1995
A N N U A L
R E P O R T
The 1995 Annual Report includes the
10-KSB for the fiscal period ended June 30, 1995,
and the 10-QSB for the first quarter ended September 30, 1995.
The reports were accepted by the Securities and Exchange Commission
on December 15, 1995, and December 22, 1995, respectively.
(logo)
SOURCE SCIENTIFIC, INC.
<PAGE>
Focused on Strengths
As a worldwide provider of OEM products and services, Source has developed
a solid base of technical expertise and a reputation for reliable,
simple-to-use products. Over the decades, we have listened to our customers
and applied a variety of technologies to solve problems in practical and
economical ways. These long term relationships have been key in
establishing Source's reputation in the biomedical industry as a solid OEM
resource for devices, laboratory instruments, and services, including
product development and contract manufacturing. Our customers are loyal,
with high expectations, and our intention is to meet their expectations by
delivering quality in every transaction. As a Company, we are committed to
our customers and our shareholders as we build on a solid foundation of
strengths, delivering exciting new products and quality services.
Product Designs to Secure the Future
Source manufactures both private label and custom devices and
instrumentation, as well as selected products under the Source label.
Products include photometers, luminometers, fluorometers and robotic
washing systems. In 1995, Source introduced two new products for OEM, which
will expand our potential in the biomedical, food testing and environmental
markets:
The PlateMate(TM) Reader is the first in a series of microplate format
analyzers with different detection capabilities. Microplates, or 96-well
plates, are used extensively in immunoassay and infectious disease testing,
and have become the standard for labs doing high-volume testing. Combining
features not available on other analyzers, and very competitively priced,
the PlateMate series will be attractive both as a replacement system and
for first time purchase.
The new FluoroStat(TM) fluorometric analyzer offers excellent
performance where high sensitivity is required. A proprietary OEM
instrument of similar design is currently being distributed for food
testing.
Product Reliability and Service
The business of Product Service -- including both repair and maintenance --
is growing. In today's cost constrained medical marketplace, instruments
remain in service almost twice as long as 10 years ago. Source's instrument
service programs are comprehensive but flexible to provide our client
companies with the exact services they need. Our Produce Service center
handles Source-manufactured products and products manufactured by others
using the same demanding processes. Many manufacturers don't have the
capacity or systems to offer such specialized programs and rely on Source
as the most cost-effective means to keep their systems operational.
Quality in Manufacturing
Source manufactures instrumentation and proprietary biomedical devices on a
contract basis. Our manufacturing group has achieved "Certified Supplier"
status from several of our clients, attesting that the goods shipped from
Source meet quality standards and parts can be received directly into stock
with no further inspection required. Achieving ISO-9001 certification in
1996 will complete Source's quality process documentation and enable us to
meet international labeling requirements. Currently FDA certified, Source
is focused on providing quality products for worldwide distribution.
The People Behind the Quality
Behind each product and service that Source provides are people dedicated
to quality and customer service. We are proud of the longevity, dedication
and cooperative spirit of our staff, and we continue to improve our team
effectiveness each year. From the customer service desk to the
manufacturing floor, Source people are producing excellent products for
customers who keep coming back.
<PAGE>
Dear Shareholders and Friends:
In fiscal 1995, Source achieved significant overall financial
improvement and focused on product development to enhance the future growth of
your Company. We reduced debt by $1,380,000 during the past year and increased
working capital by $815,000. Productivity improved as revenue per employee
increased to $90,000 from last year's $43,000. We also closed the year with a
decreased inventory level. These improvements reflect the progress we are making
in overcoming the financial obstacles the Company has faced this year. Our long-
range goals and business plan activities are on target for developing positive
results for the Company's future.
