UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A No.1
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended June 30, 1999
Commission File Number 1-11046
TOP SOURCE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-1027821
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification Number)
7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (561) 775-5756
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Class Outstanding at August 30, 1999
Common stock: $.001 par value 29,799,281 shares
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and September 30, 1998......................1
Consolidated Statements of Operations for the
Three Months Ended June 30, 1999 and 1998 (Unaudited)....2
Consolidated Statements of Operations for the
Nine Months Ended June 30, 1999 and 1998 (Unaudited).....3
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1999 and 1998 (Unaudited)..........4
Notes to Unaudited Interim Consolidated
Financial Statements...................................5-9
ITEM 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations........10-15
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...............................15
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
------------------- -----------------
(Unaudited)
June 30, September 30,
ASSETS 1999 1998
------------------- -----------------
Current Assets:
Cash and cash equivalents $ 542,052 $ 488,899
Accounts receivable trade 1,669,128 1,656,317
Inventories 2,566,089 1,489,840
Prepaid expenses 122,685 194,482
Other 125,175 152,349
------------------- -----------------
Total current assets 5,025,129 3,981,887
Property and equipment, net 1,438,158 786,438
Manufacturing and distribution rights and patents, net 242,997 271,502
Capitalized database, net 1,915,069 2,073,194
Note receivable from officer - 26,260
Other assets, net 307,771 133,814
------------------- -----------------
TOTAL ASSETS $ 8,929,124 $ 7,273,095
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,574,449 $ 1,318,835
Accounts payable 1,391,924 842,903
Accrued liabilities 858,242 840,705
------------------- -----------------
Total current liabilities 3,824,615 3,002,443
Senior subordinated convertible notes 707,000 3,020,000
Other liabilities 177,607 429,524
------------------- -----------------
Total liabilities 4,709,222 6,451,967
Minority interest 214,000 364,157
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares
authorized; 3,500 and 1,000 shares issued and 3,282,598 943,807
outstanding in 1999 and 1998, respectively
Common stock-$.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 30,942,552 29,624,951
Accumulated deficit (28,899,693) (28,791,487)
Treasury stock-at cost; 466,234 shares (1,349,354) (1,349,354)
------------------- -----------------
Total stockholders' equity 4,005,902 456,971
------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,929,124 $ 7,273,095
=================== =================
See accompanying notes to unaudited interim consolidated financial statements.
1
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
----------------- ----------------
1999 1998
------------------ ----------------
Product sales $2,172,978 $2,532,892
Service revenue 685,116 132,246
------------------ ----------------
Net sales 2,858,094 2,665,138
------------------ ----------------
Cost of product sales 1,358,092 1,733,481
Cost of services 334,973 41,968
------------------ ----------------
Cost of sales 1,693,065 1,775,449
------------------ ----------------
Gross profit 1,165,029 889,689
------------------ ----------------
Expenses:
General and administrative 962,113 1,176,220
Severance expense - 1,085,587
Selling and marketing 232,854 269,372
Depreciation and amortization 108,025 223,955
Research and development 49,242 65,654
------------------ ----------------
Total expenses 1,352,234 2,820,788
------------------ ----------------
Loss from operations (187,205) (1,931,099)
Other income (expense):
Interest income 15,149 2,672
Interest expense (100,355) (159,787)
Gain on sale of minority interest in subsidiary 664,384 1,030,435
Minority interest 87,807 -
Other income, net 14,354 20,849
------------------ ----------------
Net other income 681,339 894,169
------------------ ----------------
Income (loss) before income taxes 494,134 (1,036,930)
Income tax benefit (expense) 4,422 (4,242)
------------------ ----------------
Net income (loss) 498,556 (1,041,172)
Embedded dividend on preferred stock (155,583) (108,979)
Preferred dividends (78,750) -
Value of warrants issued with preferred stock (27,048) -
------------------ ----------------
Net income (loss) available to common stockholders $237,175 ($1,150,151)
================== ================
Income (loss) per common share:
Basic 0.01 (0.04)
================== ================
Diluted $ 0.01 $ (0.04)
================== ================
Basic weighted average common shares outstanding 29,332,915 28,274,627
================== ================
Diluted weighted average common shares outstanding 29,332,915 28,274,627
================== ================
See accompanying notes to unaudited interim consolidated financial statements.
