SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 30, 1999
TOP SOURCE TECHNOLOGIES INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 333-56083 84-1027821
-------- --------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File No.) Identification No.)
7108 Fairway Drive, Suite 200
Palm Beach Gardens, FL 33418
Registrant's telephone number, including area code: (561) 775-5756
<PAGE>
ITEM 5. ACQUISITION OR DISPOSITION OF ASSETS.
On September 30, 1999, Top Source Technologies, Inc. (the "Company")
sold substantially all of the assets of its 85% owned subsidiary, Top Source
Automotive, Inc. ("TSA") and certain of its intellectual property assets
relating to TSA's overhead sound system to Onkyo America, Inc., ("Onkyo") for a
total consideration of $10,000,000 as more particularly described in the
exhibits to this report. Additionally, Onkyo assumed approximately $825,000 of
liabilities of TSA. On October 29, 1999, Onkyo paid the $6,500,000 Note plus
interest to TSA. An escrow agent is holding $500,000 of TSA's proceeds for one
year to cover any undisclosed TSA liabilities in excess of $50,000.
Additionally, on October 29, 1999, Onkyo delivered to the Company 100 shares of
Onkyo's 5% Series A Convertible Preferred Stock, in payment of the $1,000,000
Note, delivered to the Company on September 30, 1999.
The financial statements of the Company filed as an exhibit treat TSA
as a discontinued operation for the fiscal years ended September 30, 1999, 1998,
and 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
EXHIBIT NO. EXHIBIT
- ----------- -------
2.1 Asset Purchase Agreement, dated September 30, 1999 by and
among Top Source Technologies, Inc. and Onkyo America,
Inc.*
2.2 Press Release dated October 4, 1999*
2.3 Audited Financial Statements for the years ended September
30, 1999, 1998, and 1997.
* Filed as an exhibit to Form 8-K on October, 15 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: S/ WILLIAM C. WILLIS, JR.
---------------------------------------
William C. Willis, Jr.
Date: December 13, 1999 Chairman and Chief Executive Officer
<PAGE>
EXHIBIT NO. EXHIBIT
- ----------- -------
2.3 Audited Financial Statements for the years ended September
30, 1999, 1998, and 1997.
EXHIBIT 2.3
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, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements 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, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
November 24, 1999
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 and 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
------------------ -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,308,952 $ 488,899
Accounts receivable trade, net 209,554 56,861
Due from buyer of automotive subsidiary 6,000,000 -
Inventories 1,935,832 1,140,520
Prepaid expenses 76,657 115,296
Other 102,867 130,361
Net assets from discontinued operations - 1,780,990
------------------ -----------------
Total current assets 10,633,862 3,712,927
Property and equipment, net 1,533,117 551,478
Patents, net 143,881 123,626
Capitalized database, net 1,862,361 2,073,194
Due from buyer of automotive subsidiary 1,500,000 -
Note receivable from officer - 26,260
Other assets, net 1,127 133,814
------------------ -----------------
TOTAL ASSETS $ 15,674,348 $ 6,621,299
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,913,986 $ 1,318,835
Senior subordinated convertible notes 707,000 -
Loan payable 506,712 -
Accounts payable 302,553 597,307
Accrued liabilities 2,607,408 798,662
Payable to former buyer of automotive subsidiary 1,030,835 -
------------------ -----------------
Total current liabilities 7,068,494 2,714,804
Senior subordinated convertible notes - 3,020,000
Other liabilities 89,799 429,524
------------------ -----------------
Total liabilities 7,158,293 6,164,328
Commitments and contingencies (See Note 10) - -
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,500 and 1,000 shares issued and 3,444,644 943,807
outstanding in 1999 and 1998, respectively
Common stock-$.001 par value, 50,000,000 shares
authorized; 29,799,281 and 29,053,803 shares issued and
outstanding in 1999 and 1998, respectively 29,799 29,054
Additional paid-in capital 31,208,571 29,624,951
Accumulated deficit (24,817,605) (28,791,487)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
------------------ -----------------
Total stockholders' equity 8,516,055 456,971
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,674,348 $ 6,621,299
================== =================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements .
