SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1995 Commission File Number 1-8311
SOURCE SCIENTIFIC, INC.
(Name of small business issuer in its charter)
California 95-2943936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7390 Lincoln Way, Garden Grove, California 92641
(Address of principal executive offices) (Zip Code)
(714) 898-9001
Issuer's telephone number
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 __.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
On December 11, 1995, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates of the Registrant, based on the closing sales
price of the Common Stock on the Boston Stock Exchange on that date, was
$5,328,559.00
On December 11, 1995, there were issued and outstanding 15,520,476 shares of the
Common Stock and 1,555 shares of the Series C Preferred Stock of the Registrant.
<PAGE>
PART I
In February, 1995, Alton Group, Inc., changed its name to Source Scientific,
Inc. Where the context requires, the term "Company" or "Source" refers to Source
Scientific, Inc., formerly known as Alton Group, Inc., and its wholly-owned
subsidiaries.
ITEM 1. BUSINESS
The Company designs, manufactures and markets devices and instrumentation
used worldwide in hospitals and laboratories for biomedical and industrial
applications. The Company's instrument systems integrate various detection
technologies (photometry, fluorescence, luminescence), robotics, fluidics and
custom-designed software, into complete systems or special purpose modules. As
an original equipment manufacturer (OEM), the Company offers for sale its
expertise in developing and manufacturing instruments to other companies for
resale to end-user customers. Sales of the Company's products and services are
through diagnostic systems suppliers (other instrument companies and reagent
companies), distribution networks, and direct sales.
In January, 1994, the Company acquired Source Scientific Systems, Inc., a
Delaware corporation (the "Source Subsidiary") from MicroProbe Corporation
("MicroProbe") of Bothell, Washington. The Source Subsidiary has manufactured
biomedical and laboratory instruments and components for a broad range of
applications since 1981.
After the Company's recapitalization in 1991, and acquisition of Velotec,
Inc., in June, 1991, the Company commenced the design, manufacture and marketing
of custom and proprietary electro-optic instrument products for diagnostic and
optical analysis applications.
From its inception in 1975 until 1991, the Company manufactured and
marketed computer peripheral interface products under the name Wespercorp, for
certain minicomputers and the Federal Aviation Administration (the "Wespercorp
Business"). In November, 1992, the Company sold the Wespercorp Business to a
third party, while continuing to manufacture and market the Wespercorp Business
under a license agreement until May, 1994.
COMPANY PRODUCTS AND SERVICES
The Company develops two types of products: "Source-Specified" and
"Client-Specified" products. Instrument systems designed and manufactured by
Source and sold under the Source label or marketed for private label, constitute
the Source-Specified products. All custom instrument systems designed or
manufactured for other companies under their proprietary label are designated as
Client-Specified products. Much of the new technical expertise gained by the
Company from Client-Specified and funded products may be transferable to future
Source-Specified products.
Many of Source's products use a common hardware platform, which can be
designed into different products for a variety of applications. A significant
number of the Company's design components are transferable from one product line
<PAGE>
to another, and management believes that such commonality may reduce the time
required to produce new products and product-line extensions.
The Company's products are typically used for immunoassay, a highly
sensitive and specific measurement technique based on the interaction of
antibodies and antigens in vitro (in glass or tube). Immunoassay is widely used
to detect and monitor infectious diseases, tumors, allergies, drugs of abuse,
therapeutic drugs, hormones, food pathogens, environmental contaminants and
pesticides. The Company's detection products are also used with non-immunoassay
methods, which measure analytes directly or through enzymatic reactions. Common
examples include testing for glucose, cholesterol and liver enzymes in clinical
applications; fermentation by-products in wine and beer; and microbial toxins in
foodstuff. Depending on the method, the measurement is based on the detection of
light absorbed or transmitted at specific wavelengths.
Current Products
MicroChem(TM) Analyzer. A compact, low-cost photometer with software
designed for immunoassay and general chemistry applications in the clinical and
environmental laboratory.
ChemStat(TM) Analyzer. A high-speed, automated photometer with a sample
capacity of 95 tubes and a read rate of one sample per second. This product is
suited for high-volume processing.
E/LUMINA(TM) Luminescence Analyzer. A flexible luminometer for both "flash"
and "glow" luminescence methods, this automated system reads up to 114 samples
and reports final results.
EXEC-WASH(TM) Washing System. An automated immunoassay washing system that
can be quickly configured by the user to wash different solid-phase assay
formats. The quick-change manifold design is unique among systems on the market.
Protocol Designer Software System. A development tool for researchers and
assay manufacturers, the program operates under Microsoft(R) Windows(TM) and
serves as the master programming center for EXEC-WASH systems to create fluid
handling protocols.
FOCUS(TM) - Florescence Polarization System. Fluorescence polarization
("FP") is a technology that has dominated the clinical market for therapeutic
and abuse drug level testing for many years. Management believes that research
laboratories can benefit from the product's low cost and high performance.
LamdaMeter(TM) Optical Multimeter. The LamdaMeter Optical Multimeter is a
precision, multi-function optical instrument that enables the user
simultaneously to measure the wavelength, intensity and bandwidth of a light
source.
<PAGE>
Lamda LX(TM) Series Photodiode Array Detector Modules. The Lamda LX module
is based on the Company's proprietary array technology, which provides broad
light spectrum, fast sample rate and low noise for affordable, real-time
results.
Lamda 2000(TM) Multichannel Optical Analyzer. The Lamda 2000 Series of
Multichannel Optical Analyzers offers accurate real-time detection and analysis
for a wide variety of analytical methods. The Lamda 2000 Analyzer consists of an
optical detector, interface board and powerful data management software.
New Products (under development)
PlateMate (TM) Reader. The first in a series of 96-well readers for
performing assays in microplate format. The first reader is a low-cost
photometric reader for use in laboratories. The Company anticipates availability
of this product to market in late 1996.
FluoroStat (TM) Analyzer. A compact tube fluorometer for fluorometric
assays requiring high sensitivity. Further development of the product will be
achieved through partnering with a company interested in commercialization of a
total system. The Company currently has no such partnering agreements for
further development of the product.
Services
Design and Manufacturing Services
The Company offers design, development and manufacturing services to
companies seeking to market biomedical products manufactured under
government-approved manufacturing practices. The Company's OEM services range in
complexity from contract manufacturing to full system development and
distribution. Source's manufacturing facility is approved by governmental
agencies as an FDA/GMP facility (See Regulatory Affairs).
After-Sales-Service
Management believes that after-sales service is a major marketing advantage
in various of the Company's market segments, since many of the Company's
customers do not maintain their own full service departments. A key element in
the Company providing service is Servi-Trak (TM), a proprietary software
tracking program. The Company's Service department is located in the same
facility as its research and development and manufacturing operations. A fully
functional service center located in Giessen, Germany, is contracted by the
Company to provide European service and support. Source's after-sales-service is
a significant profit center for the Company.
Technical Services
The Company's Technical Services department develops and distributes
materials and training programs for operation of its products, provides
technical support to its customers, and is responsible for the opening and
closing of customer complaint files for FDA purposes. The Technical Services
<PAGE>
department also provides training and updates for the Company's independent
manufacturer's representatives and international distributors.
Future Product Development
The Company believes that its current products represent technologies on
which it can base its future sales and product development efforts for new and
developing markets. The Company is focusing on broadening the capabilities of
its existing products and continues to seek complementary technologies through
acquisitions, strategic alliances and opportunities for contract manufacturing,
although there can be no assurance that the Company will be successful in its
endeavours for complementary technologies.
Research and Development
Certain of the Company's research and development is funded through OEM
contracts, creating certain tangential benefits in the development of
Source-Specified products. For the years ended June 30, 1995, and 1994, the
Company expensed $784,000 and $895,000, respectively, on research and
development activities, of which $181,000 and $161,000 was borne directly by the
Company's customers in the fiscal years ended June 30, 1995, and 1994,
respectively.
Customers and Marketing
The Company's products and services are offered to the medical, industrial,
environmental and other technology-related businesses, which have a broad range
of detection requirements for a wide variety of applications. Using similar and
diverse detection schemes designed and/or manufactured by the Company, the
customers can perform measurements critical to their industrial processes which
have legal and regulatory restrictions or requirements. Many of the Company's
existing customers manufacture reagents but lack instrument design and
manufacturing capabilities.
The Company's sales are generated via strategic alliances, OEM
relationships, contract manufacturing and contract research and development. The
Company has entered into manufacturing agreements with firms established in the
marketing of medical-related products. Certain of such agreements include OEM
manufacturing agreements with major corporations.
The Company believes its largest potential customer base is in the clinical
diagnostic market. Currently, diagnostic instruments sales are in the
immunoassay and clinical chemistry segments of the market world-wide. The
Company believes the current worldwide market for such systems units generates
revenues of $750 million at list price, although there can be no assurance that
the Company will benefit from market and revenue estimates. Potential customers
for the Company's instrumentation include approximately 6,300 hospital sites,
approximately 250 research sites, urgent care clinics, physician office
laboratories, surgicenters, and clinical laboratories within hospitals servicing
the testing needs of in-patients and out-patients.
The Company's plan to increase present revenues includes systematic sales
of existing off-the-shelf products into the biomedical, research, environmental
<PAGE>
and related markets; negotiation with corporate partners for development of
commercially viable instrumentation while retaining the Company's marketing
rights; development and management of appropriate additional distribution
channels; and exploitation of after-sales-services and supplies. The Company is
currently evaluating potential business combination transactions that management
believes may accelerate market penetration and increase sales volume, although
there can be no assurance the Company will be successful in its negotiations
regarding any such combinations.
Competition
The Company's OEM systems compete with off-the-shelf products from large
and small instrument providers. Management believes that the Company's
technology base, reputation for reliability, systems integration and service
capabilities provide its resellers with a competitive advantage over competitors
such as Dynatech Corp., and SLT (a division of Tecan U.S., Inc.), as well as
smaller, single-product companies, such as Awareness Technology Inc. As
out-sourcing of design and manufacturing becomes more prevalent, competition for
contract manufacturing and research and development may increase from contract
manufacturers such as Kollsman Manufacturing Company, Inc. (Massachusetts), Wilj
(U.K.), Rela, Inc. (Colorado), and United Medical Manufacturing (Indianapolis).
<TABLE>
Competition to the Company's Business and Comparison of Features
<CAPTION>
Private Contract Contract Contract Full Patents WestCoast
Brand R&D Manuf. Service Regulatory Location
<S> <C> <C> <C> <C> <C>
Source X X X X X X X
Kollsman X X X
U M M X X X
Rela X X X
Wilj X X
Awareness/Hyperion X X X
Dynatech X X X X
S L T X X X X X
</TABLE>
Several competitors exist in each of the Company's targeted markets.
However, management believes no single competitor has the market cross-over
capability of the Company.
Licenses, Patents and Trade Secrets
Proprietary core technologies of the Company's products encompass
electro-optics, fluidics, robotics and methods for the characterization of
substances on the basis of fluorescence and luminescence. The Company's
proprietary products are frequently derivatives of OEM research, such as the
EXEC-WASH automated washing system and E/LUMINA luminescence analyzer. The
Company relies on trade secrets and proprietary know-how, in part by entering
into confidentiality agreements with persons or parties deemed appropriate by
management.
<PAGE>
The Company currently has seven issued U.S. patents, and one U.S. patent
application on file, covering significant aspects of the Company's core
technology techniques, as well as several electronic and mechanical designs
employed in the Company's existing products.
Manufacturing and Supplies
The Company manufactures all of its products at its facility in Garden
Grove, California. Systems are assembled from component parts and high-level
sub-assemblies in a minimum amount of time, utilizing completed surface mount
boards and electronic components purchased from a number of electronic component
distributors.
Regulatory Affairs
In order to be made available for sale in the United States, biomedical
products require regulatory approval by governmental agencies, primarily the
United States Food and Drug Administration ("FDA"). The Company's facility is an
FDA Good Manufacturing Practices ("FDA/GMP") facility, and as such the Company
maintains high standards of quality in manufacturing, testing and documentation,
and implements strict GMP guidelines.
Registration of its manufacturing procedures and policies with the
International Standards Organization ("ISO") provides identifiable certification
that its products were manufactured in conformance with
internationally-recognized quality system processes. The Company anticipates ISO
9001 certification will be achieved by May, 1996, although there can be no
assurance that the Company will receive such certification, or that the Company
will derive increased sales or financially benefit from such certification.
The Company is organized to meet the FDA/GMP requirements governing reagent
and instrument manufacturing. Certain of the medical devices currently under
development by the Company are regulated by the FDA under the FDC Act which
regulates medical devices in the United States. Medical devices in commercial
distribution are classified by the FDA into one of three classes -- Class I, II
or III, based on the controls necessary to reasonably ensure the safety and
effectiveness of medical devices. The Company is registered as a medical device
manufacturer with the FDA and CDHS and files a listing of its products
semi-annually.
Employees and Consultants
As of December 11, 1995, the Company had a total of 57 full-time employees
with an average of six years of service, and two consultants. The Company is not
a party to any collective bargaining agreements and believes it has a good
relationship with its employees. The Company has employment agreements with
seven employees whom the Company considers key to its business. Five of the
agreements were renewed in July, 1995, and all agreements are for a 24-month
term with exception of the 36-month agreement for the Chief Executive Officer.
<PAGE>
ITEM 2. PROPERTIES.
The Company's current facility is located in Garden Grove, California. The
lease for the Company's facility was renegotiated, commencing January, 1995, and
expires January 31, 2002. The current rental is $26,185 per month and increases
to $29,131 per month on August 1, 1997, and to $32,460 on February 1, 2000. The
new lease agreement represents a current monthly savings to the Company of
$3,400 through the end of the prior lease agreement. The facility is comprised
of 41,645 square feet of total space that management believes will meet the
Company's needs for the next 12 months. A "wet applications" laboratory and
several secure areas for proprietary development of customer projects provide an
efficient functional work area. The FDA/GMP designated manufacturing facility
operates as a comprehensive system that employs proprietary resource allocation
and tracking systems, a floor plan conducive to flexible manufacturing and an
organizational structure to facilitate the transition from prototype to full
production.
ITEM 3. LEGAL PROCEEDINGS.
On September 20, 1995, the Company filed litigation entitled Source
Scientific, Inc. et al versus Scientific Measurement Systems, Inc. et al,
("SMS") located in Colorado, Orange County Superior Court Case #751112, for
breach of contract and related actions. The defendant has answered and filed a
cross-complaint which the Company has answered. Cross-complainants sued for
breach of contract and damages. In December, 1995, the court held an evaluation
conference, and another evaluation conference is scheduled for February, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 1995 to a
vote of security holders of the Company.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The Common Stock has been traded on the Boston Stock Exchange (the "BSE")
under the symbol "SSF" since March, 1995. From June, 1989, until a name change
of the Company in October, 1991, the Common Stock was traded under the symbol
"WP" until April, 1992, and under the symbol "AGP" until February, 1995. Prior
thereto, the Common Stock was traded on the American Stock Exchange. The
following table sets forth the high and low last reported sale prices for the
Common Stock on the BSE, on a quarterly basis, during the last two years.
<TABLE>
<CAPTION>
Fiscal Year High Low
<S> <C> <C> <C> <C>
1994 First Quarter $1.50 $0.50
Second Quarter $1.25 $0.75
Third Quarter $1.75 $1.00
Fourth Quarter $1.50 $0.75
1995 First Quarter $0.75 $0.72
Second Quarter $0.59 $0.34
Third Quarter $0.44 $0.31
Fourth Quarter $0.56 $0.31
</TABLE>
On December 12, 1995, the closing sale price, as reported by the BSE for
the Common Stock was $0.75. The Common Stock is thinly traded: 41,200 shares
were traded during the quarter ended September 30, 1995. As of December 12,
1995, the Company has approximately 860 shareholders of record.
The Company has not declared or paid any dividends on its Common Stock
since 1983. Further, no dividends are contemplated at any time in the
foreseeable future. There are no current or contemplated restrictions which will
limit the ability of the Company to declare and pay dividends, except with
respect to the series of Preferred Stock currently issued and outstanding (See
ITEM 12. Certain Relationships and Related Transactions, 12% Convertible
Subordinated Debentures), and any subsequently established series of Preferred
Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
The following table shows the results of operations between the 1994 and
1995 fiscal years. The operating results for the 1994 fiscal year are those of
the Company without the Source Subsidiary from July 1, 1993, to January 21,
<PAGE>
1994, and include the operations of the Company with the Source Subsidiary from
January 22, 1994, through June 30, 1994, and for the full fiscal year ending
June 30, 1995. Amounts shown in the table below are in 000's.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED CHANGE FROM
JUNE 30, 1994 JUNE 30, 1995 JUNE 1994 TO JUNE 1995
----------------------------------------------------------------------------
% of % of
Amount Sales Amount Sales Amount %
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $3,875 100.0 $4,877 100.0 $1,002 0.0
Cost of goods sold 2,591 66.9 3,199 65.6 608 -1.3
------ ------ ----- ---- --- ----
Gross profit 1,284 33.1 1,678 34.4 394 1.3
------ ------ ----- ---- --- ---
S G & A 1,623 41.9 1,647 33.8 24 -8.1
Research and development 734 18.9 839 17.2 105 -1.7
Lease termination 300 7.7 (300) 7.7
------ ----- ----- ---- ----- ----
Total operating expenses 2,657 68.6 2,486 51.0 (171) -17.6
------ ----- ----- ---- ----- -----
Operating loss (1,373) -35.4 (808) -16.6 565 18.9
Interest, net 52 1.3 132 2.7 80 1.4
------ ----- --- --- -- ---
Loss from continuing operations (1,425) -36.8 (940) -19.3 485 17.5
Discontinued operations
Income (loss) from operations (15) -0.4 0 0.0 15 0.4
Loss from disposal (66) -1.7 0 0.0 66 1.7
------ ----- --- --- -- ---
Loss before extraordinary item ($1,506) -38.9 (940) -19.3 566 19.6
----- --- ---
Extraordinary item - gain from
reduction of lease obligation 0 0.0 (309) -6.3 (309) -6.3
------ --- ---
Net loss ($1,506) -38.9 ($631) -12.9 875 25.9
------ --- ---
------ --- ---
</TABLE>
Net Sales. An increase in net sales of 26% from the 1994 fiscal year to the 1995
fiscal year was primarily due to the acquisition of the Source Subsidiary in
January, 1994. The Lamda sales decreased from $614,000 in the fiscal year 1994,
to $140,000 in the fiscal year 1995. Management decided to minimize development
costs of the Lamda product line, and to find a buyer for the product line. As of
the date of this report, no definitive buyer has been identified and there can
be no assurance the Company will be successful in selling the product line.
Research contract sales declined by 18%. In the absence of new research and
development projects during the year, the Company's research and development
resources were directed to enhance the Company's current products and
development of new products which can be derived from the technologies which the
Company currently possesses. During the 1995 fiscal year, the Company completed
the development of one product which started shipping in September, 1995. A
second product under development is expected to be completed in September, 1996.
At the present time, the Company has submitted 25 quotes to provide research and
development, manufacturing and product service contracts to potential customers.
There is no assurance such contracts will be achieved by the Company, or that in
the event any such contracts are awarded, sufficient economic value will be
realized to make a material difference in the Company's profitability within the
current year.
Cost of Goods Sold. Cost of goods sold decreased slightly as a percentage of
sales as a result of decrease in unabsorbed factory overhead resulting from
increased sales volume in fiscal year 1996.
<PAGE>
Operating Expenses. Overall operating expenses declined as a percentage of sales
due to consolidation of the operations of Alton Instruments Corporation and the
Source Subsidiary and as a result of management's implementation of cost
reduction plan which included reduction in salary rates for all employees,
reduction in the number of employees, contracts renegotiation and operating
expense control. Expense reduction for fiscal year 1995 was approximately
$300,000.
Inventory Obsolescence. At June 30, 1994, the allowance for inventory
obsolescence was $365,000 in comparison to $205,000 at June 30, 1995. The
decrease in the allowance was due to a decrease in inventories of approximately
25% at June 30, 1995 in comparison with the period for June 30, 1994. 80% of the
type of materials in inventory at June 30, 1995, have historically been used to
produce products under OEM contracts.
Lease Obligation. Subsequent to the acquisition of the Source Subsidiary in
March, 1994, the Company vacated its Irvine, California premises and
consolidated all operations in the Source facility (See Financing Activities
During Fiscal 1995). The Company also renegotiated the lease for its facility in
Garden Grove (See ITEM 2.PROPERTIES).
Discontinued Operations. The Wespercorp Business was sold in November, 1992;
thereafter, in April, 1994, the Company terminated a license agreement related
to the business. Therefore, the operation of the Wespercorp Business was treated
as a discontinued operation for the 1994 fiscal year. In the 1994 fiscal year,
the Company suffered an overall loss created by the Wespercorp Business due to
the one-time write-off of inventory acquired by the Company for the Wespercorp
Business, and for uncollectible accounts receivable associated with the sale of
the Wespercorp Business.
Financing Activities During Fiscal 1995
During the fiscal year ended June 30, 1995, the Company completed several
transactions that had a material effect on the financial condition and
operations of the Company. During the 1994 and 1995 fiscal years, the Company
operated at a loss within very tight cash-flow constraints. In the 1994 fiscal
year, the Company completed a private financing which resulted in net proceeds
of $2,090,000, including the conversion into Common Stock of all of a $230,000
bridge loan and $540,000 of a $634,000 bridge loan. In the 1995 fiscal year, the
Company sold debentures totaling $414,712.40 which were converted into Common
Stock or used to exercise warrants also held by the debenture holders. Four of
seven debentures previously sold in 1993, in the aggregate amount of $80,000,
plus accrued interest, were also converted into Common Stock or used to exercise
warrants.
During the third and fourth quarters of the fiscal year ended June 30, 1995
and the quarter ended September 30, 1995, holders of 4,216,999 A Warrants issued
by the Company in the 1994 private financing, exercised their warrants pursuant
to a temporary reduction of the exercise price. In addition to proceeds received
from the sale of debentures, which proceeds were used to exercise warrants, the
Company received an additional $214,360.10 from the exercise of A Warrants.
<PAGE>
The acquisition of the Source Subsidiary from MicroProbe was completed on
January 21, 1994, and, in conjunction with the acquisition, the Company signed
the MicroProbe Supply Agreement to supply Affirm(R) products to MicroProbe on a
continuing basis. In May, 1994, MicroProbe canceled the MicroProbe Supply
Agreement. Subsequent negotiations with the Company resulted in the
cancellation, in November, 1994, of the Company's purchase note payable to
MicroProbe in the amount of $950,000 and cancellation of 100,000 MicroProbe
warrants, as well as a reduction of royalty payments
The Company vacated its facility in Irvine in February, 1994, and
negotiated with the landlord of the Irvine facility to eliminate its four-year,
lease obligation. In consideration of the termination of the lease and all
obligations thereunder, the Company paid its former landlord $100,000 upon
execution of the agreement in November, 1994, surrendered a claim to
approximately $20,000 of deposit and offsets, and paid an additional $80,000
plus interest in periodic payments. Accordingly, the Company recorded an
extraordinary gain of $309,000 to give effect to the revised terms.
Liquidity and Capital Resources and Plan of Operation
The Company continues to suffer a liquidity problem. As of the date of
this annual report, the backlog of firm orders is growing; however, the
Company's limited available funds constrain procurement of components and
shipment of product. Management has taken actions to reduce its Sales,
Marketing, and General and Administrative costs; monthly expenses in this
category are running materially less than historical expenses. In addition,
management continues to address the Company's liquidity issue by: (i)
restructuring trade debt; (ii) offering discounts in exchange for progress
payments; and (iii) seeking equity capital.
The Company is attempting to increase sales through new product
introduction, focused advertising and an attempt to increase contract
manufacturing and after-sales service.
During the 1994 fiscal year, the Company completed the sale of Common
Stock through a private placement that increased shareholders' equity by
$2,090,000. Approximately $1,500,000 of the proceeds of the financing was used
to acquire the Source Subsidiary, approximately $104,000 was used for related
expenses and the balance was applied to the Company's working capital. In
conjunction with the acquisition of Source Subsidiary, the Company entered into
the Revolving Loan Facility (defined below), which expires December 31, 1995.
In June, 1995, the Company entered into a non-binding letter of
intent with LifeStream Technologies, Inc. ("Lifestream") pursuant to which the
Company would be granted certain production rights in professional and homecare
markets for Lifestream Diagnostic's product line. In addition, the Company may
acquire 20% of Lifestream, for an amount and type of consideration to be
negotiated. The parties are currently engaged in due diligence procedings and
there can be no assurance that any transaction between the Company and
Lifestream will be closed.