2
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
----------------- ----------------
1999 1998
----------------- ----------------
Product sales $6,314,622 $8,952,308
Service revenue 1,228,025 329,596
----------------- ----------------
Net sales 7,542,647 9,281,904
----------------- ----------------
Cost of product sales 4,034,997 6,010,274
Cost of services 645,416 132,867
----------------- ----------------
Cost of sales 4,680,413 6,143,141
----------------- ----------------
Gross profit 2,862,234 3,138,763
----------------- ----------------
Expenses:
General and administrative 2,917,506 3,427,677
Severance expense - 1,085,587
Selling and marketing 813,148 903,931
Depreciation and amortization 330,184 707,095
Research and development 162,205 128,094
----------------- ----------------
Total expenses 4,223,043 6,252,384
----------------- ----------------
Loss from operations (1,360,809) (3,113,621)
Other income (expense):
Interest income 71,398 54,971
Interest expense (376,857) (437,602)
Gain on sale of minority interest in subsidiary 2,327,254 1,030,435
Other (expense) income, net (24,135) 53,819
----------------- ----------------
Net other income 1,997,660 701,623
----------------- ----------------
Income (loss) before income taxes 636,851 (2,411,998)
Income tax expense (33,078) (41,242)
----------------- ----------------
Income (loss) before extraordinary item 603,773 (2,453,240)
Gain on extinguishment of debt 158,745 -
----------------- ----------------
Net income (loss) 762,518 (2,453,240)
Embedded dividend on preferred stock (457,416) (108,979)
Preferred dividends (198,706) -
Value of warrants issued with preferred stock (214,597) -
----------------- ----------------
Net loss available to common stockholders ($108,201) ($2,562,219)
================= ================
Earnings (loss) per common share:
Loss per common share before extraordinary item:
Basic $ (0.01) $ (0.09)
================= ================
Diluted (0.01) (0.09)
================= ================
Extraordinary item:
Basic 0.01 -
=================
Diluted 0.01 -
=================
Net loss
Basic 0.00 (0.09)
================= ================
Diluted $ 0.00 $ (0.09)
================= ================
Basic weighted average common shares outstanding 29,033,103 28,164,897
================= ================
Diluted weighted average common shares outstanding 29,033,103 28,164,897
================= ================
See accompanying notes to unaudited interim consolidated financial statements.
3
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
----------------- ----------------
1999 1998
----------------- ----------------
OPERATING ACTIVITIES:
Net income (loss) $ 762,518 $(2,453,240)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Gain on sale of minority interest in subsidiary (2,327,254) (1,030,435)
Depreciation 327,236 734,165
Amortization 277,332 209,992
Gain on extinguishment of debt (158,745) -
Disposal of equipment 3,100 157,798
Non cash compensation - 204,183
Repayments from officers 26,260 100,687
Minority interest (38,820) -
(Increase) decrease in accounts receivable, net (12,811) 393,801
Increase in inventories (1,076,249) (422,127)
Decrease (increase) in prepaid expenses 71,797 (36,241)
Decrease in other assets 27,174 735,089
Increase in accounts payable 549,021 38,418
(Decrease) increase in accrued liabilities (118,766) 101,826
Decrease in other liabilities (251,917) -
------------------ ----------------
Net cash used in operating activities (1,940,124) (1,266,084)
------------------ ----------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (982,056) (345,660)
Proceeds from sale of minority interest in subsidiary, net 2,052,243 1,450,000
Additions to patent costs, net (61,596) (27,213)
Discontinued operations - change in net assets - (15,012)
------------------ ----------------
Net cash provided by investing activities 1,008,591 1,062,115
------------------ ----------------
FINANCING ACTIVITIES:
Proceeds from exercises of stock options and warrants 26,878 292,941
Preferred stock issuance, net 3,374,638 932,500
Redemption of preferred stock Series A (500,000) -
Repayments of Senior Convertible Notes (2,064,617) -
Payment of preferred stock dividend (107,827) -
Proceeds (repayments) of borrowings 255,614 (1,162,864)
------------------ ----------------
Net cash provided by financing activities 984,686 62,577
------------------ ----------------
Net increase (decrease) in cash and cash equivalents 53,153 (141,392)
Cash and cash equivalents at beginning of period 488,899 2,103,679
------------------ ----------------
Cash and cash equivalents at end of period $542,052 $1,962,287
================== ================
See accompanying notes to unaudited interim consolidated financial statements.
4
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements of Top Source Technologies, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included in the accompanying financial statements. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. The results of operations of any interim period are not necessarily
indicative of the results of operations for the fiscal year. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-K, as amended, for the year ended
September 30, 1998. Certain fiscal year 1998 amounts have been reclassified to
conform to current year presentation.
Comprehensive Income
For the three and nine months ended June 30, 1999 and 1998, there were no
differences between net income and comprehensive income.
2. INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" during the fiscal
year 1998. SFAS No. 128 establishes standards for computing and presenting basic
and diluted earnings per share. Basic earnings per share is calculated by
dividing income (loss) available to common stockholders by the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is calculated by dividing income available to common
stockholders by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. Convertible securities and common
share equivalents have not been included in the computation of diluted income
(loss) per share in the accompanying statements of operations for the three and
nine months ended June 30, 1999 and 1998 as their impact would have been
anti-dilutive.
For the three and nine months ended June 30, 1999, the effect of equivalent
shares related to stock options, warrants and preferred stock were 3,688,666 and
4,213,998, respectively, and were not included in the dilutive average common
shares outstanding, as the effect would have been anti-dilutive. For the three
and nine months ended June 30, 1998, the effect of equivalent shares related to
stock options was 1,318,092 and 1,262,207, respectively, and were not included
in the dilutive average common shares outstanding, as the effect would have been
anti-dilutive.
5
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consisted of the following:
June 30, September 30,
1999 1998
-------- -------------
Raw materials $1,763,893 $ 1,388,058
Finished goods 802,196 101,782
--------- -----------
$2,566,089 $ 1,489,840
========= ===========
4. DEBT
During November and December 1998, the Company restructured substantially
all of its outstanding $3,020,000 of Senior Subordinated Convertible Notes (the
"Notes"). On November 20, 1998, with a portion of the proceeds from the sale of
Series B Convertible Preferred Stock (See Note 5. Convertible Preferred Stock),
the Company prepaid an aggregate of $745,000 principal amount of Notes held by
certain Noteholders agreeing to these prepayment terms ("Group One") for
$496,617 resulting in a savings of $248,383 in principal amount (not including
future debt service costs). In connection with the discounting of these Group
One Notes, the Company issued to the Noteholders warrants to purchase an
aggregate of 248,383 shares of the Company's Common Stock exercisable over a
five-year period at $1.78 per share. The value of the warrants utilizing the
Black Scholes pricing model in accordance with SFAS 123 was $71,475 and was
included in reducing the value of the savings disclosed above in determining the
extraordinary gain on extinguishment of debt. The net extraordinary gain on
extinguishment of debt amounted to $158,745.