2
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Sales revenue $ 930,749 $ 195,676 $ 294,700
Service revenue 458,929 196,977 109,153
------------ ------------ ------------
Total revenue 1,389,678 392,653 403,853
------------ ------------ ------------
Cost of sales and service 1,256,621 609,088 107,044
------------ ------------ ------------
Gross profit (loss) 133,057 (216,435) 296,809
------------ ------------ ------------
Expenses:
General and administrative 2,409,072 2,792,151 3,894,096
Selling and marketing 752,512 810,288 1,031,756
Write down of fixed assets -- 880,911 --
Severance expense -- 1,085,587 --
Depreciation and amortization 379,431 853,971 1,034,898
Research and development 146,896 286,341 25,682
------------ ------------ ------------
Total expenses 3,687,911 6,709,249 5,986,432
------------ ------------ ------------
Loss from operations (3,554,854) (6,925,684) (5,689,623)
Other income (expense):
Interest income 81,815 92,555 132,526
Interest expense (589,362) (662,312) (438,849)
Other (expense) income, net (11,008) 54,849 88,322
------------ ------------ ------------
Net other income (expense) (518,555) (514,908) (218,001)
------------ ------------ ------------
Loss before income taxes (4,073,409) (7,440,592) (5,907,624)
Income tax expense -- (75) (248,926)
------------ ------------ ------------
Loss from continuing operations before
discontinued operations and extraordinary item: (4,073,409) (7,440,667) (6,156,550)
------------ ------------ ------------
Discontinued operations:
Income from discontinued operations,
net of income taxes 1,232,451 948,345 2,921,234
Gain on disposal of discontinued operations,
net of income taxes 8,030,832 962,760 --
------------ ------------ ------------
Discontinued operations 9,263,283 1,911,105 2,921,234
------------ ------------ ------------
Income (loss) before extraordinary item 5,189,874 (5,529,562) (3,235,316)
Loss on extinguishment of debt (27,266) -- --
------------ ------------ ------------
Net income (loss) 5,162,608 (5,529,562) (3,235,316)
Embedded dividend on preferred stock (619,462) (193,807) --
Preferred dividends (277,458) (20,034) --
Value of warrants issued with preferred stock (291,806) (108,979) --
------------ ------------ ------------
Net income (loss) available to common stockholders $ 3,973,882 ($ 5,852,382) ($ 3,235,316)
============ ============ ============
Basic and Diluted Earnings (Loss) Per Share
Continuing Operations (0.18) (0.28) (0.22)
Discontinued Operations 0.32 0.07 0.10
Extraordinary item (0.00) -- --
------------ ------------ ------------
Net Income (Loss) 0.14 (0.21) (0.12)
============ ============ ============
Basic and diluted weighted average common shares outstanding 29,108,705 28,242,005 28,065,563
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements .
3
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PREFERRED PAID-IN
SHARES AMOUNT STOCK CAPITAL
------------------------------------------------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 28,446,477 $ 28,446 - $28,723,853
Exercise of stock options ($.5625 to $1.78 per share) 15,000 15 - 20,598
Treasury stock purchases - - - -
Net loss - - - -
------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 28,461,477 28,461 - 28,744,451
Exercise of stock options ($.53 to $1.50 per share) 549,700 550 - 387,791
Issuance of convertible preferred stock - Series A - - 1,000,000 -
Preferred stock issuance costs and fees - - - (118,606)
Issuance of common stock for payment of dividend
on preferred stock 42,626 43 - 19,991
Intrinsic value of preferred stock conversion feature - - (250,000) 250,000
Preferred stock embedded dividend - - 193,807 -
Value of warrants issued with preferred stock - - - 108,979
Options and warrants issued for services - - - 232,345
Net loss - - - -
------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 29,053,803 29,054 943,807 29,624,951
Exercise of stock options ($.53 to $.875 per share) 50,550 51 - 26,827
Redemption of convertible preferred stock - Series A - - (500,000) -
Conversion of convertible preferred stock - Series A
to common stock 669,149 668 (500,000) 499,332
Issuance of convertible preferred stock - Series B - - 3,500,000 -
Preferred stock issuance costs and fees - - - (129,701)
Issuance of common stock for payment of dividend
on preferred stock 25,779 26 - 12,105
Preferred stock dividend - - - -
Intrinsic value of preferred stock conversion feature - - (618,625) 618,625
Preferred stock embedded dividend - - 619,462 -
Value of warrants issued with preferred stock - - - 291,806
Options and warrants issued for services - - - 264,626
Net Income - - - -
======================================================
BALANCE, SEPTEMBER 30, 1999 29,799,281 $ 29,799 $ 3,444,644 $31,208,571
======================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED TREASURY STOCKHOLDERS'
DEFICIT STOCK EQUITY
---------------------------------------------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 $ (19,703,789) $ (131,785) $ 8,916,725
Exercise of stock options ($.5625 to $1.78 per share) - - 20,613
Treasury stock purchases - (1,217,569) (1,217,569)
Net loss (3,235,316) - (3,235,316)
---------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 (22,939,105) (1,349,354) 4,484,453
Exercise of stock options ($.53 to $1.50 per share) - - 388,341
Issuance of convertible preferred stock - Series A - - 1,000,000
Preferred stock issuance costs and fees - - (118,606)
Issuance of common stock for payment of dividend
on preferred stock (20,034) - -
Intrinsic value of preferred stock conversion feature - - -
Preferred stock embedded dividend (193,807) - -
Value of warrants issued with preferred stock (108,979) - -
Options and warrants issued for services - - 232,345
Net loss (5,529,562) - (5,529,562)
---------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 (28,791,487) (1,349,354) 456,971
Exercise of stock options ($.53 to $.875 per share) - - 26,878
Redemption of convertible preferred stock - Series A - - (500,000)
Conversion of convertible preferred stock - Series A
to common stock - - -
Issuance of convertible preferred stock - Series B - - 3,500,000
Preferred stock issuance costs and fees - - (129,701)
Issuance of common stock for payment of dividend
on preferred stock (12,131) - -
Preferred stock dividend (265,327) - (265,327)
Intrinsic value of preferred stock conversion feature - - -
Preferred stock embedded dividend (619,462) - -
Value of warrants issued with preferred stock (291,806) - -
Options and warrants issued for services - - 264,626
Net Income 5,162,608 - 5,162,608
===================================================
BALANCE, SEPTEMBER 30, 1999 $ (24,817,605) $ (1,349,354) $ 8,516,055
===================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
4