<PAGE>
In January, 1994, the Company entered into a revolving loan facility
(the "Revolving Loan Facility") with Silicon Valley Bank (the "Bank"), pursuant
to which the Company assumed $360,000 of a formerly joint MicroProbe/Source
revolving loan obligation to the Bank. As security for its obligation to the
Bank, the Company granted to the Bank a security interest in substantially all
of the Company's assets, including its accounts receivable, inventory,
furniture, fixtures and equipment and general intangibles. In December, 1995,
the revolving loan was repaid by the Company.
The Company did not have any material commitments for capital
expenditures as of the fiscal year ended June 30, 1995, or as of the date of
this Annual Report.
Historical Financings
Private Placement of Equity in January and March, 1994 - The Company
privately sold approximately 525 detachable units (the "1994 Units") of its
securities at a price of $6,000 per 1994 Unit. Each of the 1994 Units consisted
of 12,000 shares, which collectively constituted the Unit Shares and 12,000
warrants, which collectively constituted the A Warrants. Each A Warrant entitles
the holder thereof to purchase one share of Common Stock (the "A Warrants
Shares") at an initial exercise price of $0.75. As of the date of this Annual
Report, the exercise price thereof has been reduced to $0.45. The A Warrants'
exercise period commenced February 1, 1995, and concludes March 31, 1999.
Under certain conditions relating to the trading price of the Company's
common stock, such warrants may be exchanged for shares of Common Stock at the
rate of one share of Common Stock for each five A Warrants tendered, or at the
exercise price thereof further reduced from time to time at the discretion of
the Company's board of directors. The Company undertook to register the A
Warrants Shares.
Private Placement of Debt in September and December, 1993 - Two bridge
loans for the Company in the amounts of $230,000 and $634,000, respectively were
converted into $460,000 and $720,000 of 1994 Units, respectively. Accordingly,
the $230,000 loan was converted into 920,000 Unit Shares and 1,320,500 A
Warrants and $540,000 of the $634,000 loan was converted into 1,440,000 Unit
Shares and 1,980,000 A Warrants in January, 1994. The Company repaid $94,000 of
bridge loans (made in December, 1993) in January, 1994.
Revolving Loan Facility in January, 1994 - The Company entered the
Revolving Loan Facility with the Bank, pursuant to which the Company assumed
$360,000 of a formerly joint MicroProbe/Source revolving loan obligation to the
Bank. As security for its obligation to the Bank, the Company granted to the
Bank a security interest in substantially all of the Company's assets. In
addition, the Company issued to the Bank 50,000 five-year Bank Warrants, each
for the purchase of one share of Common Stock (a "Bank Warrant Share"),
exercisable at $0.75 per share. The Company granted the Bank "piggy-back"
registration rights with respect to the Bank Warrant Shares. In December, 1995,
the revolving loan was repaid by the Company.
<PAGE>
Acquisition of the Source Subsidiary in January, 1994 - All of the issued
and outstanding capital stock of the Source Subsidiary was purchased by the
Company from MicroProbe in consideration of $1,500,000, a one-year $950,000
promissory note in favor of MicroProbe (the "MicroProbe Note"), and 100,000
shares of Common Stock to holders of its warrants issued to MicroProbe
Corporation (the "MicroProbe Warrants"), each for the purchase of one share of
Common Stock (a "MicroProbe Warrants Share"), and a royalty payment on certain
products.. Subsequent to MicroProbe's cancellation and renegotiation of a supply
agreement with the Company, the promissory note, associated security agreement,
and MicroProbe Warrants were canceled by MicroProbe in November, 1994. In
addition, a reduction was made in the maximum royalty payments payable by the
Company to MicroProbe.
Convertible Subordinated Debentures in June, 1993 - In May and June, 1993,
the Company sold seven debentures in the principal amount of $20,000 each (the
"1993 Debentures") with a due date of July 1, 1995. With the issuance of the
1993 Debentures the Company issued an aggregate of 14,000 warrants, each to
purchase one share of Common Stock at an exercise price of not less than $0.75
per share. Four of the 1993 Debentures, plus accrued and unpaid interest in the
aggregate amount of $6,398.00, were converted into 431,980 shares of Common
Stock, effective on June 30, 1995, at the rate of $0.20 per share. Accrued and
unpaid interest in the aggregate amount of $14,997 was used to exercise A
Warrants in June, 1995, and converted into 87,000 shares of Common Stock at the
rate of $0.18 for each of the A Warrants. One of the 1993 Debentures was
extended for a period of five months. At the date of this Annual Report, the
three remaining 1993 Debentures have not been repaid. Two of the holders have
indicated their willingness to partially convert each debenture into common
stock of the Company upon receiving repayment of half of the original amount of
each debenture.
Convertible Subordinated Debentures in November, 1994 to February, 1995 -
In November and December, 1994, and in January and February, 1995, the Company
sold convertible subordinated debentures in the aggregate amount of $125,000,
accruing interest at the rate of 8%, with due dates in February, March, and
April, 1995, and debentures in the aggregate amount of $104,400, with a due date
of August 1, 1996. With the issuance of the debentures, and to the purchasers of
such debentures, the Company issued an aggregate of 172,050 warrants, each to
purchase one share of Common Stock at an exercise price of not less than $0.75
per share. The warrants are exerciseable commencing July 1, 1995, for a period
of five years. In March and April, 1995, holders of debentures who also hold
warrants applied $102,612.50 of their debentures to exercise 684,084 A Warrants
during the temporary period of reduced exercise price of $0.15 per warrant, and
applied $4,320.00 of the debentures to exercise 24,000 A Warrants at $0.18 per
warrant, for equal amounts of shares of common stock of the Company.
Convertible Subordinated Debentures in May and June, 1995 - In May and
June, 1995, the Company sold debentures in the aggregate amount of $185,312.40,
with due dates in June and July, 1996. In June, 1995, $98,312.40 of the
debentures were converted to exercise 655,416 A Warrants during the temporary
period of reduced exercise price of $0.15 per warrant, and $87,000 of the
debentures were converted into 435,000 shares common stock of the Company at
$0.20 per share.
Reduced Warrant Exercise Price in February and March, 1995 - In February
and March, 1995, the Company offered to holders of A Warrants a temporary
<PAGE>
reduction in the exercise price from $0.60 to $0.15 per A Warrant. As a result,
the Company raised $318,425.00 from holders of 2,122,833 A Warrants who
exercised their warrants into common shares of the Company's stock, in addition
to the debentures which were converted for exercising A Warrants, previously
described herein.
Reduced Warrant Exercise Price in June and July, 1995 - In June and July,
1995, the Company offered to holders of A Warrants a temporary reduction in the
exercise price from $0.60 to $0.18 per A Warrant. As a result, the Company
raised $116,280 from holders of 646,667 A Warrants who exercised their warrants
into common shares of the Company's stock, in addition to the debentures which
were converted for exercising A Warrants, previously described herein.
1994 Registration Statement
On October 21, 1994, the Company's registration statement filed with the
Securities and Exchange Commission on Form SB-2 (the "Prospectus") became
effective for the purpose of registering 18,396,335 shares of Common stock,
including 8,648,552 shares being sold by certain holders (the "Selling Security
Holders") as follows: (i) 6,303,999 shares (the "Unit Shares") previously issued
to the holders thereof in a private offering by the Company, (ii) 658,750 shares
(the "Union Bank Shares") held in a voting trust for the benefit of Union Bank,
(iii) 900,000 shares (the "1991 Debenture Shares") received by the holders
thereof upon conversion of certain of the 1991 Debentures, (iv) 525,000 shares
(the "Recapitalization Shares") held by two former executive officers of the
Company who purchased the shares of Common Stock in 1991, (v) 150,000 shares
(the "Alton Subsidiary Acquisition Shares") held by three former owners of
Velotec, Inc. ("Velotec") and (vi) 110,803 shares (the "Exchange Shares") held
by three otherwise unaffiliated persons. Included in the Prospectus are
9,747,783 shares of Common Stock being reserved for issuance upon the exercise
of Warrants and Options, or upon the conversion of Debentures as follows: (i)
7,455,499 shares to holders of its A Warrants (the "A Warrants"), (ii) 479,320
shares to holders of its Dealer Warrants (the "Dealer Warrants"), (iii) 479,320
shares to future holders of its B Warrants (the "B Warrants"), (iv) 50,000
shares to holders of its warrants issued to Silicon Valley Bank (the "Bank
Warrants"), (v) 100,000 shares to holders of its warrants issued to MicroProbe
Corporation (the "MicroProbe Warrants"), (vi) 275,000 shares to holders of its
warrants issued to Networld Capital (the "Networld Warrants"), (vii) 275,000
shares to future holders of its warrants underlying the Networld Warrants (the
"Networld Underlying Warrants"), (viii) 250,000 shares to holders of its options
granted to Woodbridge & Associates (the "Woodbridge Options"), (ix) 10,000
shares to holders of its options issued to First Equity Capital Securities, Inc.
(the "First Equity Options"), (x) 225,269 shares issuable to holders of its
debentures sold in 1993 (the "1993 Debentures"), (xi) 14,000 shares to holders
of its warrants issued concurrently with the 1993 Debentures (the "1993
Debentures Warrants") and (xii) 134,375 shares to holders of its options issued
to Fireman's Fund Insurance Company (the "Fireman's Fund Options").
In February and March, 1995, when the Company offered a reduced exercise
warrant price from $0.60 to $0.15 for a thirty-day period, for A Warrants, the
Company advised its Selling Security Holders that the registration statement
effective October 21, 1994, was required to be amended. In June, 1994, the
<PAGE>
Company again temporarily reduced the warrant exercise price, from $0.60 to
$0.18 for a period of 30 days. In July, 1995, and in September, 1995, two
letters of intent for merging business interests were signed by the Company with
XCEL Corporation and Biopool International, Inc., respectively, requiring
extensive due diligence procedures. The letter of intent with XCEL expired in
August, 1995, after both sides failed to achieve certain conditions required for
a merger of business. On November 3, 1995, Biopool executed an Agreement and
Plan of Merger for the acquisition of Source, which agreement was subject to
numerous significant conditions to closing and was terminated on December 4,
1995, by mutual consent.
The remaining Warrants are exerciseable at prices that range from $0.45 to
$1.00 each with various expiration dates through April, 2002. The exercise price
of the A Warrants has been permanently reduced, effective June 30, 1995, to
$0.45 each for the remaining period of the three-year period that commenced
February 1, 1995. The reduction in the exercise price was the result of the
financial performance of the Company in the fiscal year ending June 30, 1995.
The Networld Unit Warrants are exercisable for a four-year period commencing in
April, 1995, at an exercise price of $0.60. Each Networld Unit Warrant has an
underlying warrant which is exercisable for a three-year period commencing upon
the exercise of each Networld Unit Warrant at an initial exercise price of $0.75
per share, subject to price adjustments. The Dealer Warrantsare exercisable at
$0.50 each during the four-year period that commenced in April, 1995. The B
Warrants are exercisable at $0.75 each during the three-year period that
commences upon the exercise of the Dealer Warrants, subject to price
adjustments. The Options can be exercised at prices that range from $0.008 to
$0.75 each, with various expiration dates through March, 2001. The remaining
1993 Debentures in the aggregate principal amount of $59,959.00 were redeemable
on July 1, 1995, and December 1, 1995, and are convertible at the rate of $0.75
per share.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and Supplementary Data are included herein on
pages 17 through 39.
<PAGE>
SOURCE SCIENTIFIC, INC.
(Formerly Alton Group, Inc.)
-----------------
REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended June 30, 1994 And 1995
--------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Page
<CAPTION>
SOURCE SCIENTIFIC, INC. Page
- ----------------------- ----
<S> <C>
Report Of Independent Accountants 18
Consolidated Balance Sheets - June 30, 1994 And 1995 19
Consolidated Statements Of Operations -
For The Years Ended June 30, 1994 And 1995 20
Consolidated Statements Of Shareholders' Equity -
For The Years Ended June 30, 1994 And 1995 21
Consolidated Statements Of Cash Flows -
For The Years Ended June 30, 1994 And 1995 22
Notes To Consolidated Financial Statements 23
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Source Scientific, Inc.
We have audited the accompanying consolidated balance sheets of Source
Scientific, Inc. (formerly Alton Group, Inc.; the "Company") as of June 30, 1994
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Source
Scientific, Inc. as of June 30, 1994 and 1995, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations in 1994 and 1995 which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 1 to the consolidated financial statements, the Company
reclassified its Redeemable Series C Preferred Stock and, accordingly, restated
the balances of share- holders' equity as of June 30, 1993 and 1994 in the
accompanying consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
December 14, 1995
<PAGE>
SOURCE SCIENTIFIC, INC.
(Formerly Alton Group, Inc. - Note 2)
CONSOLIDATED BALANCE SHEETS
As Of June 30, 1994 And 1995
<TABLE>
<CAPTION>
1994 1995
---- ----
(Restated-
Note 1)
A S S E T S:
Current assets:
<S> <C> <C>
Cash and cash equivalents $64,000 $35,000
Accounts receivable, net 722,000 449,000
Inventories 1,642,000 1,269,000
Other 66,000 180,000
----------- ----------
Total current assets 2,494,000 1,933,000
Property and equipment, net 203,000 121,000
Excess of cost over fair value of net assets
acquired, less accumulated amortization of
$70,000 (1994) and $12,000 (1995) 974,000 78,000
Other assets, net 129,000 81,000
----------- -----------
Total assets $3,800,000 $2,213,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $736,000 $868,000
Accrued expenses 393,000 204,000
Deferred revenue 73,000
Customer deposits 50,000
Notes payable 1,408,000 387,000
Deferred rent, current portion 63,000 2,000
Lease obligation, current portion 146,000 30,000
---------- -----------
Total current liabilities 2,869,000 1,491,000
Deferred rent 141,000 230,000
Lease obligation 371,000
--------- ---------
Total liabilities 3,381,000 1,721,000
--------- ---------
Commitments and contingencies
Redeemable Series C convertible preferred
stock; no par value, authorized 1,000,000
shares, issued and outstanding 1,555 shares;
liquidation value $14 per share 22,000 23,000
Shareholders' equity:
Common stock; no par value, authorized
75,000,000 shares, issued and outstanding
9,788,738 shares (1994) and 14,612,034
shares (1995) 20,000,000 20,744,000
Accumulated deficit (19,320,000) (19,952,000)
Shareholder notes receivable (283,000) (323,000)
----------- ------------
Total shareholders' equity 397,000 469,000
---------- ------------
Total liabilities and
shareholders' equity $3,800,000 $2,213,000
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SOURCE SCIENTIFIC, INC.
(Formerly Alton Group, Inc. - Note 2)
CONSOLIDATED STATEMENTS OF OPERATIONS For
The Years Ended June 30, 1994 And 1995
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Product sales $3,131,000 $3,018,000
Research contract sales 230,000 189,000
Service contract sales 514,000 1,670,000
---------- ---------
Total net sales 3,875,000 4,877,000
--------- ---------
Cost of product sales 2,254,000 2,268,000
Cost of research contract sales 161,000 113,000
Cost of service contract sales 176,000 818,000
--------- ----------
Total cost of sales 2,591,000 3,199,000
--------- ---------
Gross profit 1,284,000 1,678,000
--------- ---------
Selling, general and administrative 1,623,000 1,647,000
Research and development 734,000 839,000
Lease obligation cost 300,000
---------- ---------
Operating loss (1,373,000) (808,000)
Interest, net 52,000 132,000
----------- -------
Loss from continuing operations (1,425,000) (940,000)
Discontinued operations:
Loss from discontinued operations (15,000)
Loss on disposal of discontinued operations (66,000)
Loss before extraordinary item (1,506,000) (940,000)
Extraordinary item - gain from reduction of
lease obligation 309,000
---------- -------
Net loss ($1,506,000) ($631,000)
---------- --------
---------- --------
Per common share amounts:
Continuing operations ($0.24) ($0.09)
Discontinued operations (0.01)
Extraordinary item 0.03
----- ----
Net loss ($0.25) $0.06)
===== ====
Weighted average number of common shares
outstanding 5,946,945 10,658,540
</TABLE>
See notes to consolidated financial statements.
<PAGE>
SOURCE SCIENTIFIC, INC.
(Formerly Alton Group, Inc. - Note 2)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY For The Years Ended June 30, 1994 And 1995
<TABLE>
<CAPTION>
Series C
Convertible
Preferred Stock Common Stock Shareholder Shareholders
-------------- ---------------------- Accumulated Notes Equity
Shares Amount Shares Amount Deficit Receivable (Deficiency)
------ ------- --------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1993, as previously reported 1,555 $15,000 3,231,314 $17,792,000 ($17,807,000) ($188,000) ($188,000)
Reclassification of redeemable preferred stock
and related accretion (1,555) (15,000) (6,000) (21,000)
----- ------ --------- ---------- ---------- ------- --------
Balances, June 30, 1993, as restated 0 0 3,231,314 17,792,000 (17,813,000) (188,000) (209,000)
Issuance of common stock for cash and note
receivable from shareholder 206,500 103,000 (95,000) 8,000
Issuance of common stock (Note 15) 6,303,999 2,090,000 2,090,000
Exercise of stock options 46,925 15,000 15,000
Accretion of redeemable preferred stock (1,000) (1,000)
Net loss (1,506,000) (1,506,000)
----- ------ --------- --------- ---------- -------- ---------
Balances, June 30, 1994, as restated 0 0 9,788,738 20,000,000 (19,320,000) (283,000) 397,000
Issuance of common stock for note receivable from
shareholder 81,375 40,000 (40,000)
Exercise of stock options 575 300 300
Exercise of warrants 4,741,346 772,700 772,700
Additional costs incurred in connection with issuance of
common stock in 1994 (69,000) (69,000)
Accretion of redeemable preferred stock (1,000) (1,000)
Net loss (631,000) (631,000)
----- ------ --------- --------- ---------- -------- ---------
Balances, June 30, 1995 0 $0 14,612,034 $20,744,000 ($19,952,000) ($323,000) $469,000
----- ------ --------- --------- ---------- -------- ---------
----- ------ --------- --------- ---------- -------- ---------
</TABLE>
See notes to the financial statements.
<PAGE>
SOURCE SCIENTIFIC, INC.
(Formerly Alton Group, Inc. - Note 2)
CONSOLIDATED STATEMENTS OF CASH FLOWS For
The Years Ended June 30, 1994 And 1995
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,506,000) ($631,000)
--------- -------
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary item (309,000)
Depreciation and amortization 187,000 147,000
Loss on disposal of property 32,000
Issuance of common stock for compensation 10,000
Issuance of note payable for compensation 100,000
Effect on cash of changes in operating
assets and liabilities, net of the
effect of business acquisition:
Accounts receivable 387,000 273,000
Inventories 181,000 373,000
Other assets 37,000 (66,000)
Accounts payable 8,000 132,000
Accrued expenses (55,000) (189,000)
Customer deposits, deferred revenue
and lease obligation 619,000 (322,000)
Deferred rent (223,000) 28,000
-------- --------
Total adjustments 1,283,000 (67,000)
--------- --------
Net cash used in operating activities (223,000) (564,000)
------- -------
Cash flows from investing activities:
Capital expenditures (31,000)
Business acquisition, net of cash acquired (1,559,000)
--------- ------
Net cash used in investing activities (1,559,000) (31,000)
--------- ------
Cash flows from financing activities:
Repayment of notes and loan payable (278,000) (84,000)
Proceeds from convertible notes payable 770,000
Proceeds from line of credit 26,000
Issuance of common stock and exercise of options 300
Issuance of common stock and exercise of warrants 1,326,000 692,700
Stock issuance costs (69,000)
--------- --------
Net cash provided by financing
activities 1,818,000 566,000
--------- -------
Net increase (decrease) in
cash and cash equivalents 36,000 (29,000)
Cash and cash equivalents, beginning of year 28,000 64,000
------ ------
Cash and cash equivalents, end of year $64,000 $35,000
------ ------
------ ------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $34,000 $141,000
------ ------
------ ------
</TABLE>
See notes to the financial statements.
<PAGE>
SOURCE SCIENTIFIC, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS For The Years Ended June 30,
1994 And 1995
1. Management's Plans And Summary Of Significant Accounting Policies:
Management's Plans:
The Company's financial statements have been prepared assuming that the
Company will continue as a going-concern. The Company has suffered
recurring losses from operations in 1994 and 1995 which raise
substantial doubt about the Company's ability to continue as a
going-concern. The Company's continued existence is dependent on its
ability to generate sufficient sales and cash flows to meet its
obligations and to obtain additional financing as required.
Management's plans for the year ending June 30, 1996 include a
reduction in overhead expenditures and implementation of a business
plan which emphasizes, among other items, increased sales in current
markets, introduction of products into new markets, and identifying
potential corporate partners. The success of these activities, however,
cannot be assured. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Principles Of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Revenue Recognition:
Revenues from the sale of the Company's products are recognized at the
time of shipment to its customers, while revenue on service contracts
and research and development contracts are recognized as service and
research and development activities are performed under the terms of
the related agreements.
Cash And Cash Equivalents:
For purposes of the statements of cash flows, the Company considers
highly liquid debt instruments purchased with a maturity of three
months or less at the date of purchase to be cash equivalents.
Concentration Of Credit Risk:
The Company sells its products throughout the United States and
worldwide. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company
maintains reserves for potential credit losses and, historically, such
losses have been within management's estimates.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
1. Management's Plans And Summary Of Significant Accounting Policies,
Continued:
Inventories:
-----------
Inventories are stated at the lower of cost (first-in, first-out) or
estimated net realizable value.
Property And Equipment:
----------------------
Property and equipment are stated at cost less accumulated depreciation
and amortization. Costs for normal repairs and maintenance are expensed
as incurred; renewals and betterments are capitalized. Depreciation and
amortization are charged to operations over the estimated useful lives
of the assets (ranging from three to ten years) using the straight-line
method. Leasehold improvements are amortized over the term of the lease
or the life of the asset, whichever is shorter. Gains and losses on
disposals are included in income at amounts equal to the difference
between the net book value of the disposed assets and the proceeds
received upon disposal.
Software Development Costs:
--------------------------
Software development costs incurred subsequent to establishing
technological feasibility are capitalized and amortized based on
anticipated revenue for the related product with minimum annual
amortization equal to the straight-line amortization over the remaining
economic life of the related product not exceeding 3 years. The Company
evaluates capitalized software amounts by comparing such amounts to
their estimated net realizable value, i.e., future revenues reduced by
the cost, if any, of completing and disposing of the product. Amounts
in excess of net realizable value are written off.
Intangible Assets:
-----------------
Excess of cost over fair value of net assets acquired is being
amortized on the straight-line method over ten years. The Company
assesses whether there has been a permanent impairment in the value of
intangible assets by considering factors such as expected future
operating income, trends and prospects, as well as the effects of
demand, competition and other economic factors. Management believes no
permanent impairment has occurred.
Customer Deposits:
-----------------
Customer deposits represent cash received in advance from customers
for product orders which have not yet been shipped.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
1. Management's Plans And Summary Of Significant Accounting Policies,
Continued:
Warranty Costs:
--------------
The Company provides a warranty against defects in materials and
workmanship for one year following the date of sale. Estimated costs of
product warranties relating to sales during the year have been accrued
and charged to operations during the year the products were sold.
Per Common Share Amounts:
------------------------
Per common share amounts are determined by dividing the weighted
average number of common shares outstanding during the year into the
relevant statement of operations caption. Common stock equivalents and
other potentially dilutive securities were excluded from the per common
share calculation as their effect was antidilutive.
Income Taxes:
------------
The Company follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted rates
in effect for the years in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amounts expected to be realized. The
provision for income taxes represents the tax payable for the period
and the change during the year in deferred tax assets and liabilities.
Prior Period Restatement:
------------------------
In 1995, the Company determined that its Redeemable Series C Preferred
Stock should be excluded from shareholders' equity due to its mandatory
redemption requirements. Accordingly, the Company has reflected such
classification in the accompanying financial statements by restating
shareholders' equity as of June 30, 1993 and 1994.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
2. Acquisition:
-----------
On January 21, 1994, the Company, then operating as Alton Group, Inc.,
acquired from MicroProbe Corporation ("MicroProbe") all of the issued
and outstanding shares of common stock of Source Scientific, Inc.
("Source") for total consideration of $2,450,000 plus acquisition
expenses of approximately $104,000. A total of $1,500,000 was paid in
cash and the balance was to be paid under the terms of a $950,000
noninterestbearing ($865,000 net of imputed interest), subordinated
promissory note due to MicroProbe. A summary of the assets and
liabilities comprising the acquisition of Source on January 21, 1994 is
shown below:
<TABLE>
<S> <C>
Cash ($4,700)
Accounts receivable 927,700
Inventory 1,585,100
Fixed assets 221,600
Other assets 60,100
Goodwill 940,600
Accounts payable (368,400)
Bank line of credit (360,000)
Accrued liabilities (317,600)
Rent obligation (215,400)
---------
Total $2,469,000
---------
---------
</TABLE>
As part of the acquisition, the Company assumed $360,000 of a formerly
joint MicroProbe and Source revolving loan obligation to Silicon Valley
Bank (Note 10). In addition, the Company issued to MicroProbe a
five-year warrant to purchase 50,000 shares of the Company's common
stock at an exercise price of $0.50 per share and a five-year warrant
to purchase an additional 50,000 shares of the Company's common stock
at an exercise price of $1.00 per share.
