<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended September 30, 1998
Commission File Number 1-11046
TOP SOURCE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter).
Delaware 84-1027821
State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of Principal executive office) (zip code)
Registrant's telephone number, including area code: (561) 775-5756
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
.001 par value common stock (Title of Class)
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
Incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
As of January 8, 1999, 29,474,447 shares of $.001 par value Common Stock (the
Registrant's only class of voting stock) were outstanding. The aggregate market
value of the common shares of the Registrant on January 8, 1999 (on the closing
sales price) held by non-affiliates of the Registrant, was approximately
$27,447,919.
Documents Incorporated by Reference
Location in Form 10-K Incorporated Document
Part III-Items 10, 11, & 12 Definitive Proxy Statement in
connection with its Annual
Meeting of Stockholders
to be held on May 18, 1999
<PAGE>
PART I
ITEM 1. BUSINESS
A. General Description of Business
Top Source Technologies, Inc. (the "Company") was organized in 1986 to
distribute a patented overhead mounted speaker system ("OHSS") for vehicles. In
1989, the Company's mission was expanded to include developing and marketing of
products, services and technologies for the transportation and related
industries. Its current primary business is the assembly, marketing and sale of
the On-Site Oil Analyzer ("OSA-II"), a second generation proprietary oil
analysis instrument that combines two spectrometers in order to analyze both new
or used oil in approximately five minutes at the end-user's site. The Company
also assembles its OHSS through its subsidiary, Top Source Automotive, Inc.
("TSA"), which the Company reached agreement to sell in fiscal 1998 (as
described in this Report).
As of January 5, 1999, the Company had four subsidiaries: TSA located in Troy,
Michigan, Top Source Instruments, Inc. ("TSI") located in Atlanta, Georgia; ARCS
Safety Seat, Inc. ("ARCS, Inc.") located in Palm Beach Gardens, Florida, and Top
Source Oil Analysis Inc. ("TSOA") formerly named UTG Inc. which is an inactive
subsidiary. In fiscal 1998, the Company derived substantially all of its revenue
from sales of its OHSS at TSA.
B. Financial Information About Industry Segments
The Company currently has two industry segments: automotive technology, TSA, and
oil analysis service, TSI. (For information on industry segments, see Item 8. -
Financial Statements and Supplementary Data, Note 16, Segment Information.)
C. Narrative Description of Business
General
The Company markets one product, the OHSS, and provides one service, oil
analysis. The Company has three proprietary technologies: its On-Site Oil
Analyzer ("OSA"), which generated approximately 3.5% of the Company's revenues
in fiscal 1998; OHSS which generated approximately 96.5% of the Company's
revenue in fiscal 1998 and ARCS, which is non-revenue generating.
Products and Technologies
Oil Analysis
Oil analysis service requires extracting a small sample of used oil from oil
lubricated equipment and sending it to a laboratory. Scientific tests identify
and quantify metal debris that is the result of wear. The amount of metal
debris, correlated to time or mileage that the oil has been in service,
indicates if wear is normal or abnormal. Other laboratory tests indicate and
measure if there is any coolant or water in the oil, the amount of airborne
dirt, viscosity, acidity, depletion level of the additive package, flash point,
coloration and many other factors. Oil analysis users select the tests from a
service menu based on their particular needs. Once the empirical data is
generated by laboratory tests, a trained evaluator reviews the results and
generates a report, which often contains service recommendations. The report is
then sent to the end user.
Oil analysis is now widely used for diagnostic and preventative maintenance
programs for equipment in many different industries including those markets
where the Company is concentrating its marketing efforts for the OSA-II. These
markets are the truck market which includes truck stops, the automotive market
which includes auto power train development, motorcycle engine development,
automobile dealerships and automobile auctions, the consumer market which
includes retail automobile service outlets, the government market which includes
the United States military and municipalities, the industrial and refinery
markets and the heavy equipment market which includes railroads.
<PAGE>
ITEM 1.
BUSINESS
Oil Analysis (Continued)
OSA Development
It is estimated that the size of the oil analysis market is in excess of two
billion dollars. This includes oil analysis performed by independent and
in-house laboratories. The Company believes that the use of oil analysis will
increase as a preventative maintenance technology. The Company also believes
that advances in oil analysis technology owned by the Company will increase oil
analysis utilization in new and existing markets.
In 1992, the Company recognized a potential business opportunity if it could
develop an on-site oil analyzer which would eliminate the use of a laboratory
and provide near instant results to the end-user. Over the next three years, the
Company in conjunction with a third party developed the first generation on-site
analyzer ("OSA" or "OSA-I"), which was based upon a proprietary database of oil
analysis samples, which the Company acquired and further developed.
The Company organized TSI in 1993 as a wholly-owned subsidiary to develop and
later market the first generation OSA-Is and now the OSA-IIs, TSI's second
generation instrument. The Company has staffed TSI with spectroscopists,
instrument specialists, sales and marketing, systems and programmer personnel as
well as technicians capable of assisting in installation, operation and
training.
The concept behind the OSA was that the oil sample must be tested by two
distinctly different types of spectrometers: an emission spectrometer to
identify and quantify metal elements and an infrared spectrometer to measure the
physical-chemical properties of the used oil. Other specifications for the
instrument included parameters such as: user friendly, low cost, minimal
maintenance, near laboratory accuracy and repeatability, reliability and short
turn around time. The overall objective was to provide high volume oil analysis
locations with an OSA that delivers acceptable data in minutes at about the same
price they pay for similar data by sending samples to a laboratory.
In calendar 1993, TSI developed alpha and beta prototypes and ultimately placed
orders with an independent manufacturer to deliver beta OSA units. Concurrently,
TSI placed an order with the manufacturer for additional beta OSA units. The
intent was to place OSAs in the field at various locations to identify any
issues yet to be resolved before a final design was established for larger
distribution. The initial thrust of the Company's OSA development and marketing
program was to develop an OSA unit that was capable of being used in the
petroleum processing industry. As a result, the Company placed three units with
the Exxon Corporation ("Exxon") in 1994, two of which were designed for process
control and one for equipment maintenance. All three were initially operated to
evaluate their ability, accuracy and repeatability with data compared to the
internal Exxon quality control laboratory.
The equipment maintenance unit, with enhancements, has met the requirements to
be used regularly, although revenue to date has been nominal. Development of the
process control OSA units was much more difficult. Through mid-1997, the Company
dedicated significant resources to modify and enhance the two process control
units in order to meet Exxon stringent highly technical requirements. Although
progress was made and certain milestones were achieved, the process control OSA
units did not receive production approval from Exxon. The reliability of the
process control OSA unit was determined to be acceptable; however, accuracy had
not reached required levels in all areas. No revenue was generated from these
units. In order to achieve refinery production acceptance, all critical test
areas must generate accepted levels of accuracy.
<PAGE>
ITEM 1. BUSINESS
OSA Development (Continued)
In December 1997, the Company removed the two Exxon refinery units and entered
into a research agreement with the University of Tennessee's Measurement and
Control Center Engineering Center ("MCEC") which is supported by the petroleum
industry. Under the terms of the agreement, the Company agreed to participate in
the funding of a one-year feasibility study on spectroscopic methods on
petroleum stream properties. In addition, one of the Exxon refinery units was
sent to MCEC. The purpose of the agreement was to review the application of the
OSA unit for the process control industry. The Company contributed $84,000 to
MCEC during calendar 1998. The Company is currently awaiting a report from the
MCEC as to the results of its study. The Company anticipates that study will be
renewed for an additional year and as a result of MCEC's efforts, a new
prototype refinery unit will be developed during calendar 1999. The Company does
not anticipate receiving any revenues or purchase orders during calendar 1999
from this unit and development project. There can be no assurances that the new
prototype unit will be developed or that the Company will receive any purchase
orders from Exxon or other oil refineries after calendar 1999.
At the same time as TSI was concentrating its efforts on developing a refinery
OSA unit, it continued to refine and modify the beta units. After completing
development of the OSA-I units, the Company began between 1995 and 1997 to place
them in various test market locations in diverse industries and has generated a
minimal amount of revenue. Between 1997 and 1998, the Company sold five OSA-I
units including four to automotive Original Equipment Manufacturers ("OEMs").
Currently, 21 OSA-I units are being leased and generating a minimal amount of
revenue in a variety of industries. These include a major national automobile
dealer, a second automobile dealer, a municipality, five units at truck stops
including four at Speedco, Inc. ("Speedco"), one OSA at an engine development
company, five OSAs at a large truck engine manufacturer's maintenance facility,
one unit at a powertrain development facility, one at an automobile auction
facility and two, which are being used in a prototype mini lab capacity offering
services to the retail public.
Based upon its initial development and experience with the OSA-Is between 1994
and 1997, and input from end-users in a variety of industries, the Company's
management recognized that it needed to develop a second generation OSA which
was technology enhanced, less expensive, modular, less environmentally
sensitive, faster and smaller. At the end of fiscal 1997, TSI began the
development of the second generation OSA-II unit. By August 1998, TSI completed
the first production run of seven OSA-II units and shipped them for use in a
revenue-generating trial, which commenced at a Jacksonville, Florida tire
retailer in September 1998. The initial acceptance at the customer sites has
been slower than anticipated. The Company is working with the customer to refine
marketing efforts. The customer and the Company believe that the level of
interest is sufficient to warrant continuing the revenue-generating test and
that customer acceptance will increase as awareness builds.
The Company intends to eventually replace the OSA-I units under lease and
previously purchased with OSA-II units. Except for Speedco, the timing and terms
under which OSA-Is will be replaced are not currently ascertainable. In August
1998, the Company announced that it entered into an agreement with Speedco to
lease to it 13 OSA-IIs to be placed at various Speedco truck oil quick-change
service centers; four of these OSA-IIs will replace OSA-Is being used by
Speedco. Under the terms of the Speedco agreement, Speedco, which intends to
expand to 75 locations over its current 13 locations, agreed to place OSA-IIs at
all of its new locations if results at the present 13 locations are favorable.
On November 13, 1998, the Company entered into a strategic alliance with Flying
J, Inc. ("Flying J"), a company engaged in various facets of highway-related
products and services including the operation of large truck stops. Flying J
agreed to purchase and market OSA-IIs in up to 100 of their truck stop service
centers. The initial purchase order was for the outright purchase of 10 OSA-II
units. The agreement covers a potential purchase of up to 100 OSA-IIs and joint
development and marketing of product enhancements to assist in the further
commercialization of the OSA-IIs within the truck stop industry. After receipt
of the initial 10 OSA-IIs, Flying J may terminate the agreement without any
liability.
<PAGE>
ITEM 1. BUSINESS
Formation of Strategic Alliance with Flying J (Continued)
This purchase order for the 10 units for approximately $700,000 represents the
largest single OSA-I or OSA-II order received by TSI since its inception. In
addition to the purchase price of the OSA-II units, Flying J is obligated to pay
the Company a per sample licensing fee which is reduced at such time as Flying J
has 36 OSA-II units operating. As part of Flying J's efforts to assist the
Company in commercializing the OSA-IIs within the truck stop, it will receive
financial incentives subject in part to its having at least 36 OSA-II units in
operation.
The Company believes that the enhanced OSA-II is more commercially viable than
the OSA-I. During fiscal 1997 and 1998, the Company generated $403,853 and
$392,653 in OSA-I revenue. As noted above, the revenue generation from the
Flying J purchase will exceed $700,000.
The Company believes during fiscal 1999 that it can significantly increase OSA
revenues over historical levels although there can be no assurances that the
Company will receive additional purchase orders from Flying J and Speedco, or
other orders of this size or greater from other customers.
Overhead Speaker Systems
The OHSS is marketed and sold to OEMs and in the automotive aftermarket for
installation in sport utility vehicles and light trucks. The Company holds five
patents for the OHSS which expire at various times through 2009. The patents
cover the design and mounting method which permits speakers, dome lights and
other accessories to be mounted overhead. The assembly includes enclosed audio
speakers pre-wired in an overhead mounting system. The unit, about six inches
wide, mounts up against the headliner across the width of the sport utility
vehicle as a rear speaker system. Overhead mounted speakers deliver unobstructed
sound directly to the listener whereas speakers mounted in the side doors,
tailgate or cargo area can become obstructed by passengers or cargo. The OHSS
eliminates the need for rear speakers in traditional locations, reduces weight
in the liftgate and because of its fixed overhead mounting, is not subject to
the same risks of damage as speakers located in door or liftgate panels. The
OHSS provides the OEMs with a cost-effective solution to improved audio sound
without additional expensive tooling and within relatively short lead times, and
the assembly reduces installation time in factory applications. The OHSS unit
can be installed in less than 30 minutes and retails for around $300.
Since 1992, TSA has been selling its OHSS to Daimler Chrysler AG ("Chrysler")
for installation on various models of its Jeep(R) vehicles. OHSS revenue reached
a high of $16,580,270 in fiscal 1997. In August 1997, TSA started shipping units
for one high-end model of the Grand Cherokee. During fiscal 1997, the Jeep
Cherokee contract, which accounted for approximately 44% of TSA's fiscal 1997
revenues expired. Sales to Chrysler for the one high-end model of the Grand
Cherokee expired in October 1998 when that model was discontinued by Chrysler.
The Company continues to ship its OHSS to Chrysler for installation in the
Jeep(R) Wrangler vehicles.
<PAGE>
ITEM 1. BUSINESS
At its Troy, Michigan facility, TSA has developed a state-of-the-art sound
laboratory which it uses to develop prototypes for OEMs and after-market
applications. As a regular part of its business, TSA has sought to expand the
market for OHSS and reduce its reliance upon Chrysler. The goal of the new
designs is to open up a wider target market range of vehicles than the sport
utility and light truck markets.
In December 1998, the Company received notice from a Detroit, Michigan OEM that
TSA has been selected to receive a contract for dealer-installed custom designed
OHSS units for one vehicle. The Company anticipates receipt of a purchase order
within the next month and will begin shipments to the OEM approximately 20 weeks
later. The Company anticipates generating material revenue from this contract
beginning in the fourth quarter of fiscal 1999. If successful at the dealership
level, the OHSS unit could result in a production line order in the future,
which normally would exceed dealership revenue levels from the OHSS, although no
assurances can be given.
In addition to the new product concepts described above, the Company has been
seeking strategic alliances with several major automobile after-market
retailers. In fiscal 1997, the Company entered into an agreement with Kenwood
U.S.A. ("Kenwood") to design and build custom overhead-mounted enclosures to
house Kenwood's high quality speakers. In addition, during fiscal 1998, the
Company entered into a purchase agreement with Kenwood and sold custom design
OHSS units to Kenwood. Sales have not been material to date.
The Company is continuing to develop prototypes for potential after-market
applications.
During 1998, TSA obtained QS-9000 certification, which is required for future
sales to OEMs to Detroit and other OEMS.
Sale of TSA
As described below, the Company's Board of Directors made a strategic decision
in fiscal 1998 to sell TSA and concentrate the Company's resources on the
roll-out of its new second generation OSA-II. On August 14, 1998, the Company
entered into an agreement to sell TSA for a minimum of $10,000,000. The proposed
transaction is scheduled to close on or before March 31, 1999. If, however, TSA
is not sold, the Company believes that it will be in a position to expand TSA's
business and current OEM and after-market initiatives, which could result in
additional revenues.
As part of the agreement to sell TSA, as described in detail below, the Company
may receive an earn-out of up to $6,000,000 in the two years following the sale
of TSA. Accordingly, in order to maximize the possibility of achieving the
earn-out, if the TSA transaction closes and being in a position to operate TSA
profitably, if the transaction does not close, TSA has continued to expend
resources toward the development of new opportunities.
On August 14, 1998, the Company executed a Asset Purchase Agreement
("Agreement") with NCT Audio Products Inc., (the "Buyer" or "NCT"), a subsidiary
of the NCT Group, Inc. of Stamford, Connecticut (NASDAQ: "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 a non-refundable $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 must occur by March 31, 1999 ("Step III"). 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,
<PAGE>
ITEM 1. BUSINESS
Sale of TSA (Continued)
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. If the 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. 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 ("New TSA") acquiring the Assets for a
two-year period following the Closing (the "Earn-Out"). If earned, for the first
year following the Closing ("Year One"), the Buyer shall pay TSA in cash 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 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, inter-company 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.
If the transaction had closed on 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.
ARCS (Acceleration Restraint Curve Safety Seat)
Over the past eight years the Company worked on developing a proprietary
technology involving controlled seat motion that occurs at the instant of a
frontal crash to help restrain vehicle occupants and assist automakers in
meeting Federal passive restraint laws. The Company labeled the technology ARCS
(Acceleration Restraint Curve Safety Seat). The primary objective of this
technology is to provide supplemental lower torso restraint to alleviate
abdominal, hip, leg and ankle injuries caused by unwanted lower torso motion
often experienced in a severe frontal crash.
The Company is unaware of any other moving seat technology that has been
successfully tested by a major automobile manufacturer. In December 1996, the
U.S. Patent Office granted patent protection for ARCS technology.
<PAGE>
ITEM 1. BUSINESS
ARCS (Acceleration Restraint Curve Safety Seat) (Continued)
The Company believes research and development costs to the Company for the ARCS
is complete and all future development and application engineering will be paid
for by the vehicle and/or seat manufacturers. Due to the requirement to design
and build actual pre-production hardware for automaker testing, the Company is
attempting to establish a strategic partner relationship with a seat
manufacturer. The Company hopes to sell the technology and maintain a long-term
opportunity for future royalty income. Based on lead times in the automobile
industry, royalties would not be generated for a minimum of four years after a
contract is signed; however, due to the increasing regulation and scrutiny on
air bag technology, the time period for implementation of an alternate
technology could be shortened.
Significant Customer Information
During 1998, approximately 95% of the Company's revenue was derived from OHSS
sales to Chrysler Corporation. (See Item 8 - Financial Statements and
Supplementary Data, Note 18 - Discontinued Operations.) For significant customer
information see Item 8. - Financial Statements and Supplementary Data, Note 15 -
Concentration of Credit Risk.
Government Regulation
The Company is subject to government regulations generally affecting all
businesses. The Company believes that it is in material compliance with all such
regulations.
Seasonal Information
The Company's management believes that their business is not seasonal, however,
its OHSS product sold by TSA is subject to normal periods of OEM production line
shutdown for vehicle model year changeovers. This shutdown period normally
occurs for periods of time ranging from two to six weeks and not necessarily
occurring during the same quarter or quarters during each fiscal year.
Offices and Employees
The Company maintains its administrative office in Palm Beach Gardens, Florida.
The Company's automotive subsidiary, TSA, is housed in a 45,000 square foot
facility in Troy, Michigan, which includes administrative, engineering and
assembly operations. TSI has a facility in Atlanta, Georgia. As of January 7,
1999, the Company employs approximately 52 full-time people.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth the location and use of the Company's facilities.
All of the facilities are leased.
USE LOCATION EXPIRATION
Corporate Headquarters Palm Beach Gardens, Florida January 2002
TSA Troy, Michigan June 2000
TSI Atlanta, Georgia September 2001
All facilities have excess capacity and the capability to accommodate
significant future growth. Each of these facilities is in good condition.
ITEM 3. LEGAL PROCEEDINGS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information For Common Stock
The following table sets forth for the periods indicated the range of quarterly
high and low representative market prices for the Company's common stock. The
Company's common stock trades on the American Stock Exchange under the symbol
"TPS".
<TABLE>
<S> <C> <C> <C> <C>
Fiscal 1998 Fiscal 1997
High Low High Low
First Quarter (December 31) 2-1/16 1 5-5/16 2-3/16
Second Quarter (March 31) 1-1/2 1 3-5/16 1-3/4
Third Quarter (June 30) 1-1/8 11/16 2-7/8 1-3/16
Fourth Quarter (September 30) 1-1/4 3/4 2-1/4 1-1/8
</TABLE>
0
Holders
As of January 6, 1999, there were approximately 1,222 holders of record of the
Company's common stock.
Dividend Policy
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon the earnings, capital requirements and operating and financial
condition of the Company, and any restrictions in loan agreements among other
factors. Currently, the Company intends to follow a policy of retaining future
earnings in order to finance the growth and development of its businesses.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the Company's
financial condition and results of operations as of and for the years ended
September 30, 1998, 1997, 1996, 1995 and 1994. The selected financial data
should be read in conjunction with Item 8. Financial Statements and
Supplementary Data and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<TABLE>
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996, 1995 AND 1994
<S> <C> <C> <C> <C>
Balance Sheet Data 1998 1997 1996 1995 1994
Total Assets $7,273,095 $ 11,355,030 $ 16,012,716 $ 19,109,250 $ 17,855,313
Long-term Debt 3,020,000 3,020,000 3,020,000 2,060,000 ---
Total Liabilities 6,451,967 6,870,577 7,095,991 4,704,152 2,351,143
Stockholders' Equity 456,971 4,484,453 8,916,725 14,405,098 15,504,170
Statement of Operations Data
Net Sales $11,207,858 $16,984,123 $16,146,524 $ 13,907,354 $ 9,259,581
Income (Loss) from Continuing
Operations (5,529,562) (3,304,057) (4,831,786) (2,820,492) 1,840,366
Net Income (Loss) (5,852,382) (3,235,316) (6,698,787) (3,399,796) 2,014,577
Income (loss) per Basic and
Diluted Common Share (1)
From Continuing Operations (0.21) (0.12) (0.17) (0.10) 0.06
Net Income ( Loss) per Basic and
Diluted Weighted Average
Common Share (0.21) (0.12) (0.24) (0.12) 0.07
</TABLE>
See Notes to Consolidated Financial Statements for information on transactions
and accounting classifications, which have affected the comparability of the
periods presented above. The Company has not declared cash dividends on its
common stock for any of the periods presented above.
(1) Includes the retroactive implementation of SFAS No. 128 ("Earnings per
Share"), which had no impact for all periods presented.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
1998 Compared to 1997
Total revenue for the year ended September 30, 1998 was $11,207,858 compared to
$16,984,123 for the year ended September 30, 1997 a decrease of 34.0%. The
decrease is primarily attributable to the loss of the OHSS sales for the Jeep
Cherokee contract which ended on June 30, 1997 partially offset by an increase
in OHSS sales for the Grand Cherokee vehicle, which commenced production during
the first quarter of fiscal 1998. There was a nominal decrease in service
revenue from 1997 to 1998 due to a decrease in the outright sales of OSA units
offset by a larger number of ongoing leases.