Focusing on our business plan "Platform Technology", we are
particularly enthusiastic about our two new products developed in 1995, the
FluoroStat(TM) Analyzer, and the PlateMate(TM) Reader Series. The debut of these
two products at a recent international clinical chemistry exhibition generated
much excitement among our regular OEM customers and created opportunities for
new contracts and strategic alliances. Most importantly, our customers recognize
our progress and are making longer-term commitments to Source manufacturing and
service capabilities. Our engineering objective is to profitably meet the market
demand for rapid, proprietary new product development. Under my direction, the
processes of product design have been integrated with manufacturability and
marketability, resulting in lower development expense and lower material and
manufacturing labor costs.
Source employees react favorably to opportunities for improving our
processes, products and services. Initially, our products are engineered for
manufacturing ease and speed, and we have applied purchasing and inventory
control to achieve faster assembly cycles. Every action taken within the Company
is purposed to add value to our products and reduce costs. This past year, we
have focused efforts to establish and document our company-wide quality
practices compliant with International Standards of Operation. We believe that
achieving ISO-9001 certification will afford the Company significant
international recognition and meet a requirement for achieving our international
sales goals.
The goal for fiscal 1996 is to expand our business through strategic
partnering, acquisitions and mergers. A year ago, in my newly appointed position
as President and Chief Executive Officer, the financial condition of the Company
made those goals very difficult to achieve. Today, Source offers better
financial health and greater capabilities for expansion into our industry
marketplace. Combining the strength of our management with a culture of
empowerment, innovation and entrepreneurial spirit, we are attracting many new
opportunities-some extraordinary possibilities are before us in pending joint
ventures and potential mergers.
We believe that our customers, shareholders, financial partners,
employees and vendors will continue to see improvements in operating procedures,
manufacturing, quality, cost and return on investment with each passing year.
Our thanks are due to our employees and our customers for the operating progress
achieved in 1995, and to our shareholders (who include 30% of our employees!)
for their patience and continued support.
Sincerely,
/s/RICHARD A. SULLIVAN
Richard A. Sullivan
President/CEO
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 December 31, 1994 matters
January 1, 1995 $4,100 Part-time employment as Director
to present per month of Legal Affairs
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
SOURCE SCIENTIFIC, INC.
RECAP OF FISCAL NEWS RELEASES
<PAGE>
NOVEMBER, 1994
Source Scientific Announces Removal of Significant Debt Liabilities.
Alton Group, Inc. (dba Source Scientific, Inc.) will remove from its books the
$950,000 note owed to MicroProbe as a result of MicroProbe's cancellation of the
promissory note and associated security agreement. The note was part of the
purchase price for Source's acquisition, in January, 1994, of MicroProbe's
former subsidiary, Source Scientific Systems, Inc. The note had a maturity date
of March 27, 1995, and was considered the Company's most significant debt
instrument. Also, Source has successfully negotiated termination of certain
distinct and unrelated contractual obligations allowing for a net reduction in
short- and long-term debt amounting to $309,000.
DECEMBER, 1994
Source Scientific, Inc. Announces New Contracts.
Under a new contract, for over $1.5 million for the 12-month period starting
January, 1995, with Hybritech, an Eli Lilly company, Source will provide
service, upgrades and parts for fielded Hybritech Immunoassay systems.
Hybritech, located in San Diego, is a recognized leader in the development,
production and marketing of diagnostic products utilizing monoclonal antibody
technology.
DECEMBER, 1994
Source Announces First Quarter Results of Operations.
The Company recorded a net income of $101,000, compared to a net loss of
$116,000 in the same quarter last year. A gain of $309,000 during the 1994 first
quarterly period was due to termination of certain obligations relating to its
former facility in Irvine, California. The Company's cost of goods sold,
selling, general and administrative expenses, and operating expenses as a
percentage of sales declined, as a result of the elimination of certain
duplicate functions when the Company's operations were consolidated. The
increase in net sales from the 1993 first quarterly period to the 1994 first
quarterly period was primarily due to the acquisition of the Source Subsidiary.
The Source Subsidiary directly contributed approximately $1,265,000 in revenues
during the 1994 first quarterly period.