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 5,162,608 $(5,529,562) $(3,235,316)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Income from discontinued operations (1,232,451) (948,345) (2,921,234)
Gain on disposal of discontinued operations (8,030,832) (962,760) --
Depreciation 307,034 679,245 829,183
Amortization 333,217 294,150 232,756
Write down of fixed assets and inventory -- 1,294,045 --
Loss on extinguishment of debt 27,266 -- --
Loss on disposal of equipment 3,100 160,963 284,212
Non cash value of services 184,620 232,345 --
Decrease in deferred income tax assets, net -- -- 245,926
Repayments from (advances to) officers 26,260 107,661 (133,921)
(Increase) decrease in accounts receivable, net (152,693) (191) 574,025
Increase in inventories (795,312) (1,437,419) (75,118)
Decrease in prepaid expenses 38,639 39,599 36,516
Decrease (increase) in other assets 27,494 729,556 (165,163)
(Decrease) increase in accounts payable (294,754) 539,889 (542,780)
Increase (decrease) in accrued liabilities 274,733 (120,769) (698,314)
(Decrease) increase in other liabilities (339,725) 429,524 --
----------- ----------- -----------
Net cash used in operating activities (4,460,796) (4,492,069) (5,569,228)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,291,773) (582,132) (820,421)
Additions to patent costs, net (103,722) (65,078) (11,410)
----------- ----------- -----------
Net cash used in investing activities (1,395,495) (647,210) (831,831)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants 26,878 388,341 20,613
Preferred stock issuance, net 3,370,299 881,394 --
Proceeds from loan payable 500,000 -- --
Repurchases of treasury stock -- -- (1,217,569)
Redemption of preferred stock Series A (500,000) -- --
Repayments of Senior Convertible Notes (2,064,617) -- --
Payment of extinguishment of debt costs (110,403) -- --
Payment of preferred stock dividend (107,827) -- --
Proceeds from (repayments of) borrowings 595,151 (677,506) 1,996,341
----------- ----------- -----------
Net cash provided by financing activities 1,709,481 592,229 799,385
----------- ----------- -----------
NET CASH USED IN CONTINUING OPERATIONS: (4,146,810) (4,547,050) (5,601,674)
----------- ----------- -----------
CASH PROVIDED BY DISCONTINUED OPERATIONS:
Operating Activities 1,488,397 1,731,370 3,796,011
Investing Activities 4,478,466 1,200,900 3,256,213
----------- ----------- -----------
Net cash provided by discontinued operations 5,966,863 2,932,270 7,052,224
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,820,053 (1,614,780) 1,450,550
Cash and cash equivalents at beginning of period 488,899 2,103,679 653,129
----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,308,952 $ 488,899 $ 2,103,679
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements .
5
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION - Currently, the Company has three wholly
owned subsidiaries, Top Source Instruments, Inc. ("TSI"), which markets, leases
and sells oil analysis services with the OSA-II, Top Source Oil Analysis, Inc.
("TSOA"), which became a discontinued operation on September 30, 1996, and ARCS
Safety Seat, Inc. ("ARCS"), which is inactive. Additionally, the Company has one
85% owned subsidiary, Top Source Automotive, Inc. ("TSA"), which became a
discontinued operation on September 30, 1999. (See Note 3. Sale of Top Source
Automotive, Inc.)
The accompanying Consolidated Financial Statements include the accounts of Top
Source Technologies, Inc. and its subsidiaries ("the Company"). All significant
inter-company accounts and transactions have been eliminated. In order to
maintain consistency and comparability between periods presented certain amounts
have been reclassified from previously reported financial statements in order to
conform to the financial statement presentation of the current year. On
September 30, 1999 the Company sold substantially all of the assets of its 85%
owned subsidiary, TSA and other assets used in TSA's business to Onkyo America,
Inc. ("Onkyo"). Accordingly, the operations and financial activity associated
with this business have been reclassified as discontinued operations. With the
disposition of this operation, the Company's core business, became the leasing
and selling of its second generation on-site used oil analyzer ("OSA-II"). The
OSA-II is a proprietary oil analysis instrument that combines two spectrometers
in order to analyze used oil in approximately five minutes and generate a
computerized diagnostic statement about the engine from which the oil was
extracted.
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 inter-company
accounts and transactions have been eliminated.
REVENUE RECOGNITION - The Company recognizes revenue from sales and leases of
OSA units at the time the products are shipped. Revenue from leased OSA units is
recognized ratably over the lease term, which range from 3 to 48 months. All
existing leases are classified as operating leases.
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.
6
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED DATABASE - The capitalized database relates to a portion of the cost
in excess of the fair value related to the TSOA 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. Capitalized
Database).
LONG-LIVED ASSETS - 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
Company's long-lived assets may warrant revision or that the assets may not be
recoverable. When such factors, events or circumstances indicate that the
long-lived assets should be evaluated for possible impairment, the Company uses
an estimate of undiscounted cash flow generated from the long-lived assets over
the remaining lives of those assets in measuring its recoverability.
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, 1999, 1998 and 1997,
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 adopted SFAS No. 131 for fiscal year ending
September 30, 1999. The adoption of SFAS No. 131 did not have a material impact
on its financial position or results of operations because its operations are
concentrated in one segment following the sale of TSA (see Note 3. Sale of Top
Source Automotive, Inc.)
QUARTERLY INFORMATION - The Company recorded an additional valuation allowance
to reduce the deferred tax asset in the amount of $249,000, during the fourth
quarter of the fiscal year ended September 30, 1997. (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.
7
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. OIL ANALYSIS SERVICE
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. An impairment loss, in the amounts of $880,911 and $413,134, was
charged to operations and is included in "Write down of fixed assets" and "Cost
of Sales and Service", respectively, in the accompanying Consolidated Statements
of Operations for the Year Ended September 30, 1998.