The following table summarizes the unaudited pro forma results of
operations as if Source had been acquired on July 1, 1993:
<TABLE>
<CAPTION>
Year Ended June 30, 1994
------------------------
<S> <C>
Net sales $6,160,000
Loss from continuing operations (2,349,000)
Net loss (2,430,000)
Net loss per share ($0.25)
</TABLE>
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
2. Acquisition, Continued:
In November 1994, the Company and MicroProbe entered into an agreement
to settle outstanding issues between them in connection with the
acquisition and a supply agreement executed concurrent with the
acquisition. As part of such settlement, the Company's promissory note
due to MicroProbe was canceled. The then existing note balance of
$883,000 was recorded as a reduction in the excess of cost over fair
value of net assets acquired. Also pursuant to this agreement, 100,000
of outstanding warrants were canceled.
The Company and MicroProbe also entered into a royalty agreement that
expires in March 2000. The agreement provides for the Company to pay up
to a maximum of $375,000 on future shipments of products manufactured
by the Company that utilize certain technologies acquired by the
Company as of January 21, 1994. Royalty payments are required at a rate
of two percent of the net sales of such products. Beginning in April
1996, royalty payments will increase to two and one-half percent. There
were no royalty payments required under the agreement in 1994 or 1995.
In February 1995, the Company changed its name to Source Scientific,
Inc.
3. Discontinued Operation:
In November 1992, the Company sold all the common stock of Wespercorp
International ("WI"). Subsequent to sale, the Company agreed to oper-
ate WI under a license agreement. This license agreement allowed the
Company to fully operate WI in return for a monthly royalty payment
paid to the new owners of WI equal to two-thirds of the profits result-
ing from sales of WI's business. Royalty expense amounted to approxi-
mately $39,000 for the year ended June 30, 1994. The license agreement
was continuous unless terminated by mutual agreement of both parties
with 120 days notice.
In February 1994, the parties to the agreement discontinued the WI
business and terminated the license agreement. Such termination was
consummated in May 1994, resulting in a loss of $66,000. Revenues from
the WI business were approximately $197,000 during 1994.
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
4. Accounts Receivable:
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------
1994 1995
---- ----
<S> <C> <C>
Trade receivables $811,000 $469,000
Less, Allowance for doubtful accounts (89,000) (20,000)
-------- --------
$722,000 $449,000
-------- --------
-------- --------
</TABLE>
In February 1995, the Company entered into an accounts receivable
factoring agreement with a bank under a one year term. The initial
advance to the Company by the bank was 80% of the accounts receivable
factored. The remaining 20%, less administrative and finance charges,
as defined in the agreement, is remitted to the Company by the bank
upon the bank's collection of the factored accounts receivable balance
above and beyond the initial advance. During 1995, under the terms of
the agreement, the Company sold with recourse accounts receivable
totalling approximately $1,242,000, of which approximately $194,600
remained uncollected by the bank at June 30, 1995 and represents the
Company's maximum exposure under the recourse provisions of the
agreement. A finance fee of 2.5% is charged monthly on the average
outstanding accounts receivable balance as defined by the agreement. An
administrative fee of 1% is charged on the face amount of each factored
accounts receivable. Interest expense for the year ended June 30, 1995
was approximately $48,000. The Company ceased factoring accounts
receivable under this agreement in October 1995.
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
5. Other Current Assets:
Other current assets consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1994 1995
----- -----
<S> <C> <C>
Prepaid expenses:
Project costs $139,000
Supplies 23,000
Marketing costs $40,000
Insurance 12,000 6,000
Property taxes 7,000
Other 7,000 12,000
------ -------
Total other current assets $66,000 $180,000
------ -------
------ -------
</TABLE>
6. Inventories:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
1994 1995
-------- -------
<S> <C> <C>
Raw materials $1,410,000 $1,124,000
Work in process 369,000 180,000
Finished goods 228,000 171,000
------ -------
2,007,000 1,475,000
Less, Allowance for inventory
obsolescence and
excess quantities (365,000) (206,000)
------- -------
$1,642,000 $1,269,000
--------- ---------
--------- ---------
</TABLE>
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
7. Property And Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1994 1995
--------- ---------
<S> <C> <C>
Machinery, equipment and tooling $260,000 $290,000
Leasehold improvements 33,000 34,000
Furniture and fixtures 59,000 59,000
--------- ---------
352,000 383,000
Less, Accumulated depreciation
and amortization (149,000) (262,000)
--------- ---------
$203,000 $121,000
--------- ---------
--------- ---------
</TABLE>
8. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1994 1995
--------- ---------
<S> <C> <C>
Software development costs $106,000 $106,000
Less, Accumulated amortization (59,000) (80,000)
-------- --------
47,000 26,000
Deposits 82,000 48,000
Other 7,000
--------- ---------
$129,000 $81,000
--------- ---------
--------- ---------
</TABLE>
Amortization of software development costs was $47,000 and $21,000 for
the years ended June 30, 1994 and 1995, respectively. The charge for
the year ended June 30, 1994 included additional amortization of
$40,000 to reflect a revision of management's estimate of net
realizable value of certain such costs.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
9. Accrued Expenses:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1994 1995
--------- ---------
<S> <C> <C>
Professional fees $52,000 $30,000
Accrued payroll, vacation and commissions 152,000 109,000
Interest 17,000 8,000
Warranty 125,000 18,000
Other 47,000 39,000
-------- -------
$393,000 $204,000
-------- -------
-------- -------
</TABLE>
10. Notes Payable:
Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1994 1995
--------- ---------
<S> <C> <C>
Note payable to MicroProbe, canceled in
November 1994 (Note 2) $883,000 0
Bank line of credit with a maximum amount
of $600,000, or 65% of the Company's
qualifying receivables, collateralized
by all assets of the Company, interest
at 4% over the bank's reference rate
(an effective rate of 9.6% and 9%
at June 30, 1994 and 1995, respec-
tively), payable monthly with principal
due July 5, 1995. Additionally, the
Company issued to the bank 50,000
warrants (Note 15) 278,000 $304,000
</TABLE>
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
10. Notes Payable, Continued:
<TABLE>
<CAPTION>
June 30,
--------------------------
1994 1995
--------- ---------
<S> <C> <C>
Debentures payable to a former officer and
two other unaffiliated individuals in
the face amount of $20,000 each,
convertible at any time into shares
of the Company's common stock at the
conversion price of $0.75 per share
or as adjusted in accordance with the
agreement, with warrants attached to
purchase one share of the Company's
common stock for each $10 of debentures
at the amended price of $0.75 per share,
exercisable any time through May 3,
1998, principal and interest at 9.75%,
two debentures due June 30, 1995 for
which extension of due dates are being
negotiated, the remaining debenture
due October 30, 1995 140,000 60,000
Note payable to a former officer,
paid in 1995 65,000
Notes payable, uncollateralized, interest
at 8%, with due dates ranging from
January 1997 to April 1997 42,000 23,000
--------- ---------
Total, all current $1,408,000 $387,000
--------- ---------
--------- ---------
</TABLE>
11. Lease Obligation:
Lease obligation, amounting to $517,000 and $30,000 at June 30, 1994
and 1995, respectively, represents the remaining cost, net of sublease
income, of the lease on the Company's prior premises. Subsequent to the
acquisition of Source, the Company vacated such premises and moved all
operations to the Source facility. In 1994, a portion of the net lease
obligation was offset against previously recorded deferred rent. The
remaining $300,000 was charged to lease obligation cost in the 1994
statement of operations.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
11. Lease Obligation, Continued:
During 1995, the Company negotiated a termination of the lease. In
consideration of the termination and all obligations thereunder, the
Company paid its former landlord approximately $150,000 and surrendered
a claim to approximately $20,000 of deposit and offsets. A remaining
balance of $30,000 is owed to the Company's former landlord at June 30,
1995 and is included in current liabilities. The settlement reduced the
Company's accrued lease obligation at June 30, 1994 by $309,000, and an
extra-ordinary gain of this amount is reflected in the 1995 statement
of operations.
12. Commitments And Contingencies:
Lease Commitments:
The Company leases its office and warehouse facilities under an
operating lease which expires in January 2002.
The following is a schedule of future minimum lease payments under
noncancellable lease agreements as of June 30, 1995:
<TABLE>
<CAPTION>
Years Ending June 30,
<S> <C>
1996 $320,000
1997 314,000
1998 314,000
1999 314,000
2000 314,000
Thereafter 498,000
--------
$2,074,000
</TABLE>
Rent expense was $153,000, net of $65,600 sublease income, for the year
ended June 30, 1994 and $324,000 for the year ended June 30, 1995.
Related Party Agreements:
The Company has agreements with three directors to provide consulting
services. One agreement provided for a monthly fee of $5,833 from July
1, 1994 through October 31, 1994. The other two agreements call for
hourly payments of $80 and $100. The total cost charged to the
statement of operations for the years ended June 30, 1994 and 1995
under all three agreements was $17,532 and $84,600, respectively.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
13. Income Taxes:
Effective July 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The cumulative effect of adopting this statement was not
material to the Company's 1994 financial statements
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory reserve $157,849 $89,010
Warranty reserve 54,084 7,712
Vacation accrual 46,076
Allowance for bad debts 38,519 8,660
Credits 559,109 578,865
Other 1,632 1,632
Net operating loss 7,346,937 7,697,673
--------- ---------
8,158,130 8,429,628
Deferred tax liability:
Property and equipment (15,640) (37,587)
--------- ---------
8,142,490 8,392,041
Valuation allowance (8,142,490) (8,392,041)
--------- ---------
Net deferred income taxes $ 0 $ 0
--------- ---------
--------- ---------
</TABLE>
The difference between the federal statutory rate of 34% and the
Company's effective tax rate of 0% is the result of incurring net
operating losses without current tax benefit for all periods presented.
As of June 30, 1995, the Company had net operating loss carryforwards
for federal and state purposes of approximately $22,000,000 and
$2,100,000, respectively. In addition, the Company had general business
tax credit carryforwards of approximately $580,000. These carryforwards
expire through 2010. As a result of transactions in securities of the
Company, certain of the Company's tax loss carryforwards are subject to
restrictions which place a maximum annual limitation on the utilization
of loss carry-forwards arising prior to a change in ownership, as
defined in the Internal Revenue Code.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
14. Common Stock Options And Warrants:
The Company amended its stock option plan during 1995 whereby the
Company may grant options to employees, officers, outside directors and
consultants to purchase up to an aggregate of 3,500,000 shares of the
Company's common stock. Options granted under the plan may be incentive
stock options or options other than incentive stock options
(nonstatutory options). The exercise price of incentive stock options
may not be less than 100% of the fair market value of the common stock
on the date of grant; the exercise price for nonstatutory options must
be at least 99% of such fair market value. No incentive stock option
shall be exercisable after the earlier of the expiration date of the
Plan or three months after termination of employment. Nonstatutory
options must be exercised prior to the expiration date of the Plan or
within a specified term ranging from one to five years.
A summary of stock options is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------
1994 1995
------- -------
<S> <C> <C>
Outstanding at beginning of year 997,111 749,116
Reissued 267,500
Granted 399,999 150,000
Exercised (258,725) (81,950)
Cancelled (389,269) (456,416)
------- -------
Outstanding at end of year 749,116 628,250
------- -------
------- -------
Range of option exercise prices:
Granted $0.50-$2.00
</TABLE>
At June 30, 1995, options for 405,250 shares were exercisable under the
plan described above.
In addition to options issued from the plan, the Company has issued
options outside of the plan to nonaffiliated entities. These options
are exercisable at $0.008 to $0.75 per share over terms ranging from 1
to 5 years and vesting at the date of grant. At June 30, 1995, 394,375
of such options have been granted, of which all are exercisable.
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
14. Common Stock Options And Warrants, Continued:
In connection with prior and current year financings, the Company has
issued a total of 6,019,815 warrants and options, each for the purchase
of one share of the Company's common stock at exercise prices ranging
from $0.45 to $0.75 per share. Of the total warrants and options
outstanding, 5,042,495 were exercisable at June 30, 1995. The remainder
become exercisable at various dates through December 1999.
15. Capital Stock:
In January 1994, in order to finance the acquisition of Source, the
Company issued 3,032,000 shares of common stock for $1,516,000 and
converted a series of two convertible notes issued in September and
December 1993 for $230,000 and $540,000, respectively, into 920,000 and
1,440,000 shares of common stock, respectively. On March 31, 1994, an
additional 912,000 shares of common stock was issued for $456,000.
Issuance costs in connection with the foregoing transactions totalled
$652,000.
Subsequent to the acquisition of Source, certain employees exercised
options for 46,925 and 206,500 shares of common stock, respectively, as
part of their severance agreements.
The Company was required to redeem the shares of Series C Preferred
Stock on September 1, 1995 at the price of $15.4666 per share. The
holders of Series C Preferred Stock were notified by the Company on
November 3, 1995, (the "Notice"), that under the terms of the
redemption rights of Series C Preferred Stock, the delay in redeeming
the preferred shares has caused in an increase in the price per share
to $18.93. The Notice also indicated the Company's intent to redeem the
shares, such date of redemption to be established by January 3, 1996.
The Company has reserved 1,804 shares of common stock for the
conversion of Series C Preferred Stock. Dividends accrue on the Series
C Preferred Stock at $0.53 per share per annum.
During 1995, certain debentures in the aggregate amount of $228,706,
plus accrued interest of $10,218, were converted into 1,195,013 shares
of common stock. With the issuance of certain debentures sold in 1995
in the aggregate amount of $414,712, and to the purchasers of such
debentures, the Company issued an aggregate of 172,050 warrants, each
to purchase one share of common stock at an exercise price of not less
than $0.75 per share. The Company temporarily reduced the warrant
exercise price of such warrants from $0.60 to $0.15 and $0.18, in
February and June, respectively,
Continued
<PAGE>
SOURCE SCIENTIFIC SYSTEMS, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO FINANCIAL STATEMENTS, Continued For
The Years Ended June 30, 1994 And 1995
15. Capital Stock, Continued:
raising aggregate funds of $318,425 from the exercise of 2,122,833
warrants into an equal number of shares of common stock. Certain of the
warrant holders, in the aggregate amount of $200,354, plus accrued
interest of $14,997, were also debenture holders who used debenture
holdings for the exercise of their warrants into an aggregate amount of
1,423,500 shares of common stock during the reduced exercise price
periods.
A retiring employee who remains a director exercised options at $0.75
per share for 81,375 shares of common stock, collateralized by a note.
16. Retirement Savings Plan:
During 1991, Source established a profit-sharing plan (the "401(k)
Plan"), which is qualified under Section 401(k) of the United States
Internal Revenue Code of 1986. The 401(k) Plan allows eligible
employees to contribute up to 15% of their salary. Effective February
1, 1995, the Company adopted the 401(k) Plan. At its discretion, the
Company may make matching contributions to the 401(k) Plan, although
none has been made.
17. Concentration Of Risk:
The Company had three customers and one customer which accounted for
approximately 58% and 37% of total 1994 and 1995 revenues,
respectively.
The Company predominately sells its products in the biomedical and
analytical instruments industry. The Company's international sales were
approximately 8% and 12% of total revenues for the years ended June 30,
1994 and 1995, respectively.
18. Subsequent Events:
On September 27, 1995, the Company signed a letter of intent relating
to a proposed acquisition of the Company by Biopool International,
Inc., ("Biopool").
On September 29, 1995, the Company executed a promissory note for
$180,000 (the "Note"), at the per annum interest rate of 7%, to which
Biopool is the holder. The terms of the Note provide a repayment date
of March 28, 1996, and subordination to the rights of Silicon Valley
Bank.
Continued
<PAGE>
SOURCE SCIENTIFIC, INC.
(Formerly Alton Group, Inc. - Note 2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Continued For The Years Ended June 30, 1994
And 1995
18. Subsequent Events, Continued:
A Plan of Merger Agreement was signed by the parties on November 3,
1995, which was terminated on December 4, 1995.
Effective October 11, 1995, an escrow was opened by the Company to
enable certain holders of warrants to sell a portion of their warrants
and to use the proceeds therefrom for conversion of their remaining
warrants at an exercise price of $0.18. Purchasers who have executed
escrow agreements will exercise their respective warrants purchased at
an exercise price of $0.18. The escrow was extended to January 31,
1995. As of December 13, 1995, approximately 1,700,000 warrants had
been deposited into the escrow but no funds have been received into the
escrow from the purchasers.
<PAGE>
(Exhibit 23.1)
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Source Scientific, Inc. and Subsidiaries (formerly Alton Group, Inc.) on Form
S-8 of our report, which includes an explanatory paragraph with respect to the
uncertainty as to the Company's ability to continue as a going concern, dated
December 14, 1995, on our audits of the consolidated financial statements as of
June 30, 1995 and 1994, and for the years then ended, which report is included
in this Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
December 14, 1995
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There is no disagreement between the Company and its accountants. See
also item 14(b).
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Company's officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Positions
<S> <C> <C>
Robert B. Lyons (1) (2) 58 Chairman of the Board and Director
Richard A. Sullivan (1) 54 President, Chief Executive Officer, Director
John A. Karsten (1) (3) 63 Director
Susan L. Preston (2) 41 Director
Joseph F. Caliguiri (2)(3) 67 Director
Jacob Y. Terner (4) 61 Director
Mokhtar A. Shawky 51 Chief Financial Officer
Catherine Curtis 48 Secretary
- --------------
<FN>
(1) Member of the Executive Committee (2) Member of the Compensation Committee
(3) Member of the Audit and Ethics Committee
(4) Dr. Terner submitted his resignation effective September 30, 1995 due to
personal business. Dr. Terner was a member of the compensation committee until
his resignation.
</FN>
</TABLE>
All directors serve for one year and thereafter until their successors are
elected and qualify. Executive officers are appointed by the Board of Directors.
Directors other than executive officers receive no cash compensation for their
services as directors, although the Company's By-Laws permit such payment. No
current director or executive officer has any arrangement or understanding
whereby he or she has been or will be selected as a director. Further, no
director or executive officer is related to any other director or executive
officer.
Robert B. Lyons has been a Director of the Company since January, 1989, and has
been the Chairman of the Board on a part-time basis since April, 1994, and
devotes approximately 20 hours per month to the Company's affairs. From 1984
through the present, Mr. Lyons has served in various capacities at the Aerospace
and Defense Sector of GenCorp. Prior to that, Mr. Lyons spent 18 years in
various technical and management positions with Ford Aerospace and
Communications Corporation, now Loral Aerospace. He served on the Board of
Directors of Western Empire Savings and Loan from 1981 to 1988. Mr. Lyons has
previously served on the City Council of Placentia, California, as a Councilman,
Mayor and Treasurer, on the Placentia Planning Commission and on the Placentia
Library District Board of Trustees.
<PAGE>
Richard A. Sullivan was appointed as a Director and as President and Chief
Executive Officer of the Company in April, 1994. He held the position of
Executive Vice President and General Manager of the Source Subsidiary since
April, 1993, and was Vice President Sales and Marketing for MicroProbe and for
Source Scientific Systems, Inc. from May, 1989, until the Company acquired the
Source Subsidiary in January, 1994. Previously, he was President of LAB 2000 in
Florida, a company specialized in import and export of clinical and industrial
products worldwide. From 1980 to 1988 he held various positions in Baker
Instruments Corporation of Pennsylvania, including Director of International
Sales and Vice President of Sales and Marketing. Mr. Sullivan holds a B.S. in
Medical Technology from the University of Buffalo, New York, and an MBA in
marketing from Pace University.
John A. Karsten has been a director of the Company since he co-founded it in
1975. From its inception through November, 1983, and from November, 1990, to
August, 1994, he served as the Company's Secretary. From November, 1990, to
June, 1994, he served as the Company's Vice President and Chief Financial
Officer. From 1984 through 1989, he served as President and Chief Executive
Officer of Hughes Electrical Management System, Inc., City of Industry,
California, a privately held firm engaged in the design, marketing and
installation of electrical energy management systems.
Susan L. Preston has been a director of the Company since May, 1994. She is
employed by the Company as Director of Legal Affairs. From 1992 to 1994, she was
Vice President and General Counsel for MicroProbe. From 1991 to 1992, she
provided legal and technical background to EMCON Northwest, a national
environmental consulting firm involved in hydrogeology, remediation and
analytical services. She represented and managed Univar Corporation's
involvement on various Superfund site committees from 1990 to 1991, and was
environmental counsel for Weyerhauser Company from 1986 to 1990.
Joseph F. Caligiuri has been a director of the Company since May, 1994. He
served Litton Industries, Inc., in various capacities between 1969 and his
retirement in 1993. From 1981 to 1993, he was the corporate executive vice
president, managing the 21-division Advanced Electronics Systems Group. In
addition, the Medical Research and Products Group also reported to Mr.
Caligiuri.
Jacob Y. Terner, M.D., was a director of the Company from June, 1994, until his
resignation which was effective September 30, 1995.
Mokhtar A. Shawky became the Company's acting Chief Financial Officer in July,
1994. Previously, he had been the Controller of the Source Subsidiary since
1989. For the two years prior to joining the Company, Mr. Shawky was a partner
of Imperial Accounting and Tax Services. Between 1979 and 1987, he served as the
Corporate Accounting Manager for Allergan Pharmaceuticals, Inc., and was the
Manager for Financial Planning and Controller for Beckman Instruments, Inc., a
division of SmithKline Beckman Corp. Mr. Shawky has a B.S. Degree in Business
Administration and his MBA graduate work is in progress.
<PAGE>
Catherine Curtis has been the Secretary of the Company since August, 1994,
having previously served as its Assistant Secretary since January, 1994. She
also serves as the Company's Director of Investor Relations and Human Resources,
positions she has held since October, 1992. Previously, she was the Secretary
for Title Energy Limited, a public energy investment corporation, from 1982
until it was sold to Baraban Securities in 1992. She coordinated investment
programs in Los Angeles, California, and Hong Kong from 1985 to 1990. Her
experience in executive management has included manufacturing, investment and
public service companies since 1970.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding compensation paid by
the Company to its Chief Executive Officer (the "Named Officer") during each of
the Company's last three fiscal years. No other executive officer of the Company
received salary and bonus payments in excess of $100,000 during the fiscal year
ended June 30, 1994, except for those who terminated their relationships with
the Company
<TABLE>
<CAPTION>
Long Term Compensation
Awards (2)
Name and Principal Position (1) Annual Compensation -------------
- ------------------------------- ------------------- Securities Underlying
Year Salary ($) Options (#)
<S> <C> <C> <C>
Richard A. Sullivan
President and Chief Executive Officer 1995 109,600
1994 103,021 200,000
Bruce Lynch 1994 47,687 0
(Resigned as President and Chief
Executive Officer on April 28, 1994)
Peter C. Yeung 1994 49,228 0
(Resigned as President and Chief 1993 73,843 4,000
Executive Officer on January 5, 1994) 1992 75,996
<FN>
(1) During the fiscal year ended June 30, 1994, three persons consecutively
held the position of President and Chief Executive Officer. Mr. Sullivan
became President and Chief Executive Officer on May 1, 1994. Bruce W. Lynch
served as President and Chief Executive Office from January 5, 1994, to
April 30, 1994, and received $47,687 in salary. Peter C. Yeung served as
President and Chief Executive Officer until January 5, 1994, and, during
the fiscal year, received $49,228.20 in salary. Mr. Yeung received
additional compensation under the provisions of a severance agreement.
(2) The Company has no stock appreciation rights plan. The Company has an incentive stock option plan.
</FN>
</TABLE>
Options Exercises and Year-End Value Table
The table below sets forth information regarding (i) the exercise of stock
options by the Named Officer during the fiscal year ended June 30, 1994, (ii)
the number of unexercised options held by the Named Officer as of June 30, 1994,
and (iii) the value as of June 30, 1994, of unexercised in-the-money options
held by the Named Officer.
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Acquired Value at Year-End (#) at Year-End ($)
Name on Exercise (#) Realized ($) Exerciseable/Unexerciseable Exerciseable/Unexerciseable (1)
---- --------------- ------------ --------------------------- -------------------------------
<S> <C> <C> <C> <C>
Richard A. Sullivan -0- -0- 100,000/100,000 13,000/13,000
<FN>
(1) Value per share is based on the difference between the option exercise
price per share and current market price per share of Common Stock ($0.63
per share) as of September 30, 1995.
</FN>
</TABLE>
Director Compensation
The Members of the Board of Directors serve without cash compensation,
other than reimbursement for expenses incurred in meetings of the Board of
Directors of the Company.