As of January 1, 1999, TSI had approximately 21 OSA I units and 14 OSA II units
generating various levels of revenue through lease and revenue generating tests
in a variety of industries including automobile dealerships, truck lube centers,
truck stops and motorcycle development laboratories. <PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1998 Compared to 1997 (Continued)
The overall gross profit margin was 28.4% for the year ended September 30, 1998
compared to 33.4% for the year ended September 30,1997. The decrease in the
gross margin is attributable to the write-off of OSA-I inventory during fiscal
1998 due to the completion and market introduction of the OSA-II and a decreased
margin in the service revenue segment due to the outright sale of OSA units in
1997, that had a higher gross profit margin in fiscal 1997 compared to a larger
number of ongoing leases in fiscal 1998. The gross profit margin for automotive
products of 31.4% was comparable to a gross profit margin of 32.4% for the year
ended September 30, 1997.
The Company's strategy is to divest substantially all of TSA assets and focus
its resources on the commercialization OSA-IIs to seven specific markets. The
Company believes that this can be best accomplished with potential strategic
partners who are interested in licensing the OSA technology for specific
industry applications both domestically and internationally.
The Company believes that their marketing efforts will be successful. However,
if the Company is unable to meet goals or to have the necessary resources to
sustain their marketing activities it could have a material adverse effect on
the financial condition of the Company. The Company will continue to evaluate
the success of the new marketing efforts.
General and administrative expenses decreased $1,157,610 for the year ended
September 30, 1998 compared to the year ended September 30, 1997. The decrease
is primarily attributable to the Company's restructuring which took place in the
fourth quarter of fiscal 1997 and continued efforts to contain costs.
Selling and marketing decreased $127,210 for the year ended September 30, 1998
compared to September 30, 1997. This decrease is primarily attributable to the
closing of the TSI Farmington Hills, Michigan location related to the OSA group.
Write down of fixed assets is comprised of $880,911 related to the original OSA
I machines which were deemed to be impaired and were written off. (See Item 8.
Financial Statements and Supplementary Data, Note 2. Oil Analysis Service
Segment.)
Severance expense of $1,085,587 is attributable to the resignation of the
Company's former Chairman and CEO. (See Item 8. Financial Statements and
Supplementary Data, Note 13. Related Party Transactions)
Depreciation and amortization decreased $188,651 for the year ended September
30, 1998 compared to September 30, 1997. This decrease is due to a decreased
asset base as a result of sales and write down of the original OSA-I machines
and a 56% decrease in purchases of fixed assets for the year ended September 30,
1998 compared to September 30, 1997.
Research and development increased $264,492 for the year ended September 30,
1998 compared to the year ended September 30, 1997. This increase is due to the
development of the new OSA II units which were designed by the Company.
Interest income decreased $44,670 for the year ended September 30, 1998 compared
September 30, 1997. This decrease is due to a decline in cash balances due to
operating losses.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
1998 Compared to 1997 (Continued)
Interest expense increased $222,633 for the year ended September 30,1998
compared to September 30, 1997. This increase is due to the borrowings and loan
fees on its credit facility, which was only in place for three months in fiscal
1997. The Company did not borrow any funds during fiscal 1997 on their prior
First Union credit facility.
The gain on the sale of the minority interest in TSA represents the gain on the
sale of 14.5% equity interest in TSA. (See Item 8. Financial Statements and
Supplementary Data, Note 3. Sale of Top Source Automotive, Inc.)
Other income (expense) decreased $49,775 for the year ended September 30, 1998
compared to September 30, 1997 due to the decrease of $43,833 in royalty income
on the EFECS ignition technology, which was sold to Adrenaline, Inc. in May
1995.
Net Loss Analysis
In order to avoid current, material, ongoing operating losses, and an increase
in this operating loss after the projected sale of the TSA assets (see Item 1.
Business), the Company must generate new, material ongoing OSA or other revenues
in future months. The Company believes that the recent OSA activity described in
this MD&A section, and the completion of development of the new OSA-II, will
improve OSA visibility in the marketplace that which will lead to significant
increase in future OSA revenues. However, there can be no assurances.
1997 Compared to 1996
On October 30, 1996, the Company sold certain assets and liabilities of the
Company's oil analysis subsidiary, UTG. (See Item 8. Financial Statements and
Supplementary Data, Note 18. Discontinued Operations. Therefore, the operations
of UTG for 1996 are excluded from the analysis below.
Total revenue for the year ended September 30, 1997 was $16,984,123 compared to
$16,146,524 for the year ended September 30, 1996, an increase of 5.2%. This
nominal increase is attributable to an increase in revenues at TSA to
$16,580,270 in fiscal 1997 compared to $16,102,523 in fiscal 1996; and an
increase in revenues at TSI to $403,853 in fiscal 1997 compared to $44,001 for
fiscal 1996. The increase in revenue at TSA is attributable to increased
production line sales of OHSS. The increase in service revenue at TSI is
attributable to the outright sale of two OSA units for $294,700; and due to an
increase in operating lease revenue from the lease of OSA units.
The gross profit margin of 33.4% for the year ended September 30, 1997 was
comparable to a gross profit margin of 33.3% for the year ended September 30,
1996. This slight increase is attributable to a decrease in product sale margins
of OHSS at TSA from 33.2% in 1996 compared to 32.4% in 1997, partially offset by
service revenue margins of 73.5% on revenues of $403,853 in 1997 compared to
nominal sales in 1996.
General and administrative expenses decreased $756,940 for the year ended
September 30, 1997 compared to the year ended September 30, 1996. This decrease
is attributable to personnel reductions at the Corporate office during the year
and due to the Company-wide restructuring which occurred during the fourth
quarter of fiscal 1997. Also included in general and administrative expenses are
restructuring expenses of $415,830
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
1997 Compared to 1996 (Continued)
and $725,000 for the periods ended September 30, 1997 and 1996 related to the
Company-wide restructuring, which took place in fiscal 1997 and 1996. (See Item
8 - Financial Statements and Supplementary Data, Note 17. Restructuring.)
Selling and marketing increased 40.1% for the year ended September 30, 1997
compared to the year ended September 30, 1996. The increase was primarily
attributable to the continued marketing and promotional activities in support of
the OSA.
Depreciation and amortization increased 19.3% for the year ended September 30,
1997 compared to the year ended September 30, 1996. The increase is primarily
attributable to purchases of $1,442,265 in capital assets, which primarily
related to $1,055,572 in capital expenditures for the OSA. Depreciation and
amortization of $319,324 was allocated to cost of sales as it directly related
to the products and services sold during the year ended September 30, 1997
compared to $307,373 for the year ended September 30, 1996.
Interest expense increased 59.6% to $441,509 for the year ended September 30,
1997 compared to $276,566 for the year ended September 30, 1996. This increase
is attributable to new borrowings in the fourth quarter under the Company's new
credit lines (See Item 8 Financial Statements and Supplementary Data Note 9.
Debt, and "Liquidity and Capital Resources"). The increase in interest expense
was partially offset by an increase of interest income in the fourth fiscal
quarter of 1997 compared to previous quarters in 1997, due to required minimum
borrowing under the terms of the Company's new credit lines.
Other income for the year ended September 30, 1997 was $98,573 compared to other
expense of $68,099 for the year ended September 30, 1996. The increase is
primarily attributable to the inclusion in 1997 of one full year of EFECS
royalty income compared to a partial year of EFECS income in the prior year.
The pre-tax loss from operations for the period ended September 30, 1997 before
the restructuring charge was $2,182,630 compared to a pre-tax loss of $2,331,219
before the restructuring charge and loss from discontinued operations for the
period ended September 30, 1996. The losses in both periods are primarily
attributable to losses at the TSI subsidiary to develop the OSA product and
corporate expenses offset by profits generated by TSA.
Liquidity and Capital Resources
Net cash flows used in operations during the current fiscal year totaled
($2,804,509). The usage of cash is primarily attributable to a net operating
loss excluding depreciation and amortization, of ($4,291,962), which is offset
by a decrease in accounts receivable of $598,986. The decrease in accounts
receivable is primarily attributable to the loss of the patented OHSS contract
for the Jeep Cherokee, which ended June 30, 1997. Inventory increased $1,021,951
and was partially offset by the write off of $413,134 OSA-I inventory. Other
assets decreased $755,484 primarily due to the refund of a deposit relating to
the OSA-I machines.
Net cash provided by investing activities was $597,500, which was attributed to
the proceeds from the sale of the minority interest in TSA. This use of cash was
attributable to $637,602 expended for capital assets and $52,996 for patent
costs.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources (Continued)
Net cash provided by financing activities was $592,229 which included the
exercise of stock options and warrants (exercise prices ranged from $.53 -
$1.50) that generated approximately $388,341 in net proceeds and $881,394 in net
proceeds from the issuance of Preferred Stock. Also, the Company repaid $677,506
from Credit Facility with NationsCredit Commercial Corporation. (See Item 8
Financial Statements and Supplementary Data, Note 9. Debt).
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 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 overall sub-limit of borrowing against
inventory is $1,500,000. The interest rate on this Credit Facility is 1-1/2%
over the prime rate and is payable monthly with a required minimum borrowing
level of $2,500,000 for the fee calculation purposes. The Company's effective
interest rate at September 30, 1998 factoring the interest earned on used drawn
funds was 12.1%. As of September 30, 1998 and December 31, 1998, the unused
available borrowings on this Credit Facility were $200,000 and $85,000,
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 Agreement was not been 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 3. 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 Top Source
Automotive common stock and assets.
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 (The "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 $3,020,000 notes,
which included a waiver of the debt to equity ratio for fiscal 1999 (see Item 8.
Financial Statements and Supplementary Data, Note 20. Events Subsequent to the
Date of the Auditor's Report).
In December 1998, a number of events occurred, which resulted in an improvement
to the Company's liquidity and financial condition. The most significant act
resulted from the sale of Series B Preferred Stock ("Series B") to two trusts of
which Mr. Mennen is a co-trustee and sole trustee, respectively. The proceeds
were used in part to prepay and restructure $2,313,000 of the Mellon Notes and
redeem one-half of the Company's outstanding Series A Preferred Stock for
details concerning these events (see Item 8. Financial Statements and
Supplementary Data, Note 20. Events Subsequent to the Date of the Auditor's
Report).
As of January 8, 1999, the Company had approximately $2,000,000 of cash on hand.
Based on this cash balance, the Credit Line and its ability to further reduce
expenses, if required, the Company believes it has sufficient cash flow and
liquidity to fund its current operations and anticipated increasing OSA
commercialization. <PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Forward-Looking Statements
The forward looking statements discussed in the Report under the Business
Section, (Item 1.) and above in Liquidity and Capital Resources include those
relating to the Company's expectations that it anticipates (1) generating
revenue from OSA-II units at current test sites, (2) entering into strategic
relationships, (3) renewal of the MCEC refinery OSA study and from other sources
and completion of a development prototype, (4) the increase in the usage of oil
analysis as a preventative maintenance in new and existing markets, (5) receipt
of additional purchase orders from Flying J and Speedco, and further
commercialization of OSA-II usage resulting in additional revenue, (6) receipt
of a purchase order and material revenue from a Detroit OEM for dealer
installation of OHSS units, (7) closing of the TSA Asset sale, (8) achieving the
Earn-Out and additional OHSS revenues, (9) adequacy of the Company's working
capital and liquidity and (10) reducing net operating losses 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) unanticipated internal problems at the
University of Tennessee's MCEC, (7) the ability of the Buyer to close its
Financing, (8) decline in production levels at Chrysler for vehicles installing
OHSS, and (9) the Company's ability to attract strategic partners for OSA-II,
and (10) the ability to attract strategic partners for TSA, if the Company is
unable to sell it.
Inflation
The impact of inflation has become less significant with dormant inflation rates
in recent years. The Company believes inflation has not had a material effect on
the Company's operations.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB")" issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which is required to be
adopted in fiscal years beginning after December 15, 1997. This statement
establishes standards for the way public business enterprises report information
about products, services, geographic areas and major customers. The Company will
adopt SFAS No. 131 or for fiscal year ended September 30, 1999. The adoption of
SFAS No. 131 will not have a material impact on its financial position or
results of operations.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Year 2000 (Continued)
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, as discussed above in Item 1 - "Business" 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.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Year 2000 (Continued)
be Y2K compliant. However, due to the complexity of the Company's technologies
and the reliance upon third parties to produce certain components that are not
under the Company's control, there can be no assurances that the Company has
identified all of the Y2K issues that could arise. Based on existing
information, the Company believes that anticipated spending necessary to become
Year 2000 compliant will not have a material effect on the financial position,
cash flows or results of operations of the Company, nor will the Year 2000
issues cause any material adverse effect on the future business operations of
the Company. However, due to the uncertainties involved, there can be no
assurances that the Company will not incur material costs or delays, which could
have a significant adverse impact on the Company's business operations and
financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
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INDEX PAGE
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- ----------------------------------------------------------------------------------------------------------------- ----------
<S>
- ----------------------------------------------------------------------------------------------------------------- ----------
- ----------------------------------------------------------------------------------------------------------------- ----------
Report of Independent Certified Public Accountants 17
- ----------------------------------------------------------------------------------------------------------------- ----------
- ----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Balance Sheets as of September 30, 1998 and 1997 18
- ----------------------------------------------------------------------------------------------------------------- ----------
- ----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996 19
- ----------------------------------------------------------------------------------------------------------------- ----------
- ----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996 20
- ----------------------------------------------------------------------------------------------------------------- ----------
- ----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996 21
- ----------------------------------------------------------------------------------------------------------------- ----------
- ----------------------------------------------------------------------------------------------------------------- ----------
Notes to Consolidated Financial Statements 22
- ----------------------------------------------------------------------------------------------------------------- ----------
</TABLE>
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Top Source Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Top Source
Technologies, Inc., (a Delaware corporation) and subsidiaries as of September
30, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Top Source Technologies, Inc.
and subsidiaries as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
December 15, 1998, (except with respect to the matter discussed in Note 20, as
to which the date is January 7, 1999).
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1998 1997
------------------ -----------------
Current Assets:
Cash and cash equivalents $ 488,899 $ 2,103,679
Accounts receivable trade 1,656,317 2,255,303
Inventories 1,489,840 881,023
Advances to officers - 57,919
Prepaid expenses 194,482 219,446
Other 152,349 155,448
------------------ -----------------
Total current assets 3,981,887 5,672,818
Property and equipment, net 786,438 2,147,403
Manufacturing and distribution rights and patents, net 271,502 284,562
Capitalized database, net 2,073,194 2,284,027
Note receivable from officer 26,260 76,002
Other assets, net 133,814 890,218
================== =================
TOTAL ASSETS $ 7,273,095 $ 11,355,030
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,318,835 $ 1,996,341
Accounts payable 842,903 672,836
Accrued liabilities 840,705 1,181,400
------------------ -----------------
Total current liabilities 3,002,443 3,850,577
Senior subordinated convertible notes 3,020,000 3,020,000
Other liabilities 429,524 -
------------------ -----------------
Total liabilities 6,451,967 6,870,577
Minority interest 364,157 -
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 1,000 outstanding 943,807 -
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,053,803 and 28,461,477 shares issued and
outstanding in 1998 and 1997, respectively 29,054 28,461
Additional paid-in capital 29,624,951 28,744,451
Accumulated deficit (28,791,487) (22,939,105)
Treasury stock-at cost; 466,234 shares in 1998
and 1997, respectively (1,349,354) (1,349,354)
------------------ -----------------
Total stockholders' equity 456,971 4,484,453
------------------ -----------------
================== =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,273,095 $ 11,355,030
================== =================
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
19
</TABLE>
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
-----------------------------------------------------
Product sales $10,815,205 $16,580,270 $16,102,523
Service revenue 392,653 403,853 44,001
-----------------------------------------------------
Net sales 11,207,858 16,984,123 16,146,524
-----------------------------------------------------
-----------------------------------------------------
Cost of product sales 7,417,402 11,197,664 10,749,431
-----------------------------------------------------
Cost of services 195,954 107,044 26,772
Write down of inventory - services 413,134 - -
-----------------------------------------------------
Cost of services - total 609,088 107,044 26,772
-----------------------------------------------------
Cost of sales 8,026,490 11,304,708 10,776,203
-----------------------------------------------------
Gross profit 3,181,368 5,679,415 5,370,321
-----------------------------------------------------
Expenses:
General and administrative 4,562,183 5,719,793 6,476,733
Selling and marketing 1,258,681 1,385,891 989,450
Write down of fixed assets 880,911 - -
Severance expense to former CEO 1,085,587 - -
Depreciation and amortization 922,820 1,111,471 931,563
Research and development 325,212 60,720 28,794
-----------------------------------------------------
Total expenses 9,035,394 8,277,875 8,426,540
-----------------------------------------------------
Loss from operations (5,854,026) (2,598,460) (3,056,219)
Other income (expense):
Interest income 74,669 119,339 112,398
Interest expense (664,142) (441,509) (276,566)
Gain on sale of minority interest in subsidiary 962,760 - -
Minority interest (38,820) - -
Other income (expense), net 48,798 98,573 (68,099)
-----------------------------------------------------
Net other income (expense) 383,265 (223,597) (232,267)
-----------------------------------------------------
Loss before income taxes (5,470,761) (2,822,057) (3,288,486)
Income tax expense (58,801) (482,000) (1,543,300)
-----------------------------------------------------
Loss from continuing operations (5,529,562) (3,304,057) (4,831,786)
Discontinued operations:
Income (loss) from discontinued operations - 68,741 (62,210)
Loss on disposal of discontinued operations - - (1,804,791)
-----------------------------------------------------
Net loss (5,529,562) (3,235,316) (6,698,787)
Embedded dividend on preferred stock (193,807) - -
Preferred dividends (20,034) - -
Value of warrants issued with preferred stock (108,979) - -
=====================================================
Net loss available to common stockholders ($5,852,382) ($3,235,316) ($6,698,787)
=====================================================
Basic and diluted net income (loss) per weighted average common share
outstanding:
Continuing operations (0.21) (0.12) (0.17)
Discontinued operations:
Income (loss) from operations 0.00 0.00 0.00
Loss on disposal 0.00 0.00 (0.07)
=====================================================
Total (0.21) (0.12) (0.24)
=====================================================
Basic and diluted weighted average common shares outstanding 28,242,005 28,065,563 28,027,959
=====================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
ADDITIONAL TOTAL
COMMON STOCK PREFERRED PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
---------------------------
SHARES AMOUNT STOCK CAPITAL DEFICIT STOCK EQUITY
--------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 27,731,477 $ 27,731 $ - $27,514,154 $(13,005,002) $(131,785) $14,405,098
Exercise of stock options
($.53 to $6.50 per share) 675,000 675 - 1,169,739 - - 1,170,414
Exercise of warrants ($1.00
per share) 40,000 40 - 39,960 - - 40,000
Net loss - - - - (6,698,787) - (6,698,787)
------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 28,446,477 28,446 - 28,723,853 (19,703,789) (131,785) 8,916,725
Exercise of stock options
($.5625 to $1.78 per share) 15,000 15 - 20,598 - - 20,613
Treasury stock purchases - - - - - (1,217,569) (1,217,569)
Net loss - - - - (3,235,316) - (3,235,316)
------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 28,461,477 28,461 - 28,744,451 (22,939,105) (1,349,354) 4,484,453
Exercise of stock options
($.53 to $1.50 per share) 549,700 550 - 387,791 - - 388,341
Issuance of convertible
preferred stock - Series A - - 1,000,000 - - - 1,000,000
Preferred stock issuance costs
and fees - - - (118,606) - - (118,606)
Issuance of common stock for
payment of dividend
on preferred stock 42,626 43 - 19,991 (20,034) - -
Intrinsic value of preferred
stock conversion feature - - (250,000) 250,000 - - -
Preferred stock embedded dividend - - 193,807 - (193,807) - -
Value of warrants issued with
preferred stock - - - 108,979 (108,979) - -
Options and warrants issued for
services - - - 232,345 - - 232,345
Net loss - - - - (5,529,562) - (5,529,562)
==========================================================================================
BALANCE, SEPTEMBER 30, 1998 29,053,803 $ 29,054 $ 943,807 $29,624,951 $(28,791,487) $(1,349,354) $ 456,971
==========================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
21
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (5,529,562) $ (3,235,316) $(6,698,787)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of minority interest in subsidiary (962,760) - -
Loss (income) from discontinued operations - (68,741) 1,867,001
Depreciation 956,693 1,152,627 963,302
Amortization 280,907 278,168 275,634
Write down of fixed assets and inventory 1,294,045 - -
Loss on disposal of equipment 160,963 284,212 151,411
Non cash value of services 232,345 - -
Minority interest 38,820 - -
Deferred income taxes - - (970,000)
Decrease in deferred income tax assets, net - 355,000 2,335,000
Repayments (advances) in notes from officers 107,661 (133,921) -
Decrease (increase) in accounts receivable, net 598,986 1,845,369 (610,881)
Increase in inventories (1,021,951) (369,065) (43,789)
Decrease (increase) in prepaid expenses 24,964 106,500 (25,397)
Decrease (increase) in other assets 755,484 (153,798) (8,561)
Increase (decrease) in accounts payable 170,067 (1,163,559) 556,634
Increase (decrease) in accrued liabilities 88,829 (691,566) 749,456
-----------------------------------------------------
Net cash used in operating activities (2,804,509) (1,794,090) (1,458,977)
-----------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (637,602) (1,442,265) (1,857,004)
Proceeds from sale of minority interest in subsidiary 1,450,000 - -
Costs incurred in sale of minority interest in subsidiay (161,903) - -
Reimbursement of tooling costs - 361,056 456,222
Additions to patent costs, net (52,995) (14,115) (42,510)
Discontinued operations - change in net assets - 3,540,579 221,847
-----------------------------------------------------
Net cash provided by (used in) investing activities 597,500 2,445,255 (1,212,445)
-----------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants 388,341 20,613 1,210,414
Preferred stock issuance, net 881,394 - -
Repurchases of treasury stock - (1,217,569) -
Proceeds from borrowings - 1,996,341 960,000
Repayments of borrowings (677,506) - -
----------------------------------------------------
Net cash provided by financing activities 592,229 799,385 2,170,414
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,614,780) 1,450,550 (501,008)
Cash and cash equivalents at beginning of period 2,103,679 653,129 1,154,137
====================================================
Cash and cash equivalents at end of period $488,899 $2,103,679 $653,129
====================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Top Source Technologies, Inc. (the "Company") is focused on
developing and commercializing state-of-the-art technologies for use in the
transportation, industrial and numerous other markets. The Company has three
wholly-owned subsidiaries: Top Source Automotive, Inc. ("TSA"), Top Source
Instruments, Inc. ("TSI"), and ARCS Safety Seat, Inc. ("ARCS, Inc."). Top Source
Oil Analysis, Inc. ("TSOI"), formerly named United Testing Group, Inc., ("UTG")
was discontinued effective September 30, 1996 and is currently inactive.
