<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A No.3
[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/A No.3 or any amendment
to this Form 10-K/A No.3 [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/A No.3 Incorporated Document
<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. Due to inconsistent levels of interest from store to
store in March 1999, all seven OSA-II units were returned to the Company.
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 had entered into an agreement with Speedco,
Inc. ("Speedco") to lease OSA-IIs to be placed at various Speedco truck oil
change service centers. Previously, the Company had leased four OSA-Is to
Speedco on a test basis. To date, the Company has delivered 14 OSA-IIs to
Speedco including three, which replaced OSA-Is. The remaining OSA-I will be
replaced in the near future.
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 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 Chrysler discontinued that model. The
Company continues to ship its OHSS to Chrysler for installation in the Jeep
Wrangler vehicles.
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.
<PAGE>
ITEM 1. BUSINESS
Overhead Speaker Systems (Continued)
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.
During the period from October 1, 1998 through the date of the filing of this
Report, the Company's management and TSA personnel continued to actively pursue
opportunities to generate new OEM and after-market revenues. As a result of
these efforts in April 1999, the Company received an aftermarket purchase order
from a Detroit OEM for approximately $800,000 annually, commencing in the fourth
calendar quarter of 1999. In addition, TSA has received non-binding commitments
from another Detroit OEM and two aftermarket retailers for approximately
$700,000 annually in new business commencing in the fourth calendar quarter of
1999 and the first quarter of 2000. The Company anticipates receiving purchase
orders for all of these new programs by May 1999, although there can be no
assurances.
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"). 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
ITEM 1. BUSINESS
Sale of TSA (Continued)
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.
The consummation of the proposed transaction is subject to the satisfaction or
waiver of certain conditions including the Buyer obtaining the necessary
financing. As a result of the completion of Steps I and II of the transaction,
the Buyer became a 20% owner of the Common Stock of TSA. Since Step III of the
transaction failed to close by December 31, 1998, the Buyer had a one week
option to cancel its exclusive right to purchase the Assets of TSA and as
consideration for such cancellation would have received an additional 15% of TSA
Common Stock. On January 7, 1999, the Buyer of TSA's Assets by virtue of not
exercising its right to receive an additional 15% minority stake in TSA,
maintained its exclusive right to complete the remainder of the transaction by
March 31, 1999.
On March 30, 1999, the Company granted the Buyer an extension until May 28, 1999
to complete the purchase of TSA. As consideration for this extension, TSA
received a non-refundable fee from the Buyer of $350,000. This extension fee
consisted of $20,685 in cash, $125,000 of the Buyer's minority interest in TSA
earnings and a $204,315 note payable due on April 16, 1999 (the "Note") from the
Buyer to TSA. Additionally, due to the Buyer's failure to close the transaction
by March 31, 1999, the Company received a penalty premium of $100,000 of the
Buyer's convertible preferred stock. Under the terms of the extension, the Buyer
was required to pay the Note no later than April 30, 1999. The Note was not paid
on April 30, 1999, and remains unpaid. As a result, none of the $350,000
extension fee can be applied against the $6,500,000 due to be paid by the Buyer
to TSA at closing. Therefore, in order to close the transaction, the Buyer must
now pay TSA, $6,500,000 plus the Note balance of $204,315 along with accrued
interest on the Note since April 16, 1999 at the rate of approximately 17%.
Additionally, if the closing does not occur by May 28, 1999, the Buyer will
forfeit all minority earnings in TSA from June 1999 through May 2000. If the
transaction fails to close by May 28, 1999, the Company will be free to attempt
to find another purchaser of TSA and the Buyer will be obligated to sell its TSA
shares to any such purchaser on the same terms and conditions as the Company
receives for its TSA Common Stock. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<PAGE>
ITEM 1. BUSINESS
Sale of TSA (Continued)
The Buyer is a subsidiary of a public company, which trades on the
over-the-counter bulletin board having been delisted from the NASDAQ Small Cap
Market. The Buyer's parent company's unaudited financial statements for the nine
months ended September 30, 1998 report a net loss attributable to common
shareholders of approximately $11,436,000 on reported net revenues of
approximately $2,275,000. Based upon the review of these public filings by the
Company, and due to the Buyer being newly organized and having minimal working
capital, management of the Company believes there is substantial doubt that the
Buyer will be able to complete a financing of at least $6,500,000 to complete
the acquisition of TSA. This belief is reinforced by the events that occurred in
1999 as described in the above paragraph. If the transaction fails to close by
May 28, 1999, the Company will be free to attempt to find another purchaser of
TSA and the Buyer will be obligated to sell its TSA shares to any such purchaser
on the same terms and conditions as the Company receives for its TSA Common
Stock. If Step III is not completed it is unlikely that the Company will be able
to secure another purchaser. This may have an adverse effect on the Company's
ability to finance OSA-IIs as well as have an adverse effect on the short-term
financial condition of the Company. If Step III is ultimately completed, TSA
will be accounted for as a discontinued operation. Pending completion of the
proposed transaction, the Company is actively seeking to improve TSA's business.