Consulting and Related Agreements
During the fiscal year ended June 30, 1995, the Company had consulting and
related agreements with the following directors:
<TABLE>
<CAPTION>
Dates of Agreement/
Name of Director Working Relationship Compensation Scope of Services Provided
<S> <C> <C> <C>
John A. Karsten July 1, 1994 to $5,833.33 Accounting and Financial preparation of
October 31, 1994 per month fiscal year end documentation (part time)
Susan A. Preston February 1, 1994 $80.00 per hour General Counsel, contract and patent
to February 28, 1995 matters
March 1, 1995 $5,200 Part-time employment as Director
to July 31, 1995 per month of Legal Affairs
August 1, 1995 $4,100 Part-time employment as Director
per month of Legal Affairs
to present
Robert B. Lyons May 15, 1994 $100.00 per Marketing support, mergers, divestitures,
hour acquisitions and special projects
</TABLE>
During the months of July, through September, 1994, the Company paid to Mr.
Karsten an aggregate of $17,500 pursuant to the above-referenced agreement.
During the months of July, 1994, through February 28, 1995, the Company paid to
Ms. Preston $65,159.41 pursuant to the above-referenced agreement, and
$31,698.38 as an employee of the Company, from March 1, 1995 through September
30, 1995. During the months of July, 1994, through September, 1995, the Company
paid to Mr. Lyons an aggregate of approximately $1940.00 pursuant to the
above-referenced agreement. The Company has employment agreements with Susan
Prestor, a director; Richard A. Sullivan, an officer and director; and with
Mokhtar A. Shawky and Catherine Curtis, who are officers of the Company.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to
beneficial ownership of the Company's outstanding Common Stock as of September
30, 1995, (i) assuming the exercise of all exerciseable outstanding Warrants and
Options; (ii) assuming the conversion into Common Stock of all Preferred Series
C Shares outstanding; and (iii) assuming the conversion into Common Stock of all
Debentures, (a) by each person who is known by the Company to own beneficially
more than five percent of the shares of the Company's Common Stock; (b) by each
director of the Company; (c) by each of the Company's executive officers named
in the Summary Compensation Table; and (d) by all directors and officers as a
group.
<TABLE>
<CAPTION>
Beneficial Ownership
----------------------------------
Shareholder Name Number of
Shares Percent
---------- ------------
<S> <C> <C>
Stanley Becker (1) 2,164,166 14.07
Peter C. Yeung (2) 1,362,975 8.86
Max Goldring Trust (3) 1,334,000 8.67
Tzium-Shou Lee (4) 981,917 6.38
Samuel E. Benjamin, MD (5) 898,333 5.84
Linda Jacobsen Franklin (6) 829,166 5.39
Wespercorp Voting Trust (7) 658,750 4.46
John A. Karsten (8) 496,614 3.23
Robert B. Lyons (9) 105,000 *
Richard A. Sullivan (10) 100,000 *
Joseph Caligiuri (11) 37,500 *
Susan L. Preston (11) 30,000 *
Jacob Y. Terner (11) 37,500 *
All officers and directors 806,114 5.24
as a group (7 persons) (12)
<FN>
* Less than one percent
1. Mr. Becker's address is 55 East End Avenue, Apt. 7A, New York, New York
10028.
2. Includes 1,329,000 shares of Common Stock, owned of record by Mr. Yeung;
also includes 31,975 1993 Debentures Shares and 2,000 1993 Debentures
Warrants Shares. Mr. Yeung's address is 9 Rocky Glen, Irvine, California
92714.
3. Includes the A Warrants, which are exercisable. Max Goldring Trust's
address is c/o Paul Garrett, Trustee, 11920 Currituck Drive, Los Angeles,
California, 90049.
4. Includes the A Warrants, which are exercisable. Mr. Lee's address is 924
Maple Road, Flessmoor, Illinois, 60422.
5. Dr. Benjamin's address is 2763 Roscomare Road, Los Angeles, California,
90077.
6. Includes the A Warrants, which are exercisable. Ms. Franklin Jacobsen's
address is 201 E 17 Street, New York, New York, 10003.
7. Represents Common Stock beneficially owned by Union Bank. Wespercorp Voting
Trust's address is 7390 Lincoln, Garden Grove, California, 92641.
8. Includes 451,614 shares of Common Stock, owned of record by Mr. Karsten;
also includes options to purchase 37,500 shares of Common Stock, which
options were vested.
9. Reflects those options to purchase such number of shares shown, which
options were granted pursuant to the ISO Plan. Also includes options to
purchase 85,000 shares of Common Stock, which options were vested pursuant
to the April, 1994 and April, 1995 grants each of 60,000 Chairman's
Options.
10. Reflects those options to purchase such number of shares shown, which
options were granted pursuant to the ISO Plan.
11. Reflects those options to purchase shares of Common Stock, which options
were vested.
12. Includes all shares of Common Stock and options referenced in footnotes 8,
9, 10, and 11, above, and includes an option granted to an executive
officer of the Company, who is not a director, which options are
exercisable within 60 days of the date of this Annual Report for 6,000
shares of Common Stock. The address of the foregoing persons is c/o the
Company at 7390 Lincoln Way, Garden Grove, California, 92641.
</FN>
</TABLE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
12% Convertible Subordinated Debentures
In December, 1981, the Company sold an aggregate of $3,000,000 of 12%
Convertible Subordinated Debentures. In December, 1984, the Debentures were
converted into shares of Series A Preferred Stock; in January, 1988 the shares
of Series A Preferred Stock were converted into shares of Series C Preferred
Stock and Common Stock; and since then substantially all of the shares of Series
C Preferred Stock have been converted into shares of Common Stock. As of the
date of this Annual Report, there are 1,555 shares of Series C Preferred Stock
outstanding. The Company was required to redeem the shares of Series C Preferred
Stock on September 1, 1995 at the price of $14.9333 per share. The holders of
Series C Preferred Stock were notified by the Company on November 3, 1995, (the
"Notice"), that under the terms of the redemption rights of Series C Preferred
Stock, the delay in redeeming the preferred shares has caused in an increase in
the price per share to $15.93. The Notice also indicated the Company's intent to
redeem the shares, such date of redemption to be established by January 3, 1996.
At the date of this Annual Report, the Company's aggregate liability to the
holders of preferred stock is $24,777.82.
Fireman's Fund
In the Company's 1987 fiscal year, the Company settled a lawsuit with
Fireman's Fund Insurance Company ("Fireman's Fund") that related to a terminated
contract with respect to which Fireman's Fund had provided the Company with a
performance bond. As part of such settlement, the Company issued to Fireman's
Fund, 41,175 shares of common stock, and also issued the Fireman's Fund Option
to purchase an additional 134,380 shares of Common Stock at an exercise price of
$0.008 per share. On November 15, 1995, Fireman's Fund exercised their option,
pursuant to notice by the Company to Fireman's Fund to exercise the Option or
such option would terminate on November 20, 1995, under the terms of the option.
1991 Recapitalization
Restructure of Union Bank Loan
In January, 1988, the Company executed a series of agreements with Union
Bank that resulted in a restructuring of loans payable of approximately
$3,929,000 to Union Bank and included issuance of 100,000 shares of each of
Series B Preferred Stock, Series D Preferred Stock and Common Stock to Union
Bank. Pursuant to the Company's 1991 Recapitalization, then-owing principal
balance of remaining loans payable to Union Bank was converted into a long-term
note in the amount of $244,000, maturing in January, 1996. Union Bank converted
all of the shares of Series B Preferred Stock and Series D Preferred Stock plus
accrued dividends of $175,000 into 563,750 shares of Common Stock and
established a voting trust (the "Wespercorp Voting Trust"). Appointees
designated by the Company as Trustees are empowered with the voting rights of
the shares of common stock represented in the Wespercorp Voting Trust. The
trustees of the Wespercorp Voting Trust are three executive officers of the
Company. The trustees have full voting power except under certain conditions
<PAGE>
relating primarily to a merger or sale of the Company. The balance of the
long-term note was repaid in January, 1994, concurrently with the Company's
acquisition of the Source Subsidiary.
As a material part of the 1991 Recapitalization, three persons purchased
the $500,000 convertible 1991 Debentures, which debentures were converted into
shares of Common Stock in December, 1991, at a conversion price of $0.50 per
share (or an aggregate of 1,000,000 shares of Common Stock). Currently with the
purchase of the 1991 Debentures, the persons became executive officers of the
Company. In addition, each of such persons purchased 262,500 Recapitalization
Shares for $0.50 per share in consideration of the Recapitalization Shares
Notes. Such persons were also granted nonstatutory options to purchase an
aggregate of 775,000 shares of Common Stock under the 1981 ISO Plan.
Business Acquisitions
On January 21, 1994, the Company acquired all of the capital stock of the
Source Subsidiary from MicroProbe. Under the terms of the acquisition agreement,
the Company paid MicroProbe $2.45 million, of which $1.5 million was paid in
cash and $950,000 is in the form of the non-interest-bearing, subordinated,
collateralized MicroProbe Note, all due and payable on March 27, 1995.
Under a five-year MicroProbe Supply Agreement, the Company was obligated to
supply to MicroProbe the Affirm(R) Processors and the Affirm(R) Scanners.
MicroProbe was to provide the Company with firm quarterly orders with monthly
delivery schedules. In May, 1994, MicroProbe Corporation ("MicroProbe") ceased
all sales and marketing of the Affirm products and purported to terminate its
Supply Agreement with the Company.
In November, 1994, the Company and MicroProbe entered into an agreement to
settle all outstanding issues between them. As part of such settlement, the
Company's promissory note in favor of MicroProbe was canceled. The note balance
was recorded as a reduction in the excess of cost of fair value of net assets
acquired from MicroProbe. The removal of the promissory note increased the
Company's working capital. The Company and MicroProbe also entered into a
royalty agreement with a reduced maximum payment, that will expire in March,
2000, and provides for the Company to pay up to a maximum of $375,000 on future
shipments of Source-manufactured products that utilize certain technologies
owned by the Company as of January 21, 1994, as the result of MicroProbe's sale
to the Company of the Source Subsidiary. The obligation for royalty payments
commenced in April, 1995, at a rate of two percent of the net sales of such
products and, 12 months later, will increase to two and one-half percent. The
Company's cost-of-goods-sold will increase on all products on which a royalty is
to be paid, however, price adjustments have been made to compensate for royalty
payments.
Wespercorp Business
In November, 1992, the Company entered into an agreement with a private
group ("Wesper") for the sale and license back of all assets and liabilities
assignable to the Wespercorp Business. By agreement dated May, 1994, the
licensing agreement, and all subsequent agreements with Wesper relating to the
<PAGE>
Wespercorp Business were terminated. As of June 30, 1995, a balance of
approximately $9,800 in accounts receivable for sales to customers of the
Wespercorp Business remained to be collected and retained by the Company as part
of the May, 1994, agreement. In May, 1994, the Company transferred certain
assets and inventory to Wesper.
Severance and Separation Agreements
Peter C. Yeung, former President and CEO As the result of an agreement with the
Company effective in January, 1994, Mr. Yeung received severance compensation of
$53,970.50 in the 3rd and 4th quarters of fiscal year ended June 30, 1994, and
$49,995.96 in the first and second quarters of fiscal year ended June 30, 1995.
A final payment of $4166.33, for severance and any outstanding obligations due
to Mr. Yeung by the Company was applied to the annual interest payment due on a
five-year promissory note bearing interest at 7% per annum, which Mr. Yeung
executed for consideration of his exercise of stock options for 206,500 shares
of Common Stock (granted under the ISO Plan) at an exercise price of $0.50 per
share. The promissory note is collateralized by such shares. The Company has
also extended the term to June 30, 1996, for payment of Mr. Yeung's
Recapitalization Shares Note, the principal balance of which at the date of this
Annual Report is $66,250. Medical coverage through and including January, 1996,
is provided by the Company to Mr. Yeung unless he obtains medical coverage
through another entity, whether or not employment-related.
John A. Karsten, a director, former Corporate Secretary and former Chief
Financial Officer By an agreement dated July, 1994, the Company paid Mr. Karsten
$21,552 in severance and as payment for part-time consulting services provided
to the Company through October, 1994. In addition, COBRA group health insurance
benefits paid by the Company for Mr. Karsten continued under the Company's plans
until June 30, 1995. The Company extended the term to June 30, 1999, for payment
of Mr. Karsten's Recapitalization Shares Note, the principal balance of which at
the date of this Annual Report is $121,250. The Recapitalization Shares Note is
collateralized by Mr. Karsten's 262,500 Recapitalization Shares. In addition,
Mr. Karsten executed a note payable to the Company, which note bears interest at
seven percent per annum for a maximum term of five years, to enable him to
exercise fully-vested options for 81,375 shares of Common Stock at a price of
$0.50 per share. Such options were granted under the ISO Plan. The resulting
shares of Common Stock collateralize the note.
Letter of Intent, XCEL Corporation
A non-binding letter of intent was signed between the Company and XCEL
Corporation, a privately-held corporation with operations in California and
Massachusetts, and internationally in Japan and the United Kingdom. XCEL is a
diversified electronics manufacturer specializing in custom integrated data
input and display subsystems and components. Closing of the business combination
was anticipated to occur by August 30, 1995, contingent upon certain
accomplishments by both parties relating to additional funding and financial
improvements. The parties have agreed to remain strategic alliance partners,
despite their decision not to close the business combination transaction.
<PAGE>
Letter of Intent, Lifestream Diagnostics, Inc.
The Company executed a letter of intent with Lifestream Diagnostics, Inc.,
of Sandpoint, Idaho, for Source's exclusive worldwide rights to provide
production services for Lifestream's diagnostic product line. Lifestream is in
final-phase clinicals for FDA approval of an instrument designed to accurately
measure cholesterol and HDL levels in one minute from a random drop of blood.
Under the terms of the letter, Source would acquire a 20% interest in
Lifestream. Although both managements anticipated completion of a definitive
agreement by August 15, 1995, the agreement remains contingent on the successful
completion of certain conditions which have not been completed at the date of
this report, not limited to, FDA approval of the subject Lifestream instrumen.
Subsequent Events
Biopool International, Inc.
On September 27, 1995, the Company signed a letter of intent concerning the
proposed acquisition of Source by Biopool International, Inc., (Nasdaq:BIPL). A
Plan of Merger agreement was signed by the parties on November 3, 1995, which
agreement was terminated on December 4, 1995. The merger had been dependent upon
several conditions precedent being met by both parties.
On September 29, 1995, the Company executed a promissory note for $180,000
(the "Note"), at the per annum interest rate of 7%, to which Biopool is the
holder. The terms of the Note provide a repayment date of March 28, 1996, and is
subordinated to the rights of Silicon Valley Bank, on all collateral except
intellectual properties and other intangible assets, and equipment and fixtures.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Index to Exhibits:
2.1 Acquisition Agreement, dated January 21, 1994, between the Registrant
and MicroProbe Corporation. (Incorporated by reference from Exhibit 1
to Registrant's Current Report on Form 8-K dated January 28, 1994.)
3.1 Articles of Incorporation of the Registrant, together with all
amendments thereto, through and including September 26, 1988.
(Incorporated by reference from Exhibit 3.1 to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended June 30, 1988 (the "1988
10-K").)
3.2 Certificate of Determination of Preferences, Rights and Limitations of
Preferred Stock of the Registrant. (Incorporated by reference from
Exhibit 3 to the Registrant's Current Report on Form 8-K dated January
28, 1988 (the "January, 1988 8-K").)
3.3 Certificate of Amendment of Articles of Incorporation of the
Registrant filed with the Secretary of State of California on February
25, 1991. (Incorporated by reference from Exhibit 10.22 to the
Registrant's Current Report on Form 8-K dated February 28, 1991 (the
"February, 1991 8-K").)
3.4 Certificate of Amendment of Articles of Incorporation of the
Registrant Incorporation filed with the Secretary of State of
California on October 31, 1991. (Incorporated by reference from
Exhibit 3.4 to the Registrant's Registration Statement on Form SB-2
filed August 24, 1994 (the "1994 SB-2").)
3.5 Certificate of Amendment of Articles of Incorporation of the
Registrant filed with the Secretary of State of California on March
30, 1992. (Incorporated by reference from Exhibit 3.5 to the
Form SB-2)
3.6 Bylaws of the Registrant as amended through 1988. (Incorporated by
reference from Exhibit 3.2 of the 1988 10-K.)
3.7 Amendments to Bylaws of the Registrant as approved in February, 1989,
and October, 1991. (Incorporated by reference from Exhibit 3.7 to the
Form SB-2.)
*3.8 Certificate of Amendment of Articles of Incorporation of the
Registrant filed with the Secretary of State of California on December
27, 1994.
<PAGE>
9.1 Voting Trust Agreement between Union Bank and certain officers of the
Company dated February 25, 1991. (Incorporated by reference from
Exhibit 10.23 to the February, 1991 8-K.)
10.1 Recapitalization Agreement dated February 4, 1991, among the
Registrant, FSG, Inc., a wholly-owned subsidiary of the Registrant,
Union Bank, Fireman's Fund Insurance Company and certain investors of
the Registrant. (Incorporated by reference from Exhibit 10.20 to the
February, 1991 8-K.)
10.2 Standard Industrial Lease -- Net, as amended to date, between GOCO
REALTY FUND I, f/k/a Glenborough Operating Co. Ltd, and the
Registrant, as successor-in-interest to Quixote Corporation.
(Incorporated by reference from Exhibit 3.7 to the Form SB-2.)
10.3 Single-Tenant Building Lease dated May, 1993, between the Registrant
and the Irvine Company for the period May 1, 1993, through April 30,
1998. (Incorporated by reference from Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.)
10.4 Amended and Restated Placement Agency Agreement between the Registrant
and First Equity Capital Securities, Inc. (Incorporated by reference
from Exhibit 3.4 to the Amendment Number 1 of the Registrant's
Registration Statement on Form SB-2 filed October 7, 1994 (the
"Amendment No. 1 of the 1994 SB-2").)
10.5 Promissory Note for $950,000, dated January 21, 1994, by the
Registrant in favor of MicroProbe Corporation, including Subordination
Agreement, dated January 21, 1994, of MicroProbe Corporation in favor
of Silicon Valley Bank. (Incorporated by reference from Exhibit 10.1
to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 28, 1994 (the "January,
1994 8-K").)
10.6 Security Agreement, dated January 21, 1994, by the Registrant in favor
of MicroProbe Corporation. (Incorporated by reference from Exhibit
10.2 to the January, 1994 8-K.)
10.7 UCC-1 Financing Statement, dated January 21, 1994, by the Registrant
in favor of MicroProbe Corporation. (Incorporated by reference from
Exhibit 10.3 to the January, 1994 8-K.)
10.8 Supply Agreement, dated January 21, 1994, between the Registrant and
MicroProbe Corporation. (Incorporated by reference from Exhibit 10.6
to the January, 1994 8-K.)
10.9 License Agreement, dated January 21, 1994, between the Registrant and
MicroProbe Corporation. (Incorporated by reference from Exhibit 10.7
to the January, 1994 8-K.)
10.10 Loan and Security Agreement, dated January 21, 1994, between the
Registrant, Alton Instruments Corporation, and Source Scientific
Systems Inc., and Silicon Valley Bank. (Incorporated by reference from
Exhibit 10.10 to the January, 1994 8-K.)
<PAGE>
10.11 Schedule to Loan and Security Agreement, dated January 21, 1994,
between the Registrant, Alton Instruments Corporation, and Source
Scientific Systems, Inc., and Silicon Valley Bank. (Incorporated by
reference from Exhibit 10.11 to the January, 1994 8-K.)
10.12 Cross-Corporate Continuing Guaranty between the Registrant, Alton
Instruments Corporation and Source Scientific Systems, Inc., in favor
of Silicon Valley Bank. (Incorporated by reference from Exhibit 10.12
to the January, 1994 8-K.)
10.13 UCC-1 Financing Statement, dated January 21, 1994, by the Registrant
in favor of Silicon Valley Bank. (Incorporated by reference from
Exhibit 10.13 to the January, 1994 8-K.)
10.14 Standard Sub Lease dated May 2, 1994, between the Registrant and Spot
International, Inc., dba Spot Sport, for the period June 1, 1994
through April 30, 1998. (Incorporated by reference from Exhibit 10.14
to the Amendment Number 1 of the 1994 SB-2.)
10.15 Letter of Intent dated February 7, 1995, between the Company and
OnBase Technology, Inc., for the acquisition of the Lamda technology.
(Incorporated by reference from Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-QSB for the period ending December 31,
1994.)
10.16 Press release issued by the Registrant on February 8, 1995, indicating
the Company's change of name from Alton Group, Inc., to Source
Scientific, Inc., and the new trading symbol, "SSF". (Incorporated by
reference from Exhibit 99.1 to the Registrant's Quarterly Report on
Form 10-QSB for the period ending December 31, 1994.)
10.17 Purchase Price Adjustment, Royalty, and Release Agreement between the
Registrant and MicroProbe Corporation dated November 23, 1994.
(Incorporated by reference from Exhibit 10.1 to the Registrant's
Current Report on Form 8-K, dated November 30, 1994.)
10.18 Settlement Agreement and Mutual Release between the Registrant and The
Irvine Company dated November 7, 1994. (Incorporated by reference from
Exhibit 10.2 to the Registrant's Current Report on Form 8-K, dated
November 30, 1994.)
10.19 Factoring Agreement between the Registrant and Silicon Valley Bank,
dated February 2, 1995. (Incorporated by reference from Exhibit (a) to
the Registrant's Quarterly Report on Form 10-QSB, dated May 18, 1995.)
*10.20 Single-Tenant Standard Industrial Lease -- Net, dated January 30,
1995, between the Company and TR Brell CAL Corp for the period
February 1, 1995 through January 31, 2002.
<PAGE>
*10.21 Form of debenture with issuance of warrants, executed by the
Registrant for eight debentures issued in November, 1994 through
February, 1995.
*10.22 Form of debenture executed by the Registrant for six debentures issued
in May and June, 1995.
*10.23 Letter of Intent dated September 27, 1995, between the Company and
Biopool International, Inc.
regarding a proposed merger/combining of business interests.
*10.24 Promissory Note, dated September 29, 1995, by the Registrant in favor
of Biopool International, Inc.
17.1 Resignation of Jacob Y. Terner as a director, effective September 30,
1995. (Incorporated by reference from 8-K filed October 13, 1995.)
21.1 List of subsidiaries of the Registrant.
*23.1 Consent of Coopers & Lybrand L.L.P.
*27.0 Financial Data Schedule (included with EDGAR electronic filing of this
report with the Securities and Exchange Commission, and not attached
as an exhibit herein.)
- -------------------
* Items so noted are filed herewith.
REPORTS FILED ON FORM 8-K DURING THE
FOURTH QUARTER OF FISCAL YEAR
ENDED JUNE 30, 1995:
1. On June 12, 1995, the Registrant filed a current report on Form 8-K
disclosing a non-binding letter of intent dated May 26, 1995, with XCEL
Corporation, a diversified international electronics manufacturer
specializing in custom integrated date input and display subsystems and
components. A definitive merger agreement was contingent upon the
parties satisfying certain conditions and completion of respective due
diligence reviews. The Company also disclosed the temporary reduction
of the exercise price of the Company's outstanding A Warrants from
$0.60 to $0.18, commencing June 13, 1995 and terminating July 13, 1995.
2. On June 29, 1995, the Registrant filed a current report on Form 8-K
disclosing a non-binding letter of intent dated June 26, 1995, with
Lifestream Technologies, Inc. (OTC BB:LFST), a Nevada corporation. The
<PAGE>
terms of the letter would grant to the Company certain production
rights in professional and home care markets for Lifestream's
diagnostics product line. In addition, the Company may acquire 20% of
Lifestream, for an amount and type of consideration to be negotiated.
REPORTS FILED ON FORM 8-K SUBSEQUENT TO FISCAL YEAR
ENDED JUNE 30, 1995:
1. On September 30, 1995, the Registrant filed a current report on Form
8-K disclosing a non-binding letter of intent dated September 27, 1995,
for the acquisition of the Company.
2. On September 30, 1995, the Registrant filed a current report on Form
8-K announcing the acceptance of the resignation of Dr. Jacob Y. Terner
as a director of the Company, due to increased responsibilities of Dr.
Terner's other business interests. The current Board of Directors has
decided to not fill the vacancy immediately.
3. On November 8, 1995, the Registrant filed a current report on Form 8-K
disclosing an Agreement and Plan of Merger to be acquired by Biopool
International, Inc. The terms of the merger would result in the
exchange of Source Scientific common stock for shares of Biopool common
stock.
<PAGE>
In accordance with Section 13 or 15(d) of theExchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Source Scientific, Inc.