On December 15, 1998, concurrent with the approval of the sale of Top
Source Automotive, Inc. ("TSA") Assets by the Company's stockholders in which
the Company received $2,050,000 (See Note 6. Sale of Top Source Automotive,
Inc.), $2,240,000 of the remaining $2,275,000 of Noteholders ("Group Two")
agreed to redeem $1,568,000 principal amount of the Notes, which was paid with a
portion of Series B Convertible Preferred Stock, leaving $672,000 of principal
outstanding due June 2000. In connection with the Group Two redemption, the
Noteholders agreed to reduce the interest rate from 9% to 5% and reduce the
conversion price on the remaining Note balance, from $10.00 per share to $2.00
per share. The terms of the remaining Noteholder (not agreeing to accept the
terms of either the Group One or Group Two Noteholders) with a principal balance
of $35,000 stayed the same with an interest rate of 9% and principal due June
2000. In connection with the repayment of the Notes, a waiver of certain
restrictive provisions of the Note Purchase Agreement, including the requirement
that the Company maintain a 1.5 to 1 debt to equity ratio, was received (through
and including September 30, 1999).
5. CONVERTIBLE PREFERRED STOCK
On November 17, 1998, the Company sold $3,500,000 of its Series B
Convertible Preferred Stock ("Series B Preferred") to two trusts in which Mr. G.
Jeff Mennen, a director of the Company, is one of the co-trustees and sole
trustee, respectively, and the beneficiaries are members of Mr. Mennen's
immediate family (the "Mennen Trusts"). The Series B Preferred is convertible on
or after November 1, 1999 into a number of shares of Common Stock computed by
dividing the stated value of $1,000 per share (the "Stated Value") by 85% of the
closing bid price of the Common Stock on the previous trading day (the
"Conversion Price"). The Company had the option to redeem the Series B Preferred
at 110% of Stated Value plus accrued dividends at any time before May 1, 1999,
and at a price of 115% of Stated Value plus accrued dividends commencing on May
1, 1999 and expiring on October 27, 1999.
6
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. CONVERTIBLE PREFERRED STOCK ( Continued )
The Series B Preferred pays a dividend of 9% per annum in cash or, if the
Company is unable to pay cash, in shares of Common Stock. The number of shares
of Common Stock to be issued in such event shall equal to the sum of: (A) the
amount of the dividend divided by the Conversion Price plus (B) 25% of the
amount obtained in clause (A). As additional consideration, the Company issued
to the Mennen Trusts 350,000 warrants to purchase the Company's Common Stock
exercisable over a 10-year period at a price of $1.94 per share (which was
equivalent to $1.00 above the closing price on the day of consummation of the
Series B Preferred sale transaction). Additionally, since the Series B Preferred
had not been redeemed or converted into Common Stock on or before May 1, 1999
(which conversion would have required the Company's consent), the Company issued
to the Mennen Trusts an additional 50,000 10-year warrants exercisable at a
price of $1.75 which was $.50 per share above the closing price of the Company's
Common Stock on April 30, 1999. In the event the Series B Preferred has not been
redeemed by October 27, 1999, the Company has agreed to file a registration
statement to cover the public sale of the shares of Common Stock issuable on
conversion of the Series B Preferred and exercise of the warrants not later than
November 30, 1999. The Company consummated this transaction after diligently and
actively seeking alternative financing sources and concluding that the proposal
was superior to competing offers available in strict arms-length transactions.
The Board of Directors voted unanimously to approve the sale of the Series B
Preferred with Mr. Mennen abstaining.
On November 8, 1998, the Company redeemed one-half or $500,000 Stated Value
of the existing Series A Preferred Stock ("Series A Preferred") by paying the
holders an aggregate purchase price of $600,000. The holders also agreed not to
convert $350,000 Stated Value of Series A Preferred until after June 30, 1999
(and the Company retained the right to redeem $350,000 Stated Value of Series A
Preferred Stock at a 20% premium above Stated Value at any time before or after
March 31, 1999). The remaining $150,000 Stated Value of Series A Preferred was
converted into an aggregate of 387,554 shares of Common Stock (including accrued
dividends) in accordance with the terms of the Series A Preferred. As
consideration for the delay in converting $350,000 Stated Value of the Series A
Preferred, the Company issued to the two holders thereof, five-year warrants to
purchase an aggregate of 25,000 share of Common Stock exercisable at $.8937 per
share commencing in April 1999.
On March 30, 1999, the Company and the holder of the Series A Preferred
agreed to modify the conversion terms of the remaining $350,000 of Series A
Preferred resulting in the conversion of the Series A Preferred into Common
stock at $1.00 per share, or into 350,000 shares. The holder agreed to restrict
public sale of these 350,000 shares of Common Stock until October 1, 1999 and
thereafter 70,000 shares, on a cumulative basis, may be sold each month. The
$1.00 price was substantially higher than the price permissible and occurred as
the result of the Company agreeing not to redeem the $350,000 Series A
Preferred.