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.
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.
<PAGE>
ITEM 1. BUSINESS
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 Company's strategy is to divest substantially all of TSA's assets and focus
its resources on the commercialization of 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 Buyer is a subsidiary of a public company, which trades on the
over-the-counter bulletin board having been delisted from the NASDAQ Small Cap
Market. The Buyer's parent company's unaudited financial statements for the nine
months ended September 30, 1998 report a net loss attributable to common
shareholders of approximately $11,436,000 on reported net revenues of
approximately $2,275,000. Based upon the review of these public filings by the
Company, and due to the Buyer being newly organized and having minimal working
capital, management of the Company believes there is substantial doubt that the
Buyer will be able to complete a financing of at least $6,500,000 to complete
the acquisition of TSA. This belief is reinforced by the events that occurred in
1999 as described in Item 1. Business - Sale of TSA. If Step III is not
completed it is unlikely that the Company will be able to secure another
purchaser. This may have an adverse effect on the Company's ability to finance
OSA-IIs as discussed above, as well as have an adverse effect on the short-term
financial condition of the Company. If Step III is ultimately completed, TSA
will be accounted for as a discontinued operation. Pending completion of the
proposed transaction, the Company is actively seeking to improve TSA's business.
The Company believes that their OSA-II 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 August 30, 1999, the Company had approximately $500,000 in cash (which
includes $150,000 available to be drawn from Nations as of August 30, 1999). As
noted in this liquidity section, the Company has substantially increased its
OSA-II inventory levels. In the event the Company is unable to sell TSA in the
short-term, the Company will be required to secure additional financing to fund
its operations in October 1999.
The Company is currently actively engaged in discussions with lenders and
possible sources of equity or debt financing. Although there can be no
assurances, based upon the current status of the Company's business, and
indications of interest from financing sources, the Company believes that it
will be able to meet its short-term working capital needs. If the Company does
not sell TSA, the Company will also need to address its long-term working
capital needs. The Company has no other current plans to meet it long-term
working capital needs. It can only effectively address these needs after it
first addresses it short-term working capital requirements. However, based upon
the Company's history, it believes it can complete an equity financing to meet
its working capital needs. Any equity financing would be dilutive to existing
stockholders. If the TSA transaction closes, the Company will have sufficient
working capital on a short-term and long-term basis.
<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 further commercialization of
OSA-II usage resulting in additional revenue, (6) receipt of purchase orders and
material revenue from a Detroit OEM and two aftermarket retailers 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>
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Report of Independent Certified Public Accountants 17
- ----------------------------------------------------------------------------------------------------------------- ----------
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Consolidated Balance Sheets as of September 30, 1998 and 1997 18
- ----------------------------------------------------------------------------------------------------------------- ----------
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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
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Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996 21
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- ----------------------------------------------------------------------------------------------------------------- ----------
Notes to Consolidated Financial Statements 22
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</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/A No. 3
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/A No. 3
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/A No. 3
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/A No. 3
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. The Buyer failed to complete Step III
of the Transaction by December 31, 1998. (See Note 20. for Events Subsequent To
The Date Of The Auditor's Report.)