By: /s/ Richard A. Sullivan
--------------------------
Richard A. Sullivan
December 13, 1995 President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
SIGNATURES TITLES DATES
/s/ Robert B. Lyons Director and Chairman December 13, 1995
---------------------
Robert B. Lyons
/s/ Richard A. Sullivan Director, President and December 13, 1995
---------------------
Richard A. Sullivan Chief Executive Officer
/s/ John A. Karsten Director December 13, 1995
---------------------
John A. Karsten
/s/ Susan L. Preston Director of Legal Affairs December 13, 1995
--------------------- Director
Susan L. Preston
Director December 13, 1995
---------------------
Joseph F. Caligiuri
/s/ Mokhtar A.Shawky Chief Financial Officer December 13, 1995
--------------------- Principal Financial Officer,
Mokhtar A. Shawky and Principal Accounting Officer
EXHIBIT 3.8
Certificate Amendment to Articles
(Description: In upper right-hand corner of the certificate:
Stamp of the office of the Secretary of State of the State of
California, number A455790, "FILED"; "DEC 27, 1994"; Signature:
"Tony Miller"; Acting Secretary of State; Ref: 743922.)
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
Richard A. Sullivan and Catherine Curtis certify that:
1. They are the president and secretary, respectively, of Alton Group, Inc., a
California corporation.
2. Article ONE of the articles of incorporation of this corporation is amended
to read as follows:
The name of this corporation is:
SOURCE SCIENTIFIC, INC.
3. The foregoing amendment of articles of incorporation has been duly approved
by the board of directors.
4. The foregoing amendment of articles of incorporation has been duly approved
by the required vote of shareholders in accordance with Section 902 of the
Corporations Code. The total number of outstanding shares of the
corporation is 9,870,688. At a meeting of Shareholders held on December 14,
1994, 6,001,466 shares voted in favor on the amendment. The percentage vote
required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
December 23, 1994
/s/RICHARD A. SULLIVAN
------------------------------
Richard A. Sullivan, President
/s/CATHERINE CURTIS
------------------------------
Catherine Curtis, Secretary
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
January 30, 1995, is made by and between TR BRELL, CAL CORP, an Illinois
corporation ("Lessor"} and SOURCE SCIENTIFIC, INC., a California corporation
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 7390 Lincoln Way located in the County of Orange,
State of California, and generally described as Approximately 41,184 square feet
of space commonly known as 7390 Lincoln Way, Garden Grove, California, as shown
by diagonal lines on Exhibit "A" attached hereto. ("Premises"). (See Paragraph 2
for further provisions.)
1.3 Term: SEVEN (7) years and 0 months ("Original Term") commencing
February 1, 1995 ("Commencement Date") and ending January 31, 2002 ("Expiration
Date"). (See Paragraph 3 for further provisions.)
1.4 Early Possession: N/A. (See Paragraphs 3.2 and 3.3 for further
provisions.)
1.5 Base Rent: $26,185.00 per month ("Base Rent"), payable on the FIRST
day of each month commencing FEBRUARY 1, 1995. (See Addendum, Paragraph 49
and 50) (See Paragraph 4 for further provisions.)
[X] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 Base Rent Paid Upon Execution: $ N/A
1.7 Security Deposit:$29,678 ("Security Deposit"). (See Paragraph 5 for
further provisions.)
1.8 Permitted Use: MANUFACTURE OF MEDICAL, DIAGNOSTIC EQUIPMENT AND RELATED
OFFICE PURPOSES. (See Paragraph 6 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers")and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes): VOIT COMMERCIAL represents
[X] Lessee exclusively ("Lessee's Broker"). (See Paragraph 15 for further
provisions.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A _"Guarantor"). (See Paragraph 37 for further provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 48(a) through 64 and Exhibits A, B, C and D, all of which constitute
a part of this Lease.
2.Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual footage is more or less.
2.2 N/A
2.3 N/A.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it
presently is in occupancy of the Premises, is familiar with the Premises and
that it has been advised by the Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, compliance with Applicable
Law, (as defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such investigation
as it deems necessary with reference to such matters and assumes all
responsibility therefor as the same related to lessee's occupancy of the
Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to the said matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or affect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises and said warranties.
3. Term
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease, however,
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
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3.3 N/A.
4. Rent
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional moneys
with Lessor sufficient to maintain the same ratio between the Security Deposit
and the Base Rent as those amounts are specified in the Basic Provisions. Lessor
shall not be required to keep all or any part of the Security Deposit separate
from its general accounts. Lessor shall, at the expiration or earlier
termination of the term hereof and after Lessee has vacated the Premises and
performed all of its obligations hereunder through to and including with respect
to Lessee's surrender of the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. Use
6.1 Use. Lessee shall use and occupy the Premises only for the purposes set
forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or permit
the use of the Premises in a manner that creates waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to, neighboring premises
or properties.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (8) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3).. "Reportable Use" shall mean (I) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
"remises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy
of any statement, report, notice, registration, application, permit, business
plan, license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i))
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to Addendum Paragraph 52, 7.3 (Lessor's
<PAGE>
Obligations to repair), 9 (damage and destruction, and 14 (condemnation), Lessee
shall, at Lessee's sole cost and expense and at all times, keep the Premises and
every part thereof in good order, condition and repair, structural and
non-structural (whether or not such portion of the Premises requiring repairs,
or the means of repairing the same, are reasonably or readily accessible to
Lessee, and whether or not the need for such repairs occurs as a result of
Lessee's use, any prior use, the elements or the age of such portion of the
Premises), including, without limiting the generality of the foregoing, all
equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke detection
systems and equipment, fire hydrants, fixtures, walls (interior and exterior),
foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, about, or adjacent to the Premises. Lessee shall
not cause or permit any Hazardous Substance to be spilled or released in, on,
under or about the Premises (including through the plumbing or sanitary sewer
system) and shall promptly, at Lessee's expense, take all investigatory and/or
remedial action reasonably recommended, whether or not formally ordered or
required, for the cleanup of any contamination of, and for the maintenance,
security and/or monitoring of the Premises, the elements surrounding same, or
neighboring properties, that was caused or materially contributed to by Lessee,
or pertaining to or involving and Hazardous Substance and/or storage tank
brought onto the Premises by or for Lessee or under its control. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may
require Lessee to repaint the exterior of the buildings on the Premises as
reasonably required, but not more frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (I) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Except for the agreements of Lessor contained in
Addendum Paragraph 52 and Paragraphs 9 (relating to destruction of the Premises)
and 14 (relating to condemnation of the Premises), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever, to repair and
maintain the Premises, the improvements located thereon, or the equipment
therein, whether structural or non structural, all of which obligations are
intended to be that of the Lessee under Paragraph 7.1 hereof. It is the
intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance under Paragraph 7.1 hereof. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises. Lessee
and Lessor expressly waive the benefit of any statute now or hereafter in effect
to the extent it is inconsistent with the terms of this Lease with respect to,
or which affords Lessee the right to make repairs at the expense of Lessor or to
terminate this Lease by reasons of any needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (I) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (III) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requesting Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security Deposit with Lessor under Paragraph 36 hereof.
(c) Indemnification. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered as part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with all
of the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
Alterations and Utilities Installations. The obligation of Lessee shall include
the repair of any damage occasioned by the installation, maintenance or removal
of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or
Utility Installations, as well as the removal of any storage tank installed by
or for Lessee, and the removal, replacement, or remediation of any soil,
material or ground water contaminated by Lessee, all as may then be required by
Applicable Law and/or good service practice. Lessee's Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee subject to its
obligation to repair and restore the Premises per this lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay, as additional rent, for all insurance
required under this Paragraph 8 except to the extent of the cost attributable to
the liability insurance carried by Lessor in excess of $3,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an invoice
for any amount due.
8.2 Liability Insurance.
(a) Carried by Lessee. See Addendum Paragraph 54.
(b) Carried by Lessor. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
<PAGE>
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the Improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under Paragraph
8.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage, including coverage for any additional costs resulting
from debris removal and reasonable amounts of coverage for the enforcement of
any ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Premises required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c)/
(b) Rental Value. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger building,
or if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increased is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations. If Lessee is the Insuring Party, the policy carried by Lessee
under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility
Installations.
8.4 Lessee's Property Insurance. See Addendum Paragraph 54.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least A:X, or such other rating as may be required by a Lender having a lien on
the Premises, as set forth in the most current issue of "Best's Insurance Guide.
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in this Paragraph 8. Lessee shall cause to be
delivered to Lessor certified copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clauses as required by this Lease. No such policy
shall be cancelable or subject to modification except after thirty (30) days
prior written notice to Lessor. Lessee shall at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with evidence of renewals or
"Insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and change the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and
maintain the insurance required to be carried by the Insuring Party under this
Paragraph 8, the other Party may, but shall not be required to, procure and
maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor ("Waiving Party") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's gross negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, (collectively, "Lessor Parties") from and against any and all
claims, loss of rents and/or damages, costs, liens, judgments, penalties,
permits, attorney's and consultant's fees, expenses and/or liabilities arising
out of, involving, or in dealing with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees or invitees, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's part
to be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgment, and whether well founded or not. In case
any action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any such
claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliance, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or place, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions
(a) "Premises Partial Damage" (See Addendum Paragraph 56.
(b) N/A
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee Owned Alterations and Utility Installations, which was caused
by an event required to be covered by the insurance described in Paragraph
8.3(a), irrespective of any deductible amounts.
(d) N/A
(e) N/A
9.2 Partial Damage -- Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, (except as to the
deductible which is Lessee's responsibility), repair such damage (but not
Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations)
as soon as reasonably possible and this Lease shall continue in full force and
effect; provided, however, that Lessee shall, at Lessor's election, make the
repair of any damage or destruction the total cost to repair of which is $10,000
or less, and, in such event, Lessor shall make the insurance proceeds available
to Lessee on a reasonable basis for that purpose. Unless otherwise agreed,
Lessee shall in no event have any right to reimbursement from Lessor for any
funds contributed by Lessee to repair any such damage or destruction.
<PAGE>
9.3 Partial Damage -- Uninsured Loss. If a premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (I) repair
such damage (exclusive of Lessee's Trade Fixtures, or Lessee Owned Alterations
and Utility Installations) as soon as reasonably possible at Lessor's expense,
(except as to the deductible which is Lessee's responsibility) in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or will act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (I) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof ) needed to make the repairs. If Lessee duly exercises such option
during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at
Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial Damage
- -- Insured), whether or not Lessor or Lessee repairs or restores the Premises,
the Base Rent, Real Property Taxes, insurance premiums, and other charges, if
any, payable by Lessee hereunder for the period during which such damage, its
repair or the restoration continues (not to exceed the period for which rental
value insurance is required under Paragraph 8.3(b), shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and
other charges, if any, as aforesaid, all other obligations of Lessee hereunder
shall be performed by Lessee, and Lessee shall have no claim against Lessor for
any damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "Commence" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 N/A
9.8 Termination -- Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 Waive Statues. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay, as additional rent, the Real
Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during
the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be
made at least ten (10) days prior to the delinquency date of the applicable
installment. Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. If any such taxes to be paid by Lessee shall
cover any period of time prior to or after the expiration or earlier termination
of the term hereof, Lessee's share of such taxes shall be equitably prorated to
cover only the period of time within the tax fiscal year this Lease is in
effect, and Lessor shall reimburse Lessee for any overpayment after such
proration. If Lessee shall fail to pay any Real Property Taxes required by this
Lease to be paid by Lessee, Lessor shall have the right to pay the same, and
Lessee shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (I) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would be come delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's
liability shall be an equitable portion of the Real Property Taxes (or all of
the land and improvements included within the tax parcel assessed, such portion
to be determined by Lessor from the respective valuations
<PAGE>
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property, or, at Lessor's option, as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall contract and pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable portion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collective, "assignment")
or sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment of subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (I) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (8) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (I) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefore to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
proceeding the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The following
terms and conditions shall apply to any subletting by Lessee of all or any part
of the Premises and shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore, or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No subleases shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent. (e) Lessor shall
deliver a copy of any notice of Default or Breach by Lessee to the
sublessee, who shall have the right
to cure the Default of Lessee within the grace period, if any, specified in such
notice. The sublessee shall have a right of reimbursement and offset from and
against Lessee for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted
by Lessor in connection with a Lessee Default or Breach (as hereinafter
defined), $1,000.00 is a reasonable minimum sum per such occurrence for legal
services and costs in the preparation and service of a notice of Default, and
that Lessor may include the cost of such services and costs in said notice as
rent due and payable to cure said Default. A "Default" is defined as a failure
by the Lessee to observe, comply with or perform any of the terms, covenants,
conditions or rules applicable to Lessee under this Lease. A "Breach" is defined
<PAGE>
as the occurrence of any one or more of the following Defaults, and, where a
grace period for cure after notice is specified herein, the failure by Lessee to
cure such Default prior to the expiration of the applicable grace period, shall
entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same, or the
abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by Lessee
to make any payment of Base Rent or any other monetary payment required to be
made by Lessee hereunder, whether to Lessor or to a third party, as and when
due, the failure by Lessee to provide Lessor with reasonable evidence of
insurance or surety bond required under this Lease, or the failure of Lessee to
fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) days following
written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure by Lessee
to provide Lessor with reasonable written evidence (in duly executed original
form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3,
(ii) the inspection, maintenance and service contracts required under Paragraph
7.1(b), (iii) the rescission of an unauthorized assignment or subletting per
Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the
subordination or non-subordination of this lease per Paragraph 30, (vi) the
guaranty of the performance of Lessee's obligations under this Lease if required
under Paragraphs 1.11 and 37, (vii) the execution of any document requested
under Paragraph 42 (easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (10) days following written
notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or provisions of
this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be
observed, complied with or performed by Lessee, other than those described in
subparagraphs (a), (b) or (c), above, where such Default continues for a period
of thirty (30) days after written notice thereof by or on behalf of Lessor to
Lessee; provided, however, that if the nature of Lessee's Default is such that
more than thirty (30) days are reasonably required for its cure, then it shall
not be deemed to be a Breach of this Lease by Lessee if Lessee commences such
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(e) The occurrence of any of the following events: (i) the making by Lessee of
any general arrangement or assignment for the benefit of creditors; (ii)
Lessee's becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days; (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery by Lessor that any financial statement given to Lessor by
Lessee or any Guarantor of Lessee's obligations hereunder was materially false.
(g) If the performance of Lessee's obligations under this Lease is guaranteed:
(i) the death of a guarantor, (ii) the termination of a guarantor's liability
with respect to this Lease other than in accordance with the terms of such
guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy
filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's
breach of its guaranty obligation on an anticipatory breach basis, and Lessee's
failure, within sixty (60) days following written notice by or on behalf of
Lessor to Lessee of any such event, to provide Lessor with written alternative
assurance or security, which, when coupled with the then existing resources of
Lessee, equals or exceeds the combined financial resources of Lessee and the
guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of
Lessee under this Lease, within ten (10) days after written notice to Lessee (or
in case of an emergency, without notice), Lessor may at its option (but without
obligation to do so), perform such duty or obligation on Lessee's behalf,
including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful means,
in which case this Lease and the term hereof shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee: (i) the worth at the time of the award
of the unpaid rent which had been earned at the time of termination; (ii) the
worth at the time of award of the amount by which the unpaid rent which would
have been earned after termination until the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided;
(iii) the worth at the time of award of the amount by which the unpaid rent for
the balance of the term after the time of award exceeds the amount of such
rental loss that the Lessee proves could be reasonably avoided; and (iv) any
other amount necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform its obligations under this Lease or
which in the ordinary course of things would be likely to result therefrom,
including but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of the leasing commission
paid by Lessor applicable to the unexpired term of this Lease. The worth at the
time of award of the amount referred to in provision (iii) of the prior sentence
shall be computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve therein the right to recover all or any part thereof in a separate suit
for such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two such grace periods
shall constitute both an unlawful detainer and a Breach of this Lease entitling
Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in California
under California Civil Code ss. 1951.4) after Lessee's Breach and abandonment
and recover the rent as it becomes due, provided Lessee has the right to sublet
or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for
the limitations on assignment and subletting which limitations Lessee and Lessor
agree are reasonable. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver to protect the Lessor's interest
under the Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the laws
or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for free
or abated rent or other charges applicable to the Premises, or for the giving or
paying by Lessor to or for Lessee of any cash or other bonus, inducement or
consideration for Lessee's entering into this Lease, all of which concessions
are hereinafter referred to as "Inducement Provisions," shall be deemed
conditioned upon Lessee's full and faithful performance of all of the terms,
covenants and conditions of this Lease to be performed or observed by Lessee
during the term hereof as the same may be extended. Upon the occurrence of a
Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless
Lessor fails within a reasonable time to perform an obligation required to be
performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time
shall in no event be less than thirty (30) days after receipt by Lessor, and by
the holders of any ground lease, mortgage or deed of trust covering the Premises
whose name and address shall have been furnished Lessee in writing for such
purpose, of written notice specifying wherein such obligation of Lessor has not
been performed; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days after such notice are reasonably required
for its performance, then Lessor shall not be in breach of this Lease if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
<PAGE>
possession, whichever first occurs. (If all or a portion of the Premises are
taken by condemnation and Lessee is therefore unable to continue to operate
Lessee's business from the Premises, Lessee may, at Lessee's option, to be
exercised in writing within ten (10) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice, within ten (10)
days after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If Lessee
does not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in the same proportion as the
rentable floor area of the Premises taken bears to the total rentable floor area
of the building located on the Premises. No reduction of Base Rent shall occur
if the only portion of the Premises taken is land on which there is no building.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures . In the event that this Lease
is not terminated by reason of such condemnation, Lessor shall to the extent of
its net severance damages received, over and above the legal and other expenses
incurred by Lessor in the condemnation matter, repair any damage to the Premises
caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair. Lessee waives any and all rights it might otherwise have
under Section 1265.130 of the California Code of Civil Procedure to terminate
this Lease as a result of any taking.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this lease.
15.2 N/A
15.3 N/A
15.4 N/A
15.5 Lessee and Lessor each represent and warrant to the other that it has had
no dealings with any person, firm, broker or finder (other than the Brokers, if
any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. Lessee
and Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor
and Lessee hereby consent to and approve all agency relationships, including any
dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days after written
notice from the other Party (the "Requesting Party") execute, acknowledge and
deliver to the Requesting Party a statement in writing in form attached hereto
as Exhibit "D", plus such additional information, confirmation and/or statements
as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires
to finance, refinance, or sell the Premises, any part thereof, or the building
of which the Premises are a part, Lessee and all Guarantors of Lessee's
performance hereunder shall deliver to any potential lender or purchaser
designated by Lessor such financial statements of Lessee and such Guarantors as
may be reasonably required by such lender or purchaser, including but not
limited to Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises, or, if this is
a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceed the maximum rate allowed by law, in addition to the late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in writing and may
be delivered in person (by hand or by messenger or courier service) or may be
sent by regular, certified or registered mail or U.S. Postal Service Express
Mail, with postage prepaid, or by facsimile transmission, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording Neither Lessor nor Lessee shall record this Lease or a short
form memorandum of this Lease.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. See Addendum.
<PAGE>
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be subject
and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions
of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership; (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent. 30.3 Non-Disturbance. With respect
to Security Devices entered into by Lessor after the execution of this Lease,
Lessee's subordination of this Lease shall be subject to receiving assurance (a
"non-disturbance agreement") from the Lender that Lessee's possession and this
Lease, including any options to extend the term hereof, will not be disturbed so
long as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. Attorney's Fees. If any Party brings an action or proceeding to enforce the
terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorney's fees. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding is
pursued to decision or judgment. The term, "Prevailing Party" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorney's fees
award shall not be computed in accordance with any court fee schedule, but shall
be such as to fully reimburse all attorney's fees reasonably incurred. Lessor
shall be entitled to attorney's fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. See Addendum
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein,
wherever in this Lease the consent of a Party is required to an act by or for
the other Party, such consent shall not be unreasonably withheld or delayed.
Lessor's actual reasonable costs and expenses (including but not limited to
architects', attorneys', engineers' or other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent
pertaining to this Lease or the Premises, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. Subject to Paragraph 12.2(e)
(applicable to assignment or subletting), Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with Lessor
an amount of money (in addition to the Security Deposit held under Paragraph 5)
reasonably calculated by Lessor to represent the cost Lessor will incur in
considering and responding to Lessee's request. Except as otherwise provided,
any unused portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act, assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent. (b) All conditions to
Lessor's consent authorized by this Lease are acknowledged by Lessee as being
reasonable. The failure to specify herein any particular condition to Lessor's
consent shall not preclude the imposition by Lessor at the time of consent of
such further or other conditions as are then reasonable with reference to the
particular matter for which consent is being given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the
form of the guaranty to be executed by each such Guarantor shall be in the
provided by Lessor, and each said Guarantor shall have the same obligations as
Lessee under this Lease, including but not limited to the obligation to provide
the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall
constitute a Default of the Lessee under this Lease if any such Guarantor fails
or refuses, upon reasonable request by Lessor to give: (a) evidence of the due
execution of the guaranty called for by this Lease, including the authority of
the Guarantor (and of the party signing on Guarantor's behalf) to obligate such
Guarantor on said guaranty, and including in the case of a corporate Guarantor,
a certified copy of a resolution of its board of directors authorizing the
making of such guaranty, together with a certificate of incumbency showing the
signature of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this
Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
<PAGE>
39.3 Multiple Options. In the event that Lessee has any Multiple Options to
extend or renew this Lease, a later Option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1, whether or not the Defaults
are cured, during the twelve (12) month period immediately preceding the
exercise of the Option.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall terminate and
be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee do not materially impede Lessee's access to and from the Premises and do
not reduce Lessee's parking capacity to less than four (4) spaces per 1000
square feet of the Premises. Lessee agrees to sign , within five (5) days of
request, any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions. 43. Performance Under Protest.
If at any time a dispute shall arise as to any amount or sum of money to be paid
by one Party to the other under the provisions hereof, the Party against whom
the obligation to pay the money is asserted shall have the right to make payment
"under protest" and such payment shall not be regarded as a voluntary payment
and there shall survive the right on the part of said Party to institute suit
for recovery of such sum. If it shall be adjudged that there was no legal
obligation on the part of said Party to pay such sum or any part thereof, said
Party shall be entitled to recover such sum or so much thereof as it was not
legally required to pay under the provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY AS THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND
STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS
TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS
LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
The Parties hereto have executed this Lease at the place and on the dates
specified above to their respective signatures.
Executed at: Garden Grove, Calif. Executed at: Garden Grove, Calif.
on: 7/11/95 on: 5/26/95
By LESSOR: By LESSEE:
TR BRELL CAL CORP, An Illinois corp. SOURCE SCIENTIFIC, INC., A California
corporation
By: KOLL MANAGEMENT SERVICES, INC., By: /S/Richard A. Sullivan
Delaware corporation, its agent Name Printed: Richard A. Sullivan
By: /S/Julie Groot Title: President and CEO
Name Printed: Julie Groot By:
Title: Senior Manager Name Printed:
By: /S/Michael E. Meyer Title:
Name Printed: Michael E. Meyer Address: 7390 Lincoln Way,
Title: Vice President Garden Grove, California 92641
Address: 12832 Valley View Street,
Suite 106, Garden Grove
California 92645
Telephone: (714) 891-0707 Telephone: (714) 891-9001
Facsimile: (714) 895-5553 Facsimile: (714) 891-1229
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa
Street, Suite M-1, Los Angeles, California 90071. (213) 687-8777. Fax No. (213)
687-8616
<PAGE>
ADDENDUM TO STANDARD
INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE (NET)
BY AND BETWEEN
TR BRELL, CAL CORP, AN ILLINOIS CORPORATION ("LESSOR"),
AND
SOURCE SCIENTIFIC SYSTEMS, INC., A DELAWARE CORPORATION ("LESSEE")
The promises, covenants agreements and declarations made and
set forth herein are intended to and shall have the same force and effect as if
set forth at length in the body of the Lease to which this Addendum is attached
(the "Lease"). To the extent that the provisions of this Addendum are
inconsistent with the terms and conditions of the Lease, the terms of this
Addendum shall control.
49(a). Paragraph 1.7 (Security Deposit). Lessor acknowledges
that Lessor presently holds the Security Deposit referenced in Paragraph 1.7
under Lessee's existing lease which will continue to be held by Lessor pursuant
to the terms of this Lease.
49. Paragraph 4.1 (Base Rent). The Base Rent shall be
increased effective as of August 1, 1997 to $29,13 1.00 per month and increased
again effective as of February 1, 2000 to $32,460.00. Lessor hereby grants
Lessee six (6) months of one-half (1/2) rent for the months of February through
July of 1995.
50. Paragraph 6.1 (Use). The following is hereby added to
paragraph 6. 1.