As discussed above, the issuance of the Series B Preferred and the
redemption of one-half of the Series A Preferred includes the issuance of Common
Stock warrants. The value of these warrants utilizing the Black Scholes Option
Pricing Model in accordance with SFAS No. 123 is approximately $215,000. The
value of these warrants have been deducted from amounts available to common
stockholders for purposes of calculating income per share for the nine months
ended June 30, 1999.
Additionally, in connection with the issuance of the Series B Preferred
Stock, the conversion feature calls for a 15% discount. The intrinsic value of
the beneficial conversion feature of the Series B Preferred is approximately
$618,000 and will be amortized as an embedded dividend in the statement of
operations in fiscal 1999 over the earliest conversion date of the Series B or
November 1, 1999. The Company amortized approximately $156,000 and $401,000 of
the conversion feature during the three and nine months ended June 30, 1999.
7
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. SALE OF TOP SOURCE AUTOMOTIVE, INC. ("TSA")
On August 14, 1998, the Company executed an Asset Purchase Agreement
("Agreement") with NCT Audio Products Inc., (the "Buyer"), a subsidiary of the
NCT Group, Inc. of Stamford, Connecticut ("NCTI") to purchase substantially all
of the assets and liabilities of TSA.
Under the terms and subject to the conditions of the Agreement, on the
closing date (the "Closing" or the "Closing Date"), the Buyer agreed to purchase
100% of the assets (the "Assets") and assume substantially all of the
liabilities of TSA for a minimum of $10,000,000 in cash. The purchase
consideration of $10,000,000 consisted of a non-refundable payment of $1,450,000
to TSA on June 10, 1998 ("Step I"), $2,050,000, which was paid into escrow on
July 30, 1998 and released to the Company (and became non-refundable) on
December 15, 1998 as a result of an affirmative stockholder approval ("Step II")
and the balance of $6,500,000 due at the Closing, which was to occur by March
31, 1999 ("Step III").
Additionally, under the terms of the Agreement, TSA could have received up
to an additional $6,000,000 payable to the Company in cash expressly contingent
upon the future earnings of the Buyer's subsidiary acquiring the assets for a
two-year period following the Closing.
The consummation of the proposed transaction was subject to the
satisfaction or waiver of certain conditions including the Buyer obtaining the
necessary financing. As a result of the completion of Steps I and II of the
transaction, the Buyer became a 20% owner of the Common Stock of TSA. Since Step
III of the transaction failed to close by December 31, 1998, the Buyer had a one
week option to cancel its exclusive right to purchase the Assets of TSA and as
consideration for such cancellation would have received an additional 15% of TSA
Common Stock. On January 7, 1999, the Buyer of TSA's Assets by virtue of not
exercising its right to receive an additional 15% minority stake in TSA,
maintained its exclusive right to complete the remainder of the transaction by
March 31, 1999.
On March 30, 1999 the Company granted the Buyer an extension until May 28,
1999 to complete the purchase of TSA. As consideration for this extension, the
Company received a $350,000 extension fee comprised of $20,685 in cash, $125,000
of the Buyer's minority interest in TSA, and an interest-bearing note ("Note")
of $204,315 from the Buyer to TSA payable on April 30, 1999. Additionally the
Buyer pledged to give the Company, $100,000 worth of its convertible preferred
stock; and agreed to forfeit all of its potential minority earnings in TSA until
June 2000. The Buyer failed to close the transaction by May 28, 1999, or pay the
Note by April 30, 1999. Therefore, the Note began accruing interest at a rate of
two times the prime rate retroactive to April 17, 1999.
On May 25, 1999 the Company granted the Buyer another extension of time,
and the exclusive right to complete the purchase of TSA's assets until July 15,
1999. In return, the Buyer agreed to relinquish 25% of its minority position in
TSA. As result, the buyer's minority interest in TSA was reduced from 20% to
15%. On May 26, 1999, the Company entered into a non-binding letter of intent
with Onkyo, granting them the contingent exclusive right purchase TSA's assets
after July 15, 1999 (in the event the Buyer was unable to close the transaction
by that time.)
The Buyer was unable to complete the transaction by the close of business
on July 15, 1999. As a result, the Buyer's right to purchase TSA assets expired.
As of August 13, 1999, the Note and accrued interest, which had a balance of
$214,673, remained unpaid to the Company. Additionally, the Buyer has failed to
deliver to the Company the $100,000 worth of its preferred stock it pledged to
deliver as part of the consideration for receiving the March 30, 1999 extension.
8
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. SALE OF TOP SOURCE AUTOMOTIVE, INC. ("TSA")( Continued )
On July 16, 1999, Onkyo America purchased a 4.9% minority interest in TSA
for $500,000. In addition, the Company granted Onkyo America the exclusive right
until September 17, 1999 to purchase the assets of TSA for $9,000,000 in cash
and $1,000,000 of Onkyo America convertible preferred stock. Closing of the
transaction, which is expected to occur by September 17, 1999, is subject to the
signing of a definitive agreement, Onkyo America obtaining financing and
customary due diligence.