The Buyer is a subsidiary of a public company, which trades on the
over-the-counter bulletin board having been delisted from the NASDAQ Small Cap
Market. The Buyer's parent company's unaudited financial statements for the nine
months ended September 30, 1998 report a net loss attributable to common
shareholders of approximately $11,436,000 on reported net revenues of
approximately $2,275,000. Based upon the review of these public filings by the
Company, and due to the Buyer being newly organized and having minimal working
capital, management of the Company believes there is substantial doubt that the
Buyer will be able to complete a financing of at least $6,500,000 to complete
the acquisition of TSA.If Step III is not completed it is unlikely that the
Company will be able to secure another purchaser. This may have an adverse
effect on the Company's ability to finance OSA-IIs, as well as have an adverse
effect on the short-term financial condition of the Company. If Step III is
ultimately completed, TSA will be accounted for as a discontinued operation.
Pending completion of the proposed transaction, the Company is actively seeking
to improve TSA's business.
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. Mr. Landow waived this clause with the
approval of the Board of 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------
13. RELATED PARTY TRANSACTIONS (Continued)
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.
A committee of non-employee directors administers the 1993 Plan. 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.
A committee of non-employee directors administer the 1993 Plan. 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
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Board of
Directors ("Board"). It has responsibility for establishing broad corporate
policies and for the overall performance of the Company. It is not, however,
involved in the operating details on a day-to-day basis. The Board is kept
advised of the Company's business through regular written communications and
discussions with management.
The Company has a classified Board, which provides
for three classes of directors each of which serves a three-year term. One class
is elected each year. Two directors were elected at the 1998 Annual Meeting and
the persons elected will hold office until their terms expire in the year 2001
and until their successors have been elected and qualified. Two directors are up
for election at the 1999 Annual Meeting. The Company's by-laws provide that the
Board shall consist of no less than three and no more than nine members, with
the actual number to be established by resolution of the Board. The current
Board has by resolution established the number of directors at seven. There are
currently two vacancies on the Board. The Company does not intend to fill them
at this time.
<TABLE>
Current Board of Directors
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
NAME AGE POSITION WITH COMPANY SINCE TERM ENDING CLASS
---- --- --------------------- ----- ---- ------ -----
- ------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
William C. Willis, Jr.(1)(2) 47 President, Chief Executive Officer and 1997 Three 2001 A
Chairman of the Board of Directors Year
- ------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
David Natan 45 Vice President, Chief Financial 1995 Three 1999 B
Officer, Secretary and Director Years
- ------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
Ronald P. Burd(3) 52 Director 1992 Three 1999 B
Years
- ------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
G. Jeff Mennen(1)(2) 59 Director 1997 Two 2000 C
Years
- ------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
L. Kerry Vickar(1)(2)(3) 42 Director 1998 Three 2001 A
Year
- ------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
</TABLE>
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
WILLIAM C. WILLIS, JR. - Mr. Willis has been President, Chief Executive Officer
and a member of the Board since May 1997. Since July 1, 1998, Mr. Willis has
served as Chairman of the Board. As President and Chief Executive Officer of the
Company, Mr. Willis is responsible for the overall management of the business,
with an emphasis on business strategy and long-term planning. Mr. Willis also
actively supervised the marketing of the Company's OSAs and currently actively
supervises the marketing of the Company's OSA-IIs. Prior to joining the Company,
Mr. Willis was Chairman of Willis & Associates, a management consulting firm
assisting small and medium sized technology, health care and consumer products
companies. From 1994 to 1995, Mr. Willis was President and Chief Operating
Officer of MBf USA, Inc., a marketer and distributor of latex products whose
Common Stock is traded on NASDAQ. From 1990 to 1994, Mr. Willis was President
and Chief Executive Officer of Insituform Technologies, Inc., a state of the art
provider of technologies for the reconstruction of pipelines and infrastructure.
From 1985 to 1990, Mr. Willis was President of The Paper Art Company, Inc., a
subsidiary of The Mennen Company.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY - (Continued)
DAVID NATAN - Was appointed a director of the Company on April 16, 1998 in order
to fill a vacancy. Currently, Mr. Natan, a CPA, has been Vice President and
Chief Financial Officer of the Company since June 1995 and Secretary from August
1997. Mr. Natan previously served on the Company's Board from June 1995 to
January 1997. Mr. Natan brings nearly 20 years of management and analytical
experience to his responsibilities. Prior to joining the Company, from November
1992 through June 1995, Mr. Natan was Chief Financial Officer of MBf USA, Inc.,
which is a NASDAQ listed subsidiary of MBf Holdings Berhad, a multi-national
conglomerate. From August 1987 through October 1992, Mr. Natan was Treasurer and
Controller for Jewelmasters, Inc., an AMEX listed company. Since January 1996,
Mr. Natan has been a director of IMX Corporation, a distributor pharmaceutical
products who's Common Stock trades on the Bulletin Board.