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
its 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 September 30, 1999, the Company sold substantially all of the assets of its
85% owned subsidiary, TSA, and certain intellectual property assets of the
Company relating to TSA's Overhead Speaker Systems ("OHSS") business, to Onkyo
America, Inc. ("Onkyo") for total consideration of $10,000,000 consisting of
$2,500,000 cash, a $6,500,000 30-day note payable to TSA and a $1,000,000 30-day
note payable to the Company in either cash or convertible preferred stock of
Onkyo. The $6,500,000 note and accrued interest of $46,479 was paid on October
29, 1999, and the $1,000,000 note was paid through issuance of $1,000,000 of
Onkyo 5% Series A Convertible Preferred Stock ("Onkyo Preferred"). Of the
$9,000,000 in cash received by the Company, $500,000 is being held in escrow for
a 12-month period until October 2000 in the event that undisclosed TSA
liabilities in excess of $50,000 arise. Upon conclusion of the one-year period,
the funds plus interest will be paid to TSA less any excess undisclosed
liabilities, if any, in excess of $50,000. No accrual has been recorded for
claims against the escrowed funds as none are anticipated at this time.
The $1,000,000 Onkyo Preferred received by the Company has the following
attributes:
a. CONVERSION. In the event that Onkyo prior to redemption completes an initial
public offering for a minimum of $10,000,000 net of underwriting discounts and
commissions and the equity valuation of Onkyo is in excess of $25 million, the
Onkyo Preferred automatically converts into Onkyo Common Stock, equal to
approximately 2.5% of the number of common shares outstanding prior to
completion of the offering.
b. REDEMPTION. After October 1, 2002, either the Company or Onkyo may redeem the
Series A Preferred Stock based upon a formula equal to (i) the product of
multiplying 4.3 times Onkyo's average, annualized net income before interest,
taxes, depreciation, and amortization for the period beginning on September 1,
1999 (including TSA's operations for the period beginning on September 1, 1999);
times (ii) the fully-diluted percentage of Common Stock into which the Series A
Preferred Stock is convertible. The term "fully-diluted" gives effect to
exercise of all outstanding options and warrants and conversion of all
outstanding convertible securities;
c. DIVIDENDS. The Series A Preferred Stock has a cumulative dividend preference
of 5% per annum payable at the end of each year.
d. LIQUIDATION PREFERENCE. Upon liquidation of Onkyo or sale of all or
substantially all of the assets of Onkyo or similar event, the Series A
Preferred Stock is entitled to a $1,000,000 liquidation preference in addition
to all cumulative and unpaid dividends; and
e. NON-VOTING. The Series A Preferred Stock has no voting rights except those
required by law.
8
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. SALE OF TOP SOURCE AUTOMOTIVE, INC., (CONTINUED)
Previously, the Company and TSA had entered into a TSA Asset Purchase agreement
with NCT Audio Products, Inc. ("NCT") on August 14, 1998 for a minimum of
$10,000,000 in cash and up to $6,000,000 in a potential earn-out based upon the
future operating results of the TSA business being sold. TSA received $1,450,000
in June 1998 and an additional $2,050,000 on December 15, 1998 when the
Company's stockholders approved the sale to NCT. As a result of the approval by
the Company's stockholders on December 15, 1998, NCT became the owner of 20% of
TSA's Common Stock in exchange for the $3,500,000 it paid. During fiscal 1999,
the Company and TSA granted NCT two additional extensions to close the
transaction with a final deadline of July 15, 1999. As part of the consideration
for these extensions, the Company received back 5% of TSA's Common Stock,
thereby reducing NCT's ownership of TSA to 15%. NCT's parent company issued a
press release on July 16, 1999 stating that it was unable to obtain the
necessary financing to complete the transaction and acknowledging that NCT
thereby let its rights under the asset purchase agreement to lapse. As a result,
the Company and TSA proceeded to negotiate a definitive agreement and ultimately
close on the sale of the assets to Onkyo on September 30, 1999. In September
1999, NCT commenced an arbitration proceeding alleging that the Company and TSA
breached the Asset Purchase Agreement and sought to obtain injunctive relief
from the Delaware Court of Chancery preventing the Company and TSA from
consummating the Onkyo transaction. The Court declined to rule on NCT's request
for a temporary restraining order and NCT's request for injunctive relief was
rendered moot when the Onkyo transaction closed. The arbitration proceeding in
which NCT claims damages, beyond their 15% equity ownership of TSA, is pending.
The Company believes that NCT's claims for damages beyond their 15% equity
ownership of TSA less certain adjustments and offsets, are without merit. In
December 1999, the Company and TSA answered the demand for arbitration by
denying all material allegations and filed a counterclaim against NCT for
substantial damages. The Company has recorded the amounts due to NCT as "Payable
to former buyer of automotive subsidiary" in the accompanying consolidated
balance sheet.
4. STATEMENTS OF CASH FLOWS
In connection with the restructuring of substantially all of the outstanding
Senior Subordinated Convertible Notes (see Note 9. Debt), the Company recorded a
non-cash gain on extinguishment of debt of $248,383 for the year ended September
30, 1999.
There were no significant non-cash investing or financing activities for the
years ended September 30, 1998 and 1997. Cash paid for interest for the years
ended September 30, 1999, 1998, and 1997 was $397,639, $564,930 and $325,782,
respectively.
