UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended December 31, 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 incorporation
or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (561) 775-5756
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Class Outstanding at February 10, 1999
Common stock: $.001 par value 29,474,477 shares
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Consolidated Balance Sheets as of December 31, 1998
(Unaudited) and September 30, 1998..........................1
Consolidated Statements of Operations for the
Three Months Ended December 31, 1998 and 1997 (Unaudited)....2
Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1998 and 1997 (Unaudited)..........3
Notes to Unaudited Interim Consolidated
Financial Statements.......................................4-7
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations.............8-12
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders................13
ITEM 6. Exhibits and Reports on Form 8-K...................................13
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<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
December 31, September 30,
ASSETS 1998 1998
------------------ -----------------
Current Assets:
Cash and cash equivalents $ 1,246,751 $ 488,899
Accounts receivable trade 1,334,953 1,656,317
Inventories 2,310,566 1,489,840
Prepaid expenses 126,535 194,482
Other 75,959 152,349
------------------ -----------------
Total current assets 5,094,764 3,981,887
Property and equipment, net 999,002 786,438
Manufacturing and distribution rights and patents, net 273,667 271,502
Capitalized database, net 2,020,486 2,073,194
Note receivable from officer 25,845 26,260
Other assets, net 379,862 133,814
================== =================
TOTAL ASSETS $ 8,793,626 $ 7,273,095
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,144,230 $ 1,318,835
Accounts payable 764,420 842,903
Accrued liabilities 877,120 840,705
------------------ -----------------
Total current liabilities 2,785,770 3,002,443
Senior subordinated convertible notes 707,000 3,020,000
Other liabilities 347,427 429,524
------------------ -----------------
Total liabilities 3,840,197 6,451,967
Minority interest 653,827 364,157
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,850 outstanding 3,327,636 943,807
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,439,881 and 29,053,803 shares issued and
outstanding in 1998 and 1998, respectively 29,440 29,054
Additional paid-in capital 30,598,149 29,624,951
Accumulated deficit (28,306,269) (28,791,487)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
------------------ -----------------
Total stockholders' equity 4,299,602 456,971
------------------ -----------------
================== =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,793,626 $ 7,273,095
================== =================
See accompanying notes to unaudited interim consolidated financial statements.
1
</TABLE>
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<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
------------------ -----------------
Product sales $2,018,312 $3,247,035
Service revenue 74,577 29,293
------------------ -----------------
Net sales 2,092,889 3,276,328
------------------ -----------------
Cost of product sales 1,267,961 2,130,646
Cost of services 43,530 9,254
------------------ -----------------
Cost of sales 1,311,491 2,139,900
------------------ -----------------
Gross profit 781,398 1,136,428
------------------ -----------------
Expenses:
General and administrative 1,015,469 1,045,240
Selling and marketing 316,229 320,390
Depreciation and amortization 109,710 260,159
Research and development 88,677 15,265
------------------ -----------------
Total expenses 1,530,085 1,641,054
------------------ -----------------
Loss from operations (748,687) (504,626)
Other income (expense):
Interest income 32,453 29,023
Interest expense (166,678) (141,976)
Gain on sale of minority interest in subsidiary 1,662,870 -
Minority interest (6,957) -
Other (expense) income, net (49,804) 4,397
------------------ -----------------
Net other income (expense) 1,471,884 (108,556)
------------------ -----------------
Income (loss) before income taxes 723,197 (613,182)
Income tax expense (18,750) (18,500)
------------------ -----------------
Income (loss) from continuing operations 704,447 (631,682)
Gain on extinguishment of debt 158,745 -
------------------ -----------------
Net income (loss) 863,192 (631,682)
Embedded dividend on preferred stock (152,454) -
Preferred dividends (37,971) -
Value of warrants issued with preferred stock (187,549) -
================== =================
Net income (loss) available to common stockholders $485,218 ($631,682)
================== =================
Earnings (loss) per common share:
Earnings (loss) per common share before extraordinary item:
Basic $ 0.01 $ (0.02)
================== =================
Diluted 0.01 (0.02)
================== =================
Extraordinary item:
Basic 0.01 -
==================
Diluted 0.00 -
==================