Greg Brown - Mr. Brown has been Vice President Marketing and Sales since
September 1998 and is responsible for all direct sales of the Company's patented
technologies as well as for the development of corporate partnership programs.
Prior to joining the Company, from September 1996 to September 1998, Mr. Brown
was Vice President of Marketing and Sales for Boston Advanced Technologies where
he developed the Latin American, European and Far Eastern markets. From March
1993 to August 1996, Mr. Brown was Sales and Service Manager for Perkin-Elmer
Corporation. From June 1992 to March 1993, Mr. Brown was the National Sales
Manager at UOP Guided Wave, where he established national account status for
DuPont, Dow, and Ashland Chemical, assisted in market development for Plastic
Extrusions, Polymers and Refineries and introduced the sale of value added model
calibrations with analyzer packages. From July 1990 to June 1992, Mr. Brown was
Sales Manager at LT Industries where he hired and directed field sales and
representatives for laboratory and process analyzers, including NIR and UV/VIS
products. He received his Bachelor of Science at the University of
Massachusetts.
Other Board Members
RONALD P. BURD - Mr. Burd has been a director of the Company since March 1992.
From 1984 through the present, Mr. Burd has been President and Chief Executive
Officer of the Devereux Foundation. Devereux, founded in 1912, is a nationwide,
private, not-for-profit organization that treats individuals of all ages who
have a wide range of emotional disorders and/or developmental disabilities.
Headquartered in Devon, Pennsylvania, Devereux operates residential, day and
community-based treatment programs located in 13 states and the District of
Columbia.
G. JEFF MENNEN - Mr. Mennen was appointed a director of the Company in October
1997. Currently, Mr. Mennen is President of Peak Management, a consulting firm
which he founded in 1989. Also, Mr. Mennen is a Managing Partner of TMF
Investment Holdings, a family investment firm. From 1981 until 1992, Mr. Mennen
was Vice Chairman of The Mennen Company where he served until that company was
sold to Colgate-Palmolive. From 1977 until 1981, Mr. Mennen was President of
Mennen International. Mr. Mennen is a director of Corbin, Ltd. and MBf USA, Inc.
L. KERRY VICKAR - Mr. Vickar was appointed a director of the Company in January
1998. Mr. Vickar has a Bachelor of Law degree from the University of Manitoba
and has extensive experience with divestitures, acquisitions, operations and
financial re-structuring. Currently, Mr. Vickar is Chairman and Chief Executive
Officer of Vickar Industries LLC, which recently acquired two printing
companies. In 1994, Mr. Vickar negotiated the sale of Gravure International
Corp. to ACX Technologies, Inc., where he remained until 1995 as Executive Vice
President and Chief Operating Officer of Flexible Division of Graphic Packaging
(a subsidiary of ACX Technologies, Inc.). From 1983 through 1994, Mr. Vickar
held various positions, including President and Chief Operating Officer with
Gravure International Corp.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Officer Compensation
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid to the Chief Executive Officer and
the other most highly compensated current executive officers of the Company
whose combined salary and bonus for the fiscal year ended September 30, 1998
exceeded $100,000 (collectively, the "Named Executive Officers") for the years
indicated. <TABLE>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------- --------------------------------------------------- ----------------------------- ------------------
Annual Compensation Long-Term Compensation
Awards
- ------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
(a) (b) (c) (d) (e) (f) (g) (i)
- ------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
Securities
Restricted Underlying
Name and Principal Other Annual Stock Option/SARs All Other
Position Year Salary Bonus Compensation Award(s) (#) Compensation
($) ($) ($) (1) ($) ($) (2)
- ------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- ------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
William C. Willis, Jr. 1998 $303,750 $0 $12,000 $0 100,000 $11,543
Chairman of the Board, 1997 $109,231(3) $0 $4,369 $0 500,000 $569
President 1996 N/A N/A N/A N/A N/A N/A
and Chief Executive
Officer
- ------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
David Natan
Vice President and 1998 $126,667 $0 $12,000 $0 100,000 $6,117
Chief Financial 1997 $125,000 $25,000 $11,298 $0 7,000 $3,511
Officer, Secretary and 1996 $125,000 $25,000 $10,914 $0 10,000 $5,448
Director
- ------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
</TABLE>
(1) Amounts consist principally of automobile allowances paid by the Company.