"Lessee shall not do anything or suffer anything to be done in
or about the Premises which will in any way conflict with any law,
statute, ordinance or other governmental rule, regulation or
requirement now in force or which may hereafter be enacted or
promulgated. Should any standard or regulation now or hereafter be
imposed on Lessor or Lessee by a State, federal or local governmental
body charged with the establishment, regulation and enforcement of
occupational, health or safety standards for employers, employees,
lessors or lessees, then, except as otherwise specifically set forth in
the Lease, Lessee agrees, at its sole cost and expense, to comply
promptly with such standards or regulations."
51. Paragraph 6.3 (Lessee's Compliance with Law). The
following language is hereby added to Paragraph 6.3:
"In addition to the general obligation of Lessee to comply
with laws and without limitation thereof, Lessee shall comply in all
respects with Title III of the Americans with Disabilities Act of 1990
(the "ADA") as respects Lessee's use of, or alteration to, the Premises
and Lessor shall not be liable to Lessee, nor shall this Lease be
affected in any way, by reason of any moratorium, initiative,
referendum, statute, regulation or other governmental decree or action
which could in any manner prevent or limit the parking rights of Lessee
hereunder. Any governmental charges or surcharges or other monetary
obligations imposed relative to parking rights with respect to the
Premises shall be considered assessments and shall be payable by Lessee
under the provisions of Paragraph 10 of the Lease. Lessor shall be
responsible for compliance with the ADA if it is required with respect
to the exterior of the Premises or the structure of the Building, and
such compliance does not relate to Lessee's specific use of the
Premises. "
52. Paragraph 7.1 (Lessee's Obligations); Paragraph 7-2
(Lessor's Obligations). In connection with Paragraph 7.1 of the Lease, all
repairs and maintenance of the Premises by Lessee as required under the Lease
shall be performed in a first class manner by contractors and other personnel
reasonably approved by Lessor, shall be performed in accordance with a repair
and maintenance plan reasonably approved by Lessor, and shall comply with
guidelines and shall meet such standards of quality as may be reasonably
established by Lessor from time to time during the Term of the Lease, including,
without limitation, providing Lessor with copies of all permits obtained by
Lessee and "as-built" drawings of such work performed by Lessee.
<PAGE>
In the event Lessor determines, at any time during the term of the Lease, that
Lessee's repair and maintenance of the Premises is not meeting the standards
therefor established by Lessor, then Lessor may, but shall not be obligated to,
undertake such repair and maintenance obligations of Lessee on behalf of Lessee,
and all costs and expenses incurred by Lessor in the performance of such repair
and maintenance shall constitute additional rent under this I-ease, and shall be
payable by Lessee to Lessor within five (5) (lays of demand.
Notwithstanding anything to the contrary contained in
Paragraphs 7.1 or 7.2, in addition to Monthly Base Rent, throughout the Term of
this Lease, Lessee agrees to pay Lessor as additional rent in accordance with
the terms of this Paragraph certain operating expenses of the Building
("Operating Expenses") consisting of all Real Property Taxes pursuant to
Paragraph 10 of the Lease, the cost of all insurance premiums for property and
liability insurance maintained by Lessor pursuant to Paragraph 8 of the Lease,
and costs and expenses incurred by Lessor with respect to landscaping, repair
and maintenance of the Building exterior, and other exterior portions of the
Premises, parking areas, including resurfacing, repairing and restriping,
walkways, sanitary sewer costs, and trash disposal, including costs and
maintenance of refuse receptacles, costs of repair and replacement of
directional signs and markers, car stops, exterior lighting and other utilities,
reasonable depreciation on improvements, machinery, and equipment used in
connection with such maintenance and any other costs and expenses incurred by
Lessor with respect to the maintenance and repair of the Building and exterior
portions of the Premises.
(a) Estimate Statement. On or about March 1st of each
calendar year during the Term of this Lease, Lessor will endeavor to
deliver to Lessee a statement ("Estimate Statement") wherein Lessor
will estimate the Operating Expenses for tile then current calendar
year. Lessee agrees to pay Lessor, as "Additional Rent", one-twelfth
(1/12th) of such Operating Expenses each month thereafter, beginning
with tile next installment of rent due, until such time as Lessor
issues a revised Estimate Statement or the Estimate Statement for the
succeeding calendar year; except that, concurrently with the regular
monthly rent payment next due following the receipt of each such
Estimate Statement, Lessee agrees to pay Lessor an amount equal to one
monthly installment of such Operating Expenses (less any applicable
Operating Expenses already paid) multiplied by the number of months
from January, in the current calendar year, to the month of such rent
payment next due, all months inclusive. If at any time during the Term
of this Lease, but not more often than quarterly, Lessor reasonably
determines that Operating Expenses for the current calendar year will
be greater than the amount set forth in the then current Estimate
Statement, Lessor may issue a revised Estimate Statement and Lessee
agrees to pay Lessor, within ten (10) days of receipt of the revised
Estimate Statement, the difference between the amount owed by Lessee
under such revised Estimate Statement and the amount owed by Lessee
under the original Estimate Statement for the portion of the then
current calendar year which has expired. Thereafter Lessee agrees to
pay Operating Expenses based on such revised Estimate Statement until
Lessee receives the next calendar year's Estimate Statement or a new
revised Estimate Statement for the current calendar year.
(b) Actual Statement. By March I st of each calendar
year during the Term of this Lease, Lessor will also endeavor to
deliver to Lessee a statement ("Actual Statement") which states the
actual Operating Expenses for the preceding calendar year. If the
Actual Statement reveals that actual Operating Expenses are more than
the total Additional Rent paid by Lessee for Operating Expenses on
account of the preceding calendar year, Lessee agrees to pay Lessor the
difference in a lump sum within ten (10) days of receipt of the Actual
Statement. If the Actual Statement reveals that actual Operating
Expenses are less than the Additional Rent paid by Lessee for Operating
Expenses on account of the preceding calendar year, Lessor will credit
any overpayment toward the next monthly installment(s) of Operating
Expenses due under this Lease.
Notwithstanding anything to the contrary contained in
Paragraphs 7.1 or 7.2, Lessee agrees to maintain and repair the roof of the
Building, at Lessee's sole cost and expense. If the roof needs to be replaced
(as determined below, Lessor shall cause such work to be performed, but Lessee
shall be responsible for reimbursing Lessor for a portion of the cost
("Replacement Cost") incurred by Lessor for replacing the roof with a roof of a
quality consistent with the structure and quality of the Building and which is
fully warranted for a minimum of 15 years, based on the following schedule:
<PAGE>
(i) if the roof is replaced during months I through 28 of the new Term, then
Lessee shall be responsible for 25% of the Replacement Cost, or (ii) if the roof
is replaced during months 29 through 56 of the new Term, then Lessee shall be
responsible for 45% of the Replacement Cost, or (iii) if the roof is replaced
during months 57 through 84 of the new Term, then Lessee shall be responsible
for 65% of the Replacement Cost. The roof will "need" to be replaced if two
independent roofing consultants, one selected by Lessor and the other selected
by Lessee, advise Lessor that replacement of the roof is recommended over
further repair in order for the roof to function properly. If a third roofing
consultant is necessary because of disagreement in the need for roof replacement
between the first two consultants, then Lessor and Lessee shall cause their
respective consultants to agree upon and mutually select a third roofing
consultant whose determination shall be conclusive. If the roof needs to be
replaced because of damage caused by Lessee or its agents, employees,
contractors or invitees, then Lessee will be responsible for the entire
Replacement Cost. Lessee shall pay its share of the Replacement Cost
concurrently with Lessor's payment of the balance of the Replacement Cost in
accordance with the terms of Lessor's contract with the roof installation
company.
53. Paragraph 7.3 (Utility Installations; Trade Fixtures-
Alterations). The following is added to Paragraph 7.3 of the Lease.
"(d) Security. In connection with Paragraph 7.3 of the Lease,
Lessee shall, at Lessee's sole cost and expense, take such security
measures as Lessee deems appropriate or necessary in order to secure
the Premises and portions thereof in accordance with such requirements
as may be imposed by contractors of Lessee; provided, however, in the
event any such security measures require any alterations of or
additions to the Premises, any such alterations and/or additions shall
be subject to the terms of Paragraphs 7.3 and 7.4 of the Lease."
54. Paragraph 8.2 (Liability Insurance). Paragraph 8.2(a)
of the Lease has been intentionally omitted, and is hereby replaced with the
following:
"(a) Carried by Lessee. Lessee agrees, at its own expense, to maintain
in full force and effect at all times during the term of this Lease, as
it may be extended, for the protection of Lessee and Lessor, as their
interests may appear, policies of insurance issued by a carrier or
carriers acceptable to Lessor and with a rating consistent with the
requirements of Paragraph 8.5 of the Lease, which afford the following
coverages: (i) Worker's compensation: statutory limits; (ii) Employer's
liability: not less than Five Hundred Thousand Dollars ($500,000.00);
(iii) Comprehensive general liability insurance including blanket
contractual liability, broad form property damage, personal injury
(including employees), owned/non-owned auto liability, pollution and
hazardous materials liability, completed operations, products
liability, and fire damage: not less than Three million Dollars
($3,000,000.00) with a combined single limit for both bodily injury and
property damage and naming Lessor, Lessor's agents and Lessor's
mortgagees as additional insureds as their respective interests may
appear; (iv) except to the extent covered by the insurance for the
Premises and leasehold improvements required to be carried by the
Insuring Party under Paragraph 8.3(a) of the Lease, "All Risk" property
insurance (including, without limitation, vandalism, malicious
mischief, water damage, earthquake, damage from pollution and hazardous
materials, course of construction endorsement, sprinkler leakage
endorsement, debris removal and demolition coverage, and boiler and
machinery coverage) on the Premises and the leasehold improvements,
Utility Installations, Alterations, Trade Fixtures, and Lessee's
personal property located on or in the Premises, which shall be in a
form providing coverage comparable to the coverage provided in the
standard ISO All-Risk form and in an amount equal to the full amount of
the replacement cost of the insured items, as the same may from time to
time increase as a result of inflation or otherwise; and (v) boiler and
machinery insurance, including, but not limited to, steam pipes,
pressure pipes, condensation return pipes and other pressure vessels
and HVAC equipment, with limits per accident of not less than the
replacement cost of all leasehold improvements, Utility Installations
(except to the extent covered by the insurance for the Premises and
leasehold improvements required to be carried by the Insuring Party
<PAGE>
under Paragraph 8.3 (a) of the Lease), Alterations, Trade Fixtures, and
Lessee's personal property and of all boilers, pressure valves, HVAC
equipment and miscellaneous electrical and mechanical equipment in the
Premises, all with deductibles not to exceed $1,000.00 per occurrence.
The insurance policies set forth above shall not contain any
intra-insured exclusions as between insured persons or organizations,
but shall include coverage for liability assumed under the Lease as an
"insured contract" for the performance of Lessee's indemnity
obligations under the Lease. The limits of said insurance required by
the Lease or as carried by Lessee shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor whose
insurance shall be considered excess insurance only."
55. Paragraph h 9 (Damage or Destruction). The following
definitions shall apply for purposes of Paragraphs 9. 1 (a) and 9. 1 (b).
(a) "Premises Partial Damage" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair time for which, as reasonably determined by
Lessor, will not exceed one hundred eighty (180) days.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair time for which, as reasonably
determined by Lessor, will exceed one hundred eighty (I 80) days.
Notwithstanding anything to the contrary set forth in
Paragraph 9 of the Lease, Lessee hereby waives the provisions of California
Civil Code Sections 1932 and 1933, and any successor sections and any other
statutes which are inconsistent with the provisions of the Lease and which
relate to the termination of leases when leased property is destroyed, and agree
that such event shall be governed by the terms of the Lease.
56. Paragraph 13.2 (Remedies). The following language is
hereby added to Paragraph 13.2:
"(e) Re-enter the Premises at its option without declaring the
Lease term ended, and re-let the whole or any part thereof for the
account of Lessee, on such terms and conditions and at such rent as
Lessor may deem proper, collecting such rent and applying it on the
amount due from Lessee hereunder and on the expense of such reletting
and on any other damage or expense so sustained by Lessor, or on any
such item or items, recovering from Lessee the difference between the
proceeds of such re-letting and the amount of the rentals reserved
hereunder, and any such damage or expense from time to time, which said
sum Lessee agrees to pay upon demand. Lessor shall not, by any re-entry
or other act, be deemed to have terminated this Lease or the liability
of Lessee for the total rental hereunder (net of re-let recovery as
specified above), or any installment thereof then due of thereafter
accruing, or for damages, unless Lessor shall notify Lessee, in
writing, that Lessor has so elected to terminate the Lease. "
57. Paragraph 17 (Lessor's Liability). The following is
added to Paragraph 17:
"Lessee acknowledges and agrees that the obligations of Lessor
under this Lease do not constitute personal obligations of the
individual partners, directors, officers or shareholders of Lessor, and
Lessee shall look to the real estate that is the subject of this Lease
and to any insurance proceeds received from insurance policies required
to be carried under this Lease, and to no other assets of Lessor for
the satisfaction of any liability with respect to this Lease, and will
not seek recourse against the individual partners, directors, officers
or shareholders of Lessor or any of their personal assets for such
satisfaction."
58. Paragraph 24 (Waivers). The following language is
hereby added to Paragraph 24:
<PAGE>
"No payment by Lessee or receipt by Lessor of a lesser amount
than the fixed rent payment herein stipulated shall be deemed to be
other than on account of the earliest stipulated rent, nor shall any
endorsement or statement on any check or any letter accompanying any
check or payment as rent be deemed an accord and satisfaction, and
Lessor may accept such check or payment without prejudice to Lessor's
right to recover the balance of such rent or pursue any other remedy in
this Lease provided."
59. Paragraph 26 (Holding Over). The following language
is hereby added to Paragraph 26:
"If Lessee remains in possession of all or any part of the
Premises after the expiration of the Term of the Lease without Lessor's
written consent (which may be withheld at Lessor's sole and absolute
discretion), Lessee shall become a Lessee at sufferance only and such
tenancy shall not constitute a renewal or extension for any further
term. In such event, Base Rent shall be increased to an amount equal to
one hundred fifty percent (I 5 0%) of the Base Rent payable during the
last month of the Term, and any other sums due hereunder shall be
payable in the amount and at the times specified in this Lease. Such
tenancy shall be subject to every other term, condition, and covenant
contained herein. The foregoing provisions of this Paragraph 26 are in
addition to and do not affect any rights of Lessor under the Lease or
as otherwise provided by law. If Lessee fails to surrender the Premises
upon the expiration of this Lease despite demand to do so by Lessor,
Lessee shall indemnify and hold Lessor harmless from all loss or
liability including, without limitation, any claim made by any
succeeding lessee founded on or resulting from such failure to
surrender."
60. Paragraph 30 (Subordination; Attormnent;
Non-Disbursement). With respect to Paragraph 30 of the Lease, neither Lessor nor
Lessee shall unreasonably withhold its consent to changes or amendments to the
Lease requested by any Lender of Lessor having a security interest in the
Premises or the Lease, so long as such changes do not alter the basic business
terms of the Lease or otherwise materially diminish any rights or materially
increase any obligation of the party from whom consent to such change or
amendment is requested. Notwithstanding any contrary provision of Paragraph 30.1
of the Lease, Lessee agrees to send by certified mail to any Lender whose
address has been furnished to Lessee, a copy of any notice of default served by
Lessee on Lessor, and if Lessor fails to cure such default within the time
provided for in the Lease, such Lenders shall have an additional thirty (30)
days to cure such default; provided, however, that if such default cannot
reasonably be cured within such thirty (30) day period, then such Lenders shall
have such additional time to cure the default as is reasonably necessary under
the circumstances, provided such Lenders commence the cure of such default
within said thirty (30) day period and diligently pursue the same to completion.
60(a). Paragraph 34 (Signs). Lessee will have no right to
install or maintain any Lessee identification signs. (or any other signs,
banners or other such displays) upon the Premises which may be visible from the
exterior of the Premises, except as (i) have been expressly approved by Lessor
'prior to the installation thereof, and (ii) are consistent and compatible with
(A) the restrictions contained in this Paragraph 60(a), (B) all governmental
regulations and requirements, (C) rules and regulations from time to time
promulgated by Lessor with respect to the Building, a current copy of which is
attached hereto as Exhibit "B", and (D) all private covenants and restrictions
now or hereafter of record affecting the Premises. All approved signs (the
"Building Sign"), if any, must be maintained, at the sole cost and expense of
Lessee, pursuant to a maintenance program approved and supervised by Lessor.
Upon the expiration or earlier termination of the Lease, Lessee, at Lessee's
sole cost and expense (subject to Lessor's supervision), will cause the Building
Sign to be removed and the Building to be restored to the condition existing
prior to the placement of such sign. If Lessee fails to remove such sign and
restore the Building as provided above within thirty (30) days following
Lessor's demand therefor, then Lessor may perform such work and all costs and
expenses incurred by Lessor in so performing such work will be reimbursed by
Lessee to Lessor within ten (10) days following Lessor's delivery to Lessee of
an invoice therefor. The sign rights hereinabove provided are personal to the
original Lessee executing this Lease and may not be assigned or transferred to,
or utilized by, any other person or entity.
<PAGE>
61. Net Lease. This Lease shall be deemed and construed to be
a "net lease" and except as herein otherwise expressly set forth Lessee shall
pay to Lessor, absolutely net throughout the Term of this Lease, the Base Rent
(as adjusted pursuant to Subparagraph 48(b) above), additional rent and other
payments hereunder, without abatement or setoff.
62. Option to Extend Term. Lessor hereby grants to Lessee one
(1) option ("Option to Extend") to extend the Term of this Lease for a period of
five (5) years ("Option Term"). The Option must be exercised if at all by
written notice ("Option to Extend Notice") delivered by Lessee to Lessor not
earlier than one hundred eighty (I 80) days nor later than ninety (90) days
prior to the end of the initial five (5) year Term. Further, the Option to
Extend shall not be deemed to be properly exercised if, as of the date of the
Option Notice and at the end of the initial five (5) year Term, Lessee is in
default under the Lease. In the event the initial five (5) year Term shall be
extended as provided in this Paragraph 62, then all of the terms, covenants and
conditions of the Lease shall remain unmodified and in full force and effect,
except for the payment of Monthly Basic Rent. Monthly Basic Rent shall be
adjusted as of the commencement date of the Option Term in accordance with the
"fair market rental rate" for the Premises determined as follows:
(a) The term "fair market rental rate" as used herein
will mean the annual amount per rentable square foot, projected (hiring
the relevant period, that a willing, comparable, non-equity tenant
(excluding sublease and assignment transactions) would pay, and a
willing, comparable landlord of a comparable industrial building
located in the vicinity of the Building would accept, at arm's length
(what Lessor is accepting in current transactions for the Building may
be considered), for space of comparable size, quality and floor height
as the leased area at issue taking into account the age, quality and
layout of the existing improvements in the leased area at issue and
taking into account items that professional real estate brokers
customarily consider, including, but not limited to, rental rates,
space availability, tenant size, tenant improvement allowances,
operating expenses, reduced rent, free rent and any other lease
concessions, if any, then being charged or granted by Lessor or the
lessors of such similar buildings. The fair market rental rate will be
an effective rate, not specifically including, but accounting for, the
appropriate economic concessions described above.
(b) If a determination of fair market rental rate is
required under this Lease, then Lessor will provide written notice of
Lessor's determination of the fair market rental rate not later than
thirty (30) days after the date upon which Lessee timely exercises the
right giving rise to the necessity for such fair market rental rate
determination. Lessee will have thirty (30) days ("Lessee's Review
Period") after receipt of Lessor's notice of the fair market rental
rate within which to accept such fair market rental rate or to
reasonably object thereto in writing. Lessee's failure to object to the
fair market rental rate submitted by Lessor in writing within Lessee's
Review Period will conclusively be deemed Lessee's approval and
acceptance thereof If Lessee reasonably objects to the fair market
rental rate submitted by Lessor within Lessee's Review Period, Lessor
and Lessee will attempt in good faith to agree upon such fair market
rental rate using their best good faith efforts. If Lessor and Lessee
fall to reach agreement on such fair market rental rate within fifteen
(I 5) days following the expiration of Lessee's Review Period (the
"Outside Agreement Date"), then each party's determination will be
submitted to appraisal in accordance with the provisions below.
(c) (i) Lessor and Lessee will each appoint one (1)
independent appraiser who by profession must be a real estate broker
who has been active over the five (5) year period ending on the date of
such appointment in the leasing of industrial properties located in the
vicinity of the Building. The determination of the appraisers will be
limited solely to the issue of whether Lessor's or Lessee's submitted
fair market rental rate for the leased area at issue is the closest to
the actual fair market rental rate for such area as determined by the
appraisers, taking into account the requirements specified in
Subparagraphs (a) and (b) above. Each such appraiser will be appointed
within fifteen (15) days after the Outside Agreement Date.
<PAGE>
(ii) The two (2) appraisers so appointed will within
fifteen (15) days of the date of the appointment of the last appointed
appraiser agree upon and appoint a third appraiser who shall be
qualified under the same criteria set forth hereinabove for
qualification of the initial two (2) appraisers.
(iii) The three (3) appraisers will within thirty
(30) days of the appointment of the third appraiser reach a decision as
to whether the parties will use Lessor's or Lessee's submitted fair
market rental rate, and will notify Lessor and Lessee thereof
(iv) The decision of the majority of the three (3)
appraisers will be binding upon Lessor and Lessee. If either Lessor or
Lessee fails to appoint an appraiser within the time period specified
in Subparagraph (c)(i) hereinabove, the appraiser appointed by one of
them will, within thirty (30) days following the date on which the
party failing to appoint an appraiser could have last appointed such
appraiser, reach a decision based upon the procedures set forth above
(i.e., by selecting either Lessor's or Lessee's submitted fair market
rental rate) and notify Lessor and Lessee thereof, and such appraiser's
decision will be binding upon Lessor and Lessee.
(v) If the two (2) appraisers fail to agree upon and
timely appoint a third appraiser, both appraisers will be dismissed and
the matter to be decided will be forthwith submitted to arbitration
under the provisions of the American Arbitration Association based upon
the procedures set forth above (i.e. by selecting either Lessor's or
Lessee's submitted fair market rental rate).
(vi) The cost of appraisal (and, if necessary,
arbitration) will be shared by Lessor and Lessee equally.
(vii) If the process described in Subparagraph (b)
above and this Subparagraph (c) has not resulted in a selection of
Lessor's or Lessee's fair market rental rate by the commencement of the
applicable lease term, then the fair market rental rate estimated by
Lessor will be used until the appraiser(s) reach a decision with an
appropriate rental credit and other adjustments for any overpayments of
Monthly Base Rent or other amounts if the appraisers select Lessee's
estimate of the fair market rental rate.
63. Tenant Improvements. Lessor shall install, at Lessor's
sole cost and expense, (i) one hundred and twenty (120) square yards of Oxford
Place carpet (with static control), over a new 3/811 commercial pad, throughout
the reception, stairway and top landing area only, and (ii) a 4" Roppe base.
64. Miscellaneous.
64.l Waiver of Trial By Jury. IN ANY ACTION OR
PROCEEDING ARISING HEREFROM, LESSEE HEREBY CONSENTS TO (I) THE
JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA,
(11) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND
(III) IN THE INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY.
64.2 Rules and Regulations. Lessee shall faithfully
observe and comply with the rules and regulations that Lessor shall
from time to time promulgate. Lessor reserves the right from time to
time in its discretion to make all reasonable additions and
modifications to the rules and regulations. Any additions and
modifications to the rules and regulations shall be binding on Lessee
when delivered to Lessee. Lessor's current rules and regulations are
attached hereto as Exhibit B.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Addendum as
of the day and year of execution of the Lease.
"LESSOR TR BRELL CAL CORP,
an Illinois corporation
By: Koll Management Services, Inc., a Delaware
corporation, Its authorized agent
By: /S/June Groot /S/Michael E. Meyer
Name: June Groot Michael E. Meyer
Title: Senior Manager Vice President
"LESSEE" SOURCE SCIENTIFIC, INC.
a California corporation
By: /S/Richard A. Sullivan
Its: President/CEO
<PAGE>
Exhibit "A"
7390 Lincoln Way
Size
Ground Floor: 27,165 square feet
Mezzanine: 14,019 square feet
Total: 41,184 square feet
Land area: 2.39 acres
Parking: 162 spaces (Four per 1,000 square feet)
Building Features
Exterior: Heat absorbing Greylite 14 glass
Brick Paved entry
Extensive landscaping
Lobby: Soaring two-story glass lobby with skylight
Herculite doors
Warehouse: Six ventilated skylights
40' by 40' column spacing
Ceiling Height: Ground floor office: 10' under drop ceiling
Assembly/Warehouse: Minimum 23' clearance
Power: 1,000 Amp., 277/480 volt, 3 phase
Expansion capability
Sprinklers: Complete sprinkler protection
Floor Loading: 100 lbs. per square foot live load on second floor
Truck Access: Two 12' by 14' ground level doors
One 20' by 14' door with double truck well capacity
(Diagram of Floor Plan of the exterior walls of the building)
<PAGE>
EXHIBIT "B"
STANDARD INDUSTRIAL LEASE
[Single Tenant - Triple Net]
RULES AND REGULATIONS
A. General Rules and Regulations. The following rules and regulations
govern the use of the Building and the Common Areas. Tenant will be bound by
such rules and regulations and agrees to cause Tenant's Authorized Users, its
employees, subtenants, assignees, contractors, suppliers, customers and invitees
to observe the same.