Net income (loss) available to common stockholders
Basic 0.02 (0.02)
================== =================
Diluted $ 0.02 $ (0.02)
================== =================
Basic weighted average common shares outstanding 28,791,722 28,084,827
================== =================
Diluted weighted average common shares outstanding 34,061,550 28,084,827
================== =================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
2
<PAGE>
<TABLE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
------------------ -----------------
OPERATING ACTIVITIES:
Net income (loss) $ 863,192 $ (631,682)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Gain on sale of minority interest in subsidiary (1,662,870) -
Depreciation 99,373 264,581
Amortization 92,907 69,733
Gain on extinguishment of debt (158,745) -
Disposal of equipment - 63,349
Repayments from (advances to) officers 415 2,757
Minority interest (31,863) -
Decrease in accounts receivable, net 321,364 136,590
Increase in inventories (820,726) (62,520)
Decrease (increase) in prepaid expenses 67,947 (19,461)
Decrease in other assets 76,390 45,137
Decrease in accounts payable (78,483) (78,150)
Decrease in accrued liabilities (61,717) (484,781)
Decrease in other liabilities (82,097) -
------------------ -----------------
Net cash used in operating activities (1,374,913) (694,447)
------------------ -----------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (311,937) (142,093)
Proceeds from sale of minority interest in subsidiary, net 2,041,976 -
Additions to patent costs, net (46,172) (1,929)
Discontinued operations - change in net assets - (142)
------------------ -----------------
Net cash provided by (used in) investing activities 1,683,867 (144,164)
------------------ -----------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants 26,659 150,000
Preferred stock issuance, net 3,411,461 -
Redemption of preferred stock Series A (500,000) -
Repayments of Senior Convertible Notes (2,064,617) -
Purchase of certificate of deposit (250,000) -
Proceeds from borrowings - 236,240
Repayments of borrowings (174,605) -
------------------ -----------------
Net cash provided by financing activities 448,898 386,240
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 757,852 (452,371)
Cash and cash equivalents at beginning of period 488,899 2,103,679
================== =================
Cash and cash equivalents at end of period $1,246,751 $1,651,308
================== =================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
3
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Top Source Technologies, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included in the accompanying
financial statements. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The results of operations of any interim
period are not necessarily indicative of the results of operations for the
fiscal year. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K/A No. 1
for the year ended September 30, 1998. Certain fiscal year 1998 amounts have
been reclassified to conform to current year presentation.
Comprehensive Income
For the three months ended December 31, 1998 and 1997, there were no
differences between net income and comprehensive income.
2. INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" during the
fiscal 1998. SFAS No. 128 establishes standards for computing and presenting
basic and diluted earnings per share. Basic earnings per share is calculated by
dividing income (loss) available to common stockholders by the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is calculated by dividing income available to common
stockholders by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. Convertible securities and common
share equivalents have not been included in the computation of diluted loss per
share in the accompanying statements of operations for the three months ended
December 31, 1997 as their impact would have been antidilutive.
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is as follows
for the three months ended December 31, 1998.
Basic Shares 28,791,722
Dilutive effect of common stock options 48,314
Dilutive effect of common stock warrants 21,575
Dilutive effect of convertible preferred shares 5,199,939
---------
Diluted Shares 34,061,550
==========
For the three months ended December 31, 1997, the effect of equivalent
shares related to stock options was 368,920 and was not included in the dilutive
average common shares outstanding, as the effect would have been antidulive.
4
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consisted of the following:
December 31, September 30,
1998 1998
Raw materials $2,045,246 $1,388,058
Finished goods 265,320 101,782
--------- -----------
$2,310,566 $ 1,489,840
========== ============
4. DEBT
During November and December 1998, the Company restructured
substantially all of its outstanding $3,020,000 of Senior Subordinated
Convertible Notes (the "Notes"). On November 20, 1998, with a portion of the
proceeds from the sale of Series B Convertible Preferred Stock (See Note 5.