FEBRUARY, 1995
Source Announces New Trading Symbol.
The Company formerly changed its name from Alton Group, Inc. to Source Scienti-
fic, Inc. The Company's common stock is listed on the Boston Stock Exchange
under the new trading symbol "SSF". The Company has been doing business
as Source Scientific, Inc. since May, 1994.
Results of Proxy Votes at Annual Shareholders Meeting, December, 1994.
The shareholders represented at the Annual Meeting voted favorably on all
measures on the Proxy, including the name change and the re-election of Robert
B. Lyons, Richard A. Sullivan, John A. Karsten, Susan L. Preston, Joseph W.
Caligiuri, and Dr. Jacob Y. Terner to the Board of Directors.
Source Announces Second Quarter Results of Operations.
The Company reported a net operating (loss) of ($204,000), or ($0.02) per share,
compared to a net operating (loss) of ($188,000), or ($0.06) per share in the
same quarter last year. During the three months ended December 31, 1994, the
Company's working capital improved from a deficiency of $618,000 at September
30, 1994, to a positive working capital of $87,000 at December 31, 1994.
APRIL, 1995
Source Announces Contracts for Manufacturing Services.
The Company signed two agreements to continue providing contract manufacturing
services with Baxter Vascular Systems (formerly Intramed Laboratories, Inc. of
San Diego) and with Nihon Kohden America. Source manufactures a sleep monitor
data acquisition station, the Neurofile, for Nihon Kohden. Baxter Vascular
Systems, a world-wide distributor, will continue under contract to have Source
manufacture the Endoscopic Irrigation Pump which is used in conjunction with the
BVS angioscope.
MAY, 1995
Source Announces Third Quarter Results of Operations.
The Company narrowed its loss to $279,000, or $0.03 per share, as compared with
a net loss of $617,000, or $0.08 per share for the third quarter ended March 31,
1994. The Company's net sales increased for the nine-month period ending March
31, 1995, compared to the nine-month period ending March 31, 1994. The overall
operating expenses and selling, general and administrative expenses declined as
a percentage of sales from 75.6% for the nine-month period ending March 31,
1994, to 49.7% for the nine-month period ended March 31, 1995. The Company's
working capital improved from a deficiency of $375,000 at June 30, 1994, to
positive working capital of $241,000 at March 31, 1995.
JUNE, 1995
Source Announces Contemplated Merger.
The Company entered into a non-binding letter of intent (LOI) to merge with XCEL
Corporation, a privately-held corporation with operations in California and
Massachusetts and internationally in Japan and the United Kingdom. Under terms
of the LOI, the Company will enter into a business combination transaction,
subject to satisfaction of certain conditions precedent to the closing, as well
as successful completion of negotiations for a definitive merger agreement. XCEL
is a diversified electronics manufacturer specializing in custom integrated data
input and display components. XCEL also manufactures high performance custom
hybrid micro-electronic circuits and bare printed circuit boards.
Source Announces First Quarter Results of Operations.
The Company announced a temporary warrant exercise price reduction for A
Warrants, the proceeds of such exercise being used for working capital.
Source Announces Potential Acquisition of Interest in LifeStream Technologies,
Inc.
Source and LifeStream executed a Letter of Intent (LOI) 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 which will measure cholesterol and HDL levels in one minute from a
non-measured sample of blood. Source will be acquiring a 20% interest in
LifeStream, the amount and type of consideration to be negotiated.
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
Form 10-QSB
------------------
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
------------------
Commission file number 1-8311
SOURCE SCIENTIFIC, INC.
(Exact name of small business issuer as specified in its charter)
California 95-2943936
(State or other jurisdiction (I.R.S. Employer
of 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
------------------
Check whether the issuer (1) 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 __.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No __.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of May 12, 1995: 12,510,938
Transitional Small Business Disclosure Format (Check one): Yes __ No X .