The Company concentrates on two industry segments: automotive technology and oil
analysis service. Within these two segments, the Company has three proprietary
technologies: an Overhead Speaker System ("OHSS"); safety restraint technology
("ARCS"); and the On-Site Analyzer ("OSA") which is now in its second
generation, ("OSA-II"). The OSA-II is a proprietary oil analysis instrument that
combines two spectrometers in order to analyze both new or used oil in
approximately five minutes at the end-user's site. The original on-site analyzer
("OSA-I") will be gradually replaced by the OSA-II during fiscal 1999. (See Note
2. Oil Analysis Service Segment)
Revenue is currently derived primarily from sales of the OHSS for both
production line and dealership installed units and from TSI sales and leases of
the OSA. (See Note 3. Sale of Top Source Automotive, Inc.)
Basis of Presentation - Certain 1997 and 1996 amounts have been reclassified to
conform to the current year presentation.
Cash Equivalents - The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition - The Company recognizes revenue from sales of its products
(Automotive Technology segment) and sales and leases of OSA units at the time
the products are shipped. Revenue from leased OSA units are recognized ratably
over the lease term.
Inventories - Inventories are stated at the lower of cost or market and are
valued by the first-in, first-out (FIFO) method.
Fair value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and debt
approximates fair value.
Property and Equipment - Property and equipment are stated at cost. Repairs and
maintenance costs are charged to expense as incurred. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, or the lease term if shorter in the case of
leasehold improvements, ranging from two to seven years. When property or
equipment is retired or otherwise disposed of, the cost less related accumulated
depreciation is removed from the accounts and the resulting gains or losses are
included in other expense in the accompanying statements of operations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Manufacturing and Distribution Rights and Patents - These assets are valued at
the lower of cost or net realizable value and are being amortized using the
straight-line method over the terms of the agreements or life of the patents,
ranging from 10 to 13 years.
Capitalized Database - The capitalized database relates to a portion of the cost
in excess of the fair value related to the UTG acquisition, which was retained
by TSI to support their OSA technology. The capitalized database is being
amortized over 15 years using the straight-line method (see Note 8.). Subsequent
to its acquisition, the Company continually evaluates factors, events and
circumstances which include, but are not limited to, the historical and
projected operating performance, specific industry trends and general economic
conditions to assess whether the remaining estimated useful life of the
capitalized database may warrant revision or that the remaining balance of the
capitalized database may not be recoverable. When such factors, events or
circumstances indicate that the capitalized database should be evaluated for
possible impairment, the Company uses an estimate of undiscounted cash flow
generated from the TSI subsidiary over the remaining lives of the capitalized
database in measuring its recoverability. See Note 8 for further discussion of
recoverability of the capitalized database.
Research and Development - The costs associated with research and development of
products and technologies are expensed as incurred.
Use of Estimates - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of assets and liabilities at the date of the
consolidating financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Comprehensive Income - For the years ended September 30, 1998, 1997 and 1996,
there were no differences between net income and comprehensive income.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which is required to be adopted in
fiscal years beginning after December 15, 1997. This statement establishes
standards for the way public business enterprises report information about
products, services, geographic areas and major customers. The Company will adopt
SFAS No. 131 for fiscal year ending September 30, 1999. The adoption of SFAS No.
131 will not have a material impact on its financial position or results of
operations.
Quarterly Information - The Company recorded an additional valuation allowance
to reduce the deferred tax assets in the amounts of $355,000 and $1,365,000
during the fourth quarters of the fiscal years ended September 30, 1997 and
1996, respectively. (See Note 12. Income Taxes)
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") encourages, but does
not require companies to record compensation plans using a fair value based
method. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value based method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the corporation's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
2. OIL ANALYSIS SERVICE SEGMENT
During 1998, revenues of the oil analysis service segment were approximately
$393,000 (See Note 16. for further information on the oil analysis service
segment). As of September 30, 1998, identifiable assets relating to this segment
were approximately as follows:
Capitalized database, net $2,073,000
Inventories 1,141,000
Property and equipment, net 500,000
Accounts receivable 57,000
Other assets 173,000
-------
$3,944,000
==========
During fiscal 1998 and as a result of the introduction of the OSA-IIs, the
original OSA-I units and related inventory were deemed to be impaired and
written off, although the OSA-Is will continue to generate minimal revenue in
fiscal 1999. An impairment loss, in the amounts of $880,911 and $413,134, has
been charged to operations and is included in "Write down of fixed assets" and
"Cost of services", respectively, in the accompanying Consolidated Statements of
Operations for the Year Ended September 30, 1998.
In fiscal 1997, the Company completed the restructuring of top management in the
corporate and oil analysis service segments (see Note 17.). New management has
devised a strategy to concentrate marketing activities to sell or lease OSA-IIs
to approximately seven specific markets. Additionally, the Company has continued
to have discussions with potential strategic partners who are interested in
licensing the OSA-II technology for specific industry applications, both
domestically and internationally.
The Company believes that its marketing efforts relating to the OSA-II will be
successful. However, if the Company is unable to meet goals or to have the
necessary resources to sustain its marketing activities it could have a material
adverse effect on the Company's financial condition and the carrying value of
the above listed assets. The Company will continue to evaluate the success of
the new marketing efforts as well as the carrying value of the related assets.
3. SALE OF TOP SOURCE AUTOMOTIVE, INC.
On August 14, 1998, the Company executed a Definitive Asset Purchase Agreement
("Agreement") with NCT Audio Products Inc., (the "Buyer" or "NCT"), a subsidiary
of the NCT Group, Inc. of Stamford, Connecticut (NASDAQ: "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 a non-refundable deposit 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 shareholder approval ("Step II") and the balance of $6,500,000 due
at the Closing, which must occur by March 31, 1999 ("Step III"). Upon completion
of Step III, the TSA sale will be accounted for as a discontinued operation.
Additionally, under the terms of the Agreement, TSA could receive up to an
aggregate of an additional $6,000,000 payable to the Company in cash expressly
contingent upon the future earnings of the Buyer's subsidiary as defined under
the Agreement, for the two-year period following the Closing.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SALE OF TOP SOURCE AUTOMOTIVE, INC. (Continued)
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. If Step III of the
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 will receive an additional 15% of TSA Common Stock. If the
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. (See Note 20. for Events Subsequent
To The Date Of The Auditor's Report.)
If the Buyer fails to complete Step III of the transaction, the Company will not
receive the final payment of $6,500,000. This may have an adverse effect on the
Company's ability to finance the OSA-IIs discussed above, as well as have an
adverse effect on the short-term financial condition of the Company.
In order to consummate the proposed transaction, the Company must pay in full
its Credit Facility as defined, with NationsCredit Commercial Corporation
("Nations"). As of December 1, 1998, approximately $1,000,000 was owed to
Nations. Upon payment of its Credit Facility, Nations will release the lien,
which it holds on all of the assets of the Company, and thus effectively cancel
the Credit Facility. (See Note 3.)
4. STATEMENTS OF CASH FLOWS
There were no significant non-cash investing or financing activities for the
years ended September 30, 1998, 1997 and 1996.
5. INVENTORIES
Inventories consisted of the following at September 30, 1998 and 1997:
1998 1997
Raw materials $1,388,058 $820,821
Finished goods 101,782 60,202
------- ------
$1,489,840 $881,023
========== ========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1998 and
1997:
<TABLE>
<S> <C> <C> <C>
Useful 1998 1997
Life (Years)
Equipment 2-7 $ 305,814 $ 296,028
Computer equipment 3-4 1,318,684 1,141,000
On-Site Analyzers 4-5 316,214 2,184,464
Tooling 2 288,307 305,273
Furniture and fixtures 3-5 315,199 309,694
Vehicles and delivery equipment 3 47,124 131,124
Leasehold improvements 2-5 172,411 155,924
- - ------- -------
2,763,753 4,523,507
Less: accumulated depreciation (1,977,315) (2,376,104)
---------- ----------
$ 786,438 $2,147,403
========== ==========
</TABLE>
Depreciation of tooling and production equipment incurred in manufacturing OHSS
in the amount of $314,780 and $319,324 for the years ended September 30, 1998
and 1997, respectively, has been allocated to cost of sales as it directly
relates to the products sold. During fiscal 1998 and as a result of the
introduction of the OSA-IIs, the OSA-Is property and equipment were written
down. (See Note 2. Oil Analysis Service Segment).
<PAGE>
7. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS
Manufacturing and distribution rights and patents consisted of the following
at September 30, 1998 and 1997:
<TABLE>
<S> <C> <C> <C>
Useful
Life (Years) 1998 1997
Manufacturing rights 13 $ 58,438 $58,438
Distribution rights 13 437,501 437,501
Patents 10 311,205 258,209
-- ------- -------
807,144 754,148
Less: accumulated amortization (535,642) (469,586)
-------- --------
$271,502 $284,562
======== ========
</TABLE>
OHSS (Overhead Speaker System)
The Company has the exclusive right to produce and sell Pelo Sound products in
North, Central and South America and a non- exclusive right to produce and sell
the products in all other areas of the world, excluding Europe. The value of
these rights is being amortized over thirteen years, and have a remaining net
book value of $13,211 at September 30, 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
7. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS
The Company has distribution rights acquired from B&R International Imports
Corp. related to its OHSS. The net book value of these rights, which are being
amortized over thirteen years, is $51,864 at September 30, 1998. The Company
also has patents on the OHSS relating to improvements and perfections on the
Overhead Speaker System. The value of these patents is being amortized over ten
years and have a remaining net book value of $82,801 at September 30, 1998.
OSA (On-Site Analyzer)
TSI has been granted five patents on unique technology critical to the
operations of its On-Site Analyzer. The value of these patents is being
amortized over ten years and have a remaining net book value of $64,917 at
September 30, 1998.
ARCS (Acceleration Restraint Curve Safety Seat)
Over the past eight years the Company worked on developing a proprietary
technology involving controlled seat motion that occurs at the instant of a
frontal crash to help restrain vehicle occupants and assist automakers in
meeting Federal passive restraint laws. The Company is unaware of any other
moving seat technology that has been successfully tested by a major automobile
manufacturer. In December 1996, the U.S. patent Office granted patent protection
for ARCS technology. The value of the patents related to the ARCS Seat Safety
Device is being amortized over ten years and have a remaining net book value of
$58,709 at September 30, 1998.
8. CAPITALIZED DATABASE
Capitalized database consisted of the following at September 30, 1998 and 1997:
Useful
Life (Years) 1998 1997
Capitalized database 15 $3,162,500 $3,162,500
Less: accumulated amortization (1,089,306) (878,473)
---------- --------
$2,073,194 $2,284,027
========== ==========
The capitalized database contains an active library of engine and machine tests
that have a diagnosed history. The value of the capitalized database was
determined based on an assessment of the number of samples included in the
database and a per unit cost to develop/buy the data. The 15-year amortization
period is supported by an independent study of the expected life in use of each
engine type in the database. The database will remain for use by TSI and will be
an integral part of TSI by developing specialized markets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
9. DEBT
Notes payable at September 30, 1998 and 1997 are as follows:
1998 1997
Senior Subordinated convertible
notes, due June 2000,
bearing interest at 9% $3,020,000 $3,020,000
========== ==========
On June 9, 1995, the Company entered into an agreement with advisory clients of
Ganz Capital Management, Inc., now Mellon Private Asset Management ("Mellon"),
whereby the holders would purchase $3,020,000 nine percent (9%) Senior
Subordinated convertible notes (the "Notes") from the Company maturing in June
2000. After June 9, 1996, the Notes could be prepaid by the Company without
penalty and could be converted by the holders into fully registered shares of
the Company's common stock at a conversion price of $10.00 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 $3,020,000 Notes, which included a waiver of the debt to equity ratio for
fiscal 1999 (See Note 20. Events Subsequent to the Date of The Auditor's
Report).
On July 1, 1997, the Company entered into a three-year $5,000,000 asset-based
financing agreement ("Credit Facility") with Nations Credit Commercial
Corporation ("Nations"). This Credit Facility replaced the facility with First
Union, which was canceled by the Company as a condition of the new Credit
Facility. The Credit Facility, which is secured by substantially all of the
assets of the Company enables it to borrow up to $5,000,000 based upon certain
percentages of accounts receivable and inventory balances. The Credit Facility
allows for borrowing of up to 85% of accounts receivable and 50% of inventory
for TSA. The overall sublimit of borrowing against inventory is $1,500,000. The
interest rate on this Credit Facility is 1-1/2% over the prime rate and is
payable monthly with a required minimum borrowing level of $2,500,000 for fee
calculation purposes. The Company's effective interest rate at September 30,
1998 factoring the interest earned on unused drawn funds was 12.1%. The initial
maturity date is June 2000, but this date may be automatically extended for
successive additional terms of three years each unless either party chooses to
terminate. The outstanding balance on this Credit Facility was $1,318,835 at
September 30, 1998. The unused available borrowings on this Credit Facility were
$200,000 at the same date.
As part of the Credit Facility, Nations was granted outside of the stock option
plans options to purchase 25,000 shares of the Company's common stock at a price
of $1.50, which was equal to 105% of the fair market value of the Company's
common stock at the date of the closing of the Credit Facility. The options vest
100% on July 1, 2000 and may be converted to stock appreciation rights after the
third year upon the occurrence of an adverse event as defined in the Agreement.
(See Note 14. Stock and Stock Option Plans.)
The Credit Facility calls for certain financial covenants that if not met would
cause a default under the Agreement. As of September 30, 1998, the Company
failed to meet the annual financial covenant relating to the amount of pre-tax
operating loss for fiscal 1998, which states the Company's operating loss cannot
exceed $2,000,000 in a fiscal year. Nations agreed to waive this covenant
through the end of fiscal 1999, in return for the Company agreeing to pay a fee
of $25,000 and agreeing to collaterally assign a $250,000 certificate of deposit
to Nations. The Company must repay the Credit Facility in full upon completion
of Step III of the sale TSA (See Note 3. 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.
Cash paid for interest on all debt for the years ended September 30, 1998, 1997
and 1996 was $664,142, $441,509, and $276,566, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space under non-cancelable operating leases. Future
minimum rental commitments under these leases are as follows:
Fiscal Year Ending September 30:
1999 385,222
2000 343,224
2001 202,149
2002 42,209
Total rental expense for continuing operations amounted to $371,869,
$492,011, and $479,135 for the years ended September 30, 1998, 1997, and 1996,
respectively.
The Company has commitments under certain employment agreements entered into
with individuals in management positions. The base salary payments due under
these agreements aggregate $450,000 and are payable during fiscal 1999.
The Company established a Retirement Salary Savings Plan (401(k)) (the "Plan")
effective October 1, 1993. All employees employed on October 1, 1993 were
eligible to join the Plan. Otherwise, they will be eligible to participate in
the Plan if they have completed three months of service and have attained the
age of 21. The enrollment dates are the first day of each quarter. The Company
will match 25% of each dollar contributed by an employee to the Plan on the
first 6% of the salary deferral, not to exceed 1 1/2% of the employee's total
salary eligible under the Plan. The cost the Company incurred for matching
employee contributions and administrative costs during fiscal 1998, 1997 and
1996 was $28,442, $41,637, and $55,521, respectively.
The Company has from time to time incurred expenses associated with litigation
defense and payment of settlements or judgments in connection with its
businesses. The Company believes that such litigation and other legal matters
should not have a significant adverse effect on the Company's financial position
or results of operations.
11. LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" during 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 shareholders 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 fiscal l998, 1997, and 1996 as their impact would
have been antidilutive.
For the years ended September 30, 1998, 1997 and 1996, the dilutive effect of
equivalent shares related to stock options was 264,378, 554,802 and 1,465,253,
respectively and was not included in the dilutive average common shares
outstanding, as the effect would have been antidilutive.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
11. LOSS PER SHARE (Continued)
As discussed in Notes 14 and 20, the Company issued 300,000 warrants during
fiscal 1998 and 675,000 warrants subsequent to year end at prices ranging from
$.84 to $2.00. Additionally, subsequent to September 30, 1998 as discussed
further in Note 20, a portion of the Company's Convertible Preferred Stock
Series A was converted into 412,970 of the Company's Common Stock.
12. INCOME TAXES
The income tax expense for the years ended September 30, 1998, 1997 and 1996 of
$58,801, $482,000, and $1,543,300 consists of state income taxes for the years
1998, 1997 and 1996 and the reversal of previously recorded deferred tax assets
in 1997 and 1996.
A valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. The Company has determined, based
on expected future taxable income which can be predicted with reasonable
certainty, that it is more likely than not that the net deferred tax assets at
September 30, 1998 will not be realized before the expiration of the underlying
net operating loss carry forwards which will begin expiring in 2002.
Accordingly, a full valuation allowance has been recorded on the potential tax
benefit generated from the operating loss carryforwards.
At September 30, 1998, the Company has net tax basis Federal operating loss
carryforwards of approximately $37,000,000, which may be used to offset future
taxable income, if any. The Company's net operating loss carryforwards expire
between 2002 and 2018.
Cash paid for state income taxes for the years ended September 30, 1998,
1997 and 1996 was approximately $109,000, $124,000 and $140,000,
respectively.
13. RELATED PARTY TRANSACTIONS
In May 1997, the Company entered into an employment agreement ("Agreement") with
the new President and Chief Executive Officer ("CEO") of the Company. The term
of this Agreement is three years through May 21, 2000 ("Employment Period"). The
Agreement provides for a base salary of $300,000 ("Annual Base Salary"). The CEO
shall also be eligible to receive a cash bonus ("Performance Bonus") as
described below for each successive period of four fiscal quarters (prorated for
any partial period) during the Employment Period, as defined in the Agreement,
in an amount of between zero and 100% of the Annual Base Salary. The Performance
Bonus, if any, for each successive four-quarter period shall be paid within 60
days after the end of such period. The Performance Bonus shall consist of the
following two components: (A) the first component of the Performance Bonus shall
be an amount of between zero and 50% of the Annual Base Salary based on the
Company meeting earnings per share targets of between $.01 and $.05 as defined
in the Agreement. (B) The second component of the Performance Bonus shall be an
amount of between zero and 50% of the Annual Base Salary based on the Company
achieving approximately five performanced based targets for each period of four
fiscal quarters during the Employment Period. As of September 30, 1997, no
bonuses were paid. In June 1997, the Company was authorized by the Board of
Directors to lend the CEO up to $30,000 evidenced by a three-year promissory
note to the Company bearing interest of 9% . At September 30, 1998, the note
receivable from officer balance with interest was $26,260. The accrued interest
was paid in October 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS
The Earnings Per Share targets and five performance-based targets for each
succeeding fourth-quarter period during the Employment Period shall be reset and
established annually by the Compensation Committee at its sole and absolute
discretion. The Compensation Committee shall notify the CEO promptly in writing
upon its determination of such subsequent targets.
In addition to the payments provided above, on May 21, 1997, the Compensation
Committee granted to the CEO, outside of the stock option plan as described in
Note 14. Stock and Stock Option Plans, options to purchase 500,000 shares of the
Company's Common Stock, with the purchase price upon exercise of such options
equal to $2.00 per share (i.e., the closing price of the Common Stock on the
American Stock Exchange on the date of such grant). The options shall vest as
follows: (a) 100,000 options will become exercisable on the first anniversary of
the date of this Agreement; (b) 100,000 options will become exercisable on the
second anniversary of the date of this Agreement; (c) 100,000 options will
become exercisable on the third anniversary of the date of this Agreement; (d)
100,000 options will become exercisable when the closing price for the Company's
common stock on the American Stock Exchange (or such other exchange or trading
system that constitutes the primary trading market for the Company's common
stock) is $7.00 per share or higher for 30 consecutive days; and (e) 100,000
options will become exercisable when the closing price for the Company's common
stock on the American Stock Exchange (or such other exchange or trading system
that constitutes the primary trading market for the Company's common stock) is
$9.00 per share or higher for 30 consecutive trading days; provided, however,
that the vesting of such options shall be accelerated in the event of a change
in control.
By meeting certain performance targets for the period May 1997 through May 1998,
the CEO was entitled to a $127,500 bonus through May 1998. In lieu of the cash
bonus, the Compensation Committee agreed to issue the CEO 100,000 Options
exercisable at $.875 per share, which was the fair market value of the Company's
common stock at that time. Compensation expense of $6,759 for the vested options
as of September 30, 1998 has been recorded in general and administrative
expenses in the accompanying statement of operations utilizing the Black-Scholes
Option Pricing Model in accordance with SFAS No. 123.
In fiscal 1993, Stuart Landow, the former Chairman of the Board of Directors,
President and Chief Executive Officer of the Company entered into an employment
agreement ("Employment Agreement") with provided a base salary of $200,000 per
year. Additionally, the Employment Agreement called for incentive compensation
payments based upon the following: (1) revenue (at the rate of 1% of quarterly
revenue, for quarterly revenue up to $6.25 million and descending downward to
the rate of .75% of quarterly revenue if it was between $6.25 million to $12.5
million and .5% of quarterly revenue, if quarterly revenue was over $12.5
million), and (2) profitability (at the rate of 50% of the incentive amount
based on revenue if net income was 8% of net sales, up to a rate of twice the
incentive amount based on revenue if net income was 20% or greater) of the
Company during the term, payable after the end of each of the Company's fiscal
quarters according to specific formulas contained in the Employment Agreement.
The incentive cash compensation expense for fiscal 1998, 1997 and 1996 was
$92,760, $178,406 and $206,965, respectively.
In the event of termination without cause, or if Mr. Landow resigned for "Good
Reason", as defined in the Employment Agreement, the Company was required to
make 36 consecutive monthly payments equal to his base and incentive
compensation. In addition, Mr. Landow was entitled to continue to receive
medical, life and disability insurance coverage during the 36-month term.
As a result of the hiring of a new CEO, who replaced Mr. Landow as CEO in May
1997, a breach in the terms of the original Employment Agreement occurred, thus,
Mr. Landow could have requested that the "Good Reason" clause of his contract be
triggered effective July 1, 1997. This clause was waived by Mr. Landow with the
approval of the Board of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------
13. RELATED PARTY TRANSACTIONS (Continued)
Directors as it was determined to be in the best interest of the Company to
retain Mr. Landow for a period of one year. This waiver was effective until June
30, 1998 or earlier, if elected by Mr. Landow at which time the terms of the
original Employment Agreement remained in effect, with the exception of the
incentive payments which would be calculated based on the previous sales for the
period from July 1, 1996 through June 30, 1997.