Convertible Preferred Stock), the Company prepaid an aggregate of $745,000
principal amount of Notes held by certain Noteholders agreeing to these
prepayment terms ("Group One") for $496,617 resulting in a savings of $248,383
in principal amount (not including future debt service costs). In connection
with the discounting of these Group One Notes, the Company issued to the
Noteholders warrants to purchase an aggregate of 248,383 shares of the Company's
Common Stock exercisable over a five-year period at $1.78 per share. The value
of the warrants utilizing the Black Scholes pricing model in accordance with
SFAS 123 was $71,475 and was included in reducing the value of the savings
disclosed above in determining the extraordinary gain on extinguishment of debt.
On December 15, 1998 concurrent with the approval of the sale of TSA
Assets by the Company's stockholders in which the Company received $2,050,000,
$2,240,000 of the remaining $2,275,000 of Noteholders ("Group Two") agreed to
redeem $1,568,000 principal amount of the notes, which was paid with a portion
of Series B Preferred, leaving $672,000 of principal outstanding due June 2000.
In connection with the Group Two redemption, the Noteholders agreed to reduce
the interest rate from 9% to 5% and reduce the conversion price on the remaining
30% Note balance from $10.00 per share to $2.00 per share. The terms of the
remaining Noteholder with a principal balance of $35,000 stayed the same with an
interest rate of 9% and principal due June 2000. In connection with the
repayment of the Notes, a waiver of certain restrictive provisions of the Note
Purchase Agreement, including the requirement that the Company maintain a 1.5 to
1 debt to equity ratio, was received (through and including September 30, 1999).
5. CONVERTIBLE PREFERRED STOCK
On November 17, 1998, the Company sold $3,500,000 of its Series B
Convertible Preferred Stock ("Series B Preferred") to two trusts in which Mr. G.
Jeff Mennen, a director of the Company, is one of the co-trustees and sole
trustee, respectively, and the beneficiaries are members of Mr. Mennen's
immediate family (the "Mennen Trusts"). The Series B Preferred is convertible on
or after November 1, 1999 into a number of shares of Common Stock computed by
dividing the stated value of $1,000 per share (the "Stated Value") by 85% of the
closing bid price of the Common Stock on the previous trading day (the
"Conversion Price"). The Company 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.
5
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. CONVERTIBLE PREFERRED STOCK ( Continued )
The Series B Preferred pays a dividend of 9% per annum in cash or, if
the Company is unable to pay cash, in shares of Common Stock. The number of
shares of Common Stock to be issued in such event shall equal to the sum of: (A)
the amount of the dividend divided by the Conversion Price plus (B) 25% of the
amount obtained in clause (A). As additional consideration, the Company issued
to the Mennen 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 was
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 before or after March 31, 1999).
The remaining $150,000 Stated Value of Series A Preferred was converted into an
aggregate of 387,554 shares of Common Stock (including accrued dividends) in
accordance with the terms of the Series A Preferred. As consideration for the
delay in converting $350,000 Stated Value of the Series A Preferred, the Company
issued to the two holders thereof, five-year warrants to purchase an aggregate
of 25,000 share of Common Stock exercisable at $.8937 per share commencing in
April 1999.
As discussed above, the issuance of the Series B Preferred and the
redemption of one-half of the Series A Preferred includes the issuance of Common
Stock warrants. The value of these warrants utilizing the Black Scholes Option
Pricing Model in accordance with SFAS No. 123 is approximately $188,000. The
value of these warrants have been deducted from amounts available to common
stockholders for purposes of calculating income per share for the three months
ended December 31, 1998.
Additionally, in connection with the issuance of the Series B Preferred
Stock, the conversion feature calls for a 15% discount. The intrinsic value of
the beneficial conversion feature of the Series B Preferred is approximately
$618,000 and will be amortized as an embedded dividend in the statement of
operations in fiscal 1999 over the earliest conversion date of the Series B or
(November 1, 1999). The Company recorded approximately $96,000 of the conversion
feature during the first fiscal quarter ended December 31, 1998.