The Company's policy is to provide executive officers with an automobile
allowance of $600 per month and a maintenance allowance of $400 intended to
cover the cost of all other expenses of operating the vehicle such as
insurance, maintenance, repairs and gasoline costs.
(2) These amounts, as follows, represent group term life insurance premiums
paid by the Company, the Company's match of the Retirement Salary Saving
Plan - 401(k) and reimbursement of out-of-pocket medical and dental
expenses not covered by the Company's insurance:
(a) The 1998 group term life insurance premiums were as follows: Mr. Willis
$4,460 and Mr. Natan $2,300.
(b) The 1998 employer match of the Retirement
Salary Savings Plan - 401(K) was as follows: Mr. Willis $2,625 and Mr.
Natan $1,958.
(c) The 1998 reimbursement of out-of pocket medical and
dental expenses not covered by the Company's insurance was as follows: Mr.
Willis $4,458 and Mr. Natan $1,859.
(3) Mr. Willis' salary is only for the partial year from May 21, 1997 through
September 30, 1997.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION - (Continued)
Executive Officer Compensation - (Continued)
Effective June 30, 1998, Mr. Stuart Landow resigned as Chairman of the Board of
Directors and as an employee. During fiscal 1998, Mr. Landow was not an
executive officer of the Company. His total compensation including salary,
bonus, 401(K) match and reimbursement of medical and dental expenses not covered
by the Company's insurance was $258,686.
<TABLE>
Options/SAR GRANTS DURING THE FISCAL YEAR
ENDED SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term(1)
- --------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
(a) (b) (c) (d) (e) (f) (g)
- --------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
Number of
securities % of Total
Underlying Options/SARs Exercise or
Name Options/SARs Granted to Base Expiration 5% 10%
granted employees Price Date ($) ($)
(#) in Fiscal Year ($/Share)
- -----------------------------------------------------------------------------------------------------------------------
EXECUTIVE
OFFICERS
- --------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
William C. Willis, 100,000 9.2% $ .875 6/15/2008 55,028(2) 139,452(3)
Jr.
- --------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
David Natan 50,000 4.6% $1.38 1/28/2008 43,237(6) 109,570(7)
- --------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
- --------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
David Natan 50,000 4.6% $1.00 7/20/2008 31,445(4) 79,687(5)
- --------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
</TABLE>
(1) The values shown are based on indicated assumed annual rates of
appreciation compounded annually through the applicable expiration date.
Actual gains realized, if any, on stock option exercises and Common Stock
holdings are dependent on the future performance of the Common Stock and
overall market conditions. There can be no assurances that the values shown
on this table will be achieved.
(2) Represents an assumed market price per share of Common Stock of $1.43.
(3) Represents an assumed market price per share of Common Stock of $2.27.
(4) Represents an assumed market price per share of Common Stock of $1.63.
(5) Represents an assumed market price per share of Common Stock of $2.59.
(6) Represents an assumed market price per share of Common Stock of $2.24.
(7) Represents an assumed market price per share of Common Stock of $3.57.
<PAGE>
TEM 11. EXECUTIVE COMPENSATION - (Continued)
The following table sets forth certain information with respect to the exercise
of Options to purchase Common Stock and SARs during the fiscal year ended
September 30, 1998, and the unexercised Options held and the value thereof at
that date, by each of the Named Executive Officers. <TABLE> <S> <C> <C> <C> <C>
<C>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
- ------------------- ------------- --------------- ---------------------------------- -----------------------------------
(a) (b) (c) (d) (e)
- ------------------- ------------- --------------- ---------------------------------- -----------------------------------
Number of Securities Underlying
Unexercised Options/SARs at Value of Unexercised In-the-Money
Fiscal Year End (#) Options/SARs
at Fiscal Year End ($) (1)
- ------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
Shares
Acquired
On Exercise Value Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
EXECUTIVE
OFFICERS
- ------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
William C. 0 N/A 200,000 400,000 $0 $0
Willis, Jr.