5. INVENTORIES
Inventories consisted of the following at September 30, 1999 and 1998:
- ------------------------------- ----------------------- ---------------------
1999 1998
- ------------------------------- ----------------------- ---------------------
Raw materials $984,082 $1,140,520
- ------------------------------- ----------------------- ---------------------
Finished goods 951,750 -0-
------- ---
- ------------------------------- ----------------------- ---------------------
$1,935,832 $1,140,520
========= =========
- ------------------------------- ----------------------- ---------------------
9
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1999 and
1998:
- --------------------------------- ------------- ---------------- ---------------
USEFUL
LIFE
(YEARS) 1999 1998
- --------------------------------- ------------- ---------------- ---------------
Computer equipment 3-4 $967,753 $1,026,411
- --------------------------------- ------------- ---------------- ---------------
On-Site Analyzers 4-5 1,482,829 316,214
- --------------------------------- ------------- ---------------- ---------------
Tools 2 24,253 11,862
- --------------------------------- ------------- ---------------- ---------------
Furniture and fixtures 3-5 190,452 188,285
- --------------------------------- ------------- ---------------- ---------------
Leasehold improvements 2-5 26,555 25,665
------ ------
- --------------------------------- ------------- ---------------- ---------------
2,691,842 1,568,437
--------- ---------
- --------------------------------- ------------- ---------------- ---------------
Less: accumulated depreciation (1,158,725) (1,016,959)
- --------------------------------- ------------- ---------------- ---------------
$1,533,117 $551,478
========= =======
- --------------------------------- ------------- ---------------- ---------------
Depreciation of leased OSA-II machines in the amount of $160,029 and $119,424
for the years ended September 30, 1999 and 1998, respectively, has been
allocated to cost of sales as it directly relates to cost of services.
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).
7. PATENTS
Patents consisted of the following at September 30, 1999 and 1998:
- ------------------------------------ ------------ -------------- ---------------
USEFUL
LIFE
(YEARS) 1999 1998
- ------------------------------------ ------------ -------------- ---------------
- ------------------------------------ ------------ -------------- ---------------
Patents 10 $241,830 $199,982
- ------------------------------------ ------------ -------------- ---------------
Less: accumulated amortization (97,949) (76,356)
-------- --------
- ------------------------------------ ------------ -------------- ---------------
$143,881 $123,626
======== ========
- ------------------------------------ ------------ -------------- ---------------
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 $96,313 at
September 30, 1999.
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
$47,568 at September 30, 1999.
10
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. CAPITALIZED DATABASE
Capitalized database consisted of the following at September 30, 1999 and 1998:
- ------------------------------------ -------------- -------------- -------------
USEFUL
LIFE (YEARS) 1999 1998
- ------------------------------------ -------------- -------------- -------------
- ------------------------------------ -------------- -------------- -------------
Capitalized database 15 $3,162,500 $3,162,500
- ------------------------------------ -------------- -------------- -------------
Less: accumulated amortization (1,300,139) (1,089,306)
----------- -----------
- ------------------------------------ -------------- -------------- -------------
$1,862,361 $2,073,194
========== ==========
- ------------------------------------ -------------- -------------- -------------
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.
9. DEBT
Notes payable at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Senior Subordinated convertible notes, due June 2000,
bearing interest at 5% $707,000 $3,020,000
======= ==========
</TABLE>
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 until
September 30,1999. As of September 30, 1999, the Company was in compliance with
this ratio.
During December 1998, the Company restructured substantially all of the
outstanding $3,020,000 of Senior Subordinated Convertible Notes (the "Notes").
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 is currently in the process of registering 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, Noteholders representing $2,240,000 of the remaining
$2,275,000 in Notes outstanding agreed to be prepaid $1,568,000 of the Notes,
leaving $707,000 of principal outstanding due on 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).
11
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. DEBT, (CONTINUED)
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"). The Credit Facility, which was secured by substantially
all of the assets of the Company enabled the Company to borrow up to $5,000,000
based upon certain percentages of accounts receivable and inventory balances.
The interest rate on this Credit Facility was 1-1/2% over the prime rate and was
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,
1999 factoring the interest earned on unused drawn funds was 17.4%. As a result
of the sale of TSA assets, the Note balance of approximately $1,914,000, which
included a redemption fee of $100,000, was paid in full. Additionally, the
Credit Facility was cancelled and liens on all assets of the Company were
released on October 1, 1999.
On August 13, 1999, a trust in which Mr. G. Jeff Mennen, a director of the
Company, is one of the trustees (the "Trust") provided the Company a six-month
short-term unsecured loan of $500,000 at a 10% interest rate. The loan can be
prepaid without penalty at anytime during the first six months. In the event the
Company does not repay the loan before February 13, 2000, the Company will be
required to file a registration statement by February 13, 2000. The registration
statement will allow the Trust to convert the loan to Common Stock at 90% of the
market price. As consideration, the Trust received 50,000 warrants at the market
price of $.875 exercisable immediately, and 50,000 warrants at the market price
of $.875 exercisable in one year. The value of these warrants utilizing the
Black- Scholes Option Pricing Model in accordance with SFAS No. 123 was $76,344.
This amount was deducted as interest expense in the fourth quarter of the fiscal
year 1999. Total interest accrued on this loan for the period ended September
30, 1999 amounted to $6,712.
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:
2000 $199,899
2001 202,149
2002 42,209
Total rental expense for continuing operations amounted to $188,538, $174,386,
and $299,525 for the years ended September 30, 1999, 1998, and 1997,
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 $467,560 and are payable during fiscal 2000.
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 month. 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 1999, 1998 and
1997 was $17,980, $19,160, and $30,943, respectively.