6
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. SALE OF TOP SOURCE AUTOMOTIVE, INC.
On August 14, 1998, the Company executed a Asset Purchase Agreement
("Agreement") with NCT Audio Products Inc., (the "Buyer" 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 $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").
Additionally, under the terms of the Agreement, TSA could receive up to
an additional $6,000,000 payable to the Company in cash based expressly
contingent upon the future earnings of the Buyer's subsidiary acquiring the
assets for a two-year period following the Closing. If earned, for the first
year following the Closing ("Year One"), the buyer shall pay TSA in cash an
amount of up to $3,000,000 and a cumulative amount of up to $6,000,000 for Year
One and 12-month period subsequent to Year One ("Year Two"). The amount in Year
One shall be equal to the amount by which the product of four and one-half times
income before interest, taxes, depreciation and amortization for Year One
exceeds $8,000,000.
The consummation of the proposed transaction is subject to the
satisfaction or waiver of certain conditions including the Buyer obtaining the
necessary financing. As a result of the completion of Steps I and II of the
transaction, the Buyer became a 20% owner of the Common Stock of TSA. Since Step
III of the transaction failed to close by December 31, 1998, the Buyer had a one
week option to cancel its exclusive right to purchase the Assets of TSA and as
consideration for such cancellation would have received an additional 15% of TSA
Common Stock.
On January 7, 1999, the Buyer of TSA's Assets by virtue of not
exercising its right to receive an additional 15% minority stake in TSA,
maintained its exclusive right to complete the remainder of the transaction by
March 31, 1999. 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.
Upon the sale of 100% of TSA's Assets, this transaction will be treated
as a discontinued operation, as defined under Accounting Principles Board No.
30. However, due to the potential that the Company may not receive the final
payment from the Buyer, the gain on the equity interest has been treated as part
of continuing operations on the December 31, 1998 Consolidated Statement of
Operations.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenue for the three month period ended December 31, 1998 was $2,092,889
compared to $3,276,328 for the same period in 1997. The decrease in revenue for
the three month period ended December 31, 1998 compared to the same period in
1997 is primarily attributable to the loss of the patented Overhead Mounted
Speaker System ("OHSS") sales for the Grand Cherokee(TM) contract which expired
in October 1998 partially offset by a nominal increase in OSA revenues.
For the three months ended December 31, 1998, the Jeep Grand Cherokee(TM) sales
were $11,718 compared to $1,109,887 in sales for the three months ended December
31, 1997. The decrease in the Wrangler sales for the three-month period was
nominal. For the three months ended December 31, 1998, On-Site Used Oil Analyzer
("OSA") sales were $74,577 compared to $29,293 for the three months ended
December 31, 1997. The increase in OSA sales of 155% is a result of 21 first
generation ("OSA I") and 17 second generation ("OSA II") machines generating
various levels of revenue (some which were nominal) for the three months ended
December 31, 1998 compared to five OSA I units in 1997.
As of February 10, 1999, Top Source Instruments, Inc. ("TSI") had approximately
40 OSA units generating various levels of revenue (in some cases nominal monthly
revenue) through lease and revenue generating tests in a variety of industries
including automobile dealerships, truck lube centers, truck stops, and a
motorcycle development laboratory.
The gross profit margin for three months ended December 31, 1998 was 37.3%
compared to 34.7% for the same period in 1997. The increase in the gross profit
margin compared to the prior year is primarily attributable to decreased labor
and overhead costs relating to product sales at TSA.
General and administrative expenses decreased $29,771 or 2.8% for the three
month period ended December 31, 1998 compared to the same period in 1997. This
decrease is attributable to the Company's restructuring which took place in the
fourth quarter of fiscal 1997 offset by increases in expenses at TSI as a result
of the growth and expansion of the business.