- ------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
David Natan 0 N/A 52,833 129,167 $0 $0
- ------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
</TABLE>
(1) Based on the difference between the closing market price of the Company's
Common Stock on the AMEX at September 30, 1998 of $.8125 and the Option
exercise price.
Executive Compensation Agreements
WILLIAM C. WILLIS, JR.
In May 1997, the Company entered into an employment agreement with William C.
Willis, Jr., its then new President and Chief Executive Officer of the Company.
The term of this employment agreement is three years through May 21, 2000
("Employment Period"). The employment agreement provides for a base salary of
$300,000 ("Annual Base Salary"). Effective July 1, 1998 Mr. Willis' Annual Base
Salary increased to $315,000. Mr. Willis receives an automobile allowance of
$600 per month and an automobile maintenance and gasoline allowance of $400 per
month. Mr. Willis shall also be eligible to receive a cash bonus ("Performance
Bonus") as described below for each successive period of four fiscal quarters
(prorated for any partial period) during the Employment Period, as defined in
the employment agreement, in an amount of between zero and 100% of the Annual
Base Salary. The Performance Bonus, if any, for each successive four-quarter
period shall be paid within 60 days after the end of such period. The
Performance Bonus shall consist of the following two components:
(A) The first component of the Performance Bonus shall be an amount of between
zero and 50% of the Annual Base Salary based on the Company meeting annual
earnings per share targets of between $.01 and $.05 as defined in the
employment agreement.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION - (Continued)
Executive Compensation Agreements - (Continued)
(B) The second component of the Performance Bonus shall be an amount of between
zero and 50% of the Annual Base Salary based on the Company achieving five
annual performance based targets for each period of four fiscal quarters
during the Employment Period. As of September 30, 1997, Mr. Willis had not
earned any Bonuses. In June 1998, the Company granted Mr. Willis 100,000
Options initially exercisable over a three-year term at $.875 per share in
exchange for his waiving his earned Performance Bonus of approximately
$127,500.
The earnings per share targets and five performance based targets for each
succeeding four quarter period during the Employment Period shall be reset and
established annually by the Compensation Committee.
In addition to the payments provided above, on May 21, 1997, the Compensation
Committee granted to Mr. Willis Options to purchase 500,000 shares of the
Company's Common Stock exercisable at $2.00 per share vesting annually in equal
increments of 100,000 Options over a three-year term commencing in May 1998.
Additionally, 100,000 Options will become exercisable if the closing price for
the Company's Common Stock is $7.00 per share or higher for 30 consecutive
trading days and 100,000 Options will become exercisable if the closing price
for the Company's Common Stock is $9.00 per share or higher for 30 consecutive
trading days; provided, however, that the vesting of such Options shall be
accelerated in the event of a change in control.
In the event Mr. Willis' employment is terminated by the Company for other than
cause, death or disability or Mr. Willis terminates his employment for good
reason, all as defined in his employment agreement, the Company is obligated to
pay Mr. Willis (1) his annual base salary for 12 months, (2) a lump cash sum
paid within 30 days equal to accrued obligations consisting of any owed but
unpaid Performance Bonus, vacation pay and other monetary payments Mr. Willis
was entitled to on the date of his termination, and (3) continued medical
coverage for Mr. Willis and his dependents for 12 months following termination.
Effective in August 1997, the Company began providing Mr. Willis with a
$1,000,000 life insurance policy.
Executive Compensation Agreements
DAVID NATAN
Mr. David Natan, Vice President and Chief Financial Officer, joined the Company
on June 30, 1995 at an annual salary of $125,000. In August 1998, Mr. Natan's
salary was increased to $135,000. He also receives pursuant to an employment
agreement, a car allowance of $600 per month and an automobile maintenance and
gasoline allowance of $400 per month. In January 1997, Mr. Natan's employment
agreement provides for 12 months of severance benefits which include salary,
medical and dental benefits in the event of a qualifying termination of Mr.