In June 1998, Mr. Landow and the Company's Board of Directors reached an
agreement to modify his Employment Agreement which resulted in Mr. Landow
triggering the Good Reason clause of his contract and resigning as Chairman and
as a director of the Company, effective June 30, 1998.
In order to lessen the cash impact of the Employment Agreement, Mr. Landow and
the Company agreed to a reduction of approximately $195,000 of the total
compensation Mr. Landow was entitled to receive during the three-year period
ending June 30, 2001 by reducing the 36-month term of the severance to 30
months. Mr. Landow agreed to raise the exercise price on 200,000 of his 600,000
options (all of which remain vested) from $2.06 to $3.56. In return for these
modifications to the Employment Agreement, the Company agreed to extend the
exercise period for all of Mr. Landow's 600,000 vested options from the original
expiration date of July 1, 1999 to the new date of July 1, 2001.
Additionally, the modified Employment 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. The Company is deducting the
monthly installments from Mr.
Landow's monthly severance compensation payments.
As a result of the triggering of the Good Reason clause of the Employment
Agreement and the modifications, the Company recorded a one-time charge against
earnings of $1,085,587, which is included in "Severance expense to former CEO"
in the accompanying Consolidated Statement of Operations for the Year Ended
September 30, 1998. This one-time charge was comprised of $918,507 in future
severance payments and a non-cash charge of $167,080 which the Company was
required to record due to the change in the stock option measurement date under
SFAS No. 123 and the Black-Scholes Option Pricing Model.
<PAGE>
14. STOCK AND STOCK OPTION PLANS
The "1990 Stock Plan", as amended, covers 3,300,000 shares of common stock and
is intended to provide: (a) officers and other employees of the Company
opportunities to purchase stock in the Company pursuant to options granted
hereunder which qualify as incentive stock options ("ISOs") under the Internal
Revenue Code of 1986, as amended; (b) directors, officers, employees and
consultants of the Company opportunities to purchase stock in the Company
pursuant to options granted hereunder which do not qualify as ISO's
("Non-Qualified Options"); (c) directors, officers, employees and consultants of
the Company awards of stock in the Company ("Awards"); (d) directors, officers,
employees and consultants of the Company opportunities to make direct purchases
of stock in the Company ("Purchases"); and (e) directors of the Company who are
not employees of the Company with Non-Discretionary Options.
The 1990 Stock Plan is administered by a committee of four non-employee
directors. The committee, subject to certain restrictions in the 1990 Stock
Plan, has the authority to grant or issue, as applicable, ISOs, Non-Qualified
Options, Awards, Purchases and Non-Discretionary Options. The committee also
establishes exercise or issue prices, vesting schedules and expiration dates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS (Continued)
The Company's 1993 Stock Option Plan (the "1993 Plan") covers 1,500,000 shares
of Common Stock. The 1993 Plan provides: (a) officers and other employees of the
Company opportunities to purchase stock in the Company pursuant to options
granted hereunder which qualify as ISOs; and (b) directors, officers, employees
and consultants of the Company opportunities to purchase stock in the Company
pursuant to Non-Qualified Options.
The 1993 Plan is administered by a committee of non-employee directors. The
committee, subject to certain restrictions in the 1993 Plan, has the authority
to (i) determine the employees of the Company to whom ISOs may be granted, and
determine to whom Non-Qualified Options may be granted; (ii) determine the time
or times at which Options may be granted; (iii) determine the exercise price of
shares subject to Options; (iv) determine whether Options granted shall be ISOs
or Non-Qualified Options; (v) determine the time or times when the Options shall
become exercisable, the duration of the exercise period and when the Options
shall vest; (vi) determine whether restrictions such as repurchase options are
to be imposed on shares subject to Options and the nature of such restrictions,
if any, and (vii) interpret the 1993 Plan and promulgate and rescind rules and
regulations relating to it.
The 1993 Plan also provides for the automatic grant of 30,000 Non-Qualified
Options to any director who is not an employee of the Company. These options
vest in increments of 5,000 options per director every June 30 and December 31,
provided that they are still serving as a director at that time. However, in the
event any director resigns prior to full vesting, the Options will vest on a
pro-rata basis.
The Company has issued the following Options and warrants to directors,
officers, employees and consultants during 1998, 1997 and 1996. All of the
following Options and warrants issued to employees, directors and officers were
issued at the fair market value of the underlying stock at the date of grant;
therefore, no compensation expense has been recognized. Options or warrants
issued to consultants were charged to operations, determined by the
Black-Scholes Option Pricing Model in accordance with SFAS No. 123.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS (Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
Outstanding,
beginning of year:
3,160,580 $2.66 2,681,314 $3.57 3,079,450 $2.85
Granted 1,683,727 $1.79 1,148,257 $2.12 514,572 $6.66
Expiration Dates 01/12/2002-09/01/2008 11/11/2006-9/25/2007 10/24/2005-6/30/2006
Exercised (549,700) $.71 (15,000) $1.37 (715,000) $1.77
Expired or
Canceled (1,028,735) $3.33 (653,991) $5.50 (197,708) $6.78
---------- -------- --------
Outstanding, end
of year: 3,265,872 $2.34 3,160,580 $2.66 2,681,314 $3.57
========= ========= =========
Exercisable, end
of year: 1,802,234 $2.94 2,089,163 $2.85 1,969,226 $2.76
========= ========= =========
Weighted-average
fair value of
options granted
during the year $.98 $1.46 $5.49
==== ===== =====
Available for
grant, end of 114,369
=======
year:
</TABLE>
Included in the above table at September 30, 1998 are 675,000 outstanding
options which were granted outside of the Stock Option Plans during fiscal 1998
and 1997 with a weighted average price of $1.86, and $1.95, respectively. Also,
included in the above table are 300,000 warrants, which were granted during
fiscal 1998 at prices ranging from $1.10 - $2.00.
Subsequent to September 30, 1998, the Company issued 675,000 warrants to
purchase the Company's common stock. The warrants were granted at prices ranging
from $.84 - $1.94. (See Note 20. Events Subsequent To The Date of The Auditor's
Report.)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS (Continued)
Information about stock options in various price ranges at September 30,
1998 follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- ---------------------------------------------
Weighted-Average
Remaining
Contractual Life Weighted-Average
Outstanding (Years) Exercise Exercisable Weighted-Average
Range of as of Price as of Exercise Price
Exercise Prices 09/30/98 09/30/98
$0.00 - $1.00 500,800 6.3 $0.79 100,300 $0.53
$1.01 - $2.00 1,591,138 8.8 $1.65 577,167 $1.72
$2.01 - $3.00 574,820 5.5 $2.23 530,653 $2.18
$3.01 - $5.00 295,000 8.0 $3.47 295,000 $3.47
$5.01 - $8.00 274,114 6.4 $6.71 269,114 $6.71
$8.01 - $10.00 30,000 5.4 $8.75 30,000 $8.75
------ ------
3,265,872 7.4 $2.34 1,802,234 $2.94
========= =========
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for its Stock Option Plans. Had compensation for the Company's
stock-based compensation plans been determined pursuant to SFAS No. 123, the
Company's net loss and loss per share would have increased accordingly. Using
the Black-Scholes Option Pricing Model for all options granted after October 1,
1995, the Company's pro forma net loss and pro forma net loss per share, with
related assumptions, are as follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Pro forma net $(6,577,819) $(3,619,598) $(6,839,341)
loss
Pro forma basic and diluted net loss per share (.23) (.13) (.24)
Expected life (years) 7 7 7
Risk-Free interest rate 5.67% 6.51% 6.08%
Expected volatility 86% 81% 81%
Quarterly dividend none none none
</TABLE>
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to October 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
On November 12, 1996, the Company announced that it put into effect a stock
repurchase plan to repurchase up to 400,000 shares of its common stock. From
November 12, 1996 through April 22, 1997, the Company repurchased 378,700 shares
at an average purchase price of $3.21 per share. The Company anticipates no
further stock repurchases for the immediate future, and is restricted from doing
so under the terms of its NationsCredit Agreement. (See Note 9. Debt) <PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
15. CONCENTRATION OF CREDIT RISK
In fiscal 1998, the majority of the Company's overall revenue was derived in the
automotive technology segment from one customer, an OEM, which accounted for 95%
of the total business activity. That same customer accounted for 97% and 99% of
net sales in both 1997 and 1996. As of September 30, 1998, the Company's
receivable balance from this OEM customer was approximately $1,598,611. The
majority of this receivable was subsequently collected. The loss of this
customer would have a material adverse effect on the Company. Export sales in
1998, 1997 and 1996 were insignificant.
16. SEGMENT INFORMATION
The Company currently classifies its operations into the following segments: (1)
Automotive Technology which primarily consists of the OHSS, and (2) Oil Analysis
Service which primarily consists of TSI operations. Items below exclude amounts
from UTG operations. Corporate and other includes general corporate assets
consisting primarily of cash and cash equivalents, property and equipment,
deferred income tax assets, and corporate expenses. The material components of
corporate general and administrative expenses are salaries and benefits; travel
and entertainment; consulting; and proxy, printing and transfer costs. In fiscal
1998, 1997 and 1996, corporate expenses (salaries, benefits and general and
administrative expenses) have been allocated to the segments. Financial
information about the Company's operations by segments for the years ended
September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Automotive Oil Analysis Corporate
Technology Service and Other Consolidated
Revenue:
1998 $10,815,205 $ 392,653 $ - $ 11,207,858
1997 $16,580,270 $ 403,853 $ - $ 16,984,123
1996 $16,102,523 $ 44,001 $ - $ 16,146,524
Operating Income
(Loss):
1998 $ 1,071,657 $ (5,571,947) $ (1,353,736) $ (5,854,026)
1997 $ 3,091,161 $ (4,203,111) $ (1,486,510) $ (2,598,460)
1996 $ 3,093,833 $ (4,605,624) $ (1,544,428) $ (3,056,219)
Depreciation and
Amortization:
1998 $ 68,850 $ 727,812 $ 126,158 $ 922,820
1997 $ 76,573 $ 917,820 $ 117,078 $ 1,111,471
1996 $ 94,080 $ 701,510 $ 135,973 $ 931,563
Identifiable
Assets:
1998 $ 2,432,786 $ 3,943,553 $ 896,756 $ 7,273,095
1997 $ 3,679,544 $ 4,783,365 $ 2,892,121 $ 11,355,030
1996 $ 4,952,795 $ 2,555,431 $ 4,666,022 $ 12,174,248
Capital
Expenditures:
1998 $ 62,385 $ 560,408 $ 14,809 $ 637,602
1997 $ 357,940 $ 1,055,572 $ 28,753 $ 1,442,265
1996 $ 516,968 $ 1,190,629 $ 149,407 $ 1,857,004
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------
17. RESTRUCTURING
On September 12, 1996, the Board of Directors approved a restructuring plan,
which included the restructuring of management, relocating the TSI office and
laboratories as well as certain personnel. The Company recorded $725,000 of
restructuring charges in fiscal 1996, which consisted primarily of severance
costs, lease cancellation costs and other expenses that have no future benefit.
As of September 30, 1997, all of these restructuring costs had been paid.
During July 1997, the Company undertook and substantially completed another
restructuring. During this time period, the Company closed its New York investor
relations office, consolidated its Top Source Instruments operations in
Farmington Hills, Michigan into its Top Source Automotive facility in Troy,
Michigan and reduced its personnel in July 1997 by approximately one-third from
78 employees to 54 employees. The Company believes that these reductions will
not have an adverse impact on its sales, marketing and administrative
capabilities. This restructuring resulted in a one-time charge to earnings in
the fourth quarter of fiscal 1997 of approximately $416,000, which primarily
consisted of severance of $350,000 and facilities of $66,000. As of September
30, 1998, substantially all of these restructuring costs have been paid.
18. DISCONTINUED OPERATIONS
On September 12, 1996, the Company's Board of Directors approved a plan to sell
certain assets and liabilities of the Company's oil analysis subsidiary, UTG.
The sale was consummated on October 30, 1996. The provision for loss on the
disposal of UTG of $1,804,791 reflected in the consolidated statement of
operations includes a write down of the net assets of $1,565,621 and an
additional $239,170 for estimated costs to dispose of these operations.
The net loss of UTG for the year ended September 30, 1996 is included in the
consolidated statement of operations under "discontinued operations." Revenue
from such operations for the year ended September 30, 1996 was $4,549,944 and
was not included in service revenue in the accompanying consolidated statements
of operations.
19. PRIVATE PLACEMENT OF SERIES A CONVERTIBLE PREFERRED STOCK
In May 1998, the Company completed the sale in a private offering to two foreign
investors of 1,000 shares of Series A Convertible Preferred Stock ("Series A
Preferred ") with a liquidation value of $1,000 per share and a par value of
$.10 per share. This funding was comprised of $1,000,000 in Series A Preferred,
less placement and legal fees, yielding $881,394 in net proceeds to the Company.
This Series A Preferred pays an annual dividend of 5% in cash or common stock.
The Company issued an aggregate of 42,626 shares of common stock for payment of
the dividend due on the Series A Preferred through September 30, 1998.
The holders of Series A Preferred had the right to convert each share of Series
A Preferred into a number of shares of common stock in whole or in part
cumulatively as follows: 25% on August 8, 1998, 25% on September 8, 1998, 25% on
October 8, 1998 and 25% November 8, 1998. The conversion price would be the
lesser of $1.10 or 85% of the five-day average closing bid price of the shares
of the Company prior to conversion, decreasing to 83% for conversion after 120
days and 80% for conversion after 150 days. The Company can redeem the Series A
Preferred, at any time, in whole or in part at 120% of the purchase price of the
Series A Preferred plus all accrued and unpaid dividends. The intrinsic value of
the above described beneficial conversion feature of ($250,000) has been
recognized as an increase in additional paid-in-capital and a decrease in Series
A Preferred. This beneficial conversion feature is being amortized as an
embedded Series A Preferred dividend through November 8, 1998 (the date on which
all the stock may be converted into Common Stock ).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------
19. PRIVATE PLACEMENT OF SERIES A CONVERTIBLE PREFERRED STOCK (continued)
As part of the transaction, the foreign investors and the placement agent
received a total of 250,000 three-year warrants exercisable at $1.10, of which
100,000 warrants were fully vested upon funding and the remaining 150,000
warrants vested upon the redemption on November 13, 1998. 100,000 fully vested
warrants have been valued at $108,979 utilizing the Black-Scholes Option Pricing
Model in accordance with SFAS No. 123 as of September 30, 1998 and the remaining
warrants will be valued in the first quarter of fiscal 1999. The value of these
warrants have been deducted from amounts available to common stockholders for
the purposes of calculating loss per share. As a requirement of the Subscription
Agreement, the Company has filed a Registration Statement with the Securities
and Exchange Commission covering the future sale of common stock underlying the
Series A Preferred and warrants. (See Note 20. Events Subsequent To The Date Of
The Auditor's Report, regarding subsequent redemption of Preferred Stock.)
20. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITOR'S REPORT
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 has 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. 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 Trust 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 is equivalent to $1.00 above the closing price on the
day of consummation of the Series B Preferred sale transaction). Additionally,
if the Series B Preferred has not been redeemed or converted into common stock
on or before May 1, 1999 (which conversion requires the Company's consent), the
Company shall issue to the Mennen Trust an additional 50,000 10-year warrants
exercisable at a price of $.50 per share above the closing price of the
Company's common stock on April 30, 1999. Not later than November 30, 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. 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 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 on or before March 31, 1999). The
remaining $150,000 Stated Value of Series A Preferred was converted into an
aggregate of 412,970 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.
<PAGE>
20. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITOR'S REPORT (Continued)
During December 1998, the Company restructured substantially all of its
outstanding $3,020,000 of Senior Subordinated Convertible Notes (the "Notes").
With a portion of the proceeds from the Series B Preferred, the Company prepaid
an aggregate of $745,000 principal amount of Notes 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 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 Company has agreed to register the shares of common stock issuable upon
exercise of the warrants. In addition, on December 15, 1998 concurrent with the
approval of the sale of TSA Assets by the Company's stockholders, the remaining
$2,275,000 of noteholders agreed to redeem $1,568,000 principal amount of the
notes (at the rate of .70 per $1,000), which was paid with a portion of Series B
Preferred, leaving $707,000 of principal outstanding due June 2000. In
connection with this redemption, the noteholders agreed to reduce the interest
rate from 9% to 5% and reduce the conversion price on the remaining 30% Note
balance from $10.00 per share to $2.00 per share. 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).
As discussed above, the issuance of the Series B Preferred, redemption of
one-half of the Series A Preferred, and the restructuring of the Notes all
include 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 $286,000 and will be recorded by the Company during the first
quarter of fiscal year 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
conversion feature of the Series B Preferred is approximately $618,000 and will
be amortized as a reduction of income to common shareholders in the statement of
operations in fiscal 1999 over the earliest conversion date of the Series B or
(November 1, 1999).
On January 7, 1999, as further discussed in Note 3., 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. As a result, the Buyer will remain as a 20%
minority owner of TSA unless Step III of the transaction is completed.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated by reference from the Proxy Statement, for the Annual
Meeting of Stockholders to be held on May 18, 1999 section entitled
"Election of Directors".
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Proxy Statement, for the annual
meeting of stockholders to be held on May 18, 1999, section entitled
"Executive Officer Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Proxy Statement, for the annual
meeting of stockholders to be held on May 18, 1999, section entitled
"Voting Securities and Principal Holders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Proxy Statement, for the annual
meeting of stockholders to be held on May 18, 1999, section entitled
"Related Party Transactions".
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
(a) (1) Financial Statements.(See Item 8. of Form 10-K)............. 16
(a) (2) Financial Statement Schedules required to be filed.
Schedule II - Valuation and Qualifying Accounts............ 42
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
All other schedules have been omitted because the required
information is shown in the consolidated financial statements
or notes thereto or they are not applicable.
<TABLE>
(a) (3) Exhibits
<S> <C> <C>
Page
- --------- ------------------------------------------------------------------------------------------------------------ -------
3.0 Amended and Restated Certificate of Incorporation 1
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
3.1 Amendment to Certificate of Incorporation 8
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
3.2 Bylaws of Registrant 2
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
3.3 Amendment to Bylaws of Registrant 8
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
3.4 Amendment to the Amended and Restated Certificate of Incorporation 6
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
4.0 1990 Stock Plan 3
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
4.1 1993 Stock Option Plan 6
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.1 First Amendment to Lease of On-Site Analysis, Inc., Atlanta, Georgia 6
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.2 Shareholder Rights Plan 5
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.3 Note Purchase Agreement dated as of June 9, 1995 Regarding 9% Senior Subordinated Convertible Notes Due 7
June 9, 2000 by and among Top Source Technologies, Inc. Purchasers and Ganz Capital Management, Inc.
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.4 First Amendment to Shareholder Rights Plan 8
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.5 Second Amendment to Shareholder Rights Plan 9
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.6 Lease Agreement dated February 10, 1995 for Michigan facility, Troy, MI 10
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.7 Employment Agreement of David Natan 11
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.8 Lease of Office Space dated December 20, 1995 of Top Source Technologies, Inc., Palm Beach Gardens, FL 12
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.9 Asset Purchase Agreement between Top Source Technologies, Inc., Conam Inspection, Inc. and United Testing 13
Group, Inc. dated October 30, 1996
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.10 NationsCredit Agreement dated July 1, 1997 15
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.11 Employment Agreement of William C. Willis, Jr. 16
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.12 Series A 5% Convertible Preferred Stock and Warrants of Top Source Technologies, Inc. 17
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.13 Thermo Jarrell Ash Corporation Agreement 17
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.14 Asset Purchase Agreement by and among Top Source Technologies, Inc., Top Source Automotive, Inc., NCT 18
Audio Products, Inc. and Noise Cancellation Technologies, Inc.
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.15 Amendment to Stuart Landow's Employment Agreement 18
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.16 Amendment to Asset Purchase Agreement by and among Top Source Technologies, Inc., Top Source Automotive, 19
Inc., NCT Audio Products, Inc. and Noise Cancellation Technologies, Inc. - Appendix A-I dated October 7,
1998
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.17 Amendment to NationsCredit Agreement dated November 11, 1998 20
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.18 Amendment to Series A 5% Convertible Preferred Stock issued to Excalibur Limited Partnership and Gundyco 20
in Trust
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.19 Amendment to Second Certificate of Designation of Rights and Preferences of the Series A Convertible 20
Preferred Stock of Top Source Technologies, Inc.
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.20 Third Certificate of Designation of Top Source Technologies, Inc. Series B Convertible, Redeemable 20
Preferred Stock
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.21 Amendment to Note Purchase Agreement dated as of June 9,m 1995 regarding 9% Senior Subordinated 20
Convertible Notes Due June 9, 2000
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.22 Amended Stock Purchase Agreement dated December 23, 1998, by and among Top Source Technologies, Inc. G. 20
Jeff Mennen and Wilmington Trust Co.
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
10.23 Second Certificate of Designation of Top Source Technologies, Inc. Series B Convertible, Redeemable 20
Preferred Stock
- --------- ------------------------------------------------------------------------------------------------------------ -------
- --------- ------------------------------------------------------------------------------------------------------------ -------
27.0 Financial Data Schedule 20
- --------- ------------------------------------------------------------------------------------------------------------ -------
</TABLE>
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended
September 30, 1998.