12
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES, (CONTINUED)
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 are calculated by dividing income
(loss) available to Common Stockholders by the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per share is
calculated by dividing income available to common stockholders by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding.
For the years ended September 30, 1999, 1998 and 1997, the dilutive effect of
convertible securities and common stock equivalent shares of 4,039,032,
1,274,896, and 554,802, respectively, were not included in the dilutive average
common shares outstanding, as the effect would have been antidilutive.
12. INCOME TAXES
The income tax expense for the years ended September 30, 1999, 1998 and 1997 of
$0, $0, and $249,000 consists of the reversal of previously recorded deferred
tax assets in 1997.
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, it is
not more likely than not that the net deferred tax assets at September 30, 1999
will be realized before the expiration of the underlying net operating loss
carryforwards 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, 1999, the Company has net tax basis Federal operating loss
carryforwards of approximately $31,000,000, which may be used to offset future
taxable income, if any. The Company's net operating loss carryforwards expire
between 2002 and 2018.
13. RELATED PARTY TRANSACTIONS
In order to assure the Company would not violate a covenant under the Notes, in
January 1998, G. Jeff Mennen, a director of the Company, agreed to infuse
sufficient capital into the Company to maintain compliance of this ratio through
October 1, 1998 or refinance the Notes (see Note 9. Debt). In consideration for
this guarantee, the Company issued to Mr. Mennen 50,000 10-year warrants
exercisable at $2.00 per share and agreed to register the underlying shares of
Common Stock at its sole expense. These warrants were valued at $31,854
utilizing the Black Scholes Option Pricing Model in accordance with SFAS No. 123
and has been deducted as an expense for the period ended September 30, 1998.
13
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS, (CONTINUED)
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 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 a price of 115% of Stated Value plus accrued
dividends, which option expires on January 1, 2001. The Series B Preferred pays
a dividend of 9% per annum in cash or, if the Company is unable to pay cash, in
shares of Common Stock. The number of shares of Common Stock to be issued in
such event shall equal to the sum of: (A) the amount of the dividend divided by
the Conversion Price plus (B) 25% of the amount obtained in clause (A). As
additional consideration, the Company issued to the Mennen Trusts 350,000
warrants to purchase the Company's Common Stock exercisable over a 10-year
period at a price of $1.94 per share (which was equivalent to $1.00 above the
closing price on the day of consummation of the Series B Preferred sale
transaction). These warrants were valued at $177,251 utilizing the Black Scholes
Option Pricing Model in accordance with SFAS No. 123 and has been deducted from
amounts available to Common Stockholders for the purpose of calculating income
per share for the period ended September 30, 1999. Additionally, since the
Series B Preferred was not redeemed or converted into Common Stock on or before
May 1, 1999 (which conversion required the Company's consent), the Company
issued to the Mennen Trusts an additional 50,000 10-year warrants exercisable at
a price of $1.75, $0.50 per share above the closing price of the Company's
Common Stock on April 30, 1999. These warrants were valued at $27,048 utilizing
the Black-Scholes Option Pricing Model in accordance with SFAS No. 123 and has
been deducted from amounts available to Common Stockholders for the purpose of
calculating income per share for the period ended September 30, 1999.
Under the original terms of the series B Preferred Stock, the Company agreed to
file a registration statement by November 30, 1999 to cover the public sale of
the shares of Common Stock issuable on conversion of the Series B Preferred
Stock and exercise of the warrants. The company did not file a registration
statement (see Note 18. Subsequent Events).
On August 13, 1999, a trust in which Mr. G. Jeff Mennen, a director of the
Company, is one of the trustees (the "Trust") provided the Company a six-month
short-term unsecured loan of $500,000 at a 10% interest rate. The loan can be
prepaid without penalty at anytime during the first six months. In the event the
Company does not repay the loan before February 13, 2000, the Company will be
required to file a registration statement by February 13, 2000. The registration
statement will allow the Trust to convert the loan to Common Stock at 90% of the
market price. As consideration, the Trust received 50,000 warrants at the market
price of $.875 exercisable immediately, and 50,000 warrants at the market price
of $.875 exercisable in one year. The value of these warrants of $76,344 of
utilizing the Black-Scholes Option Pricing Model in accordance with SFAS No. 123
has been deducted as interest expense in the fourth quarter of fiscal year 1999.
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") which provided a base salary of $200,000 per
year. Additionally, the Employment Agreement called for incentive compensation
payments. The incentive cash compensation expense for fiscal 1999, 1998, and
1997 was $0, and $92,760, and $178,406, respectively.
14
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS, (CONTINUED)
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. This waiver was effective until June 30,
1998 or earlier, if elected by Mr. Landow at which time the terms of the
original Employment Agreement remained in effect, with the exception of the
incentive payments which would be calculated based on the previous sales for the
period from July 1, 1996 through June 30, 1997.
In June 1998, Mr. Landow and the Company's Board of Directors reached an
agreement to modify his Employment Agreement, which resulted in Mr. Landow
triggering the Good Reason clause of his contract and resigning as Chairman and
as a director of the Company, effective June 30, 1998.
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 would
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" 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.
As of September 30, 1999, the Company owes Mr. Landow additional payments of
$429,524, which is included in accrued liabilities in the accompanying financial
statements.
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.