1. Except as specifically provided in the Lease to which these
Rules and Regulations are attached, no sign, placard, picture, advertisement,
name or notice may be installed or displayed on any part of the outside or
inside of the Building without the prior written consent of Landlord. Landlord
will have the right to remove, at Tenant's expense and without notice, any sign
installed or displayed in violation of this rule. All approved signs or
lettering on doors and walls are to be printed, painted, affixed or inscribed at
the expense of Tenant and under the direction of Landlord by a person or company
designated or approved by Landlord.
2. If Landlord objects in writing to any curtains, blinds,
shades, screens or hanging plants or other similar objects attached to or used
in connection with any window or door of the Premises, or placed on any
windowsill, which is visible from the exterior of the Premises, Tenant will
immediately discontinue such use. Tenant agrees not to place anything against or
near glass partitions or doors or windows which may appear unsightly from
outside the Premises.
3. Tenant will not obstruct any sidewalks, passages, exits or
entrances of the Development. The sidewalks, passages, exits and entrances are
not open to the general public, but are open, subject to reasonable regulations,
to Tenant's business invitees. Landlord will in all cases retain the right to
control and prevent access thereto of all persons whose presence in the
reasonable judgment of Landlord would be prejudicial to the safety, character,
reputation and interest of the Development and its tenants, provided that
nothing herein contained will be construed to prevent such access to persons
with whom any tenant normally deals in the ordinary course of its business,
unless such persons are engaged in illegal or unlawful activities. No tenant and
no employee or invitee of any tenant will go upon the roof of the Building.
4. Landlord expressly reserves the right to absolutely prohibit
solicitation, canvassing, sales and displays of products, goods and wares in
all portions of the Development except for such activities as may be expressly
requested by a tenant and conducted solely within such requesting tenant's
premises. Landlord reserves the right to restrict and regulate the use of the
Common Areas of the Development by invitees of tenants providing services to
tenants on a periodic or daily basis including food and beverage vendors. Such
restrictions may include limitations on time, place, manner and duration of
access to a tenant's premises for such purposes.
5. Landlord reserves the right to require tenants to
periodically provide Landlord with a written list of any and all business
invitees which periodically or regularly provide goods and services to such
tenants at the premises. Landlord reserves the right to preclude all vendors
from entering or conducting business within the Development if such vendors
are not listed on a tenant's list of requested vendors.
6. Landlord reserves the right to prevent access to the
Development in case of invasion, mob, riot, public excitement or other
commotion by closing the doors or by other appropriate action.
7. All cleaning and janitorial services for the Development and
the Premises will be provided exclusively through Landlord, and except with
the written consent of Landlord, no person or persons other than those
approved by Landlord will be employed by Tenant or permitted to enter the
Development for the purpose of cleaning the same. Tenant will not cause any
unnecessary labor by carelessness or indifference to the good order and
cleanliness of the Premises.
8. Landlord will furnish Tenant, free of charge, with two keys
to each door lock in the Premises. Landlord may make a reasonable charge for any
additional keys. Tenant shall not make or have made additional keys, and Tenant
shall not alter any lock or install any new additional lock or bolt on any door
of the Premises. Tenant, upon the termination of its tenancy, will deliver to
EXHIBIT "B"
<PAGE>
Landlord the keys to all doors which have been furnished to Tenant, and in the
event of loss of any keys so fumished, will pay Landlord therefor.
9. If Tenant requires telegraphic, telephonic, burglar alarm,
satellite dishes, antennae or similar services, it will first obtain Landlord's
approval, and comply with, Landlord's reasonable rules and requirements
applicable to such services, which may include separate licensing by, and fees
paid to, Landlord.
10. No deliveries will be made which impede or interfere with
other tenants or the operation of the Building.
11. Tenant will not use or keep in the Premises any kerosene,
gasoline or inflammable or combustible fluid or material other than those
limited quantities necessary for the operation or maintenance of office
equipment. Tenant will not use or permit to be used in the Premises any foul or
noxious gas or substance, or permit or allow the Premises to be occupied or used
in a manner offensive or objectionable to Landlord or other occupants of the
Building by reason of noise, odors or vibrations, nor will Tenant bring into or
keep in or about the Premises any birds or animals.
12.Landlord reserves the right, exercisable without notice and
without liability to Tenant, to change the name and street address of the
Building. Without the written consent of Landlord, Tenant will not use the name
of the Building or the Development in connection with or in promoting or
advertising the business of Tenant except as Tenant's address.
13.The toilet rooms, toilets, urinals, wash bowls and other
apparatus will not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from any
violation of this rule will be borne by the tenant who, or whose employees or
invitees, break this rule.
14.Tenant will not sell, or permit the sale at retail of
newspapers, magazines, periodicals, theater tickets or any other goods or
merchandise to the general public in or on the Premises. Tenant will not make
any building-to-building solicitation of business from other tenants in the
Development. Tenant will not use the Premises for any business or activity other
than that specifically provided for in this Lease, Canvassing, soliciting and
distribution of handbills or any other written material, and peddling in the
Development are prohibited, and Tenant will cooperate with Landlord to prevent
such activities.
15. Tenant will not install any radio or television antenna,
loudspeaker, satellite dishes or other devices on the rooqs) or exterior walls
of the Building or the Development. Tenant will not interfere with radio or
television broadcasting or reception from or in the Development or elsewhere.
16. Except for the ordinary hanging of pictures and wall
decorations, Tenant will not mark, drive nails, screw or drill into the
partitions, woodwork or plaster or in any way deface the Premises or any part
thereof, except in accordance with the provisions of the Lease pertaining to
alterations. Landlord reserves the right to direct electricians as to where and
how telephone and telegraph wires are to be introduced to the Premises. Tenant
will not cut or bore holes for wires. Tenant will not affix any floor covering
to the floor of the Premises in any manner except as approved by Landlord.
Tenant shall repair any damage resulting from noncompliance with this rule.
17. Landlord reserves the right to exclude or expel from the
Development any person who, in Landlord's judgment, is intoxicated or under the
influence of liquor or drugs or who is in violation of any of the Rules and
Regulations of the Building.
18. Tenant will store all its trash and garbage within its
Premises or in other facilities provided by Landlord. Tenant will not place in
any trash box or receptacle any material which cannot be disposed of in the
ordinary and customary manner of trash and garbage disposal. All garbage and
refuse disposal is to be made in accordance wit,h directions issued from time to
time by Landlord.
19. The Premises will not be used for lodging nor shall the
Premises be used for any improper, immoral or objectionable purpose.
20. Tenant agrees to comply with all safety, fire protection and
evacuation procedures and regulations established by Landlord or any
governmental agency.
B-2
<PAGE>
21. Tenant assumes any and all responsibility for protecting its
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed.
22. Tenant shall use at Tenant's cost such pest extermination and
control contractor(s) as Landlord may direct and at such intervals as Landlord
may reasonably require.
23. To the extent Landlord reasonably deems it necessary to exer-
cise exclusive control over any portions of the Common Areas for the mutual
benefit of the tenants in the Development, Landlord may do so subject to
reasonable, non-discriminatory additional rules and regulations.
24. Tenant's requirements will be attended to only upon
appropriate application to Landlord's asset management office for the
Development by an authorized individual of Tenant. Employees of Landlord will
not perform any work or do anything outside of their regular duties unless under
special instructions from Landlord, and no employee of Landlord will admit any
person (Tenant or otherwise) to any office without specific instructions from
Landlord.
25.These Rules and Regulations are in addition to, and will not
be construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease. Landlord may waive any one or
more of these Rules and Regulations for the benefit of Tenant or any other
tenant, but no such waiver by Landlord will be construed as a waiver of such
Rules and Regulations in favor of Tenant or any other tenant, nor prevent
Landlord from thereafter enforcing any such Rules and Regulations against any or
all of the tenants of the Development.
26.Landlord reserves the right to make such other and reasonable
and non-discriminatory Rules and Regulations as, in its judgment, may from time
to time be needed for safety and security, for care and cleanliness of the
Development and for the preservation of good order therein. Tenant agrees to
abide by all such Rules and Regulations herein above stated and any additional
reasonable and nondiscriminatory rules and regulations which are adopted. Tenant
is responsible for the observance of all of the foregoing rules by Tenant's
employees, agents, clients, customers, invitees and guests.
B. Parking Rules and Regulations. The following rules and regulations
govern the use of the parking facilities which serve the Building. Tenant will
be bound by such rules and regulations and agrees to cause its employees,
subtenants, assignees, contractors, suppliers, customers and invitees to observe
the same,
1. Tenant will not permit or allow any vehicles that belong to or
are controlled by Tenant or Tenant's employees, subtenants, customers or
invitees to be loaded, unloaded or parked in areas other than those designated
by Landlord for such activities. No vehicles are to be left in the parking areas
overnight and no vehicles are to be parked in the parking areas other than
normally sized passenger automobiles, motorcycles and pick-up trucks. No
extended term storage of vehicles is permitted.
2. Vehicles must be parked entirely within painted stall lines of
a single parking stall.
3. All directional signs and arrows must be observed.
4. The speed limit within all parking areas shall be five (5)
miles per hour.
5. Parking is prohibited:
(a) in areas not striped for parking;
(b) in aisles or on ramps;
(c) where "no parking" signs are posted;
(d) in cross-hatched areas, and
(e) in such other areas as may be designated from
time to time by Landlord or Landlord's parking operator.
6. Landlord reserves the right, without cost or liability to
Landlord, to tow any vehicle if such vehicle's audio theft alarm system remains
engaged for an unreasonable period of time.
B-3
<PAGE>
7. Washing, waxing, cleaning or servicing of any vehicle in
any area not specifically reserved for such purpose is prohibited.
8. Landlord may refuse to permit any person to park in the
parking facilities who violates these rules with unreasonable frequency, and any
violation of these rules shall subject the violator's car to removal, at such
car owner's expense. Tenant agrees to use its best efforts to acquaint its
employees, subtenants, assignees, contractors, suppliers, customers and invitees
with these parking provisions, rules and regulations.
9. Parking stickers, access cards, or any other device or form of
identification supplied by Landlord as a condition of use of the parking
facilities shall remain the property of Landlord. Parking identification
devices, if utilized by Landlord, must be displayed as requested and may not be
mutilated in any manner. The serial number of the parking identification device
may not be obliterated. Parking identification devices, if any, are not
transferable and any device in the possession of an unauthorized holder will be
void. Landlord reserves the right to refuse the sale of monthly stickers or
other parking identification devices to Tenant or any of its agents, employees
or representatives who willfully refuse to comply with these rules and
regulations and all unposted city, state or federal ordinances, laws or
agreements.
10.Loss or theft of parking identification devices or access
cards must be reported to the management office in the Development immediately,
and a lost or stolen report must be filed by the Tenant or user of such parking
identification device or access card at the time, Landlord has the right to
exclude any vehicle from the parking facilities that does not have a parking
identification device or valid access card. Any parking identification device or
access c ard which is reported lost or stolen and which is subsequently found in
the possession of an unauthorized person will be confiscated and the illegal
holder will be subject to prosecution.
11. All damage or loss claimed to be the responsibility of
Landlord must be reported, itemized in writing and delivered to the management
office located within the Development within ten (10) business days after any
claimed damage or loss occurs. Any claim not so made is waived. Landlord is not
responsible for damage by water or fire, or for the acts or omissions of others,
or for articles left in vehicles. In any event, the total liability of Landlord,
if any, is limited to Two Hundred Fifty Dollars ($250.00) for all damages or
loss to any car, Landlord is not responsible for loss of use.
12. The parking operators, managers or attendants are not
authorized to make or allow any exceptions to these rules and regulations,
without the express written consent of Landlord. Any exceptions to these rules
and regulations made by the parking operators, managers or attendants without
the express written consent of Landlord will not be deemed to have been approved
by Landlord.
13. Landlord reserves the right, without cost or liability to
Landlord, to tow any vehicles which are used or parked in violation of these
rules and regulations.
14. Landlord reserves the right from time to time to modify
and/or adopt such other reasonable and non-discriminatory rules and regulations
for the parking facilities as it deems reasonably necessary for the operation of
the parking facilitie
Tenant's Initials ______
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, ASSIGNED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED OR QUALIFIED THEREUNDER OR UNLESS AN
EXEMPTION THEREFROM IS AVAILABLE.
ALTON GROUP, INC.
8.0% Convertible Subordinated Debenture
Debenture No. XXXXXX
$xx,000.00 Debenture Date:
FOR VALUE RECEIVED, Alton Group, Inc., dba Source Scientific, Inc.
(herein the "Company"), a corporation organized and existing under the laws of
California with its principal office at 7390 Lincoln Way, Garden Grove,
California 92641, hereby promises to pay to or the registered assigns, (the
"Holder") the principal sum of Dollars ($xx,000.00) on February 1, 1996.
Interest at the rate of eight percent (8.0%) per annum (computed on the basis of
a 365-day year) on the unpaid balance of principal hereof shall be paid monthly,
commencing , and on the first day of each month thereafter through and including
.
The Company shall have the option to prepay in full the principal
amount of this Debenture from time to time, along with interest accrued on the
amount prepaid to the prepayment date, at any time after giving the Holder a
thirty (30) day written notice prior to prepayment.
In the event of a dissolution, liquidation, sale or merger of the
Company in which the Company is not the surviving entity, the outstanding
principal amount of the Debenture plus any accrued and unpaid interest shall
become due and payable immediately unless otherwise agreed to in writing with
the Holder. The Company shall be considered the surviving corporation following
a merger or consolidation involving the Company if the holders of outstanding
voting securities of the Company immediately prior to the merger or
consolidation own equity securities possessing more than fifty percent (50%) of
the voting power of the resulting corporation existing following the merger or
consolidation; provided, however, that (i) in making the determination of
ownership of equity securities by the shareholders of the resulting corporation
existing immediately after a merger or consolidation, equity securities which
the shareholders of the Company owned immediately before the merger or
consolidation as shareholders of another party to the transaction shall be
disregarded; and (ii) voting securities of a corporation shall be calculated by
assuming the conversion of all equity securities convertible (immediately or at
some future time) into shares entitled to vote, including outstanding warrants
and options.
1. GENERAL.
1.1 Definitions.
(a) Holder. The term "Holder" shall mean the registered holder
of the Debenture.
(b) Debenture Date. The term "Debenture Date" shall mean the
date, as noted above, upon which the Debenture is executed by the
Company in receipt of funds for the full amount of the Debenture.
(c) Common Stock. The term "Common Stock" as used in this
Debenture shall include any class of capital stock of the Company, now
or hereafter authorized, the right of which to share in distributions
of earnings and assets of the Company is without limit as to any amount
or percentage; provided, however, that Common Stock issuable upon
conversion of this Debenture shall include only shares of Common Stock
of the Company authorized on the date hereof and Common Stock or other
securities issued in substitution or exchange for the presently
authorized Common Stock in connection with a reorganization,
reclassification, merger or sale of assets.
<PAGE>
(d) Conversion Price. The term "Conversion Price" shall mean the
conversion price per share to be applied when exercising the Right of
Conversion and shall be the conversion price in effect at the date of
delivery of notice of conversion to the company determined as provided
herein.
(e) Registrable Securities. The term "Registrable Securities"
shall mean (i) Common Stock issuable upon conversion of the Debenture;
(ii) Common Stock issuable pursuant to the Attached Warrants, subject
to granting and exercise under paragraph 3.1 of this Debenture; and
(iii) Common Stock issuable pursuant to the Conversion Warrants,
subject to granting and exercise under paragraph 3.2 of this Debenture,
provided, however, that shares of Common Stock or other securities
shall only be treated as Registrable Securities if and so long as they
have not been (A) sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, or (B)
sold or are available for sale in the opinion of counsel to the Company
in a single transaction exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended, (the
"Securities Act") so that all transfer restrictions and restrictive
legends with respect thereto are or may be removed upon the
consummation of such sale.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing with the Securities and
Exchange Commission (the "Commission") a registration statement in
compliance with the Securities and Exchange Act of 1933, as amended
(the "Securities Act,") and the declaration or ordering of the
effectiveness of such registration statement by the Commission.
1.2 Series of Debentures. This Debenture is one of a series of up to
ten (10), eight percent (8.0%) Convertible Subordinated Debentures (the
"Debentures") that may be issued by the Company, in the aggregate amount of Five
Hundred Thousand Dollars ($500,000).
1.3 Waivers. The Company hereby waives demand, presentment for payment,
notice of dishonor, protest, notice of protest and diligence, and agrees that
the Holder hereof may extend the time for payment or accept partial payment
without discharging or releasing the Company.
1.4 Subordination. This Debenture is subordinate to bank borrowings and
bank lines of credit which may be granted to the Company by various banks or
other lenders from time to time. This Debenture shall be subordinated to the
security interest proposed to be granted by the Company to any third party to
secure borrowings by the Company or any wholly owned subsidiary of the Company
from such party.
2. CONVERSION.
2.1 Right of Conversion. The Holder of the Debenture shall have the
right as hereinafter provided to convert any or all of the principal balance and
unpaid and outstanding interest thereon from time to time into shares of Common
Stock, at the conversion price of Seventy-five Cents ($0.75) per share or as
adjusted in accordance with paragraph 2.3.
2.2 Exercise of Conversion Right. This Debenture shall be convertible
from time to time and at any time on or prior to the close of business on the
last business day next preceding (i) with respect to any portion of this
Debenture to be prepaid, the date fixed for such prepayment, or (ii) February 1,
1996, whichever shall first occur. In order to exercise the conversion right,
the Holder of this Debenture shall surrender it at the principal office of the
Company in Garden Grove, California (or at such other place as the Company may
designate in writing sent to the Holder at his or her address shown on the books
of the Company). Each Debenture surrendered for conversion shall be endorsed by
its Holder with signature guaranteed by a member of NASD or by a national
banking association. Such Holder shall thereupon be deemed the Holder of Common
Stock so purchased and the principal amount so converted of such Debenture shall
be deemed to have been paid in full. Interest accrued through the date of such
surrender on the principal amount being converted shall be payable to the Holder
of this Debenture, payment for which, at the option of the Holder, may be made
in the form of additional Common Stock at the Conversion Price.
<PAGE>
If this Debenture shall have been converted in part, the Holder shall be
entitled to a new Debenture representing the unpaid principal balance of such
Debenture remaining after deducting the principal amount converted. The Company
shall, as soon as practicable thereafter, issue or cause to be issued and
deliver to such Holder certificate(s) for such shares, such new Debenture, if
any, and a check for accrued interest, if any. Notwithstanding anything to the
contrary contained herein, if the conversion is in connection with a firmly
underwritten offer of securities registered pursuant to the Securities Act, the
conversion may, at the option of the Holder of the Debenture, be conditioned
upon the concurrent closing of the sale of securities pursuant to such offering,
in which event the person(s) entitled to receive Common Stock issuable upon
conversion of a Debenture shall not be deemed to have converted such Debenture
until immediately prior to the closing of such sale of securities.
2.3 Adjustment to Conversion Right. The conversion price, number and
kind of securities to be issued upon exercise of the conversion rights shall be
subject to adjustment from time to time upon the happening of certain events, as
follows:
(a) Stock Combinations and Splits. In case the Company shall
combine all of the outstanding Common Stock of the Company
proportionately into a smaller number of shares, the Conversion Price
hereunder in effect immediately prior to such combination shall be
proportionately increased and in case the Company shall subdivide its
Common Stock into a greater number of shares of Common Stock, the
Conversion Price in effect immediately prior to such subdivision shall
be proportionately reduced.
(b) Reorganizations. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with another corporation (other than a merger
or reorganization with another corporation in which the Company is the
surviving corporation and which does not result in any reclassification
or change in the capital stock of the Company, provided, however, that
any issuances of Common Stock in connection with such merger or
reorganization shall be subject to the other provisions of this Section
2.3, if applicable), or the sale of all or substantially all of its
assets to another corporation shall be effected, then, as a condition
of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby each Holder
of a Debenture shall thereafter have the right to purchase and receive
upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock of the Company immediately
theretofore issuable upon conversion of such Debenture, such shares of
stock, securities or assets as may be issued or payable with respect to
or in exchange for a number of outstanding shares of such Common Stock
equal to the number of shares of such Common Stock immediately
theretofore issuable upon conversion of such Debenture had such
reorganization, reclassification, consolidation, merger of sale not
taken place; and in any such case appropriate provisions shall be made
with respect to the rights and interest of the holders of the
Debentures to the end that the provisions hereof (including without
limitation provisions for adjustment of the Conversion Price and of the
number of shares issuable upon the conversion of any Debenture) shall
thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the
exercise hereof. The Company shall not effect any such consolidation,
merger or sale, unless prior to or simultaneously with the consummation
thereof the successor corporation (if other than the Company) resulting
from such consolidation or merger or the corporation purchasing such
assets shall assume by a written instrument executed and mailed by
registered mail or delivered to each of such holders at the last
address therof appearing on the books of the Company, the obligation of
the Company to deliver to such holders such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such holders
may be entitled to upon conversion of the Debentures.
(c) Default. In the event of any default in the payment of
principal or interest under this Debenture, which default continues for
90 days following written notice of default from the Holder, the then
outstanding Conversion Price shall be automatically adjusted to
one-half of the then-current Conversion Price.
<PAGE>
2.4 Reservation of Shares. The Company agrees that, so long as any of
the Debentures shall remain outstanding, the Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized capital
stock, for the purpose of issue upon conversion of the Debentures, the full
number of shares of Common Stock then issuable upon conversion of all
outstanding Debentures. If the Common Stock shall be listed on any national
stock exchange, the Company at its expense shall include in its listing
application all of the shares of Common Stock reserved for issuance upon
conversion of the Debentures (subject to issuance upon notice of issuance to the
exchange).
2.5 Validity of Shares. The Company agrees that all shares of Common
Stock which may be issued upon conversion of the Debentures will, upon issuance,
be legally and validly issued, fully paid and non-assessable and free to the
Holder thereof from all taxes, liens and charges with respect to the issue
thereof.
2.6 Reports to Holder. The Company shall promptly provide to the Holder
all reports on Form 10-KSB and Form 10-QSB, and any other reports sent to
holders of the Company's Common Stock.
3. WARRANTS.
3.1 Attached Warrants. This Debenture is issued with
( ) warrants (the "Attached Warrants"), each Attached Warrant entitling the
holder thereof to purchase one (1) share of Common Stock at an exercise price of
Seventy-five Cents. The Attached Warrants are exercisable commencing on or after
July 1, 1995, and expire five (5) years from the Debenture Date.
3.2 Conversion Warrants. If this Debenture is converted in full,
the Company will grant and issue ( ) additional warrants (the "Conversion
Warrants"), each Conversion Warrant entitling the holder thereof to purchase one
(1) share of Common Stock at an exercise price of Seventy-five Cents. The
Conversion Warrants, if granted and issued, will be exercisable commencing on or
after July 1, 1995, and expire five (5) years from the Debenture Date. If this
Debenture is not converted in full, no Conversion Warrants shall be granted or
issued.
4. REGISTRATION.
4.1 Notice of Registration. If at any time within the period commencing
five months and ending five years after the Debenture Date, the Company shall
determine to register any of its securities, either for its own account or the
account of a security holder or holders, other than (i) a registration relating
solely to employee benefit plans or (ii) a registration relating solely to a
Commission Rule 145 transaction, the Company will:
(a) give the Holder written notice within twenty (20) days of
filing an applicable registration statement with the Commission; and
(b) include in such registration (and any related
qualification under blue sky laws, or other compliance), and in any
underwriting involved therein, all of the Registrable Securities
specified in a written request by the Holder made within twenty (20)
days after receipt of the Company's written notice under paragraph
4.1(a) above, subject to the terms of paragraph 4.2 below. The Company
shall use its best efforts to cause such registration statement to be
declared effective.