<TABLE>
Exhibit Index
<S> <C>
- ------- ---------------------------------------------------------------
1 Contained in the Form 8-A dated July 10, 1993.
- ------- ---------------------------------------------------------------
- ------- ---------------------------------------------------------------
2 Contained in the documents previously filed with the Securities and
Exchange Commission in conjunction with the Form 8-B on 11/16/92.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
3 Contained in the documents previously filed with the Securities and
Exchange Commission in conjunction with the 12/31/90 Form 10-K.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
4 Contained as an exhibit to the Proxy Statement dated January 11, 1994.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
5 Contained in Form 8-K dated January 5, 1995.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
6 Contained in the documents filed with the Securities and Exchange Commission in conjunction with the 9/30/94
Form 10-K.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
7 Contained in documents filed with the Securities and Exchange Commission
in conjunction with the 6/30/95 Form 10-Q.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
8 Contained in the Form 8-A/A No. 1 dated July 17, 1995.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
9 Contained in the Form 8-A/A No. 2 dated December 5, 1995.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
10 Contained in Amendment No. 1 to the Registration Statement on Form S-3 filed May 4, 1995.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
11 Contained in Amendment No. 3 to the Registration Statement on Form S-3 filed September 27, 1995.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
12 Contained in documents filed with the Securities and Exchange Commission
in conjunction with the September 30, 1995 Form 10-K.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
13 Contained in the Form 8-K dated November 12, 1996.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
14 Contained in documents filed with the Securities and Exchange Commission
in conjunction with September 30, 1996 Form 10-K/A No. 1.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
15 Contained in documents filed with the Securities and Exchange Commission
in conjunction with the June 30, 1997 Form 10-Q.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
16 Contained in documents filed with the Securities and Exchange Commission
in conjunction with September 30, 1997 Form 10-K/A No. 3.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
17 Contained in documents filed with the Securities and Exchange Commission
in conjunction with the March 31, 1998 Form 10Q/A No. 1.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
18 Contained in documents filed with the Securities and Exchange Commission
in conjunction with the June 30, 1998 Form 10-Q.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
19 Contained as an exhibit to the November 6, 1998 Proxy Statement.
- ------- ---------------------------------------------------------------------------------------------------------------
- ------- ---------------------------------------------------------------------------------------------------------------
20 Attached herewith.
- ------- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
================================= ----------------- ------------- ---------------------- ---------------- ===============
Balance at Charged to Balance at
Beginning of Costs and Additions Chaged Deductions End of Period
Description Period Expenses to Other Accounts
================================= ----------------- ------------- ---------------------- ---------------- ===============
Deducted from Accounts
Receivable - Allowance for
Doubtful Accounts
================================= ----------------- ------------- ---------------------- ---------------- ===============
Year Ended Sept. 30, 1998 $ - $ - $ - $ $ -
-
================================= ----------------- ------------- ---------------------- ---------------- ===============
Year Ended Sept. 30, 1997 $ 83,650 $ - $ - $ -
($83,650)
- --------------------------------- ----------------- ------------- ---------------------- ---------------- ===============
Year Ended Sept. 30, 1996 $145,703 $ - $ - ( $62,053) $ 83,650
- --------------------------------- ----------------- ------------- ---------------------- ---------------- ===============
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Registrant's report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: \s\William C. Willis, Jr.
William C. Willis, Jr., Chairman,
President and Chief Executive Officer
By: \s\David Natan
David Natan
Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
Dated:
January 13, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
\s\ William C. Willis, Jr. Chairman, President and January 13, 1999
William C. Willis, Jr. Chief Executive Officer
\s\ Ronald P. Burd Director January 13, 1999
Ronald P. Burd
\s\ G. Jeff Mennen Director January 13, 1999
G. Jeff Mennen
\s\ David Natan Director January 13, 1999
David Natan
\s\ L. Kerry Vickar Director January 13, 1999
L. Kerry Vickar
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 488,899
<SECURITIES> 0
<RECEIVABLES> 1,656,317
<ALLOWANCES> 0
<INVENTORY> 1,489,840
<CURRENT-ASSETS> 3,981,887
<PP&E> 786,438
<DEPRECIATION> 1,977,315
<TOTAL-ASSETS> 7,273,095
<CURRENT-LIABILITIES> 3,002,443
<BONDS> 0
0
0
<COMMON> 29,054
<OTHER-SE> 427,917
<TOTAL-LIABILITY-AND-EQUITY> 7,273,095
<SALES> 11,207,858
<TOTAL-REVENUES> 11,207,858
<CGS> 8,026,490
<TOTAL-COSTS> 8,026,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (664,142)
<INCOME-PRETAX> (5,470,761)
<INCOME-TAX> (58,801)
<INCOME-CONTINUING> (5,529,562)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,852,382)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.17
November 11, 1998
Top Source Automotive, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, Florida 33418
Top Source Instruments, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, Florida 33418
Re: Loan and Security Agreement entered into on July 1, 1997, between
NationsCredit Commercial Corporation, through its NationsCredit Commercial
Funding Division ("Lender") and Top Source Automotive, Inc. ("TS Auto")
("TS Auto Loan Agreement"); Loan and Security Agreement entered into on
July 1, 1997, between Lender and Top Source Instruments, Inc. ("TS
Instruments") ("TS Instruments Loan Agreement"); Each of TS Auto and TS
Instrument may be referred to herein as a "Borrower" or collectively as
"Borrowers," and each of the TS Auto Loan Agreement and the TS Instrument
Agreement may be referred to herein as a "Loan Agreement" or collectively
as "Loan Agreements." Unless otherwise defined in this letter, all
capitalized terms shall have the same meaning set forth in the TS Auto Loan
Agreement and the TS Instruments Loan Agreement.
Gentlemen:
You have recently notified us of the following:
A. The Borrowers and Top Source Technologies, Inc.'s ("Parent") net
losses for the fiscal year ending September 30, 1998 exceeded $2
million, exclusive of extraordinary gains and extraordinary
losses, which is a violation of Section 5.19 of each of the Loan
Agreements;
B. Pursuant to your counsel's correspondence of November 3, 1998 (a
copy of which is attached), you are proposing to sell $3,500,000
of convertible preferred stock which will be used to pre-pay in
part $3,020,000 of convertible notes, and would be a violation of
Sections 5.18 (viii) and (xiii) of each of the Loan Agreements;
C. Pursuant to the same letter, some of the proceeds of the sale of
preferred stock will be used to partially redeem convertible
preferred stock issued by the Parent and/or the Borrowers in May,
1998, which would also be a violation of Section 5.18 of each of
the Loan Agreements; and
D. On or about August 14, 1998 TS Auto, along with Parent and other
affiliates of TS Auto and TS Instruments, entered into an Asset
Purchase Agreement with NCT Audio Products, Inc. ("Buyer"),
pursuant to which Borrowers (i) proposed to sell substantially all
of their assets to the Buyer ("Asset Purchase Agreement"), the
consummation of which would also be an Event of Default under each
of the Loan Agreements and (ii) have sold 20% of the issued and
outstanding common stock of TS Auto, which is an Event of Default
under the TS Auto Loan Agreement.
In connection with each of the foregoing actions, you have requested
our waiver of any Events of Default and/or, where appropriate, our consent
thereto. In consideration of the matters set forth below and for other good and
valuable consideration, Lender and Borrowers agree as follows:
1. If Borrowers' shareholders approve the Asset Purchase Agreement
and such approval is obtained on or before December 31, 1998,
then:
a) Lender shall be deemed to have waived any Event of Default as
a result of Borrowers' violation of Section 5.19 of each of
the Loan Agreements for Borrowers' fiscal year ending
September 30, 1998;
b) Section 8(e)(i) of Schedule A to each of the Loan Agreements
shall be deemed to be amended as follows:
(i) Maximum Cumulative Pre-tax Net Loss: $1,000,000, exclusive of extraordinary
gains and extraordinary losses, for TST and each of its subsidiaries on a
consolidated basis beginning October 1, 1998.
c) Section 1(d)(i) Schedule A of the TS Auto Loan Agreement shall
be deemed to be amended as follows:
Overall sublimit on advances $250,000
against eligible inventory
d) Borrower shall collaterally assign to Lender a $250,000
certificate of deposit issued by a bank acceptable to Lender
and secured pursuant to documentation acceptable to Lender.
In the event Borrowers' shareholders fail to approve the Asset
Purchase Agreement on or before December 31, 1998, then Lender
will not be deemed to have waived Section 5.19 of each of the Loan
Agreements as set forth above in Section 1(a) or any default that
may result from the issuance of stock under the Asset Purchase
Agreement.
2. Lender hereby waives any Event of Default under Sections 5.18
(viii) and (xiii) of each of the Loan Agreements resulting from
Borrowers' consummation of the sale of $3,500,000 of convertible
preferred stock and using such proceeds to pay $3,020,000 of
convertible notes as set forth in paragraph B above. Borrowers
agree that they may (i) not pay any cash dividends due under such
preferred stock if there is any other Event of Default under
either the TS Automotive Loan Agreement or the TS Instruments Loan
Agreement and (ii) redeem any of their capital stock from the
proceeds of this transaction and not from any proceeds of
financing provided by Lender;
3. Lender does not object to the closing of the Asset Purchase
Agreement so long as there is no Event of Default at the time of
closing of the Asset Purchase Agreement.
4. All proceeds from the closing of the Asset Purchase Agreement will
be first used to satisfy all of Borrowers' Obligations to Lender
including all accrued and/or unpaid interest, charges, fees, loan
fees, Early Termination Fees, Minimum Borrowing Fees, and all
other sums chargeable to Borrowers under the Loan Agreements.
5. Borrowers hereby agree to pay Lender a fee of $25,000. Neither
Lender's acceptance of this fee nor Lender's waivers or consents
herein shall be deemed to be a consent of any other action or
waiver of any other Default, whether prior or subsequent to the
date of this letter, and whether or not similar to the defaults
and actions set forth herein. Borrowers agree Lender may charge
such fee to any of Borrowers' loan accounts maintained by Lender.
Except as set forth herein, each of the Loan Agreements remain
unchanged and in full force and effect.
Very truly yours,
NationsCredit Commercial Corporation,
through its NationsCredit Commercial Funding Division
By: _____________________________
Tom D. Chapman
Senior Vice President
Top Source Automotive, Inc.
By: _____________________________
Its: _____________________________
Top Source Instruments, Inc.
By: _____________________________
Its: ______
EXHIBIT 10.18
November 13, 1998
Excalibur Limited Partnership
c/o William S. Hechter, Esq.
Barrister & Solicitor
75 Lowther Avenue
Toronto, Ontario M5R 1C9
CANADA
Gundyco in Trust for RRSP
RRSP 5500-98866-1-9
c/o William S. Hechter, Esq.
Barrister & Solicitor
75 Lowther Avenue
Toronto, Ontario M5R 1C9
CANADA
Re: Top Source Technologies, Inc.
Dear Sirs:
This letter agreement serves to modify the terms and conditions of the
Series A 5% Convertible Preferred Stock (the "Preferred Stock") issued to
Excalibur Limited Partnership ("Excalibur") and Gundyco in Trust for RRSP RRSP
5500-98866-1-9 ("Gundyco") as of May 7, 1998. Each of you by your signature
agree that notwithstanding the provisions contained in the Certificate of
Designation of Rights and Preferences of the Series A Convertible Preferred
Stock of Top Source Technologies, Inc. (the "Company") filed with the Delaware
Secretary of State and notwithstanding any other agreement to which you are a
party with the Company including the Regulation D Private Securities
Subscription Agreement (the "Subscription Agreement"), the terms and conditions
of this letter agreement shall prevail to the extent inconsistent with any other
instrument or agreement. Subject to delivery by the Company of the consideration
specified below, each of you agree with the Company as follows:
1. The Company shall on or before November 20, 1998 redeem one-half of the
Preferred Stock owned by Excalibur and Gundyco by tendering the sum of
$600,000 in the aggregate together with 5% simple interest from
November 13, 1998. All allocation of funds and securities shall be
allocated on a pro-rata basis based upon ownership of Preferred Stock;
2. Excalibur and Gundyco shall be deemed to convert an aggregate of
$150,000 of Preferred Stock as of November 6, 1998. Pursuant to this
conversion, Excalibur shall receive 294,894 shares of common stock and
Gundyco shall receive 118,076 shares of common stock which sums shall
include all dividends due through March 31, 1999;
3. The remaining $350,000 of Preferred Stock may not be converted until on
or after March 31, 1999, but may still be redeemable according to their
terms at a price of $420,000. The Company will use its best efforts to
redeem such Preferred Stock on or before March 31, 1999;
4. The Company shall issue to Excalibur and Gundyco an aggregate of an
additional 25,000 Warrants exercisable at $.8937 as reported by the
American Stock Exchange. These Warrants may not be exercised for six
months after issuance and may be exercised for five years expiring
November 6, 2003. The 250,000 Warrants previously issued shall remain
in effect at an exercise price of $1.10 per Warrant;
5. The 2% late penalty for the delay in the effectiveness of the
registration statement on Form S-3 shall continue to accrue on the
principal of $1,000,000 until the date of redemption of the $500,000;
and for the $150,000 being converted until the effectiveness of the
registration statement with the Securities and Exchange Commission.
After redemption of $500,000 of Preferred Stock, the 2% late
registration penalty shall continue to accrue on the remaining $350,000
of Preferred Stock until effectiveness of the registration statement.
This portion of the 2% penalty shall only be payable if the $350,000 of
Preferred Stock is not redeemed on or before March 31, 1999.
6. No additional dividends are due on the Preferred Stock through and including
March 31, 1999;
7. All other penalties relating to the late registration of the common
stock underlying the Preferred Stock are waived; and
8. Excalibur and Gundyco waive the right to purchase additional shares of
Preferred Stock as provided in the Subscription Agreement. Furthermore,
the provisions in Sections 9 and 10 of the Subscription Agreement
relating to restrictions on new securities and the right of first
refusal are cancelled.
If the foregoing is acceptable to you, please execute a copy of this
letter agreement and fax it to me at the above number.
Very truly yours,
David Natan, Vice President
Chief Financial Officer
We hereby agree to the contents of the foregoing letter agreement.
Date: November 13, 1998 EXCALIBUR LIMITED PARTNERSHIP
By:
GUNDYCO IN TRUST FOR RRSP RRSP 5500-98866-1-9
By:
EXHIBIT 10.19
AMENDMENT TO SECOND CERTIFICATE OF DESIGNATION
OF RIGHTS AND PREFERENCES OF THE
SERIES A CONVERTIBLE PREFERRED STOCK OF
TOP SOURCE TECHNOLOGIES , INC.
I, William C. Willis, Jr., President, of Top Source Technologies, Inc. a
corporation organized and existing under the laws of the state of Delaware
(hereinafter the "Corporation"), DO HEREBY CERTIFY:
FIRST:
That pursuant to authority expressly granted and vested in the Board of
Directors of said Corporation under Section 242 of the Delaware General
Corporation Law and the provisions of the Corporation's Certificate of
Incorporation, said Board of Directors, on November 5, 1998, adopted the
following resolution setting forth the designations, powers, preferences and
rights of its Convertible Preferred Stock as set out in this Amendment to Second
Certificate of Designation.
RESOLVED: That the designations, powers, preferences and rights of the Series A
5% Convertible Preferred Stock be, and they hereby are, as set forth below:
1. Number of Shares of Series A Convertible Preferred Stock.
The Corporation hereby authorizes the issuance of up to 2,500 (two thousand,
five hundred) shares of Series A Convertible Preferred Stock par value $.10 per
share (the "Preferred Stock"). Each share of Preferred Stock shall have a value
equal to $1,000.00 (one thousand dollars) (the "Stated Value"). Commencing April
1, 1999, this Preferred Stock shall pay an annual dividend of 5%, payable
quarterly on each subsequent June 30th, (pro-rated for the first payment based
upon the number of days from issuance to June 30th) September 30th, December
31st and March 31st, and shall be payable in cash or shares of Common Stock at
the Corporation's option, the Corporation shall pay the dividend within ten (10)
business days of the quarterly dates. The Corporation may pay the dividend in
shares upon conversion, and the number of shares paid shall be calculated
pursuant to Section 5(a) of this Certificate of Designation.
Any outstanding Preferred Stock shall be converted automatically on the terms
pursuant to Section 5(a) of this Certificate of Designation, two (2) years from
the date of issue.
2. Voting.
(a) Except as provided by law, by the provisions of Subparagraph 2(b) below,
holders of Preferred Stock (the "Holders") shall not have the right to vote on
any matter affecting the Corporation.
(b) The Corporation shall not amend, alter or repeal the preferences, special
rights or other powers of the Preferred Stock so as to affect adversely the
Preferred Stock, without the written consent or affirmative vote of the Holders
of at least a two thirds majority of the then outstanding shares of Preferred
Stock to be affected by amendment, alteration or repeal, given in writing or by
vote at a meeting, consenting or voting (as the case may be,) separately as a
class. For this purpose, without limiting the generality of the foregoing, the
authorization or issuance of any series of preferred stock with preference or
priority over or on a parity with the Preferred Stock as to the right to receive
either dividends or amounts distributable upon liquidation, dissolution or
winding up of the Corporation shall not be deemed to affect adversely the
designated class of Preferred Stock.
3. Liquidation.
In the event of a voluntary or involuntary dissolution, liquidation, or winding
up of the Corporation, the Holders of Preferred Stock shall be entitled to
receive out of the assets of the Corporation legally available for distribution
to holders of its capital stock, before any payment or distribution shall be
made to holders of Common Stock or any other class of stock ranking junior to
the Preferred Stock, the Stated Value per share plus any accrued and unpaid
dividends. If upon such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the Holders of Preferred Stock shall be insufficient to permit payment to
the Holders of Preferred Stock of the amount distributable as aforesaid, then
the entire assets of the Corporation to be so distributed shall be distributed
ratably among the Holders of Preferred Stock. Upon any such liquidation,
dissolution or winding up of the Corporation, after the Holders of Preferred
Stock shall have been paid in full the amounts to which they shall be entitled,
the remaining net assets of the Corporation may be distributed to the Holders of
stock ranking on liquidation junior to the Preferred Stock. Written notice of
such liquidation, dissolution or winding up, stating a payment date, the amount
of the liquidation payments and the place where said liquidation payments shall
be payable, shall be given by mail, postage prepaid or by telex or facsimile to
non-U.S. residents, not less than 10 days prior to the payment date stated
therein, to the Holders of record of Preferred Stock, such notice to be
addressed to each such Holder at its address as shown by the records of the
Corporation. For purposes hereof the Common Stock, shall rank on liquidation
junior to the Preferred Stock.
4. Restrictions.
The Corporation will not modify the terms of the Preferred Stock at any time
when shares of Preferred Stock are outstanding, without the approval of the
Holders of at least a two thirds majority of the then outstanding shares of
Preferred Stock given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, except where the vote or written
consent of the Holders of a greater number of shares of the Corporation is
required by law or by the Corporation's Certificate of Incorporation, as
amended, provided, however, that pursuant to the power granted to them in the
Corporation's Certificate of Incorporation, the Corporation's Board of Directors
may, without approval of any of the Holders of the Preferred Stock, resolve to:
(i) increase the number of shares of the Preferred Stock issuable under this
Certificate of Designation, or (ii) decrease the number of shares of Preferred
Stock issuable under this Certificate of Designation to the number of shares of
Preferred Stock then outstanding.
5. Optional Conversion.
The Holders of shares of Preferred Stock shall have the following conversion
rights:
(a) Right to Convert: Conversion Price, Subject to the terms, conditions, and
restrictions of this Section 5, the Holder of any share or shares of Preferred
Stock shall have the right to convert each such share of Preferred Stock into a
number of shares of Common Stock equal to the Stated Value of the Preferred
Stock plus all accrued but unpaid dividends of such share or shares of Preferred
Stock divided by the "Conversion Price" which shall be equal to the lesser of
(a) 80% of the average closing bid price of the Common Stock (the "Average
Closing Price") during the period of five (5) trading days immediately preceding
the Conversion Date or (b) $ 1.10 per share of Common Stock.
(b) Conversion Date, The Holder of any share or shares of Preferred Stock may
convert such shares after March 31, 1999.
(c) Conversion Notice. The right of conversion shall be exercised by the Holder
thereof by telecopying or faxing an executed and completed written notice (the
"Conversion Notice") attached as Exhibit 1 to this Certificate of Designation,
to the Corporation that the Holder elects to convert a specified number of
shares of Preferred Stock representing a specified Stated Value thereof into
Common Stock and by delivering the original Conversion Notice and a certificate
or certificates of Preferred Stock being converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the Holders of the Preferred
Stock), together with a statement of the name or names (with address) in which
the certificate or certificates for shares of Common Stock shall be issued. The
business date indicated on a Conversion Notice which is telecopied to and
received by the Corporation in accordance with the provisions hereof shall be
deemed a Conversion Date. The Conversion Notice shall include therein the Stated
Value of shares of Preferred Stock to be converted, and a calculation (a) of the
Average Closing Bid Price, (b) the Conversion Price, and (c) the number of
shares of Common Stock to be issued in connection with such conversion. The
Corporation shall have the right to review the calculations included in the
Conversion Notice, and shall provide notice of any discrepancy or dispute
therewith within one (1) business day of the receipt thereof. The Holder shall
deliver to the Corporation an original Notice of Conversion and the original
Preferred to be converted within three (3) business days from the date of the
Notice of Conversion. Whenever this Certificate of Designation refers to the
delivery of Preferred Stock or conversion of Preferred Stock or the redemption
of Preferred Stock such delivery, conversion or redemption shall not be
completed until the Holder delivers an executed stock power containing either a
medallion or a broker guarantee. The failure to mention the stock power herein
shall not create an implication to the contrary.
(d) Issuance of Certificates - Time Conversion Effected. Promptly, but in no
event more than three (3) business days after the receipt of the Conversion
Notice referred to in Subparagraph (5)(c) and surrender of the certificate or
certificates for the share or shares of Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered, to the
Holder, unlegended and unrestricted shares of Common Stock, registered in such
name or names as such Holder may direct, a certificate or certificates for the
number of whole shares of Common Stock into which such shares of Preferred Stock
are converted. Such conversion shall be deemed to have been effected as of the
close of business on the date on which such Conversion Notice shall have been
received by the Corporation, and the rights of the Holder of such share or
shares of Preferred Stock shall cease, at such time, and the person or persons
in whose name or names any certificate or certificates for shares of Common
Stock shall be issuable upon such conversion shall be deemed to have become the
Holder or Holders of record of the shares represented thereby. Issuance of
shares of Common Stock issuable upon conversion which are requested to be
registered in a name other than that of the registered Holder shall be subject
to compliance with all applicable federal and state securities laws.
(e) Penalty for Late Delivery. The Corporation shall pay to the Holders a Late
Delivery Penalty, which is defined as liquidated damages of $10.00 per $1,000.00
Stated Value of Preferred Stock for every day subsequent to five (5) business
days after (the later of ) (i) the receipt of an original Conversion Notice and
(ii) the receipt of the original certificate or certificates representing the
share or shares of Preferred Stock, that the Corporation fails to deliver the
Common Stock to the Holder. The Corporation shall not be liable for a Late
Delivery Penalty if the original Conversion Notice is incomplete or inaccurately
filled out or a strike, power failure, weather conditions, terrorist act, an act
of war, or an act of God delays delivery, provided the Corporation has made good
faith efforts to effect timely delivery. Further, in the event of a Late
Delivery Penalty, the number of shares of Common Stock issued upon conversion
pursuant to Section 5(a) shall be adjusted and calculated at an amended
conversion price to reflect any five (5) trading day period as selected by the
Holder commencing on the date that the Private Securities Subscription Agreement
was duly executed by all parties and ending on the date of delivery of the
shares of Common Stock to the Holder (Amended Conversion Price).