Depreciation and amortization decreased by $150,449 or 57.8% for the three
months ended December 31, 1998 compared to the same period in 1997. This
decrease is primarily attributable to the write-down of the original OSA I
machines in September 1998.
Interest income increased 11.8% for the three months ended December 31, 1998
compared to the same period in 1997. The increase is attributable to interest on
the $2,050,000 escrow deposit released to the Company in December 1998 in
connection with the sale of TSA. This increase was offset by a decline in on
hand cash balances due to operating losses and purchases of capital equipment
and inventory.
Interest expense increased 17.4% for the three months ended December 31, 1998
compared to the same period in 1997. The increase is due to an increase in
amortization of loan fees on its credit facility and interest on accrued
severance agreement offset by a decrease in interest as a result of the
restructuring of the senior subordinated convertible notes in November and
December 1998.
The gain on sale of the minority interest in TSA represents the gain on the
sale of the additional 5.5% equity interest in TSA in December 1998.
( See Note 6. Sale of Top Source Automotive, Inc. )
Gain on extinguishment of debt represents the gain from restructuring
of a portion of the outstanding $3,020,000 of Notes. (See Note 4. Debt)
8
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
In August 1998, the Company completed the first production run of seven OSA II's
and shipped them for use in a revenue-generating trial, which commenced at a
Jacksonville, Florida tire retailer in September 1998. The initial acceptance by
customers at these locations has been slower than anticipated. The tire retailer
and the Company believe that the level of customer interest, which has increased
slightly during the past few weeks, is sufficient to warrant continuing the
test. The Company also believes that customer acceptance will increase as
awareness of the product builds, however, there can be no assurances.
Since October 1998, OSA II activity at various customer locations has increased.
The Company intends to eventually replace all OSA I's previously purchased and
leased with OSAII's by the end of calendar 1999. The terms of the replacements
are not currently ascertainable.
In August 1998 the Company announced that it had entered into an agreement with
Speedco Inc. ("Speedco") , to lease 13 OSAII's to be placed at various Speedco
truck oil quick- change service centers located throughout the United States.
Under the terms of the agreement, Speedco agreed to place additional OSAII's at
all of their future new locations as they open , if the results at the initial
13 locations were favorable. Speedco has publicly announced that they intend to
expand to 75 locations within the next three years. As of February 9, 1999, 12
Speedco locations were using the OSA II with an additional 3 units committed for
lease within the next month. There can be no assurances that Speedco will be
successful in opening new locations, or that they will lease additional OSA-
II's at other new locations.
In November 1998, the Company entered into a strategic alliance with Flying J
Inc. ("Flying J") a billion dollar company engaged in various facets of
highway-related products and services including the operation of large truck
stop centers. Under the terms of the agreement, Flying J agreed to purchase and
market OSA-II's in up to 100 of their truck stop service centers. The initial
order by Flying J. was for the outright purchase of 10 OSA-II units for
approximately $700,000. The agreement covers the potential purchase of up to 100
OSA-II's payment of per sample technology licensing fees, and joint development
and marketing of product enhancements to assist the further commercialization of
the OSAII's within the truck stop industry. Additionally, under the terms of the
agreement, Flying J. will receive financial incentives upon the attainment of
certain performance milestones.
In January 1999, Flying J. paid the Company in full for all 10-OSAII units
covered in the initial purchase order. There can no assurances that Flying J.
will decide to purchase any of the additional 90 OSAII's or that any further
commercialization of the OSA-II's within the truck stop industry will prove
successful.
Net Loss Analysis
In order to avoid current, material, ongoing operating losses, and an increase
in this operating loss after the projected sale of TSA Assets ( See Note 6. Sale
of Top Source Automotive, Inc. ), the Company must generate new, material
ongoing OSA or other revenues in future months. The Company believes that the
recent OSA activity described in the MD&A section will improve OSA visibility in
the marketplace that which will lead to significant increases in future OSA
revenues. However, no assurances can be given.