Natan, defined as (1) a material adverse change to his job duties and
responsibilities; (2) a material reduction in his salary, compensation or
eligibility to participate in Company benefit programs; or (3) an unwilling
relocation to a location greater than 50 miles away from his current work
location. In January 1998, in order to compensate Mr. Natan, the Company granted
him new Options in exchange for cancellation of higher priced mostly vested
Options as follows:
<PAGE>
TEM 11. EXECUTIVE COMPENSATION - (Continued)
Executive Compensation Agreements - (Continued)
<TABLE>
<S> <C> <C> <C>
Number of Exercise Price
Options Number Vested
--------------------- ------------------- ---------------- ----------------------------
Cancelled Options 93,750 $6.94 78,175
10,000 $7.75 10,000
--------------------- ------------------- ---------------- ----------------------------
New Grant 75,000 $3.00 37,500(1)
--------------------- ------------------- ---------------- ----------------------------
</TABLE>
(1) The balance vest January 28, 1999.
In January 1998, Mr. Natan was granted 50,000 Options exercisable at $1.375 per
share. In July 1998, concurrent with his salary increase, Mr. Natan was granted
50,000 Options exercisable at of $1.00 per share. The Options vest in accordance
with the Company's standard policy of equal semi-annual vesting over a
three-year period. Effective in December 1997, the Company began providing Mr.
Natan with a $1,000,000 life insurance policy.
Termination/Resignation Executive Compensation
Effective June 30, 1998, Mr. Stuart Landow resigned as Chairman of the Board and
as an employee. Pursuant to a 1993 employment agreement, as modified, he is
receiving Severance, as defined, of 30 months compensation. He waived six months
of Severance or approximately $195,000. In exchange for this waiver and Mr.
Landow agreeing to increase the exercise price of 200,000 Options, the Company
extended the term of all 600,000 Options held by Mr. Landow for two years. See
Item 13. Certain Relationships and Related Transactions.
Repricing of Options
Repricing of Options held by a named executive officer during the fiscal year
ended September 30, 1998 and information on all repricing of Options held by an
executive officer during the last 10 fiscal years is provided in the following
table:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities Market Price of Exercise Price
Underlying Stock at Time at Time of Length of Original
Options/SARs Repricing or Repricing or New Option Term Remaining
Repriced or Amendment Amendment Exercise at Date of Repricing or
Amended ($) ($) Price Amendment
Name Date (#) ($)
- ------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
- ------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
- ------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
- ------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
David Natan 1/28/98 75,000(1) $1.375 $6.94 $3.00 7 years and 5 months
- ------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
</TABLE>
(1) The repricing was in consideration of cancellation of 103,750 Options. At
September 30, 1998, 37,500 Options shares were vested. The balance vest on
January 28, 1999.
<PAGE>
Mr. David Natan was hired as Vice President and Chief Financial Officer of the
Company in June 1995. During 1995, Mr. Natan was granted 103,750 Options. At
that time, the Company's stock was trading at prices substantially higher than
current levels. Between 1995 and 1998, the Company reported significant
operating losses. During this time period, except for Mr. Natan, substantially
the entire executive-management group and Board of Directors were replaced.
The Compensation Committee, consisting of Messrs. William C. Willis, Ronald P.
Burd, G. Jeff Mennen and L. Kerry Vickar, believes that despite these losses,
Mr. Natan's quality performance in maintaining the Company's liquidity during
this period, arranging for difficult financings and continuing current
performance, justified a repricing. In order to incentivize Mr. Natan, reduce
Company share dilution, and to encourage Mr. Natan's ongoing employment with the
Company, his Options were repriced. As a precondition of the repricing, the
Compensation Committee requested that Mr. Natan forfeit 28,750 Options and
re-vest the new Options over a one-year period. On January 28, 1998, the Company
cancelled 103,750 Options above fair market value held by Mr. Natan, and
regranted to Mr. Natan 75,000 new option shares exercisable at $3.00 per share,
which was $1.625 above market value on January 28, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned as of December 31, 1998 by (i) owners of more than 5%
of the Company's Common Stock, (ii) by each director, and (iii) all directors
and named executive officers of the Company as a group.
<TABLE>
<S> <C> <C> <C> <C>
Amount and Nature
of Beneficial Percent
Title of Ownership Of
Class Name and Address of Beneficial Owner Class
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock and WILLIAM C. WILLIS, JR.(1) 291,666 *
Vested Options Top Source Technologies, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock DAVID NATAN(2) 119,549 *
and Vested Top Source Technologies, Inc.