4.2 Underwriting. If the registration of which the Company provides
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice given
pursuant to paragraph 4.1 (a), above. In such event, the right of the Holder to
registration pursuant to this paragraph 4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided in this
Debenture. If the Holder proposes to distribute its Registrable Securities
through a registered offering involving an underwriter, the Holder, together
with the Company, shall enter into an underwriting agreement in customary form
with the managing underwriter selected
<PAGE>
for such underwriting by the Company. Notwithstanding any other provision of
this paragraph 4, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may limit the Registrable Securities to be included in such
registration, and the Company shall promptly so advise the Holder. If the Holder
disapproves of the terms of any such underwriting, the Holder may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public or
private distribution prior to 90 days after the effective date of the
registration statement relating thereto, or such other shorter period of time as
the managing underwriter may require. The Company may include shares of Common
Stock held by shareholders, other than the Holder, in such registration
statement, provided that, if the number of shares includible in such
registration statement is not sufficient to accommodate the Registrable
Securities specified in the written request of the Holder and the shares of
Common Stock held by such other shareholders including Common Stock held by
officers, directors, employees, and other insiders, and Common Stock held by
consultants to the Company (collectively the "Remaining Shareholders"), the
Registrable Securities and the shares of Common Stock of the Remaining
Shareholders shall be appropriately reduced on a pro rata basis.
The Company shall have the right to terminate or withdraw any registration
initiated by it under this paragraph 4 prior to the effectiveness of such
registration whether or not the Holder has elected to include securities in such
registration.
5. DEFAULT.
5.1 Events of Default. If and whenever any of the following events
or action (herein "Events of Default") shall occur, namely:
(a) If the Company shall default in the payment of principal
and interest on any of the Debentures for more than 10 days after the
same shall have become due and payable; or
(b) The Company, after exhaustion of all appellate rights, is
subject to a final judgment, or enters into an agreement and settlement
of any pending or threatened litigation or similar proceeding, which
requires the Company to pay more than $2,000,000 in satisfaction of
such final judgment or in settlement of such pending or threatened
litigation or similar proceeding or subjects the Company to any levy of
attachment or like process in excess of $2,000,000; or
(c) The Company makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally
as they become due; or an order for relief or judgment or decree is
entered adjudicating the Company bankrupt or insolvent; or the Company
petitions or applies to any tribunal for the appointment of a trustee,
receiver, custodian or liquidator of the Company or any substantial
part of the assets of the Company; or the Company commences any
proceeding for a voluntary reorganization, liquidation or dissolution;
or any such petition or application is filed, or any such proceeding is
commenced against the Company and the Company by any act, consents
thereto or acquiesces therein, or such petition, application or
proceeding is not dismissed within 60 days following receipt by the
Company of notice thereof;
then and in any such event the Holder may at any time (unless all defaults
theretofore have been remedied) at the Holder's option, by written notice to the
Company, declare the principal of and the accrued interest on the Debenture to
be immediately due and payable, without presentment, demand, protest, or any
notice (other than as required by this Debenture), all of which are hereby
waived by the Company.
<PAGE>
6. MISCELLANEOUS.
6.1 This Debenture shall be governed and enforced under and in
accordance with the laws of the State of California.
6.2 Notices, requests, demands and other communications (collectively,
"Notices") given or made pursuant to this Debenture shall be in writing and
shall be deemed to have been duly given if sent by registered or certified mail,
return receipt requested, postage and fees prepaid, or otherwise actually
delivered as follows: (a) if to the Company, to its principal corporate address;
and (b) if to the Holder, to the Holder's address on the Debenture register
maintained by the Company.
Notice shall be deemed duly given when received by the addressee
thereof. The Company and the Holder may from time to time change their
respective addresses for receiving Notices by giving written notice thereof in
the manner set forth above.
IN WITNESS WHEREOF this Debenture has been executed and delivered as a
sealed instrument at the place and on the date set forth above by the duly
authorized representatives of the Company.
ALTON GROUP, INC.
By:
Richard A. Sullivan
Its President and Chief Executive Officer
Debenture Holder:
- -------------------------------
Name: _________________________
SSN: __________________________
Address:
- -------------------------------
- -------------------------------
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, ASSIGNED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED OR QUALIFIED THEREUNDER OR UNLESS AN
EXEMPTION THEREFROM IS AVAILABLE.
SOURCE SCIENTIFIC, INC.
8.0% Convertible Subordinated Debenture
Debenture No. SS5-XXX
$xx,000.00 Debenture Date: ______, 1995.
FOR VALUE RECEIVED, Source Scientific, Inc. (herein the "Company"), a
corporation organized and existing under the laws of California with its
principal office at 7390 Lincoln Way, Garden Grove, California 92641, hereby
promises to pay to , or the registered assigns, (the "Holder") the principal sum
of Dollars ($xx,000.00) on June 1, 1996. Interest at the rate of eight percent
(8.0%) per annum (computed on the basis of a 365-day year) on the unpaid balance
of principal hereof shall be paid monthly, commencing July 1, 1995, and on the
first day of each month thereafter through and including June 1, 1996.
The Company shall have the option to prepay in full the principal
amount of this Debenture from time to time, along with interest accrued on the
amount prepaid to the prepayment date, at any time after giving the Holder a
thirty (30) day written notice prior to prepayment.
In the event of a dissolution, liquidation, sale or merger of the
Company in which the Company is not the surviving entity, the outstanding
principal amount of the Debenture plus any accrued and unpaid interest shall
become due and payable immediately unless otherwise agreed to in writing with
the Holder. The Company shall be considered the surviving corporation following
a merger or consolidation involving the Company if the holders of outstanding
voting securities of the Company immediately prior to the merger or
consolidation own equity securities possessing more than fifty percent (50%) of
the voting power of the resulting corporation existing following the merger or
consolidation; provided, however, that (i) in making the determination of
ownership of equity securities by the shareholders of the resulting corporation
existing immediately after a merger or consolidation, equity securities which
the shareholders of the Company owned immediately before the merger or
consolidation as shareholders of another party to the transaction shall be
disregarded; and (ii) voting securities of a corporation shall be calculated by
assuming the conversion of all equity securities convertible (immediately or at
some future time) into shares entitled to vote, including outstanding warrants
and options.
1. GENERAL.
1.1 Definitions.
(a) Holder. The term "Holder" shall mean the registered holder
of the Debenture.
(b) Debenture Date. The term "Debenture Date" shall mean the
date, as noted above, upon which the Debenture is executed by the
Company in receipt of funds for the full amount of the Debenture.
(c) Common Stock. The term "Common Stock" as used in this
Debenture shall include any class of capital stock of the Company, now
or hereafter authorized, the right of which to share in distributions
of earnings and assets of the Company is without limit as to any amount
or percentage; provided, however, that Common Stock issuable upon
conversion of this Debenture shall include only shares of Common Stock
of the Company authorized on the date hereof and Common Stock or other
securities issued in substitution or exchange for the presently
authorized Common Stock in connection with a reorganization,
reclassification, merger or sale of assets.
(d) Conversion Price. The term "Conversion Price" shall mean
the conversion price per share to be applied when exercising the Right
of Conversion and shall be the conversion price in effect at the date
of delivery of notice of conversion to the company determined as
provided herein.
(e) Registrable Securities. The term "Registrable Securities"
shall mean Common Stock issuable upon conversion of the Debenture
subject to granting and exercise under paragraph 3.2 of this Debenture,
provided, however, that shares of Common Stock or other securities
shall only be treated as Registrable Securities if and so long as they
have not been (A) sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, or (B)
sold or are available for sale in the opinion of counsel to the Company
in a single transaction exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended, (the
"Securities Act") so that all transfer restrictions and restrictive
legends with respect thereto are or may be removed upon the
consummation of such sale.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing with the Securities and Exchange
Commission (the "Commission") a registration statement in compliance with the
Securities and Exchange Act of 1933, as amended (the "Securities Act,") and the
declaration or ordering of the effectiveness of such registration statement by
the Commission.
1.2 Waivers. The Company hereby waives demand, presentment for payment,
notice of dishonor, protest, notice of protest and diligence, and agrees that
the Holder hereof may extend the time for payment or accept partial payment
without discharging or releasing the Company.
1.3 Subordination. This Debenture is subordinate to bank borrowings and
bank lines of credit which may be granted to the Company by various banks or
other lenders from time to time. This Debenture shall be subordinated to the
security interest proposed to be granted by the Company to any third party to
secure borrowings by the Company or any wholly owned subsidiary of the Company
from such party.
2. CONVERSION.
2.1 Right of Conversion. The Holder of the Debenture shall have the
right as hereinafter provided to convert any or all of the principal balance and
unpaid and outstanding interest thereon from time to time into shares of Common
Stock, at the conversion price of Seventy-five Cents ($0.75) per share or as
adjusted in accordance with paragraph 2.3.
2.2 Exercise of Conversion Right. This Debenture shall be convertible
from time to time and at any time on or prior to the close of business on the
last business day next preceding (i) with respect to any portion of this
Debenture to be prepaid, the date fixed for such prepayment, or (ii) July 1,
1996, whichever shall first occur. In order to exercise the conversion right,
the Holder of this Debenture shall surrender it at the principal office of the
Company in Garden Grove, California (or at such other place as the Company may
designate in writing sent to the Holder at his or her address shown on the books
of the Company). Each Debenture surrendered for conversion shall be endorsed by
its Holder with signature guaranteed by a member of NASD or by a national
banking association. Such Holder shall thereupon be deemed the Holder of Common
Stock so purchased and the principal amount so converted of such Debenture shall
be deemed to have been paid in full. Interest accrued through the date of such
surrender on the principal amount being converted shall be payable to the Holder
of this Debenture, payment for which, at the option of the Holder, may be made
in the form of additional Common Stock at the Conversion Price. If this
Debenture shall have been converted in part, the Holder shall be entitled to a
new Debenture representing the unpaid principal balance of such Debenture
remaining after deducting the principal amount converted. The Company shall, as
soon as practicable thereafter, issue or cause to be issued and deliver to such
Holder certificate(s) for such shares, such new Debenture, if any, and a check
for accrued interest, if any. Notwithstanding anything to the contrary contained
herein, if the conversion is in connection with a firmly underwritten offer of
securities registered pursuant to the Securities Act, the conversion may, at the
option of the Holder of the Debenture, be conditioned upon the concurrent
closing of the sale of securities pursuant to such offering, in which event the
person(s) entitled to receive Common Stock issuable upon conversion of a
Debenture shall not be deemed to have converted such Debenture until immediately
prior to the closing of such sale of securities.
2.3 Adjustment to Conversion Right. The conversion price, number and
kind of securities to be issued upon exercise of the conversion rights shall be
subject to adjustment from time to time upon the happening of certain events, as
follows:
(a) Stock Combinations and Splits. In case the Company shall
combine all of the outstanding Common Stock of the Company
proportionately into a smaller number of shares, the Conversion Price
hereunder in effect immediately prior to such combination shall be
proportionately increased and in case the Company shall subdivide its
Common Stock into a greater number of shares of Common Stock, the
Conversion Price in effect immediately prior to such subdivision shall
be proportionately reduced.
(b) Reorganizations. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with another corporation (other than a merger
or reorganization with another corporation in which the Company is the
surviving corporation and which does not result in any reclassification
or change in the capital stock of the Company, provided, however, that
any issuances of Common Stock in connection with such merger or
reorganization shall be subject to the other provisions of this Section
2.3, if applicable), or the sale of all or substantially all of its
assets to another corporation shall be effected, then, as a condition
of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby each Holder
of a Debenture shall thereafter have the right to purchase and receive
upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock of the Company immediately
theretofore issuable upon conversion of such Debenture, such shares of
stock, securities or assets as may be issued or payable with respect to
or in exchange for a number of outstanding shares of such Common Stock
equal to the number of shares of such Common Stock immediately
theretofore issuable upon conversion of such Debenture had such
reorganization, reclassification, consolidation, merger of sale not
taken place; and in any such case appropriate provisions shall be made
with respect to the rights and interest of the holders of the
Debentures to the end that the provisions hereof (including without
limitation provisions for adjustment of the Conversion Price and of the
number of shares issuable upon the conversion of any Debenture) shall
thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the
exercise hereof. The Company shall not effect any such consolidation,
merger or sale, unless prior to or simultaneously with the consummation
thereof the successor corporation (if other than the Company) resulting
from such consolidation or merger or the corporation purchasing such
assets shall assume by a written instrument executed and mailed by
registered mail or delivered to each of such holders at the last
address therof appearing on the books of the Company, the obligation of
the Company to deliver to such holders such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such holders
may be entitled to upon conversion of the Debentures.
(c) Default. In the event of any default in the payment of
principal or interest under this Debenture, which default continues for
90 days following written notice of default from the Holder, the then
outstanding Conversion Price shall be automatically adjusted to
one-half of the then-current Conversion Price.
2.4 Reservation of Shares. The Company agrees that, so long as any of
the Debentures shall remain outstanding, the Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized capital
stock, for the purpose of issue upon conversion of the Debentures, the full
number of shares of Common Stock then issuable upon conversion of all
outstanding Debentures. If the Common Stock shall be listed on any national
stock exchange, the Company at its expense shall include in its listing
application all of the shares of Common Stock reserved for issuance upon
conversion of the Debentures (subject to issuance upon notice of issuance to the
exchange).
2.5 Validity of Shares. The Company agrees that all shares of Common
Stock which may be issued upon conversion of the Debentures will, upon issuance,
be legally and validly issued, fully paid and non-assessable and free to the
Holder thereof from all taxes, liens and charges with respect to the issue
thereof.
2.6 Reports to Holder. The Company shall promptly provide to the Holder
all reports on Form 10-KSB and Form 10-QSB, and any other reports sent to
holders of the Company's Common Stock.
3. REGISTRATION.
3.1 Notice of Registration. If at any time within the period commencing
five months and ending five years after the Debenture Date, the Company shall
determine to register any of its securities, either for its own account or the
account of a security holder or holders, other than (i) a registration relating
solely to employee benefit plans or (ii) a registration relating solely to a
Commission Rule 145 transaction, the Company will:
(a) give the Holder written notice within twenty (20) days of
filing an applicable registration statement with the Commission; and
(b) include in such registration (and any related
qualification under blue sky laws, or other compliance), and in any
underwriting involved therein, all of the Registrable Securities
specified in a written request by the Holder made within twenty (20)
days after receipt of the Company's written notice under paragraph
4.1(a) above, subject to the terms of paragraph 4.2 below. The Company
shall use its best efforts to cause such registration statement to be
declared effective.
3.2 Underwriting. If the registration of which the Company provides
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice given
pursuant to paragraph 3.1 (a), above. In such event, the right of the Holder to
registration pursuant to this paragraph 3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided in this
Debenture. If the Holder proposes to distribute its Registrable Securities
through a registered offering involving an underwriter, the Holder, together
with the Company, shall enter into an underwriting agreement in customary form
with the managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this paragraph 3, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit the Registrable
Securities to be included in such registration, and the Company shall promptly
so advise the Holder. If the Holder disapproves of the terms of any such
underwriting, the Holder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall not
be transferred in a public or private distribution prior to 90 days after the
effective date of the registration statement relating thereto, or such other
shorter period of time as the managing underwriter may require. The Company may
include shares of Common Stock held by shareholders, other than the Holder, in
such registration statement, provided that, if the number of shares includible
in such registration statement is not sufficient to accommodate the Registrable
Securities specified in the written request of the Holder and the shares of
Common Stock held by such other shareholders including Common Stock held by
officers, directors, employees, and other insiders, and Common Stock held by
consultants to the Company (collectively the "Remaining Shareholders"), the
Registrable Securities and the shares of Common Stock of the Remaining
Shareholders shall be appropriately reduced on a pro rata basis.
The Company shall have the right to terminate or withdraw any registration
initiated by it under this paragraph 3 prior to the effectiveness of such
registration whether or not the Holder has elected to include securities in such
registration.
4. DEFAULT.
4.1 Events of Default. If and whenever any of the following events
or action (herein "Events of Default") shall occur, namely:
(a) If the Company shall default in the payment of principal
and interest on any of the Debentures for more than 10 days after the
same shall have become due and payable; or
(b) The Company, after exhaustion of all appellate rights, is
subject to a final judgment, or enters into an agreement and settlement
of any pending or threatened litigation or similar proceeding, which
requires the Company to pay more than $2,000,000 in satisfaction of
such final judgment or in settlement of such pending or threatened
litigation or similar proceeding or subjects the Company to any levy of
attachment or like process in excess of $2,000,000; or
(c) The Company makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally
as they become due; or an order for relief or judgment or decree is
entered adjudicating the Company bankrupt or insolvent; or the Company
petitions or applies to any tribunal for the appointment of a trustee,
receiver, custodian or liquidator of the Company or any substantial
part of the assets of the Company; or the Company commences any
proceeding for a voluntary reorganization, liquidation or dissolution;
or any such petition or application is filed, or any such proceeding is
commenced against the Company and the Company by any act, consents
thereto or acquiesces therein, or such petition, application or
proceeding is not dismissed within 60 days following receipt by the
Company of notice thereof;
then and in any such event the Holder may at any time (unless all defaults
theretofore have been remedied) at the Holder's option, by written notice to the
Company, declare the principal of and the accrued interest on the Debenture to
be immediately due and payable, without presentment, demand, protest, or any
notice (other than as required by this Debenture), all of which are hereby
waived by the Company.
5. MISCELLANEOUS.
5.1 This Debenture shall be governed and enforced under and in
accordance with the laws of the State of California.
5.2 Notices, requests, demands and other communications (collectively,
"Notices") given or made pursuant to this Debenture shall be in writing and
shall be deemed to have been duly given if sent by registered or certified mail,
return receipt requested, postage and fees prepaid, or otherwise actually
delivered as follows: (a) if to the Company, to its principal corporate address;
and (b) if to the Holder, to the Holder's address on the Debenture register
maintained by the Company.
Notice shall be deemed duly given when received by the addressee
thereof. The Company and the Holder may from time to time change their
respective addresses for receiving Notices by giving written notice thereof in
the manner set forth above.
IN WITNESS WHEREOF this Debenture has been executed and delivered as a
sealed instrument at the place and on the date set forth above by the duly
authorized representatives of the Company.
SOURCE SCIENTIFIC, INC.
By:
Richard A. Sullivan
Its President and Chief Executive Officer
Debenture Holder:
- -------------------------------
Name: _________________________
SSN: __________________________
Address:
- -------------------------------
- -------------------------------
Biopool International, Inc.
6025 Nicole Street
Ventura, California 93003
September 27, 1995
Richard A. Sullivan
President and CEO
Source Scientific, Inc.
7390 Lincoln Way
Garden Grove, California 92641
Re: Letter of Intent between Biopool International and Source Scientific
Dear Dick:
This letter of intent (the "Letter") is intended to summarize the
mutual understanding and intention between Source Scientific, Inc. (hereinafter
"Source") and Biopool International, Inc. (hereinafter "Biopool") concerning the
proposed acquisition of Source by Biopool.
The parties desire to structure the proposed transaction as a
merger/pooling of interests; provided that the parties mutually determine that
the proposed transaction would qualify for accounting treatment as a pooling of
interests. In the event that the parties determine that the transaction would
not qualify for accounting treatment as a pooling of interests, the parties will
endeavor to determine an alternative structure for the completion of the
proposed transaction. The merger would provide for the issuance of newly issued
common stock of Biopool upon occurrence of the merger for all of the
then-outstanding shares of capital stock of Source (which may include shares of
Source represented by outstanding warrants) at an agreed-to exchange ratio. To
date, the parties have discussed proposed exchange ratios, and shall endeavor
to finalize the same.
The parties shall continue discussions of the proposed transaction in
good faith, including without limitation as to the exchange ratio of Biopool
shares for Source shares, and shall proceed with conducting all necessary due
diligence in anticipation of the proposed transaction. The parties desire to
have due diligence completed and definitive documents finalized by October 20,
1995. The definitive agreement shall contain normal and customary terms and
conditions associated with a transaction of this type, including all required
board and shareholder approvals, representations and warranties and completion
of all required board and shareholder approvals, representations and warranties
and completion of all required legal and regulatory requirements.
Neither party will make any public disclosure or publicity release
pertaining to the existence of this Letter or the subject matter contained
herein without the consent of the other signatory hereto; provided, however,
that each party shall be permitted to make such disclosure to the public (the
<PAGE>
Richard A. Sullivan
September 27, 1995
Page 2
form of which must be approved by the other party in writing) or to governmental
agencies as its counsel shall deem necessary in order to comply with any
applicable laws. Any disclosure to a third party permitted under the foregoing
terms, other than as deemed required for regulatory compliance, shall only be
made under a written agreement with such third party whereby such third party
agrees to be bound by such confidentiality requirement. It is further understood
that all information provided by and between the parties is to be maintained in
strict confidence, and such requirement shall survive this Letter.
The obligations of Biopool and Source will not be fixed until each has
completed its business, financial and legal investigations with respect to the
other, and until the transaction has been approved by each party's board of
directors and its authorized officers have executed and delivered a
definitive written agreement encompassing such matters as may be agreed upon.
Until such time, each party reserves the right at any time unilaterally to
withdraw from negotiations, without any liability to the other or to any third
party for any damages or events, direct or indirect, incidental or
consequential, including expenses of any nature.
If the foregoing terms and conditions are acceptable, please sign this
Letter as indicated below to allow for completion of due diligence and formal
documentation.
Sincerely,
BIOPOOL INTERNATIONAL, INC.
/s/ Michael Bick
- --------------------------
By: Michael Bick, Ph. D.
Chief Executive Officer
Read, understood and agreed to:
SOURCE SCIENTIFIC, INC.
/s/ Richard A. Sullivan
- --------------------------
By: Richard A. Sullivan
President and Chief Executive Officer
ATTACHMENT A
PROMISSORY NOTE
$180,000 Garden Grove, California
September 29, 1995
FOR VALUE RECEIVED, the undersigned Source Scientific, Inc. (the "Maker")
promises to pay in lawful money of the United States to the order of Biopool
International, Inc. (the "Holder") at such place as the Holder from time to time
may designate in writing, the principal sum of One Hundred Eighty Thousand
Dollars ($180,000).
The principal of this Note, together with all accrued interest, shall be paid on
or before March 28, 1995. This Note bears interest (computed for actual days
elapsed on the basis of a 365-day year, as appropriate) on the unpaid principal
amount at a per annum rate of seven percent (7%). The undersigned may repay the
Note in whole or in part at any time without penalty. Payments shall be applied
first to accrued interest, then to principal.
This Note is given subject to the terms of that certain Loan and Security Agree-
ment between the Maker and the Holder of even date herewith, and is subordinated
to the rights of Silicon Valley Bank against Debtor as agreed therein.
The Maker shall pay reasonable costs and expenses of collection, including with-
out limitation, reasonable attorneys' fees and disbursements in the event that
any action, suit or proceeding is brought by the Holder to collect this Note and
either the Holder obtains a judgment in its favor that is not appealed from or
is upheld on appeal, or such action, suit or proceeding is settled with any sum
due and owing to the Holder as a result of such settlement.
The undersigned and all endorsers and all persons liable or to become liable on
this Note waive presentment, demand, protest and notice of demand, protest and
nonpayment and consent to any and all renewals and extensions of the time of
payment hereof and further agree that at any time the terms of payment hereof
may be modified or security released without affecting the liability of any
party to this Note or any person liable or to become liable with respect to any
indebtedness evidenced hereby.
This note shall be construed according to the laws of the State of California
without regard to conflicts of laws.
SOURCE SCIENTIFIC, INC.
By: /s/ Richard A. Sullivan
------------------------------
Richard A. Sullivan,
President and CEO
(Exhibit 23.1)
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Source Scientific, Inc. and Subsidiaries (formerly Alton Group, Inc.) on Form
S-8 of our report, which includes an explanatory paragraph with respect to the
uncertainty as to the Company's ability to continue as a going concern, dated
December 14, 1995, on our audits of the consolidated financial statements as of
June 30, 1995 and 1994, and for the years then ended, which report is included
in this Annual Report on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
December 14, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 469
<ALLOWANCES> (20)
<INVENTORY> 1,269
<CURRENT-ASSETS> 1,933
<PP&E> 383
<DEPRECIATION> (262)
<TOTAL-ASSETS> 2,213
<CURRENT-LIABILITIES> 1,491
<BONDS> 0
<COMMON> 20,744
23 <F1>
0
<OTHER-SE> (20,275)
<TOTAL-LIABILITY-AND-EQUITY> 2,213
<SALES> 4,877
<TOTAL-REVENUES> 4,877
<CGS> 3,199
<TOTAL-COSTS> 3,199
<OTHER-EXPENSES> 2,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> (940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (940)
<DISCONTINUED> 0
<EXTRAORDINARY> 309
<CHANGES> 0
<NET-INCOME> (631)
<EPS-PRIMARY> (0.059)
<EPS-DILUTED> (0.029)
<FN>
<F1> The Preferred Mandatory amount is not included in equity. Under the terms
of the Series C Preferred Stock certificate, the shares are required to be
redeemed by the Company after September 1, 1995.
</FN>
</TABLE>