Liquidity and Capital Resources
Net cash used in operating activities was $1,374,913 for the three months ended
December 31, 1998. This usage of cash was attributable to a net loss of
$766,143, which excludes depreciation, amortization, gain on sale of minority
interest in subsidiary and gain on extinguishement of debt, an increase in
inventories of $820,726 and a decrease in accounts payable and accrued
liabilities of $222,297. This was partially offset by a decrease in accounts
receivable of $321,364 and prepaid and other assets of $144,337. The decrease in
accounts receivable is primarily attributable to the loss of the Grand
Cherokee(TM) contract which expired in October 1998. The increase in inventories
is primarily the result of the build-up of OSA II machines.
9
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
Net cash provided by investing activities was $1,683,867. This increase in cash
was attributable to the release of the $2,050,000 escrow deposit in connection
with the sale of TSA to the Company on December 15, 1998 offset by expenditures
for capital assets.
Net cash provided by financing activities was $448,898, which consisted of net
proceeds from sales of common stock through exercise of stock options of
$26,659, net proceeds from the sale of Series B Preferred stock of $3,411,461
offset by the redemption of 50% or $500,000 of the Series A Preferred stock ,
the repayment of the Notes of $2,064,617, repayments of $174,605 on the
Company's credit facility ("Credit Facility") with NationsCredit Commercial
Corporation ("Nations") and purchase of a $250,000 certificate of deposit for
Nations.
The Credit Facility, which is secured by substantially all of the assets of the
Company enables the Company to potentially borrow a sum based upon certain
percentages of accounts receivable and inventory balances. The Credit Facility
allows for borrowing of up to 85% of all accounts receivable and 50% of
inventory for TSA. The interest rate on this Credit Facility is 1-1/2% over the
prime rate and is payable monthly with a required minimum borrowing level of
$2,500,000 for the fee calculation purposes. The Company's effective interest
rate at December 31, 1998 factoring the interest earned on used drawn funds was
18.3%. As of December 31, 1998 and February 10, 1999, the unused available
borrowings on this Credit Facility were $85,000 and $50,000, respectively.
The Credit Facility calls for certain financial covenants that, if not met,
would cause a default under the Agreement and increase the interest rate by 2%
over current levels. As of September 30, 1998, the covenant requiring the
Company's fiscal year pre-tax operating loss, not to exceed certain levels, as
defined in the Credit Facility was not met by the Company. Nations later agreed
to waive this covenant precluding the Company from having a loss of more than
$2,000,000 in a fiscal year. In conjunction with such waiver, the Company paid
Nations a fee of $25,000 and agreed to collaterally assign a $250,000
certificate of deposit to Nations. The Company is required to repay the Credit
Facility in full upon the ultimate sale of TSA (see Note 6. Sale of Top Source
Automotive, Inc.). Upon payment of the Credit Facility, Nations will release the
lien, which it holds on all of the assets of the Company including 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 Notes, which
included a waiver of the debt to equity ratio for fiscal 1999
(see Note 4 Debt).
10
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
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 to the Mennen Trusts. The
proceeds were used in part to prepay and restructure $2,313,000 of the Notes and
redeem one-half of the Company's outstanding Series A Preferred stock for
details concerning these events (see Note 4. Convertible Preferred Stock )
As of February 10, 1999, the Company had approximately $1,800,000 of cash on
hand. Based on this cash balance, the Credit Facility 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.
Year 2000
The Company is assessing the potential impact of the Year 2000 ("Y2K") on the
Company's internal business systems, products, assembly procedures and
operations. The Company's Y2K initiatives include (i) testing and upgrading
internal business systems and facilities; (ii) contacting key suppliers, vendors
and customers to determine their Y2K compliance state; and (iii) developing
contingency plans.
To date, the Company has been evaluating all of its information technology
systems, which relate to its corporate offices including its accounting systems;
these systems must be replaced because they are not Y2K compliant. The Company
has received one proposal and plans to implement the replacement of its
corporate information technology systems during the second and third calendar
quarters of 1999. The Company estimates that the cost will be approximately
$40,000.