15
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS, (CONTINUED)
The 1990 Stock Plan is administered by a committee of four non-employee
directors. The committee, subject to certain restrictions in the 1990 Stock
Plan, has the authority to grant or issue, as applicable, ISOs, Non-Qualified
Options, Awards, Purchases and Non-Discretionary Options. The committee also
establishes exercise or issue prices, vesting schedules and expiration dates.
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 administers 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.
16
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS (CONTINUED)
The Company has issued the following options and warrants to directors,
officers, employees and consultants during 1999, 1998 and 1997. 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.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTE
AVERAGE AVERAGE D
EXERCISE EXERCISE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS EXERCISE
--------- -------- --------- -------- --------- PRICE
--------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year: 3,265,872 $ 2.34 3,160,580 $ 2.66 2,681,314 $ 3.57
Granted 1,219,748 $ 1.53 1,683,727 $ 1.79 1,148,257 $ 2.12
Expiration Dates 11/13/03- 01/12/2002- 11/11/2006-
9/22/2009 09/01/2008 9/25/2007
Exercised (50,550) $ .53 (549,700) $ .71 (15,000) $ 1.37
Expired or Canceled (474,609) $ 3.23 (1,028,735) $ 3.33 (653,991) $ 5.50
--------- -------
Outstanding, end
of year: 3,960,461 $ 1.94 3,265,872 $ 2.34 3,160,580 $ 2.66
========= ======== ========= ========= ========
Exercisable, end
of year: 3,117,323 $ 2.12 1,802,234 $ 2.94 2,089,163 $ 2.85
========= ======== ========= ========= ========
Weighted-average
fair value of
options granted
during the year $ .60 $ .98 $ 1.46
========= ========== ==========
Available for
grant, end of year: 42,613
=========
</TABLE>
Included in the above table at September 30, 1999 are 575,000 outstanding
options, which were granted outside of the Stock Option Plans during fiscal 1998
and 1997 with a weighted average price of $2.00, and $1.98, respectively. Also,
included in the above table are 1,073,383 warrants, which were granted during
fiscal 1998 and 1999 at prices ranging from $.875 - $2.00.
17
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. STOCK AND STOCK OPTION PLANS (CONTINUED)
Information about stock options in various price ranges at September 30, 1999
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------- -------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF LIFE EXERCISE AS OF EXERCISE
EXERCISE PRICES 09/30/99 (YEARS) PRICE 09/30/99 PRICE
- ------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$0.00 - $1.00 687,416 8.3 $0.85 357,743 $0.83
$1.01 - $2.00 2,262,739 8.5 $1.67 1,754,274 $1.72
$2.01 - $3.00 574,820 4.6 $2.23 574,820 $2.23
$3.01 - $5.00 295,000 7.0 $3.47 295,000 $3.47
$5.01 - $8.00 110,486 5.5 $6.76 105,486 $6.77
$8.01 - $10.00 30,000 4.5 $8.75 30,000 $2.12
--------- --- ----- --------- -----
3,960,461 7.7 $1.94 3,117,323 $2.12
========= =========
- ---------------------------------------------------------------------------------------------------
</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>
<CAPTION>
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Pro forma net income (loss) $3,445,032 $(6,577,819) $(3,619,598)
Pro forma basic and diluted net income
(loss) per share .12 (.23) (.13)
Expected life (years) 7 7 7
Risk-Free interest rate 6.14% 5.67% 6.51%
Expected volatility 69% 86% 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.
18
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. CONCENTRATION OF CREDIT RISK
In fiscal 1999, the Company derived approximately 50% of its revenue from the
outright sale of 10 OSA-II units to Flying J, Inc. Additionally, in fiscal 1999,
the Company derived approximately 14% of its revenue from ongoing long-term
leases with Speedco, Inc., a major truck stop company affiliated with
Shell/Equilon. Loss of Speedco, Inc. ongoing revenues during fiscal year 2000
would have a material adverse impact on the Company.
During fiscal 1998, approximately 63% of the Company's revenues were derived
from four customers, all of which were different than the key customers noted
above in fiscal 1999.
16. DISCONTINUED OPERATIONS
On September 30, 1999, the Company sold substantially all the assets of its 85%
owned subsidiary, TSA and its intellectual property assets relating to TSA's
OHSS business to Onkyo.
The financial activities associated with TSA have been classified as
discontinued operations in the accompanying Consolidated Financial Statements.
The results of operations attributable to TSA are included in the accompanying
Consolidated Statements of Operations as a component of the line items
captioned, "Income from discontinued operations, net of income taxes" and "Gain
on disposal of discontinued operations, net of income taxes". The combined
incomes from these activities were $9,263,283, $1,911,105 and $2,921,234 for the
years ended September 30, 1999, 1998 and 1997, respectively.
Revenues for TSA were $8,863,814, $10,815,205 and $16,580,270 for the years
ended September 30, 1999, 1998, and 1997, respectively. Interest expense was
$547, $1,830 and $2,660 for the years ended September 30, 1999, 1998, 1997,
respectively. Income tax expense was $53,000, $58,726 and $233,074 for the years
ended September 30, 1999, 1998 and 1997, respectively.