(f) Fractional Shares. No fractional shares shall be issued upon conversion of
any Preferred Stock into Common Stock. All fractional shares shall be rounded
down to the nearest whole share. In case the number of shares of Preferred Stock
represented by the certificate or certificates surrendered pursuant to
Subparagraph 5(a) exceeds the number of shares converted, the Corporation shall,
upon such conversion, execute and deliver to the Holder, at the expense of the
Corporation, a new certificate or certificates for the number of shares of
Preferred Stock represented by the certificate or certificates surrendered which
are not to be converted.
(g) Reorganization or Reclassification. If any capital reorganization or
reclassification of the capital stock of the Corporation shall be effected in
such a way that Holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization or reclassification, lawful and adequate
provisions shall be made whereby each Holder of a share or shares of Preferred
Stock shall thereupon have the right to receive, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the conversion of such share or shares
of Preferred Stock, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock immediately
theretofore receivable upon such conversion had such reorganization or
reclassification not taken place, and in any such case appropriate provisions
shall be made with respect to the rights and interests of such Holder to the end
that the provisions hereof (including without limitation provisions for
adjustments of the conversion rights) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of such conversion rights.
(h) Adjustments for Splits, Combinations, etc., The Conversion Price and the
number of shares of Common Stock into which the Preferred Stock shall be
convertible shall be adjusted for stock splits, combinations, or other similar
events. Additionally, an adjustment will be made in the case of an exchange of
Common Stock, consolidation or merger of the Corporation with or into another
corporation or sale of all or substantially all of the assets of the Corporation
in order to enable the Holder of Preferred Stock to acquire the kind and the
number of shares of stock or other securities or property receivable in such
event by a Holder of the Preferred Stock of the number of shares that might
otherwise have been issued upon the conversion of the Preferred Stock. No
adjustment to the Conversion Price will be made for dividends (other than stock
dividends), if any, paid on the Common Stock or for securities issued for fair
value.
(i) Mandatory Conversion. All outstanding shares of Preferred Stock will
automatically convert to Common Stock pursuant to the formula set forth in
Section 5 two (2) years from the date of issuance.
6. Assignment.
Subject to all applicable restrictions on transfer, the rights and obligations
of the Corporation and the Holder of the Preferred Stock shall be binding upon
and benefit the successors, assigns, heirs, administrators, and transferees of
the parties.
7. Shares to be Reserved.
The Corporation, upon the effective date of this Certificate of Designation, has
a sufficient number of shares of Common Stock available to reserve for issuance
upon the conversion of all outstanding shares of Preferred Stock, pursuant to
the terms and conditions set forth in Section 5. The Corporation will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon the conversion of Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Common Stock which shall be so issued shall be duly
and validly issued, fully paid and non assessable. The Corporation will take all
such action as may be required, if the total number of shares of Common Stock
issued and issuable after such action upon conversion of the Preferred Stock
would exceed the total number of shares of Common Stock then authorized by the
Corporation's Certificate of Incorporation, as amended, in order to increase the
number of authorized shares of Common Stock to a number sufficient to permit
conversion of the Preferred Stock.
8(a). Redemption.
The Corporation may redeem the Preferred Stock at any time, in whole or in part,
prior to the submission of a Conversion Notice at one hundred and twenty percent
(120%) of the Stated Value of the Preferred Stock plus all accrued and unpaid
dividends. To redeem Preferred Stock, the Corporation shall deliver notice to
the Holders, provided, however, that the Corporation may not redeem Preferred
Stock after a Notice of Conversion has been delivered by the Holder.
8(b). Mechanics and Effect of Redemption.
As promptly as practicable after receiving notice of the Corporation's election
to redeem the Preferred Stock (but in no case later than three (3) business days
thereafter), the Holder, at its expense, shall surrender the Preferred Stock to
the Corporation, duly endorsed with medallion guarantees, at the principal
offices of the Corporation. The Corporation shall make the redemption payment
within five (5) business days after the Corporation delivers to the Holder
notice of redemption (Redemption Payment Date). Dividends shall continue to
accrue on the Preferred Stock until the Redemption Payment Date. If the
Preferred Stock is to be redeemed in part, then upon surrender of the Preferred
Stock, the Corporation shall deliver to the Holder a new certificate of
Preferred Stock in the aggregate principal amount equal to the unredeemed
portion thereof. If the Corporation falls to make payment, by cheque drawn on an
United States commercial bank, in cash to the Holder, in full by the Redemption
Payment Date, the Corporation shall forfeit its rights of redemption pursuant to
Section 8 in relation to the redemption made and all future redemptions.
9. No Reissuance of Series A Convertible Preferred Stock
Shares of Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.
10. Closing of Books.
The Corporation will at no time close its transfer books against the transfer of
any Preferred Stock or of any shares of Common Stock issued or issuable upon the
conversion of any shares of Preferred Stock in any manner which interferes with
the timely conversion of such Preferred Stock, except as may otherwise be
required to comply with applicable securities laws.
11. Definition of Common Stock.
As used in this Certificate of Designation, the term "Common Stock" shall mean
and include the Corporation's authorized Common Stock, as constituted on the
date of filing of these terms of the Preferred Stock, and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
neither be limited to a fixed sum or percentage of par value in respect of the
rights of the Holders thereof to participate in dividends nor entitled to a
preference in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the corporation; provided that the
shares of Common Stock receivable upon conversion of shares of Preferred Stock
shall include only shares designated as Common Stock of the Corporation on the
date of filing of this instrument, or in case of any reorganization,
reclassification, or stock split of the outstanding shares thereof, the stock,
securities or assets provided for hereof.
The said determination of the designation, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, relating to the Preferred Stock was duly made by the Board
of Directors pursuant to the provisions of the Corporation's Certificate of
Incorporation and in accordance with the provisions of the Delaware General
Corporation Law.
12. Delivery
Except as provided in Section 5(c), all notices and deliveries contemplated
hereunder shall be by Federal Express or other overnight delivery service with
delivery required by the morning of the next business day. Delivery shall be
complete when the Stock Certificates are issued by the Corporation's stock
transfer agent and delivered to Federal Express or other overnight delivery
service.
IN WITNESS HEREOF, this Certificate of Designation has been signed by:
William C. Willis, Jr., President, on this 30th day of November, 1998.
- ------------------------------------------
William C. Willis, Jr., President
TOP SOURCE TECHNOLOGIES, INC.
EXHIBIT 10.20
THIRD CERTIFICATE OF DESIGNATION
OF
TOP SOURCE TECHNOLOGIES, INC.
Section 1. Designation, Number of Shares and Stated Value of Series B
Convertible, Redeemable Preferred Stock. There is hereby authorized and
established a series of Preferred Stock that shall be designated as Series B
Convertible, Redeemable Preferred Stock ("Series B Preferred"), and the number
of shares constituting such Series shall be 3,500. Such number of shares may be
increased or decreased, but not to a number less than the number of shares of
Series B Preferred then issued and outstanding, by resolution adopted by the
Board of Directors. The Stated Value per share of the Series B Preferred shall
be equal to $1,000.
Section 2. Definitions. In addition to the definitions set forth elsewhere
herein, the following terms shall have the meanings indicated:
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in Miami, Florida are authorized or obligated
by law or executive order to close.
"Common Stock" shall mean the common stock, par value $0.001 per share,
of the Corporation.
"Conversion Price" shall mean the conversion price per share of Common
Stock into which the Series B Preferred is convertible, as such conversion price
may be adjusted pursuant to the provisions hereof. The Series B Preferred may be
convertible into a number of shares of Common Stock computed by dividing the
Stated Value of the Series B Preferred being converted by 90% of the closing bid
price for the previous trading day and if the conversion occurs on or after
November 1, 1999, by 85% of the closing bid price for the previous trading day.
"Corporation" shall mean Top Source Technologies, Inc.
"Junior Securities" means the Common Stock and any other series of
stock issued by the Corporation ranking junior as to the Series B Preferred upon
liquidation, dissolution or winding up of the Corporation.
"Original Issue Date" shall mean the date on which shares of the Series
B Preferred are first issued.
"Parity Security" means any class or series of stock issued by the
Corporation ranking on a parity with the Series B Preferred upon liquidation,
dissolution or winding up of the Corporation.
"Person" means any individual, corporation, association, partnership, joint
venture, limited liability company, trust, estate, or other entity or
organization, other than the Corporation, any subsidiary of the Corporation, any
employee benefit plan of the Corporation or any subsidiary of the Corporation,
or any entity holding shares of Common Stock for or pursuant to the terms of any
such plan.
"Senior Securities" means any class or series of stock issued by the
Corporation ranking senior to the Series B Preferred upon liquidation,
dissolution or winding up of the Corporation.
Section 3. Dividends and Distributions.
(a) The Series B Preferred shall rank prior to the Common Stock with
respect to dividends. Dividends shall be payable quarterly, when, as and if
declared by the Board of Directors, on April 10, July 10, October 10, and
January 10 in each year (each a "Dividend Payment Date") to holders of record as
of March 31, June 30, September 30 and December 31 in each year (the "Record
Date"). Dividends shall be paid in cash unless the Corporation is unable to do
so as a result of a restriction contained in a loan agreement or other financing
agreement entered into prior to or after the date of this Second Certificate of
Designation or if the agreement to pay cash or the payment of cash results in a
breach of any such agreement. In such case the Corporation shall issue shares of
its Common Stock in lieu of a cash dividend. The number of shares of Common
Stock to be issued as a dividend shall be based upon the Conversion Price then
in effect, and the previous trading day shall be deemed to be as of the
applicable Record Date. Such number shall be increased by 25% and rounded up to
the nearest whole share. By way of example, if a quarterly dividend is $78,750
and the Conversion Price is $1.00, 98,438 shares of Common Stock shall be
issued. The registration rights contained in Section 4(c) of the Stock Purchase
Agreement entered into between the Corporation and the Wilmington Trust Co. &
George Jeff Mennen, Co-Trustees shall apply to all shares of Common Stock issued
as dividends.
(b) Dividends shall be calculated on the basis of the time elapsed from
and including the date of issuance of such shares to and including the Record
Date or on any final distribution date relating to conversion or redemption or
to a dissolution, liquidation or winding up of the Corporation. Dividends
payable on the shares of Series B Preferred for any period of less than a full
calendar year shall be pro-rated for the partial year on the basis of a 360-day
year.
(c) Dividends payable on each Dividend Payment Date shall be paid to
record holders of the shares of Series B Preferred as they appear on the books
of the Corporation at the close of business on the applicable Record Date
immediately preceding the respective Dividend Payment Date or on such other
record date as may be fixed by the Board of Directors of the Corporation in
advance of a Dividend Payment Date, provided that no such Record Date shall be
less than 10 nor more than 60 calendar days preceding such Dividend Payment
Date.
(d) So long as any shares of Series B Preferred are outstanding, no
dividend or other distribution, whether in liquidation or otherwise, shall be
declared or paid, or set apart for payment on or in respect of, any Junior
Securities, nor shall any Junior Securities be redeemed, purchased or otherwise
acquired for any consideration (or any money be paid to a sinking fund or
otherwise set apart for the purchase or redemption of any such Junior
Securities), unless (i) all dividends have been paid on all outstanding shares
of the Series B Preferred shall have been paid or set apart for payment for all
past dividend periods, and (ii) sufficient funds shall have been set apart for
the payment of the dividend for the then current dividend period with respect to
the Series B Preferred.
Section 4. Certain Covenants and Restrictions.
(a) So long as any shares of Series B Preferred are outstanding.
(i) The Corporation shall at all times reserve and keep
available for issuance upon the conversion of the shares of Series B
Preferred such number of its authorized but unissued shares of Common
Stock as will be sufficient to permit the conversion of all outstanding
shares of Series B Preferred, and all other securities and instruments
convertible into shares of Common Stock, and shall take all reasonable
action within its power required to increase the authorized number of
shares of Common Stock necessary to permit the conversion of all such
shares of Series B Preferred and all other securities and instruments
convertible into shares of Common Stock.
(ii) The Corporation represents, warrants and agrees that all
shares of Common Stock that may be issued upon exercise of the
conversion rights of shares of Series B Preferred will, upon issuance,
be fully-paid and non-assessable.
(iii) The Corporation will endeavor to make the shares of
stock that may be issued upon exercise of the conversion rights of
shares of Series B Preferred eligible for trading upon any national
securities exchange, or any automated quotation system of a registered
securities association, if any, upon or through which the Common Stock
shall then be traded prior to such delivery.
(iv) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon redemption or conversion
of the Series B Preferred, the Corporation will endeavor to comply with
all federal and state securities laws and regulations thereunder
requiring the registration of such securities with, or any approval of
or consent to the delivery of such securities by, any governmental
authority.
(v) The Corporation shall pay all taxes and other governmental
charges (other than any income or franchise taxes) that may be imposed
with respect to the issue or delivery of shares of Common Stock upon
conversion of Series B Preferred as provided herein. The Corporation
shall not be required, however, to pay any tax or other charge imposed
in connection with any transfer involved in the issue of any
certificate for shares of Common Stock in any name other than that of
the registered holder of the shares of the Series B Preferred
surrendered in connection with the conversion thereof, and in such case
the Corporation shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid, or it has
been established to the Corporation's satisfaction that no tax or other
charge is due.
(b) In the event the Corporation proposes to offer, sell or issue any
of its equity securities (including, without limitation, shares of the
Corporation's capital stock or any rights to acquire such shares), excluding (i)
interests issued pursuant to the Corporation's option plans that have been
adopted by the stockholders of the Corporation, (ii) securities issuable
pursuant to a transaction governed by Rule 145 of the Securities Act of 1933, as
amended, and (iii) securities issuable as dividends or upon the exercise or
conversion of other securities outstanding as of the filing of this Second
Certificate of Designation with the Delaware Secretary of State, then the
holders of shares of Series B Preferred shall have the preemptive right to
acquire such securities from the Corporation. In the event that the Corporation
proposes to make any offer, sale or issuance that is subject to this Section
4(b), then and in each such case the Corporation shall at least 15 days prior to
any such event (the "Window"), provide to the Series B Preferred holders written
notice of the Corporation's intention to take such action. Such notice shall
include the number and type of securities, the price, the intended transaction
date, and any other information reasonably requested by the Series B Preferred
holders. Each Series B Preferred holder may exercise this preemptive right, by
providing written notice to the Corporation within eight days (the "Response")
after receipt of the foregoing notice from the Corporation, with respect to a
percentage of the securities to be offered, sold or issued, calculated by
dividing (i) the number of shares of Common Stock then entitled to be received
upon the conversion of all shares of Series B Preferred held by such holder, by
(ii) the total number of shares of Common Stock then entitled to be received
upon the conversion of all shares of Series B Preferred then outstanding. In the
event any holder(s) shall elect not to exercise the preemptive rights as
provided hereunder, then the aggregate shares otherwise entitled to be purchased
by such non-participating holders (the "Non-Subscribed Securities") shall be
available for purchase by each remaining Series B Preferred holder, who shall
accordingly receive notice from the Corporation of such availability within
three days after the expiration of the Response Date, in the proportion that the
number of shares of Common Stock then entitled to be received by such holder
upon conversion of its Series B Preferred shares then held bears to the total
number shares of Common Stock then entitled to be received upon conversion of
the Series B Preferred shares held by all such holders electing to exercise
preemptive rights. The preemptive rights to acquire the Non-Subscribed
Securities shall expire upon the expiration of the Window, at which time the
Corporation may sell or issue any and all securities regarding which the Series
B Preferred holders failed to exercise their preemptive rights hereunder.
Section 5. Redemption of the Company. The Corporation shall have the
option to redeem the Series B Preferred at 110% of Stated Value plus accrued
dividends at any time on or before April 30, 1999 and at a price of 115% of
Stated Value plus accrued dividends for a period of 180-days commencing on May
1, 1999 and expiring at 6:00 p.m., Miami time on October 27, 1999.
Section 6. Reacquired Shares. Any shares of Series B Preferred
repurchased, redeemed, converted or otherwise acquired by the Corporation shall
be retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock, without designation as to series or class.
Section 7. Voting Rights. Except as otherwise provided in by law, the
holders of the shares of Series B Preferred shall not have the right to vote on
any matters that come before the stockholders of the Corporation.
Section 8. Conversion Rights. Holders of shares of Series B Preferred shall
have the right to convert all or a portion of such shares into Common Stock, as
follows:
(a) Prior to November 1, 1999, the Series B Preferred shall not be
convertible without the express written consent of the Corporation.
(b) Once convertible, the Series B Preferred may be convertible into a
number of shares of Common Stock computed by dividing the Stated Value of the
Series B Preferred (including accrued dividends) being converted by 90% of the
closing bid price for the previous trading day and if the conversion occurs on
or after November 1, 1999 by dividing the Stated Value of the Series B Preferred
(including accrued dividends) being converted by 85% of the closing bid price
for the previous trading day. The closing bid price shall be determined by the
principal market for the Corporation's Common Stock.
(c) Fractional shares shall not be issued and the Corporation shall
issue cash for any fractional shares.
(d) The conversion of any share of Series B Preferred may be effected
by the holder thereof by the surrender of the certificate or certificates
therefor, duly endorsed, at the principal offices of the Corporation or to such
agent or agents of the Corporation as may be designated by the Board of
Directors and by filing written notice to the Corporation that such holder
elects to convert the same.
(e) As promptly as practicable after the surrender of shares of Series
B Preferred for conversion, the Corporation shall issue and deliver or cause to
be issued and delivered to the holder of such shares certificates representing
the number of fully paid and non-assessable share of Common Stock into which
such shares of Series B Preferred has been converted in accordance with the
provisions of this Section 8. Subject to the following provisions of this
Section 8(f), such conversion shall be deemed to have been made as of the close
of business on the date on which the shares of Series B Preferred shall have
been surrendered for conversion in the manner herein provided, so that the
rights of the holder of the shares of Series B Preferred so surrendered shall
cease at such time, and the person or persons entitled to receive the shares of
Common Stock upon conversion thereof shall be treated for all purposed as having
become the record holder or holders thereof for all purposes, at the opening of
business on the next succeeding day on which such transfer books are open.
Section 9. Record Holders. The Corporation may deem and treat the record
holder of any shares of Series B Preferred as the true and lawful owner thereof
for all purposes, and the Corporation shall not be affected by any notice to the
contrary.
Section 10. Notice. Except as may otherwise be provided by law or
provided for herein, all notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have been given upon receipt, in the case
of a notice of conversion given to the Corporation, or, in all other cases, upon
the earlier of receipt of such notice or two Business Days after the delivery by
overnight courier addressed if to the Corporation, to its principal executive
offices or to any agent of the Corporation designated as permitted hereby, or if
to a holder of the Series B Preferred, to such holder at the address of such
holder of the Series B Preferred as listed in the stock record books of the
Corporation, or to such other address as the Corporation or holder, as the case
may be, shall have designated by notice similarly given.
Section 11. Successors and Transferees. The provisions applicable to
shares of Series B Preferred shall bind and inure to the benefit of and be
enforceable by the Corporation, the respective successors to the Corporation,
and by any record holder of shares of Series B Preferred.
IN WITNESS WHEREOF, the undersigned has signed and executed the
foregoing Second Certificate of Designation on this 17th day of November, 1998.
TOP SOURCE TECHNOLOGIES, INC.
By:_______________________________
William C. Willis, Jr., President
EXHIBIT 10.21
AMENDMENT TO NOTE PURCHASE AGREEMENT
THIS AMENDMENT (the "Amendment") to the Note Purchase Agreement dated
as of June 9, 1995 entered into as of this ____ day of November 1998, by and
among Top Source Technologies, Inc. (the "Company"), the purchasers listed on
Exhibit A hereto (the "Mellon Purchasers") and Mellon Private Asset Management,
formerly known as Ganz Capital Management, Inc. (the "Agent"). Capitalized terms
used herein and not otherwise defined shall have the same meaning set forth in
the Note Purchase Agreement (the "Agreement").
WHEREAS, the Company, the Mellon Purchasers and the Agent entered into the
Agreement as of June 9, 1995; and
WHEREAS, the Company, the Mellon Purchasers and the Agent wish to
modify certain terms and conditions contained in the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
consideration contained in this Agreement, the parties agree as follows:
A. Waiver of Certain Provisions. The Agent waives certain provisions of the
Agreement as follows:
(a) The ratio of Indebtedness to equity contained in Section
8.1(a) of the Agreement shall be waived through and including September
30, 1999.
(b) Notwithstanding the provisions of Section 8.1(b) of the
Agreement, the Company may make Restricted Payments for the purpose of
paying cash dividends on Preferred Stock sold after November 1, 1998
and for the purpose of redeeming any Preferred Stock.
(c) Upon the making of the payments provided in Section 2(a)
and 2(b) of this Amendment, notwithstanding the provisions of Sections
8.2 and 8.7 of the Agreement, the Company and its Subsidiary, Top
Source Automotive, Inc. ("TSA"), may sell the assets of Top Source
Automotive, Inc. to NCT Audio
Products, Inc. ("NCT").
2. Prepayment of Notes.
(a) On or before December ___, 1998, the Company shall pay
each of the Mellon Purchasers $.33 for each $1.00 of principal amount
of the Notes held by such Mellon Purchaser.
(b) If, as and when the stockholders of the Company approve
the sale of assets of TSA to NCT, the Company shall pay to each of the
Mellon Purchasers $.37 for each $1.00 of principal amount of Notes held
by such Mellon Purchaser.
3. Modification of the Notes. After the making of the payments referred
to in Section 2(b) above, the remaining Notes held by the Mellon Purchasers
shall be modified by reducing the conversion price from $10.00 per share to
$2.00 per share, subject to adjustment as provided in the Agreement, and by
reducing the interest rate from 9% per annum to 5% per annum (which reduction
shall not be retroactive). The Agent represents that it has the authority to act
in this regard on behalf of the Mellon Purchasers.
4. Disclosure. The Agent represents that it has received a copy of the
Company's Proxy Statement dated November 6, 1998 and such Proxy Statement has
been made available to the Mellon Purchasers either directly or through access
on the Internet on the Securities and Exchange Commission Website, www.sec.gov.