At TSA, the Company intends to replace its management reporting and accounting
software modules. The management reporting system is used by TSA in its assembly
of OHSS. The Company anticipates the cost of new hardware and software to make
TSA Y2K compliant will be approximately $40,000. The Company has appointed
representatives at TSA to coordinate TSA's information technology systems with
Chrysler, TSA's major customer. This process has continued for approximately six
months. At TSI, the Company believes OSA-IIs are Y2K compliant. While the OSA-Is
are not Y2K compliant, the OSA-Is are being replaced by OSA-IIs during 1999. TSI
is currently communicating with four key suppliers, which make proprietary
parts, which may not be readily replaceable. Presently, the Company does not
know whether these suppliers are or will be Y2K compliant and, if not, what
options are available to TSI. The Company intends to aggressively assess this
issue during the balance of the current calendar quarter and develop a
contingency plan that will allow TSI's business operations to continue despite
potential disruptions due to Y2K issues. The plan will focus on identifying and
securing alternative suppliers and/or assisting any current suppliers in
achieving Y2K compliance in a timely manner. The Company cannot presently
estimate what, if any, additional costs it will incur if one or more of these
suppliers are not Y2K compliant.
11
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
As the Company continues to evaluate the Y2K readiness of its business systems,
suppliers, vendors and customers, it will modify and adjust its contingency
plans as may be required. However, due to the complexity of the Company's
technologies and reliance upon third parties to produce certain components,
there can be no assurances that the Company has identified all of the Y2K issues
that could arise. While the Company is attempting to minimize any negative
consequences arising from Y2K non-compliance, there can be no assurances that
Y2K issues will not have a material adverse impact on the Company's business,
operations or financial condition. If any of the Company's material suppliers,
vendors or customers experience business disruptions due to Y2K issues, the
Company might also be materially adversely affected. Any unexpected costs or
delays arising from Y2K issues could have a material adverse impact on the
Company's business, operations and financial condition.
Forward-Looking Statements
The forward looking statements discussed in this Report include those relating
to the Company's expectations that it anticipates (1) increase in awareness of
OSA at a tire retailer (2) receipt of additional purchase orders from Flying J
and Speedco, and further commercialization of OSA-II usage resulting in
additional revenue, (3) closing of the TSA Asset sale, (4) adequacy of the
Company's working capital and liquidity and (5) 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) the ability of the Buyer to close its
financing, and (7) the Company's ability to attract strategic partners for
OSA-II.
.
12
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on December 15,
1998. The stockholders voted to approve the Asset Purchase Agreement, as
amended, by and among the Company, Top Source Automotive, Inc. and NCT Audio
Products, Inc. ( "Proposal No.1" ). 16,131,921 votes were cast in favor of this
proposal, 162,334 were cast against it, and 119,583 abstained. There were
9,111,819 broker non-votes.
The stockholders voted to elect William C. Willis Jr.and L.Kerry Vickar
to serve as Directors of the Company until 2001 ("Proposal No. 2" ). 25,132,518
votes were cast for and 393,139 votes were withheld from the election of William
C. Willis Jr. and 25,134,421 votes were cast for and 391,236 votes were withheld
from the election of L. Kerry Vickar. Ronald P. Burd and David Natan will
continue to serve as Directors until their present terms expire in 1999 and
their successors are duly elected, and G. Jeff Mennen will continue to serve as
Director until his present term expires in 2000 and his successor is duly
elected.
The stockholders also voted to approve the selection of Arthur Andersen
LLP as the independent auditors of the Company for the fiscal year ending
September 30, 1998 ("Proposal No. 3"). 25,354,589 votes were cast in favor of
this proposal, 109,415 were cast against it and 61,653 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.0 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended December 31, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: /s/ DAVID NATAN
David Natan
Vice President and Chief Financial Officer
Dated: February 11, 1999
13
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,246,751
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<RECEIVABLES> 1,334,953
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