Under the terms of the original August 14, 1998 Agreement between the
Company and the Buyer, the Buyer consented to a sale of the assets in exchange
for a prorated share, or 15%, of the proceeds. Therefore, at the anticipated
closing, if it occurs on September 17, 1999, the Company will receive
approximately $7,368,000 in cash. This is equivalent to 85% of $9,000,000 cash
purchase price plus the unpaid Buyer's Note plus accrued interest less $500,000
already paid by Onkyo America.
In the event that Onkyo America does not close on the sale of TSA, it is
unlikely that the Company will be able to secure a new buyer in the immediate
future. This will have an adverse effect on the short-term financial condition
of the Company. Pending completion of the proposed transaction, the Company
continues to manage and improve TSA business to maintain its acquisition value
and preserve its positive cash flow contribution to the Company. During fiscal
1999, TSA has received purchase orders for approximately $1,000,000 in new
after-market business. Additionally, TSA is in active discussions with a major
automotive OEM and an aftermarket supplier for additional new business. There
can be no assurance that these discussions will result in any new revenue
generating programs for TSA.
During the three months ended June 30, 1999, the Company recognized gain on
sale of minority interest in TSA of approximately $664,000. This gain consists
of the Note and cash associated with the extension fee and equity relinquishment
in TSA by the Buyer to the Company with the second extension.
Upon the sale of 100% of TSA's Assets, this transaction will be treated as
a discontinued operation, as defined under Accounting Principles Board No. 30.
However, due to the substantial doubt that the Company will close on the sale of
TSA due to the non-binding nature of the Company's agreement with Onkyo America
and due to material contingencies, the gain on the equity interest has been
treated as part of continuing operations on the June 30, 1999 Consolidated
Statement of Operations.
9
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TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
TEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenue for the three and nine months ended June 30, 1999 was
$2,858,094 and $7,542,647 compared to $2,665,138 and $9,281,904 for the same
periods in 1998. The increase in revenue of $192,956 or 7.2% for the three month
period ended June 30, 1999 compared to the same period in 1998 is primarily due
to an increase in On-Site Analyzer ("OSA") revenue at Top Source Instruments,
Inc. ("TSI"), offset by a decrease in revenue primarily attributable to the loss
of the patented Overhead Mounted Speaker System ("OHSS") sales for the Grand
Cherokee contract at TSA, which expired in October 1998. The expiration of the
contract was attributable to the discontinuation of production of the vehicle.
The decrease in revenue of $1,739,257 or 18.7% for the nine month period ended
June 30, 1999 compared to the same period in 1998 is primarily attributable to
the loss of the patented OHSS sales for the Grand Cherokee partially offset by
an increase in OSA revenues.
For the three and nine months ended June 30, 1999, the Grand Cherokee sales
were $0 and $11,718 compared to $339,095 and $2,565,020 for the same periods in
1998. Wrangler sales at TSA remained relatively unchanged for the three and nine
months June 30, 1999 compared to the same periods in 1998.
For the three and nine months ended June 30, 1999, OSA sales were $685,116
and $1,228,025 compared to $132,246 and $329,596 for the same periods in 1998.
The increase in OSA sales of $552,870 or 418.1% for the three month period is
primarily the result of the sale of 7 second generation ("OSA-II") machines
during the three months ended June 30, 1999 compared to the sale of 1 first
generation ("OSA-I") machines during same period in 1998. The increase in OSA
sales of $898,429 or 272.6% for the nine month period is primarily the result of
the sale of 12 OSA-II machines during the nine months ended June 30, 1999
compared to the sale of 3 OSA-I machines during same period in 1998. In
addition, monthly revenue increased as a result of 60 OSA machines generating
various levels of revenue (some of which were nominal) for the nine months ended
June 30, 1999 compared to 14 OSA machines in 1998.
As of August 13, 1999, Top Source Instruments, Inc. ("TSI") had
approximately 60 OSA units generating various levels of revenue (in some cases
nominal monthly revenue) through lease and revenue generating tests in a variety
of industries including automobile dealerships, mini labs, truck lube centers,
truck stops, engine development laboratories, municipalities, and others.
The gross profit margin for three and nine months ended June 30, 1999 was
40.8% and 38.0% compared to 33.3% and 33.8% for the same periods in 1998. The
increase in the gross profit margin compared to the prior year is primarily
attributable to the sale of the 7 and 12 OSA-II machines during the three and
nine months ended June 30, 1999.
General and administrative expenses were $962,113 and $2,917,506 for the
three and nine months ended June 30, 1999 compared to $1,176,220 and $3,427,677
for the same periods in 1998. The decrease of $214,107 or 18.2% for the three
month period and $510,171 or 14.9% for the nine month period is attributable to
a reduction in expenses at TSA and the corporate office offset partially by
increases in expenses at TSI as a result of the growth and expansion of the
business.
Depreciation and amortization was $108,025 and $330,184 for the three and
nine months ended June 30, 1999 compared to $223,955 and $707,095 for the same
periods in 1998. This decrease of $115,930 or 51.8% for the three month period
and $376,911 or 53.3% for the nine month period is primarily attributable to the
write-down of the original OSA-I machines in September 1998.
Interest income was $15,149 and $71,398 for the three and nine months ended
June 30, 1999 compared to $2,672 and $54,971 for the same periods in 1998. The
increase of $16,427 or 29.9% for the nine months ended June 30, 1999 is
attributable to interest income on the $2,050,000 payment received by the
Company in December 1998 in connection with the sale of TSA.