5. Status of the Agreement. The Agreement is ratified and confirmed and
except as specifically modified by this Amendment, it shall remain in effect.
6. Severability. In the event any parts of this Amendment are found to
be void, the remaining provisions of this Amendment shall nevertheless be
binding with the same effect as though the void parts were deleted.
7. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. The execution of this
Amendment may be by actual or facsimile signature.
8. Benefit. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their legal representatives, successors and
assigns.
9. Notices and Addresses. All notices, offers, acceptance and any other
acts under this Amendment (except payment) shall be in writing, and shall be
sufficiently given if delivered to the addressees in person, by Federal Express
or similar receipted delivery, by facsimile delivery or, if mailed, postage
prepaid, by certified mail, return receipt requested, as follows:
The Company: Top Source Technologies, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418-3757
Facsimile: (561) 691-5220
with a copy to: Michael D. Harris, Esq.
MICHAEL HARRIS, P.A.
1645 Palm Beach Lakes Blvd.
Suite 550
West Palm Beach, FL 33401
Facsimile (561) 478-1817
The Agent: Mellon Private Asset Management
f/n/a Ganz Capital Management, Inc.
2875 N.E. 191st Street, Penthouse I
North Miami Beach, FL 33180
Facsimile: (305) 936-0051
or to such other address as either of them, by notice to the other may designate
from time to time. The transmission confirmation receipt from the sender's
facsimile machine shall be conclusive evidence of successful facsimile delivery.
Time shall be counted to, or from, as the case may be, the delivery in person or
by mailing.
10. Attorney's Fees. In the event that there is any controversy or
claim arising out of or relating to this Amendment, or to the interpretation,
breach or enforcement thereof, and any action or proceeding including an
arbitration proceeding is commenced to enforce the provisions of this Amendment,
the prevailing party shall be entitled to an award by the court or arbitrator,
as appropriate, of reasonable attorney's fees, costs and expenses.
11. Oral Evidence. This Amendment constitutes the entire Amendment
between the parties and supersedes all prior oral and written agreements between
the parties hereto with respect to the subject matter hereof. Neither this
Amendment nor any provision hereof may be changed, waived, discharged or
terminated orally, except by a statement in writing signed by the party or
parties against which enforcement or the change, waiver discharge or termination
is sought.
12. Additional Documents. The parties hereto shall execute such
additional instruments as may be reasonably required by their counsel in order
to carry out the purpose and intent of this Amendment and to fulfill the
obligations of the parties hereunder.
13. Governing Law. This Amendment and any dispute, disagreement, or
issue of construction or interpretation arising hereunder whether relating to
its execution, its validity, the obligations provided herein or performance
shall be governed or interpreted according to the internal laws of the State of
Florida without regard to choice of law considerations.
14. Section or Paragraph Headings. Section headings herein have been
inserted for reference only and shall not be deemed to limit or otherwise
affect, in any matter, or be deemed to interpret in whole or in part any of the
terms or provisions of this Amendment.
IN WITNESS WHEREOF the parties hereto have set their hand and seals as
of the date first above written.
WITNESSES: TOP SOURCE TECHNOLOGIES, INC.
By:
William C. Willis, Jr.
President
MELLON PRIVATE ASSET MANAGEMENT
F/K/A GANZ CAPITAL MANAGEMENT, INC.
By:
EXHIBIT A
THE MELLON PURCHASERS
Mrs. Lois England
Mr. Richard England
Mr. Joyce Gillman
Mr. Norman Broad
Ms. Pauline Ganz
Macks Family Foundation
Dr. Arthur Gillman
Kane Investments
Mr. Richard Slavin
Mr. Erwin Harvith
Mr. Arthur Horowitz
Mrs. Arthur Horowitz
Mr. Morris Futernick
Mr. Richard Slavin
Mrs. Richard Slavin
Mr. Richard Freundlich
Mr. Donald A. Kaplan
<PAGE>
December 2, 1998
Via Fax and Federal Express
Dear Noteholder:
We are writing to solicit your consent to the modification of the Note
Purchase Agreement (the "Agreement") dated as of June 9, 1995 among Top Source
Technologies, Inc. (the "Company"), Ganz Capital Management, Inc. (the "agent")
and various Noteholders who purchased an aggregate of $3,020,000 in principal
amount of the Company's 9% Senior Subordinated Convertible Note due June 9, 2000
(the "Notes"). The modification is contained in the enclosed amendment (the
"Amendment"). Under the terms of the Agreement, your consent is required because
the Amendment provides for (1) partial pre-payment of your Note, for (2) the
reduction in the conversion price of your Note from $10.00 to $2.00, and for (3)
the reduction of the interest rate on your Note from 9% to 5%. The Amendment has
been negotiated over a number of months between Top Source and representatives
of Mellon Bank, which owns the Agent. With the Federal Express version of this
letter, we are enclos- ing a copy of the Company's Proxy Statement and
Supplement to the Proxy Statement.
As is typical with any agreement, both sides made concessions. In
addition to the substantially reduced conversion price (thus providing you the
potential to convert your Note to equity on substantially improved terms) and
reduced interest rate, the Company is required to prepay the Notes as follows:
(i) On or before December 15, 1998, the Company shall pay each Noteholder who
consents to prepayment, the amount of $.33 for each $1.00 of principal
amount of Notes held (less a credit for pro-rata prepaid interest); and
(ii) Assuming that the stockholders of the Company approve the sale of the
assets of its subsidiary, Top Source Automotive, Inc. to NCT Audio
Products, Inc. at the stockholders' meeting currently scheduled for
December 15, 1998, not later than two days later the Company shall pay each
consenting Note- holder an additional $.37 for each $1.00 principal amount
of Notes owned by such Noteholder (less a credit for pro-rata prepaid
interest) bringing the total pre-payment to $.70 for each $1.00 principal
amount of Notes.
In order to receive the payments described above, each Noteholder being
offered these terms must consent to the Amendment. We have provided two
alternative boxes for you to express your position. The first box represents
approval of the prepayment transaction negotiated by the Agent.
Because time is of the essence and your consent is needed, we are
requesting that you Fax (561) 691-5220 or deliver via Priority Mail/Fedex your
response as quickly as possible but not later than December 11, 1998.
Sincerely, yours,
William C. Willis, Jr.
President and CEO
ww/jmo
cc: Mellon Bank, N.A.
Ganz Capital Management, Inc.
==============================================================================
OPTION 1
_____ I hereby agree to the terms and conditions of the Amendment
-----
substantially in the form presented by Top Source Technologies
and supported by Ganz Capital Management, Inc.
OPTION 2
_____ I hereby agree to the terms and conditions of the Amendment
-----
substantially in the form presented by Top Source Technologies
except I do not want to have my Note prepaid.
------
---------------------
Signature
---------------------
Print Name
December , 1998_
<PAGE>
EXHIBIT A
TO
AMENDMENT TO NOTE PURCHASE AGREEMENT
LIST OF CONSENTING PURCHASERS
[To be completed upon receipt of consents.]
<PAGE>
Exhibit B
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
9% Senior Subordinated Convertible Notes
Maturity Date: June 20, 2000
Interest: 9% based over twelve 30-day months and a 360-day year
Interest is payable on July 1 and January 1
<S> <C> <C> <C> <C>
Summary of Note Holders: ParticiNoteng
Name House Amount Name Attention
- ---------------------------------------------------------------------------------------------------------
F/B/O Lewis A. Imerman Successor Trustee U/A FBO JComeri35,000tComerica Boris Vasileff
F/B/O Kaaren Reagan IRA Dean W25,000 Mellon Bank Proxy Unit
Alice A. Schrieber Indivi25,000 Alice A. Shrieber c/o Blades & Ros
Batrus & Co. Indivi50,000 Batrus & Co.
Green Haft Trustee F/B/O Richard J. Haft Indivi125,000Richard Haft Richard Haft
Morris Futernick Family Foundation Indivi35,000 Northern Trust BanChristopheraRuss
Richard J. Haft Indivi20,000 Richard Haft Richard Haft
C/F Lois England 8%-Charitable Remainder Annuity TInvest125,000Investors Bank TruRon Gayton
C/F Richard England 5%-Charitable Remainder AnnuitInvest125,000Investors Bank TruRon Gayton
FBO Ganz Advisory Accounts-Vision Associates Kalb V30,000 Kalb Voorhis & Co.Mark Criscitello
E. Pierce Marshall, Successor Trustee Eleanor P. MIndivi100,000Same
Elaine T. Marshall, Trustee FBO Elaine H. MarshallIndivi100,000Same
FBO Ganz Advisory Accounts Mac & 125,000Mellon Bank Proxy Unit
Harvey R. Sorenson, Trustee Eleanor P. Marshall StMacn& 85,000tMellonrBankInvest Proxy Unit
Harvey R. Sorenson, Trustee, Eleanor P. Marshall SMace&s15,000tMellonrBankInvest Proxy Unit
Richard Freundlich Mac & 35,000 Mellon Bank Proxy Unit
Arthur Horowitz and Bernice Horowitz Mellon35,000 Mellon Bank Proxy Unit
Bernice Goldstein Mellon100,000Mellon Bank Proxy Unit
Budd & Nanette Mayer Foundation Inc. Mellon20,000 Mellon Bank Proxy Unit
Erwin Harvith Trust U/A DTD6-28-72, Sylvia HarvithMellon30,000 Mellon Bank Proxy Unit
FBO Ganz Advisory Accounts-Kane Investments Mellon25,000 Mellon Bank Proxy Unit
Frank Lipschutz Trust Mellon145,000Mellon Bank Proxy Unit
Joy Steinberg, Trustee, Joy Steinberg Revocable TrMellon25,000 Mellon Bank Proxy Unit
Joyce Haft-Gillman Mellon25,000 Mellon Bank Proxy Unit
Louise D. and Morton J. Macks Family Foundation, IMellon25,000eMellongBankst Proxy Unit
May Lipschutz Trust Mellon120,000Mellon Bank Proxy Unit
Milton Steinberg, Trustee, Milton Steinberg RevocaMellon25,000 Mellon Bank Proxy Unit
Norman Broad-Account G Mellon20,000 Mellon Bank Proxy Unit
Pauline Ganz Revocable Trust Mellon25,000 Mellon Bank Proxy Unit
Richard Slavin and June Slavin Mellon35,000 Mellon Bank Proxy Unit
Richard Slavin, IRA R/O Mellon25,000 Mellon Bank Proxy Unit
The Ganz Family Foundation Mellon35,000 Mellon Bank Proxy Unit
The Louise and Morton Macks Family Foundation Mellon25,000 Mellon Bank Proxy Unit
The Nancy & Charles Ganz Family Supporting FoundatMellon25,000 Mellon Bank Proxy Unit
Slade Inc. Mercan$125,00Mercantile Safe DeJanet Stamas
The Pearlstone Foundation for Jewish Living Mercan150,000Mercantile Safe DeJanet Stamas
The Pearlstone Institute for Living Judiasm Mercan150,000Mercantile Safe DeJanet Stamas
The Peggy Meyerhoff Pearlstone Foundation Mercan20,000 Mercantile Safe DeJanet Stamas
Frederick D. Tecce Merril100,000Paine Webber John Frampton
R.J. Thomas Nation75,000 Nations Bank of Texas
Donald A Kaplan IRA Paine 50,000 Paine Webber Mark Milask
Joan G. Robbins Indivi50,000 Joan G. Robbins Joan G. Robbins
Arthur Gillman M.D., Joyce S. Gillman Co-Trustees Pruden40,0001Arthur & Joyce GilArthur & Joyce
Clive E. Roberson MD Indivi140,000Clive E. Roberson,Clive E. Roberso
=======
Total $3,020,000
=======
</TABLE>
<PAGE>
EXHIBIT C
TO
AMENDMENT TO NOTE PURCHASE AGREEMENT
List of Holders of Senior Indebtedness
NationsCredit Commercial Corporation, through its
NationsCredit Commercial Funding Division
222 North LaSalle Street, Suite 500
Chicago, Illinois 60601
<PAGE>
EXHIBIT D
December 1, 1998
Michael Harris, P.A., Escrow Agent
1645 Palm Beach Lakes Blvd.
Suite 550
West Palm Beach, FL 33401
Re: Top Source Technologies, Inc./Ganz
Dear Sirs:
Reference is made to the sum of $2,050,000 together with accrued
interest accruing thereon which you are currently holding in escrow pursuant to
the Asset Purchase Agreement by and among Top Source Technologies, Inc. (the
"Company"), Top Source Automotive, Inc. ("TSA"), NCT Audio Products, Inc. and
Noise Cancellation Technologies, Inc. entered into as of August 14, 1998 as
amended (the "Agreement"). Pursuant to the terms and conditions of an escrow
agreement, you are required to hold the funds in escrow until such time as the
stockholders of the Company have convened the meeting and voted upon the
proposal of sale of the assets of TSA pursuant to the terms and conditions of
the Agreement. At such time as the stockholders of the Company approve the sale
of the assets of TSA pursuant to the Agreement, you are directed to pay to the
noteholders listed on Exhibit A the amounts set forth on that exhibit (except to
the extent any of the noteholders elect in writing not to be prepaid) and
disburse the balance to TSA. The Company agrees that the noteholders listed on
Exhibit A are third party beneficiaries of this letter agreement. These payment
instructions are subject to the Company entering into a binding agreement with
Ganz Capital Management, Inc. which is substantially in the form sent to holders
of outstanding convertible notes.
Please execute a copy of this letter evidencing your agreement to abide
by these payment instructions.
Very truly yours,
William C. Willis, Jr.
President and CEO
ww/jmo
cc: Ganz Capital Management, Inc.
We hereby agree to the contents of the foregoing letter agreement.
Date: December ___, 1998 MICHAEL HARRIS, P.A.
By: _________________
Michael D. Harris, President
EXHIBIT 10.22
AMENDED STOCK PURCHASE AGREEMENT
THIS AMENDED STOCK PURCHASE AGREEMENT (the "Agreement") entered into as
of this 23rd day of December, 1998, by and among TOP SOURCE TECHNOLOGIES, INC.
(the "Company"), G. Jeff Mennen, Co-Trustee U/A Dated 10/23/85 FBO Descendents
of George S. Mennen ("Mennen") and Wilmington Trust Co. ("Wilmington") & George
Jeff Mennen, Co-Trustees U/A dated 11/25/70 with George S. Mennen for John Henry
Mennen (collectively the "Purchasers") hereby amends that certain Stock Purchase
Agreement dated on November 17, 1998, as amended in order to correct scriveners
errors as to the parties to that Agreement.
WHEREAS, the Company desires to sell and has sold to Wilmington and
Mennen $2,000,000 and $1,500,000, respectively, of 9% Series B Convertible
Preferred Stock (the "Preferred Stock") on the terms and conditions contained in
this Agreement.
WHEREAS, Wilmington and Mennen desire to purchase and have purchased
$2,000,000 and $1,500,000, respectively, of Preferred Stock on the terms and
conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises made herein,
and in consideration of the representations, warranties, and covenants contained
herein, the parties agree as follows:
1. Sale of Preferred Stock and Warrants.
(a) Purchase and Sale of Preferred Stock. On and subject to
the terms and conditions of this Agreement, the Company has sold to
Mennen and Wilmington and Mennen and Wilmington have purchased from the
Company $1,500,000 and $2,000,000, respectively, of Preferred Stock.
The terms and conditions of the Preferred Stock are contained on the
Certificate of Designation annexed as Schedule 1(a) to this Agreement
which Certificate of Designation has been filed with the Delaware
Secretary of State following the Closing, as defined.
(b) Issuance of the Warrants. As additional consideration for
the $3,500,000 to be paid by the Purchasers, the Company issued Mennen
and Wilmington 150,000 and 200,000 warrants, respectively, (the
"Warrants") exercisable at a price of $1.00 above the last sale price
of the Company's common stock the day of the Closing, as defined or
$1.9375 per share. The Warrants shall not be redeemable and shall be
exercisable for a period of 10 years from issuance. Additionally, if
the Preferred Stock has not been redeemed or converted into common
stock on or before May 1, 1999, the Company shall issue to Mennen and
Wilmington an additional 21,429 and 28,571 Warrants, respectively,
containing the same terms and conditions as the 350,000 Warrants except
that the 50,000 Warrants shall be exercisable at a price of $.50 per
share above the last sale of the Company's common stock on April 30,
1999.
(c) The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") took place at the offices of the
Company at 7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida
at 10:00 a.m. on the 17th day of November, 1998. At the Closing, (i)
the Company delivered to the Purchasers the various certificates,
instruments and documents referred to in this Agreement including
certificates for the Preferred Stock and the Warrants, (ii) the
Purchasers delivered to the Company $3,500,000, and (iii) the Company
executed the Certificate of Designation and transmitted it for filing
to the Delaware Secretary of State.
2. Representations and Warranties of the Company. The Company
represents and warrants to the Purchasers that the statements contained in this
Section 2 are, to its knowledge, correct and complete as of the date of this
Agreement and were, to its knowledge, correct and complete as of the Closing
Date.
(a) Organization of the Company. The Company is a corporation
duly organized, validly existing, and in good standing under the laws
of the State of Delaware. The Company is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction in
which the Company owns, leases or operates property or in which such
qualification is required for the conduct of its business except where
the failure to be so qualified will not have a material adverse effect
on the results of operations or future prospects of the Company taken
as a whole. The Company has full corporate power and authority to carry
on the businesses in which it is engaged and to own and use the
properties owned and used by it. The Company has delivered to the
Purchasers correct and complete copies of its certificate of
incorporation and bylaws, as amended. The Company is not in default
under or in violation of any provision of its certificate of
incorporation or bylaws.
(b) Authorization of Transaction. The Company has the full
power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. Subject to execution, delivery and
authorization of the Purchasers, this Agreement constitutes the binding
obligation of the Company enforceable in accordance with its terms and
conditions. The Company need not give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
(c) Non-Contravention. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions
contemplated hereby, will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court
to which the Company is subject or, (ii) conflict with, result in a
breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under, any agreement, contract, lease,
license, instrument, or other arrangement to which the Company is a
party or by which it is bound or to which any of its assets are
subject.
(d) Brokers' Fees. The Company has no liability or obligation
to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which
the Purchasers could become liable or obligated.
(e) Title to Assets. The Company has good and marketable title
to, or a valid leasehold interest in, the properties and assets used by
it, located on its premises, shown on its Form 10-Q for the quarter
ended June 30, 1998 (the "Form 10-Q") or acquired after the date
thereof and the properties and assets are free and clear of all
security interests, except for properties and assets disposed of in the
ordinary course of business since June 30, 1998, as shown on Schedule
2(e), or as disclosed on the Form 10-Q, Form 10-K/A No. 3 for the year
ended September 30, 1997 (the "Form 10-K") or the preliminary Proxy
Statement dated November 6, 1998 (the "Proxy") and the Supplement dated
November 23, 1998 filed by the Company with the Securities and Exchange
Commission (the "SEC").
(f) Capitalization.
(i) The authorized capital stock of the Company
consists of 50,000,000 shares of common stock of which
29,018,439 shares are outstanding and 5,000,000 shares of
Preferred Stock of which 1,000 shares of 5% Series A Preferred
Stock were outstanding as of November 17, 1998. All of the
issued and outstanding shares of common stock and the
outstanding 5% Series A Preferred Stock are validly issued and
are fully paid, non-assessable and free of preemptive rights.
(ii) Except as disclosed in the Form 10-Q, the Form
10-K, the Proxy or the Supplement, or as set forth on Schedule
2(f)(ii), there are (A) no outstanding subscriptions, options,
calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security,
instrument or other agreement and also including any rights
plan or other anti-takeover agreement, obligating the Company
to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of the capital stock of the Company or
obligating the Company to grant, extend or enter into any
agreement or commitment, and (B) no voting trusts, proxies or
other agreements or understandings to which the Company is a
party or is bound with respect to the voting of any shares of
the capital stock of the Company. The shares of common stock
to be issued to the Purchasers upon conversion of the
Preferred Stock and exercise of the Warrants will be duly
authorized, validly issued, fully paid and non-assessable and
free of preemptive rights.
(g) Reports and Financial Statements. The Company has filed
with the SEC all forms, statements, reports and documents (including
all exhibits, amendments and supplements thereto) required to be filed
by it under each of the Securities Act of 1933 (the "Securities Act"),
the Securities Exchange Act of 1934 and the respective rules and
regulations thereunder, all of which, as amended if applicable,
complied in all material respects with all applicable requirements of
the appropriate act and the rules and regulations thereunder. The
Company has previously delivered to the Purchasers copies of its Form
10-Q, Form 10-K, the Proxy and the Supplement. As of their respective
dates, the Form 10-Q, the Form 10-K, the Proxy and the Supplement did
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included
in such reports (collectively the "Company's Financial Statements")
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial
position of the Company as of the dates thereof and the results of
operations and changes in financial position for the periods then
ended, subject, in the case of the unaudited interim financial
statements, to normal year-end and audit adjustments and any other
adjustments described therein.
(h) Absence of Undisclosed Liabilities. Except as disclosed in
the Form 10-Q, the Company did not have at June 30, 1998, and has not
incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except: (A)
liabilities, obligations or contingencies (1) which are accrued or
reserved against in the Company's Financial Statements or reflected in
the notes thereto, or (2) which were incurred after June 30, 1998 and
were incurred in the ordinary course of business and consistent with
past practices; (B) liabilities, obligations or contingencies which (1)
would not, in the aggregate, have a material adverse effect on the
Company, or (2) have been discharged or paid in full prior to the date
hereof; and (C) liabilities and obligations which are of a nature not
required to be reflected in the financial statements of the Company
prepared in accordance with generally accepted accounting principles
consistently applied and which were incurred in the ordinary course of
business.
(i) Absence of Certain Changes or Events. Since the date of
the Form 10-Q, except as disclosed in the Proxy, there has not been any
material adverse change in the business, operations, properties,
assets, liabilities, condition (financial or other), results of
operations or prospects of the Company, taken as a whole, including as
a result of any change in capital structure, employee compensation
arrangement (including severance rights and benefit plans), accounting
method or applicable law.
(j) Material Agreements. Since October 1, 1997, the Company
has not entered into any material agreements which were not filed as
exhibits to or disclosed in the Form 10-Q, Form 10-K, the Proxy or the
Supplement except in the ordinary course of business.
(k) Form 8-Ks. Since October 1, 1997, the Company has not
filed with the SEC any reports on Form 8-K.
