892 on the Company's
credit facility ("Credit Facility") with NationsCredit Commercial Corporation
("Nations") and purchase of a $250,000 certificate of deposit for Nations.
The Credit Facility, which is secured by substantially all of the assets of the
Company enables the Company to potentially borrow a sum based upon certain
percentages of accounts receivable and inventory balances. The Credit Facility
allows for borrowing of up to 85% of all accounts receivable and 50% of
inventory for TSA. 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 for the six months ended March 31, 1999 factoring the interest earned on
used drawn funds was 17.4%. As of March 31, 1999 and May 12, 1999, the unused
available borrowings on this Credit Facility were $85,000 and $50,000,
respectively.
The Credit Facility calls for certain financial covenants that, if not met,
would cause a default under the Agreement and increase the interest rate by 2%
over current levels. As of September 30, 1998, the covenant requiring the
Company's fiscal year pre-tax operating loss, not to exceed certain levels, as
defined in the Credit Facility was not met by the Company. Nations later agreed
to waive this covenant precluding the Company from having a loss of more than
$2,000,000 in a fiscal year. In conjunction with such waiver, the Company paid
Nations a fee of $25,000 and agreed to collaterally assign a $250,000
certificate of deposit to Nations. The Company is required to repay the Credit
Facility in full upon the ultimate sale of TSA (see Note 6. Sale of Top Source
Automotive, Inc.). 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.
12
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
On June 9, 1995, the Company entered into an agreement with advisory clients of
Ganz Capital Management, Inc., now Mellon Private Asset Management ("Mellon"),
whereby the holders would purchase $3,020,000 in Senior Subordinated nine
percent (9%) convertible notes maturing in June 2000. After June 9, 1996, the
Notes could be prepaid by the Company without penalty and can be converted by
the holders into fully registered shares of the Company's Common Stock at a
conversion price of $10 per share. The Notes are subject to an Indebtedness to
Equity ratio that cannot exceed 1.5 to 1.0. As of September 30, 1998, the
Company was not in compliance with the ratio. Subsequent, to September 30, 1998,
the Company restructured substantially all of the Notes, which included a waiver
of the debt to equity ratio for fiscal 1999 (see Note 4 Debt ).
As of May 12, 1999, the Company had approximately $1,000,000 (which includes
$250,000 held as collateral by Nations) of cash. As noted in this liquidity
section, the Company has substantially increased its OSA-II inventory levels. In
the event the Company is unable to sell TSA in the short-term, the Company will
be required to secure additional financing to fund it operations.
The Company is currently actively engaged in discussions with lenders and
possible sources of equity financing. Although there can be no assurances, based
upon the current status of the Company's business, and indications of interest
from financing sources, the Company believes that it will be able to meet its
working capital needs.
Year 2000
The Company is assessing the potential impact of the Year 2000 ("Y2K") on the
Company's internal business systems, products, assembly procedures and
operations. The Company's Y2K initiatives include (i) testing and upgrading
internal business systems and facilities; (ii) contacting key suppliers, vendors
and customers to determine their Y2K compliance state; and (iii) developing
contingency plans.
To date, the Company has been evaluating all of its information technology
systems, which relate to its corporate offices including its accounting systems;
these systems must be replaced because they are not Y2K compliant. The Company
has received one proposal and plans to implement the replacement of its
corporate information technology systems during the second and third calendar
quarters of 1999. The Company estimates that the cost will be approximately
$40,000.
At TSA, the Company intends to replace its management reporting and accounting
software modules. The management reporting system is used by TSA in its assembly
of OHSS. The Company anticipates the cost of new hardware and software to make
TSA Y2K compliant will be approximately $40,000. The Company has appointed
representatives at TSA to coordinate TSA's information technology systems with
Chrysler, TSA's major customer. This process has continued for approximately six
months. At TSI, the Company believes OSA-IIs are Y2K compliant. While the OSA-Is
are not Y2K compliant, the OSA-Is are being replaced by OSA-IIs during 1999. TSI
is currently communicating with four key suppliers, which make proprietary
parts, which may not be readily replaceable. Presently, the Company does not
know whether these suppliers are or will be Y2K compliant and, if not, what
options are available to TSI. The Company intends to aggressively assess this
issue during the balance of the current calendar quarter and develop a
contingency plan that will allow TSI's business operations to continue despite
potential disruptions due to Y2K issues. The plan will focus on identifying and
securing alternative suppliers and/or assisting any current suppliers in
achieving Y2K compliance in a timely manner. The Company cannot presently
estimate what, if any, additional costs it will incur if one or more of these
suppliers are not Y2K compliant.
13
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
As the Company continues to evaluate the Y2K readiness of its business systems,
suppliers, vendors and customers, it will modify and adjust its contingency
plans as may be required. However, due to the complexity of the Company's
technologies and reliance upon third parties to produce certain components,
there can be no assurances that the Company has identified all of the Y2K issues
that could arise. While the Company is attempting to minimize any negative
consequences arising from Y2K non-compliance, there can be no assurances that
Y2K issues will not have a material adverse impact on the Company's business,
operations or financial condition. If any of the Company's material suppliers,
vendors or customers experience business disruptions due to Y2K issues, the
Company might also be materially adversely affected. Any unexpected costs or
delays arising from Y2K issues could have a material adverse impact on the
Company's business, operations and financial condition.
Forward-Looking Statements
The forward looking statements discussed in this Report include those relating
to the Company's expectations that it anticipates (1) receipt of additional
purchase orders from Flying J and further commercialization of OSA-II usage
resulting in additional significant revenue, (2) closing of the TSA Asset sale,
(3) adequacy of the Company's working capital and liquidity, (4) replacement of
OSA-Is with OSA-IIs and (5) the Company will become Y2K compliant are
forward-looking statements within the meaning of the Reform Act.
Some or all of these forward-looking statements may not occur. 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 the following: (1) the continued reliability of
the OSA technology over an extended period of time, (2) the Company's ability to
market OSAs, (3) the acceptance of the OSA technology by the marketplace, (4)
the general tendency of large corporations to slowly change from known
technology to emerging new technology, (5) potential future competition from
third parties that may develop proprietary technology, which either does not
violate the Company's proprietary rights or is claimed not to violate the
Company's proprietary rights, (6) the ability of the Buyer to close its
financing (7) the Company's ability to attract strategic partners for OSA-II (8)
the Company's ability to make its systems Y2K compliant for the anticipated
costs and various risks which impact on the ability of TSI suppliers to achieve
Y2K compliance or for TSI to locate alternative suppliers and (9) the ability of
the Company to reach agreement on the terms of a new debt or equity financing. .
14
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.0 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: /s/ DAVID NATAN
David Natan
Vice President and Chief Financial Officer
Dated: May 12, 1999
15
<PAGE>
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