10
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Interest expense was $100,355 and $376,857 for the three and nine months
ended June 30, 1999 compared to $159,787 and $437,602 the same periods in 1998.
The decrease of $59,432 or 37.2% for the three month period and $60,745 or 13.9%
for the nine month period is due to a decrease in interest as a result of the
restructuring of the senior subordinated convertible notes in November and
December 1998 offset by an increase in amortization of loan fees on its credit
facility.
Gain on sale of the minority interest in TSA was $664,384 and $2,327,254
for the three and nine months ended June 30, 1999 compared to $1,030,435 for the
same periods in 1998. The gain represents the sale of a cumulative 15% equity
interest in TSA. ( See Note 6. Sale of Top Source Automotive, Inc. )
Gain on extinguishment of debt of $158,745 for the nine months ended June
30, 1999 represents the gain from restructuring of a portion of the outstanding
$3,020,000 of Notes. (See Note 4. Debt)
The Company's strategy since March 1998 has been to divest substantially
all of TSA's assets and focus its resources on the commercialization of OSA-IIs
in a number of diverse market segments.
In the event that Onkyo America does not close on the sale of TSA, it is
unlikely that the Company will be able to secure a new buyer. This will have an
adverse effect on the short-term financial condition of the Company. If sale of
TSA is ultimately completed, TSA will be accounted for as a discontinued
operation. Pending completion of the proposed transaction, the Company is
actively seeking to improve TSA's business.
Since October 1998, OSA-II activity at various customer locations has
increased. The Company intends to eventually replace all OSA-I's previously
purchased and leased with OSA-II's by the end of calendar 1999. As of August 30,
1999, there were five OSA-I's in the field. The terms of the replacements for
these units are not currently ascertainable.
On August 19, 1999, the Company entered into a four year OSA-II lease
agreement with Speedco. Previously, the Company had leased OSA-II units to
Speedco pursuant to the terms of a short-term lease. Under the terms of the four
year lease agreement, Speedco agreed to pay the Company a fixed minimum monthly
rental fee and per usage fees above certain thresholds at each Speedco location
using the Company's OSA-II unit. On August 31, 1999, there were 20 Speedco
locations, each using one OSA-II unit. Speedco intends to open between 5 and 10
new locations by the end of calendar 1999, and anticipates that each of these
new locations will lease one OSA-II. Additionally, the agreement requires the
Company to provide ongoing service and marketing assistance to help Speedco
locations increase their retail usage of the OSA-II. Based upon a total 30 units
leased by Speedco, the Company estimates that this lease will generate a minimum
of $2,500,000 in OSA-II revenue during the four year term of the lease; however,
there can be no assurances.
In November 1998, the Company entered into a strategic alliance with Flying
J Inc. ("Flying J") a company with over a billion dollars in sales engaged in
various facets of highway-related products and services including the operation
of large truck stop centers. Under the terms of the agreement, Flying J agreed
to purchase and market OSA-II's in their truck stop service centers. The initial
order by Flying J was for the outright purchase of 10 OSA-II units for
approximately $700,000. The agreement covers the potential purchase of up to 100
OSA-II's, payment of per sample technology licensing fees, and provides
financial incentive to Flying J for meeting certain performance milestones. In
January 1999, Flying J paid the Company in full for all 10 OSA-II units covered
in the initial purchase order. Flying J has informed the Company that it will
not purchase any additional OSA-II units until certain custom modifications were
made to the OSA-II to meet the individual needs of Flying J. The expected cost
of the project is between $75,000 - $100,000.
The Company expects to complete this project by the end of calendar 1999
and receive additional purchase orders from Flying J. There can be no
assurances, however, that the project will be successful or that Flying J will
purchase any additional units if the project is completed successfully. The
Company believes that these enhancements will have applications at other OSA
customer locations and for potential new OSA customers.
11
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
TEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Net Loss Analysis
In order to avoid current, material, ongoing operating losses, and an
increase in this operating loss after the potential sale of TSA Assets (See Note
6. Sale of Top Source Automotive, Inc. ), if it occurs, the Company must
generate new, material ongoing OSA or other revenues in future months. The
Company believes that the recent OSA activity described in the MD&A section will
improve OSA visibility in the marketplace that which will lead to significant
increases in future OSA revenues. However, no assurances can be given.
Liquidity and Capital Resources
Net cash used in operating activities was $1,940,124 for the nine months
ended June 30, 1999. This usage of cash was attributable to a net loss of
$1,118,913, which excludes depreciation, amortization, gain on sale of minority
interest in subsidiary and gain on extinguishment of debt and an increase in
inventories of $1,076,249. This was partially offset by a decrease in prepaid
and other assets of $98,971 and a net increase in accounts payable and accrued
liabilities of $178,338. The increase in inventories is primarily the result of
the build-up of OSA-II units in anticipation of future OSA-II orders.
Net cash provided by investing activities was $1,008,591. This increase in
cash was attributable to the release of the $2,050,000 escrow deposit in
connection with the sale of TSA to the Company on December 15, 1998 offset by
expenditures for capital assets.
Net cash provided by financing activities was $984,686, which consisted of
net proceeds from sales of common stock through exercise of stock options of
$26,878, net proceeds from the sale of Series B Preferred stock of $3,374,638
offset by the redemption of 50% or $500,000 of the Series A Preferred stock, the
repayment of the Notes of $2,064,617, payment of $107,827 of Series B Preferred
stock dividends and borrowings of $255,614 on the Company's credit facility
("Credit Facility") with NationsCredit Commercial Corporation ("Nations").