================================================================================
<PAGE>
ITEM 1. Financial Statements:
SOURCE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1995 and June 30, 1995
ASSETS
SEPTEMBER 30, 1995 JUNE 30, 1995
(UNAUDITED) (AUDITED
Current Assets:
Cash and cash equivalents $ 17,000 $ 35,000
Accounts receivable, net (Note 3) 303,000 449,000
Inventories (Note 4) 1,354,000 1,269,000
Other current assets 172,000 180,000
---------- -----------
Total current assets 1,846,000 1,933,000
Property and equipment, net (Note 5) 92,000 121,000
Excess of cost over fair value of net
assets acquired, less accumulated
amortization of $15,000 (September,
1995); $12,000 (June, 1995) 75,000 78,000
Other assets, net 79,000 81,000
--------- --------
Total assets $2,092,000 $2,213,000
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 867,000 $ 868,000
Accrued expenses 272,000 204,000
Notes payable, current portion
(Note 6) 178,000 387,000
Deferred rent, current portion 0 2,000
Lease obligation 5,000 30,000
--------- --------
Total current liabilities 1,322,000 1,491,000
Deferred rent 244,000 230,000
--------- --------
Total liabilities 1,566,000 1,721,000
--------- --------
Redeemable Series C convertible preferred
stock; no par value, authorized
1,000,000 Shares, issued and
outstanding 1,555 shares; liquidation
value at June 30, 1995, $14; at Sept-
ember 30, 1995, $15.93 per share 25,000 23,000
Shareholders' equity
Common stock; no par value, authorized
75,000,000 shares; 15,386,101 and
14,612,034 shares issued and
outstanding at September 30, 1995
and June 30, 1995, respectively 20,857,000 20,744,000
Accumulated deficit (20,033,000) (19,952,000)
Shareholder notes receivable (323,000) (323,000)
--------- --------
Total shareholders' equity 501,000 469,000
--------- --------
Total liabilities and
shareholders' equity $2,092,000 $2,213,000
--------- ---------
--------- ---------
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30,
1995 and September 30, 1994
(UNAUDITED)
Three Months Ended
September 30
--------------------------
1995 1994
-------- --------
Product sales $ 598,000 $ 909,000
Research contract sales 17,000 83,000
Service contract sales 488,000 403,000
--------- --------
Total net sales 1,103,000 1,395,000
--------- ---------
Cost of product sales 455,000 712,000
Cost of research contract sales 8,000 46,000
Cost of service contract sales 224,000 101,000
------- -------
Total cost of sales 687,000 859,000
------- -------
Gross profit 416,000 536,000
Selling, general and administrative 298,000 521,000
Research and development 198,000 223,000
-------- -------
Operating loss (80,000) (208,000)
------- --------
Interest, net 1,000 15,000
------- ------
Loss from operations (81,000) (223,000)
------- -------
Extraordinary item - gain from
reduction of lease obligation 0 (309,000)
------- -------
Net income (loss) ($81,000) $86,000
------- -------
------- -------
Per common share amounts
Operations (.007) (.02)
Extraordinary Item .000 .03
----- -----
Net income (loss) ($0.007) $0.01
----- -----
----- -----
Weighted average number of
common shares outstanding 15,278,663 9,789,624
---------- ---------
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended September 30, 1995
and September 30, 1994
(UNAUDITED)
Three Months Ended
September 30
--------------------------
1995 1994
-------- --------
Cash flows from operating activities
Net income (loss) ($81,000) $86,000
------- ------
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Depreciation and amortization 32,000 66,000
Imputed interest 17,000
Effect on cash of changes in operating
assets and liabilities
Accounts receivable 146,000 27,000
Inventories (86,000) 89,000
Other current assets and other assets 10,000 (58,000)
Accounts payable and accrued expenses 69,000 103,000
Other liabilities 0 (385,000)
Deferred rent (11,000) (16,000)
------ ------
Total adjustments 160,000 (157,000)
------- -------
Net cash provided (used) by
operating activities 79,000 (71,000)
------- ------
Cash flows from investing activities:
Capital expenditures 0 (23,000)
------- ------
Net cash used in investing activities 0 (23,000)
------- ------
Cash flows from financing activities:
Proceeds from notes 0 222,000
Repayment of notes (210,000) (26,000)
Common stock issued for exercise of warrants 113,000 0
-------- -------
Net cash provided (used) by
financing activities (97,000) 196,000
------- -------
Net increase (decrease) in cash and
cash equivalents (18,000) 102,000
Cash and cash equivalents at beginning of period 35,000 64,000
-------- --------
Cash and cash equivalents at end of period $17,000 $166,000
-------- --------
-------- --------
Non Cash Transactions
During the three months ended September 30, 1995, 24,000 warrants were
exercised for an equal number of common shares of the Company's stock with
debentures in the amount of $4,320; and debentures in the amount of $20,680 were
converted into 103,400 common shares of the Company's stock .