(l) Disclosure. The representations and warranties contained
in this Section 2(l) do not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements and information contained in this Section 4 not misleading.
(m) No Other Representations. The Company shall not be deemed
to have made to the Purchasers any representation or warranty other
than as is expressly made in Sections 2(a) through (l).
3. Representations and Warranties of the Purchasers. The
representations and warranties of Wilmington are being made by George
Jeff Mennen, as Co-Trustee and Wilmington Trust Co., Trustee is relying
on George Jeff Mennen as to the accuracy of such representations and
warranties.
(a) Authorization of Transaction. The Purchasers have the full
power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. Subject to execution, delivery and
authorization of the Company, this Agreement constitutes the obligation
of the Purchasers enforceable in accordance with its terms and
conditions. The Purchasers need not give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
(b) Investment Intent. The Purchasers are acquiring the
Preferred Stock and the Warrants for investment for their own account
and not with a view to, or for resale in connection with any
distribution thereof. The Purchasers understand that neither the
Preferred Stock nor the Warrants have been registered under the
Securities Act or the securities laws of any state by reason of
specific exemptions from the registration provisions of the Securities
Act and applicable state securities laws, which exemptions are
dependent upon, among other things, the bona fide nature of the
investment of the Purchasers as expressed herein.
(c) Accreditation Investor. The Purchasers are "accredited
investors" as that term is defined by Rule 501(a) promulgated under the
Securities Act.
(d) Rule 144. The Purchasers understand that the Preferred
Stock and the Warrants must be held indefinitely by them unless
subsequently registered under the Securities Act and applicable
securities laws or an exemption from such registration is available.
The Purchasers are aware of the provisions of Rule 144 promulgated
under the Securities Act which permit limited resale of securities
purchased in a private placement subject to the satisfaction of certain
conditions.
(e) No Public Market. The Purchasers understand that no public
market now exists for any of the Preferred Stock or Warrants to be
issued to it and that a public market is not expected to ever exist for
the Preferred Stock or the Warrants. the Purchasers are relying upon
the registration rights provided by Section 4(c) of this Agreement.
(f) Endorsement or Approval. The Purchasers understand and
acknowledge that no federal or state agency has passed upon or made any
recommendations or endorsement of the Preferred Stock or the Warrants.
(g) Direct Communication. The offer and sale of the Preferred
Stock and the Warrants to the Purchasers was made only through direct
personal communication between officers of the Company and officers or
representatives of the Purchasers and not through any general
solicitation or advertising.
4. Post-Closing Covenants. The Company agrees as follows with respect
to the period following the Closing:
(a) General. In case at any time after the Closing any further
action is necessary to carry out the purposes of this Agreement, the
Company will take such further action (including the execution and
delivery of such further instruments and documents) as the Purchasers
reasonably may request, all at the sole cost and expense of the
Company.
(b) Inspection. At all times upon reasonable notice, the
Purchasers or their authorized representatives shall have the power to
inspect the books and records including the books and records of
account of the Company for any proper purpose. As part of such
inspection, the Purchasers and their authorized representatives may
make such copies and extra sets of the Company's books and records as
it or they may reasonably request. All of the foregoing rights are
subject to the inspecting persons executing any confidentiality
agreement.
(c) Registration Rights. The Company shall file a registration
statement with the SEC on or before November 30, 1999 registering for
public sale the common stock underlying all of the Warrants issued and
underlying the Preferred Stock unless such Preferred Stock has been
fully redeemed. The Company shall use its best efforts to keep the
registration statement current until expiration of the Warrants.
(i) The Company shall comply with the requirements of
Section 4(c) at its own expense including legal, accounting,
filing, blue sky qualification, and printing fees and costs,
but excluding underwriting commissions or discounts and
attorneys' fees and costs for the Purchasers. The Company
shall pay for all blue sky costs in any states reasonably
requested.
(ii) The Company's obligation under Sections 4(c)
shall be conditioned upon a timely receipt by the Company in
writing of:
(A) Information as to the terms of such
public offering furnished by or on behalf of the
Purchaser intending to make a public distribution of
its common stock; and
(B) Such other information as the Company
may reasonably require from the Purchasers for
inclusion in such registration statement or
post-effective amendment including a statement as to
compliance with Regulation M promulgated under the
Securities Exchange Act of 1934.
5. Remedies For Breaches of This Agreement.
(a) Survival of Representations and Warranties. All of the
representations and warranties of the parties contained in this
Agreement shall survive the Closing hereunder and continue in full
force and effect for a period of three years (subject to any applicable
statutes of limitations).
(b) Indemnification Provisions for Benefit of the Purchasers.
In the event the Company breaches any of its representations,
warranties, and covenants contained herein and provided that the
Purchasers make a written claim for indemnification against the
Company, then the Company agrees to indemnify the Purchasers from and
against the entirety of any losses, damages, amounts paid in settlement
of any claim or action, expenses, or fees including court costs and
reasonable attorneys' fees and expenses.
6. Miscellaneous.
(a) Expenses. Each of the parties to this transaction shall
bear its own costs and expenses (including legal fees and expenses)
incurred in connection with this Agreement and the transactions
contemplated hereby except that the Company shall reimburse the
Purchasers up to $20,000 (allocated on a pro-rata basis) for legal fees
and expenses incurred in connection with the negotiation and execution
of this Agreement.
(b) Severability. In the event any parts of this Agreement are
found to be void, the remaining provisions of this Agreement shall
nevertheless be binding with the same effect as though the void parts
were deleted.
(c) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. The
execution of this Agreement may be by actual or facsimile signature.
(d) Benefit. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their legal representatives,
successors and assigns.
(e) Notices and Addresses. All notices, offers, acceptance and
any other acts under this Agreement (except payment) shall be in
writing, and shall be sufficiently given if delivered to the addressees
in person, by Federal Express or similar receipted delivery, by
facsimile delivery or, if mailed, postage prepaid, by certified mail,
return receipt requested, as follows:
The Company: William C. Willis, Jr., President
Top Source Technologies, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418-3757
Facsimile: (561) 691-5220
with a copy to:
Michael D. Harris, Esq.
Michael Harris, P.A.
1645 Palm Beach Lakes Blvd.
Suite 550
West Palm Beach, FL 33401
Facsimile: (561) 478-1817
Mennen: c/o TMF Investments, Inc.
25B Hanover Road
Florham Park, NJ 07932
Wilmington: Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, DE 19890-0001
or to such other address as any of them, by notice to the other may
designate from time to time. The transmission confirmation receipt from
the sender's facsimile machine shall be conclusive evidence of
successful facsimile delivery. Time shall be counted to, or from, as
the case may be, the delivery in person or by mailing.
(f) Attorney's Fees. In the event that there is any
controversy or claim arising out of or relating to this Agreement, or
to the interpretation, breach or enforcement thereof, and any action or
proceeding including an arbitration proceeding is commenced to enforce
the provisions of this Agreement, the prevailing parties shall be
entitled to an award by the court or arbitrator, as appropriate, of
reasonable attorney's fees, costs and expenses.
(g) Oral Evidence. This Agreement constitutes the entire
Agreement between the parties and supersedes all prior oral and written
agreements between the parties hereto with respect to the subject
matter hereof. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, except by a statement
in writing signed by the party or parties against which enforcement or
the change, waiver discharge or termination is sought.
(h) Governing Law. This Agreement and any dispute,
disagreement, or issue of construction or interpretation arising
hereunder whether relating to its execution, its validity, the
obligations provided herein or performance shall be governed or
interpreted according to the internal laws of the State of Delaware
without regard to choice of law considerations.
(i) Arbitration. Any controversy, dispute or claim arising out
of or relating to this Agreement, or its interpretation, application,
implementation, breach or enforcement which the parties are unable to
resolve by mutual agreement, shall be settled by submission by either
party of the controversy, claim or dispute to binding arbitration in
Palm Beach County, Florida (unless the parties agree in writing to a
different location), before three arbitrators in accordance with the
rules of the American Arbitration Association then in effect. In any
such arbitration proceeding the Parties agree to provide all discovery
deemed necessary by the arbitrators. The decision and award made by the
arbitrators shall be final, binding and conclusive on all parties
hereto for all purposes, and judgment may be entered thereon in any
court having jurisdiction thereof.
(j) Section or Paragraph Headings. Section headings herein
have been inserted for reference only and shall not be deemed to limit
or otherwise affect, in any matter, or be deemed to interpret in whole
or in part any of the terms or provisions of this Agreement.
IN WITNESS WHEREOF the parties hereto have set their hand and seals as
of the date first above written.
WITNESSES: TOP SOURCE TECHNOLOGIES, INC.
By:
David Natan, Vice President and CFO
G. Jeff Mennen, Trustee
U/A dated FBO Descendents of
George S. Mennen
______________________ By: ___________________________
G. Jeff Mennen
- ----------------------
WILMINGTON TRUST CO. & GEORGE JEFF MENNEN, CO-TRUSTEES
U/A DATED 11/25/70 WITH GEORGE S. MENNEN FOR JOHN HENRY MENNEN
By:
Wilmington Trust Co., Trustee
By:____________________________
George Jeff Mennen, Co-Trustee
EXHIBIT 10.23
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
SCHEDULE 1(a)
SECOND CERTIFICATE OF DESIGNATION
<PAGE>
SECOND CERTIFICATE OF DESIGNATION
OF
TOP SOURCE TECHNOLOGIES, INC.
Section 1. Designation, Number of Shares and Stated Value of Series B
Convertible, Redeemable Preferred Stock. There is hereby authorized and
established a series of Preferred Stock that shall be designated as Series B
Convertible, Redeemable Preferred Stock ("Series B Preferred"), and the number
of shares constituting such Series shall be 3,500. Such number of shares may be
increased or decreased, but not to a number less than the number of shares of
Series B Preferred then issued and outstanding, by resolution adopted by the
Board of Directors. The Stated Value per share of the Series B Preferred shall
be equal to $1,000.
Section 2. Definitions. In addition to the definitions set forth elsewhere
herein, the following terms shall have the meanings indicated:
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in Miami, Florida are authorized or obligated
by law or executive order to close.
"Common Stock" shall mean the common stock, par value $0.001 per share,
of the Corporation.
"Conversion Price" shall mean the conversion price per share of Common
Stock into which the Series B Preferred is convertible, as such conversion price
may be adjusted pursuant to the provisions hereof. The Series B Preferred may be
convertible into a number of shares of Common Stock computed by dividing the
Stated Value of the Series B Preferred being converted by 90% of the closing bid
price for the previous trading day and if the conversion occurs on or after
November 1, 1999, by 85% of the closing bid price for the previous trading day.
"Corporation" shall mean Top Source Technologies, Inc.
"Junior Securities" means the Common Stock and any other series of
stock issued by the Corporation ranking junior as to the Series B Preferred upon
liquidation, dissolution or winding up of the Corporation.
"Original Issue Date" shall mean the date on which shares of the Series
B Preferred are first issued.
"Parity Security" means any class or series of stock issued by the
Corporation ranking on a parity with the Series B Preferred upon liquidation,
dissolution or winding up of the Corporation.
"Person" means any individual, corporation, association, partnership,
joint venture, limited liability company, trust, estate, or other entity or
organization, other than the Corporation, any subsidiary of the Corporation, any
employee benefit plan of the Corporation or any subsidiary of the Corporation,
or any entity holding shares of Common Stock for or pursuant to the terms of any
such plan.
"Senior Securities" means any class or series of stock issued by the
Corporation ranking senior to the Series B Preferred upon liquidation,
dissolution or winding up of the Corporation.
Section 3. Dividends and Distributions.
(a) The Series B Preferred shall rank prior to the Common Stock with
respect to dividends. Dividends shall be payable quarterly, when, as and if
declared by the Board of Directors, on April 10, July 10, October 10, and
January 10 in each year (each a "Dividend Payment Date") to holders of record as
of March 31, June 30, September 30 and December 31 in each year (the "Record
Date"). Dividends shall be paid in cash unless the Corporation is unable to do
so as a result of a restriction contained in a loan agreement or other financing
agreement entered into prior to or after the date of this Second Certificate of
Designation or if the agreement to pay cash or the payment of cash results in a
breach of any such agreement. In such case the Corporation shall issue shares of
its Common Stock in lieu of a cash dividend. The number of shares of Common
Stock to be issued as a dividend shall be based upon the Conversion Price then
in effect, and the previous trading day shall be deemed to be as of the
applicable Record Date. Such number shall be increased by 25% and rounded up to
the nearest whole share. By way of example, if a quarterly dividend is $78,750
and the Conversion Price is $1.00, 98,438 shares of Common Stock shall be
issued. The registration rights contained in Section 4(c) of the Stock Purchase
Agreement entered into between the Corporation and the Wilmington Trust Co. &
George Jeff Mennen, Co-Trustees shall apply to all shares of Common Stock issued
as dividends.
(b) Dividends shall be calculated on the basis of the time elapsed from
and including the date of issuance of such shares to and including the Record
Date or on any final distribution date relating to conversion or redemption or
to a dissolution, liquidation or winding up of the Corporation. Dividends
payable on the shares of Series B Preferred for any period of less than a full
calendar year shall be pro-rated for the partial year on the basis of a 360-day
year.
(c) Dividends payable on each Dividend Payment Date shall be paid to
record holders of the shares of Series B Preferred as they appear on the books
of the Corporation at the close of business on the applicable Record Date
immediately preceding the respective Dividend Payment Date or on such other
record date as may be fixed by the Board of Directors of the Corporation in
advance of a Dividend Payment Date, provided that no such Record Date shall be
less than 10 nor more than 60 calendar days preceding such Dividend Payment
Date.
(d) So long as any shares of Series B Preferred are outstanding, no
dividend or other distribution, whether in liquidation or otherwise, shall be
declared or paid, or set apart for payment on or in respect of, any Junior
Securities, nor shall any Junior Securities be redeemed, purchased or otherwise
acquired for any consideration (or any money be paid to a sinking fund or
otherwise set apart for the purchase or redemption of any such Junior
Securities), unless (i) all dividends have been paid on all outstanding shares
of the Series B Preferred shall have been paid or set apart for payment for all
past dividend periods, and (ii) sufficient funds shall have been set apart for
the payment of the dividend for the then current dividend period with respect to
the Series B Preferred.
Section 4. Certain Covenants and Restrictions.
(a) So long as any shares of Series B Preferred are outstanding.
(i) The Corporation shall at all times reserve and keep
available for issuance upon the conversion of the shares of Series B
Preferred such number of its authorized but unissued shares of Common
Stock as will be sufficient to permit the conversion of all outstanding
shares of Series B Preferred, and all other securities and instruments
convertible into shares of Common Stock, and shall take all reasonable
action within its power required to increase the authorized number of
shares of Common Stock necessary to permit the conversion of all such
shares of Series B Preferred and all other securities and instruments
convertible into shares of Common Stock.
(ii) The Corporation represents, warrants and agrees that all
shares of Common Stock that may be issued upon exercise of the
conversion rights of shares of Series B Preferred will, upon issuance,
be fully-paid and non-assessable.
(iii) The Corporation will endeavor to make the shares of
stock that may be issued upon exercise of the conversion rights of
shares of Series B Preferred eligible for trading upon any national
securities exchange, or any automated quotation system of a registered
securities association, if any, upon or through which the Common Stock
shall then be traded prior to such delivery.
(iv) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon redemption or conversion
of the Series B Preferred, the Corporation will endeavor to comply with
all federal and state securities laws and regulations thereunder
requiring the registration of such securities with, or any approval of
or consent to the delivery of such securities by, any governmental
authority.
(v) The Corporation shall pay all taxes and other governmental
charges (other than any income or franchise taxes) that may be imposed
with respect to the issue or delivery of shares of Common Stock upon
conversion of Series B Preferred as provided herein. The Corporation
shall not be required, however, to pay any tax or other charge imposed
in connection with any transfer involved in the issue of any
certificate for shares of Common Stock in any name other than that of
the registered holder of the shares of the Series B Preferred
surrendered in connection with the conversion thereof, and in such case
the Corporation shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid, or it has
been established to the Corporation's satisfaction that no tax or other
charge is due.
(b) In the event the Corporation proposes to offer, sell or issue any
of its equity securities (including, without limitation, shares of the
Corporation's capital stock or any rights to acquire such shares), excluding (i)
interests issued pursuant to the Corporation's option plans that have been
adopted by the stockholders of the Corporation, (ii) securities issuable
pursuant to a transaction governed by Rule 145 of the Securities Act of 1933, as
amended, and (iii) securities issuable as dividends or upon the exercise or
conversion of other securities outstanding as of the filing of this Second
Certificate of Designation with the Delaware Secretary of State, then the
holders of shares of Series B Preferred shall have the preemptive right to
acquire such securities from the Corporation. In the event that the Corporation
proposes to make any offer, sale or issuance that is subject to this Section
4(b), then and in each such case the Corporation shall at least 15 days prior to
any such event (the "Window"), provide to the Series B Preferred holders written
notice of the Corporation's intention to take such action. Such notice shall
include the number and type of securities, the price, the intended transaction
date, and any other information reasonably requested by the Series B Preferred
holders. Each Series B Preferred holder may exercise this preemptive right, by
providing written notice to the Corporation within eight days (the "Response")
after receipt of the foregoing notice from the Corporation, with respect to a
percentage of the securities to be offered, sold or issued, calculated by
dividing (i) the number of shares of Common Stock then entitled to be received
upon the conversion of all shares of Series B Preferred held by such holder, by
(ii) the total number of shares of Common Stock then entitled to be received
upon the conversion of all shares of Series B Preferred then outstanding. In the
event any holder(s) shall elect not to exercise the preemptive rights as
provided hereunder, then the aggregate shares otherwise entitled to be purchased
by such non-participating holders (the "Non-Subscribed Securities") shall be
available for purchase by each remaining Series B Preferred holder, who shall
accordingly receive notice from the Corporation of such availability within
three days after the expiration of the Response Date, in the proportion that the
number of shares of Common Stock then entitled to be received by such holder
upon conversion of its Series B Preferred shares then held bears to the total
number shares of Common Stock then entitled to be received upon conversion of
the Series B Preferred shares held by all such holders electing to exercise
preemptive rights. The preemptive rights to acquire the Non-Subscribed
Securities shall expire upon the expiration of the Window, at which time the
Corporation may sell or issue any and all securities regarding which the Series
B Preferred holders failed to exercise their preemptive rights hereunder.
Section 5. Redemption of the Company. The Corporation shall have the
option to redeem the Series B Preferred at 110% of Stated Value plus accrued
dividends at any time on or before April 30, 1999 and at a price of 115% of
Stated Value plus accrued dividends for a period of 180-days commencing on May
1, 1999 and expiring at 6:00 p.m., Miami time on October 27, 1999.
Section 6. Reacquired Shares. Any shares of Series B Preferred
repurchased, redeemed, converted or otherwise acquired by the Corporation shall
be retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock, without designation as to series or class.
Section 7. Voting Rights. Except as otherwise provided in by law, the
holders of the shares of Series B Preferred shall not have the right to vote on
any matters that come before the stockholders of the Corporation.
Section 8. Conversion Rights. Holders of shares of Series B Preferred shall
have the right to convert all or a portion of such shares into Common Stock, as
follows:
(a) Prior to November 1, 1999, the Series B Preferred shall not be
convertible without the express written consent of the Corporation.
(b) Once convertible, the Series B Preferred may be convertible into a
number of shares of Common Stock computed by dividing the Stated Value of the
Series B Preferred (including accrued dividends) being converted by 90% of the
closing bid price for the previous trading day and if the conversion occurs on
or after November 1, 1999 by dividing the Stated Value of the Series B Preferred
(including accrued dividends) being converted by 85% of the closing bid price
for the previous trading day. The closing bid price shall be determined by the
principal market for the Corporation's Common Stock.
(c) Fractional shares shall not be issued and the Corporation shall
issue cash for any fractional shares.
(d) The conversion of any share of Series B Preferred may be effected
by the holder thereof by the surrender of the certificate or certificates
therefor, duly endorsed, at the principal offices of the Corporation or to such
agent or agents of the Corporation as may be designated by the Board of
Directors and by filing written notice to the Corporation that such holder
elects to convert the same.
(e) As promptly as practicable after the surrender of shares of Series
B Preferred for conversion, the Corporation shall issue and deliver or cause to
be issued and delivered to the holder of such shares certificates representing
the number of fully paid and non-assessable share of Common Stock into which
such shares of Series B Preferred has been converted in accordance with the
provisions of this Section 8. Subject to the following provisions of this
Section 8(f), such conversion shall be deemed to have been made as of the close
of business on the date on which the shares of Series B Preferred shall have
been surrendered for conversion in the manner herein provided, so that the
rights of the holder of the shares of Series B Preferred so surrendered shall
cease at such time, and the person or persons entitled to receive the shares of
Common Stock upon conversion thereof shall be treated for all purposed as having
become the record holder or holders thereof for all purposes, at the opening of
business on the next succeeding day on which such transfer books are open.
Section 9. Record Holders. The Corporation may deem and treat the record
holder of any shares of Series B Preferred as the true and lawful owner thereof
for all purposes, and the Corporation shall not be affected by any notice to the
contrary.
Section 10. Notice. Except as may otherwise be provided by law or
provided for herein, all notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have been given upon receipt, in the case
of a notice of conversion given to the Corporation, or, in all other cases, upon
the earlier of receipt of such notice or two Business Days after the delivery by
overnight courier addressed if to the Corporation, to its principal executive
offices or to any agent of the Corporation designated as permitted hereby, or if
to a holder of the Series B Preferred, to such holder at the address of such
holder of the Series B Preferred as listed in the stock record books of the
Corporation, or to such other address as the Corporation or holder, as the case
may be, shall have designated by notice similarly given.
Section 11. Successors and Transferees. The provisions applicable to
shares of Series B Preferred shall bind and inure to the benefit of and be
enforceable by the Corporation, the respective successors to the Corporation,
and by any record holder of shares of Series B Preferred.
IN WITNESS WHEREOF, the undersigned has signed and executed the
foregoing Second Certificate of Designation on this 17th day of November, 1998.
TOP SOURCE TECHNOLOGIES, INC.
By:_______________________________
William C. Willis, Jr., President
WILMINGTON TRUST CO. & GEORGE JEFF MENNEN, CO-TRUSTEES U/A DATED
11/25/70 WITH GEORGE S. MENNEN FOR JOHN HENRY MENNEN
By:
Wilmington Trust Co., Trustee
By:
George Jeff Mennen, Co-Trustee
Date: November __, 1998