The Credit Facility, which is secured by substantially all of the assets of
the Company enables the Company to potentially borrow a sum based upon certain
percentages of accounts receivable and inventory balances. The Credit Facility
allows for borrowing of up to 85% of all accounts receivable and 50% of
inventory for TSA. The interest rate on this Credit Facility is 1-1/2% over the
prime rate and is payable monthly with a required minimum borrowing level of
$2,500,000 for the fee calculation purposes. The Company's effective interest
rate for the nine months ended June 30, 1999 factoring the interest earned on
used drawn funds was 16.9%. As of June 30, 1999 and August 13, 1999, the unused
available borrowings on this Credit Facility were $75,000 and $20,000,
respectively.
The Credit Facility calls for certain financial covenants that, if not met,
would cause a default under the Agreement and increase the interest rate by 2%
over current levels. As of September 30, 1998, the covenant requiring the
Company's fiscal year pre-tax operating loss, not to exceed certain levels, as
defined in the Credit Facility was not met by the Company. Nations later agreed
to waive this covenant precluding the Company from having a loss of more than
$2,000,000 in a fiscal year. In conjunction with such waiver, the Company paid
Nations a fee of $25,000 and agreed to collaterally assign a $250,000
certificate of deposit to Nations. The Company is required to repay the Credit
Facility in full upon the ultimate sale of TSA (see Note 6. Sale of Top Source
Automotive, Inc.). Upon payment of the Credit Facility, Nations will release the
lien, which it holds on all of the assets of the Company.
On June 28, 1999, the Company signed an agreement with Nations to make
available for advances on the previously described $250,000 certificate of
deposit. The availability of the advances will be reduced each month by $50,000
commencing on July 15, 1999 thereby eliminating this availability on November
15, 1999. In consideration for entering into this agreement, Nations was paid a
fee of $10,000. An additional $15,000 fee will be charged upon the use of any
part of the advance. As of August 13, 1999, the Company has not drawn any of the
available funds.
12
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
On August 13th, 1999, a trust in which Mr. G. Jeff Mennen, a Director of
the Company, is one of the trustees (the "Mennen 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 Mennen Trust to convert the loan to common
stock at 90% of the market price. As consideration, the Mennen 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 will be deducted from amounts available to common stockholders
in the fourth quarter of the fiscal year 1999. The Company consummated this
transaction after diligently and actively seeking alternative financing sources
and concluding that the proposal was superior to competing offers available in
strict arms-length transactions. The Board of Directors voted unanimously to
approve the unsecured loan with Mr. Mennen abstaining.
On June 9, 1995, the Company entered into an agreement with advisory
clients of Ganz Capital Management, Inc., now Mellon Private Asset Management
("Mellon"), whereby the holders would purchase $3,020,000 in Senior Subordinated
nine percent (9%) convertible notes maturing in June 2000. After June 9, 1996,
the Notes could be prepaid by the Company without penalty and can be converted
by the holders into fully registered shares of the Company's Common Stock at a
conversion price of $10 per share. The Notes are subject to an Indebtedness to
Equity ratio that cannot exceed 1.5 to 1.0. As of September 30, 1998, the
Company was not in compliance with the ratio. Subsequent, to September 30, 1998,
the Company restructured substantially all of the Notes, which included a waiver
of the debt to equity ratio for fiscal 1999 (see Note 4 Debt ). As of June 30,
1999, the ratio was .57 to 1.0, and the Company was in compliance.
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.
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.
13
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources - (Continued)
To date, the Company has been evaluating all of its information technology
and other systems, which relate to its corporate offices including its
accounting systems; certain of 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 third
calendar quarter of 1999. The Company estimates that the cost will be
approximately $40,000.
In the event the Company is unable to sell the assets of TSA to Onkyo
America, (See Note 6. Sale of Top Source Automotive, Inc.), the Company intends
to replace its management reporting and accounting software modules at TSA. 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 nine months. At TSI, the
Company believes OSA-IIs are Y2K compliant. While the OSA-Is are not Y2K
compliant, the OSA-Is are being replaced by OSA-IIs during 1999. TSI is
currently communicating with four key suppliers, which make proprietary parts,
which may not be readily replaceable. Presently, the Company does not know
whether these suppliers are or will be Y2K compliant and, if not, what options
are available to TSI. The Company intends to address 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. In
addition, the Company is in the process of contacting its customers to determine
their Y2K readiness.
As the Company continues to evaluate the Y2K readiness of its business
systems, suppliers, vendors and customers, it will modify and adjust its
contingency plans as may be required. However, due to the complexity of the
Company's technologies and reliance upon third parties to produce certain
components, there can be no assurances that the Company has identified all of
the Y2K issues that could arise. While the Company is attempting to minimize any
negative consequences arising from Y2K non-compliance, there can be no
assurances that Y2K issues will not have a material adverse impact on the
Company's business, operations or financial condition. If any of the Company's
material suppliers, vendors or customers experience business disruptions due to
Y2K issues, the Company might also be materially adversely affected. Any
unexpected costs or delays arising from Y2K issues could have a material adverse
impact on the Company's business, operations and financial condition.