Options 7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock RONALD P. BURD(3),(4) 201,750 *
and Vested 251 Linden Lane
Options Merion Station, PA 19066
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock G. JEFF MENNEN(5) 538,332 1.8%
TMF Investments
25B Hanover Road
Florham Park, NJ 07932
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock L. KERRY VICKAR(6) 23,541 *
19010 Mary Ardrey Circle
Cornelios, NC 28031
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
(Continued)
<TABLE>
Security Ownership of Certain Beneficial Owners - (Continued)
<S> <C> <C> <C> <C>
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Amount and Nature
of Beneficial Percent
Title of Ownership Of
Class Name and Address of Beneficial Owner Class
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock GREG BROWN(7) 11,112 *
Top Source Technologies, Inc.
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418
- ------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock MELLON BANK CORPORATION(8) 2,079,700 7.1%
and Vested 2875 N.E. 191st Street, Penthouse I
Options N. Miami Beach, FL 33130
- ------------------------------------------------------------------------------ --------------------- ---------------
All Directors and Named Executive Officers of the Company as a group (5 1,185,950 3.9%
persons)(1)(2)(3)(4)(5)(6)
*Less than 1% of class
- ------------------------------------------------------------------------------ --------------------- ---------------
</TABLE>
(1) Includes 200,000 vested Options held by Mr. Willis at approximately $2.00
per share and 75,000 shares held by Mr. Willis.
(2) Includes 75,000 vested Options held by Mr. Natan exercisable at
approximately $3.00 per share, 7,000 vested Options exercisable at
approximately $1.56 per share, 16,666 vested Options at approximately $1.38
per share, and 8,333 exercisable at $1.00 per share, 11,550 shares held by
Mr. Natan and 1,000 shares held by Mr. Natan's wife.
(3) Includes 25,000 vested Options exercisable at approximately $3.38 per
share, 40,000 vested Options exercisable at approximately $1.78 per share
and 30,000 vested Options exercisable at approximately $6.25, 6,250 vested
Options exercisable at approximately $1.75 and 10,000 Options exercisable
at approximately $1.31 per share held by Mr. Burd.
(4) Includes 87,000 shares held jointly by Mr. Burd and his wife and 3,500
shares gifted by Mr. Burd to the Devereux Foundation, of which Mr. Burd is
President and Chief Executive Officer.
(5) Includes 10,000 vested Options exercisable at approximately $1.38, 1,666
vested Options exercisable at approximately $2.00 per share and 16,666
vested Options exercisable at approximately $1.19 per share, and 110,000
shares held indirectly by Mr. Mennen in the name of Wilmington Trust
Company and George Jeff Mennen co-trustee for Christina M. Andrea and John
Henry Mennen. Also, on January 12, 1998, the Company issued to Mr. Mennen
50,000 warrants at an exercise price of $2.00 per share. Mr. Mennen is
co-trustee and sole trustee of the two trusts, which purchased the
Preferred Stock and his family members are the beneficiaries. Also,
includes shares of Common Stock reserved for exercise of 350,000 10-year
warrants issued to the trusts exercisable at $1.94 per share. Does not
include shares of Common Stock into which $3,500,000 of Series B
Convertible Preferred Stock may convert on or after November 1, 1999.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
(Continued)
Security Ownership of Certain Beneficial Owners - (Continued)
(6) Includes 12,500 shares held by Mr. Vickar and 11,041 vested Options
exercisable at approximately $1.13 per share.
(7) Includes 6,112 shares held by Mr. Brown and 5,000 vested Options
exercisable at approximately $1.13 per share.
(8) Mellon Bank Corporation formerly Ganz Capital Management, Inc. beneficially
owned 2,079,700 shares of Common Stock of the Company as of January 23,
1998. This represents beneficial ownership of 7.1% of the Company's
outstanding shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 8. Financial Statements and Supplementary Data, Note 13. 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/A No.3..... 16
(a) (2) Financial Statement Schedules required to be filed.
Schedule II - Valuation and Qualifying Accounts......... 52
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. <PAGE>
TERM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(a) (3) Exhibits
<TABLE>
<S> <C> <C>
Footnote
- --------- ------------------------------------------------------------------------------------------------------------ -------
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>
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.
<PAGE>
Exhibit Index
<TABLE>
<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 Contained in Form 10-K for the year ended September 30, 1998.
- ------- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <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 Charged 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/A No. 1 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
Dated: September 3, 1999
<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-BASIC> (0.21)
<EPS-DILUTED> 0
</TABLE>