The components of the net liabilities associated with TSA's discontinued
operations included in the accompanying Consolidated Balance Sheet as of
September 30, 1998 consist of the following:
- --------------------------------------------------------------- -------------
1998
- --------------------------------------------------------------- -------------
- --------------------------------------------------------------- -------------
Accounts receivable, net $1,599,456
- --------------------------------------------------------------- -------------
Inventories 349,320
- --------------------------------------------------------------- -------------
Prepaid expenses 79,186
- --------------------------------------------------------------- -------------
Other assets 21,988
- --------------------------------------------------------------- -------------
Property and equipment, net 234,960
- --------------------------------------------------------------- -------------
Manufacturing & distribution rights & patents, net 147,876
- --------------------------------------------------------------- -------------
Total assets 2,432,786
- --------------------------------------------------------------- -------------
Accounts payable 245,596
- --------------------------------------------------------------- -------------
Accrued liabilities 42,043
- --------------------------------------------------------------- -------------
Minority interest 364,157
- --------------------------------------------------------------- -------------
Total liabilities 651,796
- --------------------------------------------------------------- -------------
Net assets of discontinued operations $1,780,990
- --------------------------------------------------------------- -------------
19
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. PRIVATE PLACEMENT OF SERIES A AND B 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 paid an annual dividend of 5% in cash or Common Stock.
The Company issued an aggregate of 25,779 and 42,626 shares of Common Stock for
payment of the dividend due on the Series A Preferred for the periods ending
September 30, 1999, and 1998, respectively.
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. These warrants were
valued utilizing the Black-Scholes Option Pricing Model in accordance with SFAS
No. 123. The value of these warrants of $77,209 and $108,070 has been deducted
from amounts available to Common Stockholders for the purposes of calculating
loss per share for the periods ending September 30, 1999 and 1998, respectively.
Under the terms of the Preferred Stock agreement, 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. The Company
had the right to 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) was recognized as an increase in additional
paid-in-capital and a decrease in Series A Preferred. This beneficial conversion
feature was amortized as an embedded Series A Preferred dividend through
November 8, 1998 (the date on which all the stock could have been converted into
Common Stock). On November 8, 1998, the Company redeemed one-half or $500,000
Stated Value of the existing Series A Preferred Stock ("Series A Preferred") by
paying the holders an aggregate purchase price of $600,000. The holders also
agreed not to convert $350,000 Stated Value of Series A Preferred until after
March 31, 1999 (and the Company retained the right to redeem $350,000 Stated
Value of Series A Preferred Stock at a 20% premium above Stated Value at any
time before or after March 31, 1999). The remaining $150,000 Stated Value of
Series A Preferred was converted into an aggregate of 387,554 shares of Common
Stock (including accrued dividends) in accordance with the terms of the Series A
Preferred. As consideration for the delay in converting $350,000 Stated Value of
the Series A Preferred, the Company issued to the two holders thereof, five-year
warrants to purchase an aggregate of 25,000 shares of Common Stock exercisable
at $.8937 per share commencing in April 1999. These warrants were valued at
$10,298 utilizing the Black-Scholes Option Pricing Model in accordance with SFAS
No. 123 and has been deducted from amounts available to Common Stockholders for
the purpose of calculating income per share for the period ended September 30,
1999.
On November 17, 1998, the Company sold $3,500,000 of its Series B Convertible
Preferred Stock (see Note 13. Related Party Transactions).
On March 30, 1999, the Company and the holders of the Series A Preferred agreed
to modify the conversion terms of the remaining $350,000 of Series A Preferred
resulting in the conversion of the Series A preferred into Common Stock at $1.00
per share, or into 350,000 shares. The holder agreed to restrict public sale of
these 350,000 shares of Common Stock until October 1, 1999 and thereafter 70,000
shares, on a cumulative basis, may be sold each month. The $1.00 price was
substantially higher than the price permissible and occurred as the result of
the Company agreeing not to redeem the $350,000 Series A Preferred.
20
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
18. SUBSEQUENT EVENTS
Under the original terms of the Series B Preferred, the Company was allowed to
redeem the Series B Preferred Stock at a 15% premium until October 27, 1999 (see
Note 13. Related Party Transactions). A redemption did not occur by that date,
so the Company was required to file a registration statement no later than
November 30, 1999. However, on October 21, 1999, the Mennen Trusts agreed to
allow the Company to delay filing a registration statement until January 1, 2001
to cover the potential public sale of the shares of the Company's Common Stock
issuable upon conversion of the Preferred Stock and warrants. Under the terms of
the agreement, the Mennen Trusts received 250,000 warrants at a strike price of
$2.38. In return, the Company maintained its 15% redemption right and was
allowed to extend the required registration or redemption until January 1, 2001.
These warrants were valued at $252,180 utilizing the Black Scholes Option
Pricing Model in accordance with SFAS No. 123 and will be deducted from amounts
available to common stockholders for the purpose of calculating income per share
for the first quarter of fiscal year 2000.
MIGHTYCLEAN 2000(TM)
In November 1999, the Company entered into an agreement with BioTek
Environmental Services, Inc. ("BioTek"), which gave the Company the exclusive
world-wide rights to market and sell BioTek's proprietary, hydrocarbon eating
microbes in certain defined markets. Under the terms of the agreement, the
Company has the exclusive world-wide rights for 25 years to market and sell the
proprietary biotechnology under the trademark MightyClean 2000(TM) brand name in
the automotive, trucking and food service businesses. Maintenance of these
exclusive rights is expressly contingent upon the Company attaining $1,000,000
in sales of the product by May 31, 2000. This includes manufacturers, dealers,
and services of cars and trucks; gas stations, quick lube centers, tire and
battery stores; operators of vehicle fleets including limousines, taxis and
buses, and overnight delivery services as well as municipal, government and
military fleets. Within the food service industry, the Company may market and
sell MightyClean 2000(TM) to restaurants, fast food stores, wholesale food
distributors and food manufacturers including meat, poultry and seafood
processors.
21