Forward-Looking Statements
The forward looking statements discussed in this Report include those
relating to the Company's expectations that it anticipates (1) receipt of
additional purchase orders from Flying J, (2) successfully completing the Flying
J development project, (3) further commercialization of OSA-II usage resulting
in additional significant revenue, (4) closing of the TSA Asset sale, (5)
adequacy of the Company's working capital and liquidity, (6) replacement of
OSA-Is with OSA-IIs, (7) generating $2,500,000 in OSA revenue during the next
four years from the OSA-II lease with Speedco, and (8) the Company will become
Y2K compliant are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.
14
<PAGE>
TOP SOURCE TECHNOLOGIES, INC.
FORM 10-Q/A No. 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Forward-Looking Statements - (Continued)
Some or all of these forward-looking statements may not occur. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Such risks and uncertainties include the following: (1) the
continued reliability of the OSA technology over an extended period of time, (2)
the Company's ability to market OSAs, (3) the acceptance of the OSA technology
by the marketplace, (4) the general tendency of large corporations to slowly
change from known technology to emerging new technology, (5) potential future
competition from third parties that may develop proprietary technology, which
either does not violate the Company's proprietary rights or is claimed not to
violate the Company's proprietary rights, (6) the ability of the Onkyo America
to obtain financing and contractual issues which may prevent the signing of a
definitive agreement for the TSA transaction, (7) the Company's ability to
attract strategic partners for the OSA-II, (8) the Company's ability to make its
systems Y2K compliant for the anticipated costs and various risks which impact
on the Company's vendors and customers to achieve Y2K readiness, or to locate
additional alternative vendors and customers, (9) the ability of the Company to
reach agreement on the terms of a new debt or equity financing, (10) the ability
of the OSA technical staff to meet Flying J's technical requirements necessary
to complete the development project, and (11) Speedco's decision to put OSA-II
units into ten new Speedco locations.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.24 Onkyo America Letter Agreement dated July 16, 1999
27.0 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOP SOURCE TECHNOLOGIES, INC.
By: /s/ DAVID NATAN
David Natan
Vice President and Chief Financial Officer
Dated: September 3, 1999
15
EXHIBIT 10.24
July 13, 1999
VIA FACSIMILE NUMBER (812) 342-0422
Mr. Shinobu Shimojima
Chief Executive Officer and President
Onkyo America, Inc.
3030 Barker Drive
Columbus, Indiana 47201
RE: Top Source Technologies, Inc./Onkyo America
Dear Mr. Shimojima:
This letter confirms our recent discussions regarding Onkyo America's
("Onkyo") purchase of 4.9% of the stock of Top Source Automotive, Inc. ("TSA")
for $500,000 and the exclusive right to purchase 100% of the assets of TSA on or
before September 17, 1999.
Upon your execution of this letter agreement, and payment of $500,000 Onkyo
shall own 4.9% of TSA's outstanding common stock and TSA shall grant to Onkyo
the exclusive right to purchase 100% of the assets of TSA until 5:00 p.m. Miami
time on September 17, 1999, subject to the following terms and conditions:
1. Onkyo shall wire transfer $500,000 to:
Michael Harris, P.A. Trust Account
Citibank, F.S.B.
Palm Beach Gardens Branch
11521 U.S. Highway One
Palm Beach Gardens, FL 33410
(800)374-9800
ABA ROUTING#:
ACCOUNT NUMBER:
or before Wednesday, July 15, 1999 5:00 p.m. Miami time.
2. Assuming TSA's current exclusive agreement with NCT Audio, Inc. ("NCT")
expires on Thursday, July 15, 1999 at 5:00 p.m. Miami time; at 5:01 p.m.
Miami time the $500,000 shall be released to TSA and a stock certificate
evidencing Onkyo's ownership of 4.9% of the issued and outstanding stock of
TSA shall be promptly delivered to Onkyo; provided, however, that Onkyo
shall have no right or claim to any dividends accrued or paid on their 4.9%
minority interest in TSA through September 17, 1999, and, provided further,
that in the event Onkyo does not close the purchase of 100% of the assets
of TSA by September 17, 1999, or later date agreed to by both parties, and
Top Source Technologies, Inc. (the "Parent") or TSA subsequently finds a
third-party buyer for 100% of the common stock or assets of TSA after
Onkyo's exclusive right has lapsed, Onkyo agrees to sell its 4.9% of TSA's
common stock to such third-party purchaser for the pro-rata share of the
consideration to be paid by such purchaser to TSA or the Parent for 100% of
the common stock or assets of TSA, payable in the same type of
consideration and at the same times as the Parent receives such
consideration; and
3. Onkyo and TSA shall, in good faith, negotiate the terms of a definitive
agreement to purchase 100% of the assets of TSA, such transaction to close
on or before September 17, 1999.
4. At closing, the $500,000 paid for 4.9% of TSA outstanding stock will be
applied to the $9,000,000 cash component of the purchase price, in exchange
for return of 4.9% of TSA outstanding stock.
Please confirm your agreement to the above terms by signing in the place
indicated below.
Very truly yours,
William C. Willis, Jr.,
Chairman and CEO On behalf of
Top Source Technologies, Inc. and
Top Source Automotive, Inc.
We hereby agree to the foregoing.
Onkyo America, Inc.
By: ---------------------------------------------------
Shinobu Shimojima, Chief Executive Officer and President
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