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
NOTE 1 - INTERIM ACCOUNTING POLICY
The accompanying consolidated financial statements have not been audited by
independent accountants, but in the opinion of Source Scientific, Inc. and its
subsidiaries (the "Company"), such unaudited statements include all adjustments
necessary for a fair presentation of the financial position of the Company and
its consolidated subsidiaries as of September 30, 1995, and the results of
operations and changes in cash flow for the three-month periods ended September
30, 1995, and September 30, 1994. Although the Company believes that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations for the
three-month period ended September 30, 1995 are not necessarily indicative of
the results to be expected for the full year.
NOTE 2 - 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. Fully diluted and primary per common share amounts were the
same for the three months ended September 30, 1995, while for the three months
ended September 30, 1994, fully diluted per common share amounts would have been
anti-dilutive.
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable are summarized as follows:
September 30, June 30,
1995 1995
Trade receivables $ 323,000 $ 469,000
Less: Allowance for doubtful accounts (20,000) (20,000)
-------- -------
Net accounts receivable $ 303,000 $ 449,000
-------- -------
-------- -------
NOTE 4 - INVENTORIES:
Inventories are summarized as follows:
September 30, June 30,
1995 1995
Raw materials $1,125,000 $ 1,124,000
Work in process 256,000 180,000
Finished goods 160,000 171,000
--------- ---------
1,541,000 1,475,000
Less allowance for inventory, obsolescence
and excess quantities (187,000) (206,000)
--------- ---------
Net inventories $ 1,354,000 $ 1,269,000
--------- ---------
--------- ---------
<PAGE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, June 30,
1995 1995
----------- ----------
Machinery, equipment and tooling $290,000 $290,000
Leasehold improvements 34,000 34,000
Furniture and fixtures 59,000 59,000
-------- --------
383,000 383,000
Less accumulated depreciation and amortization (291,000) (262,000)
------- -------
Net property and equipment $92,000 $121,000
------- -------
------- -------
NOTE 6. NOTES PAYABLE:
Notes Payable include:
September 30, June 30,
1995 1995
----------- ----------
Loan payable to Silicon Valley Bank (the "Bank") 98,000 304,000
under a line of credit (the "Revolving Loan
Facility") with a maximum amount of $500,000,
or $1,000,000 subject to the Company imple-
menting lockbox arrangements regarding its
accounts receivable, or 65% of qualifying
accounts receivable, collateralized by
substantially all assets of the Company,
interest at 3% over the Bank's reference rate
(10.75% at September 30, 1994; 9.6% at
June 30, 1994), payable monthly. During October,
1994, the Bank agreed to increase the Company's
availability under the Revolving Loan Facility
to $600,000. In December, 1995, the revolving
loan was repaid by the Company.
Debentures payable to a former officer and two 60,000 60,000
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 $10.00 of debentures at the amended price
of $0.75 per share, exercisable at any time
through May 3, 1998, principal and interest
at 9.75%, due on June 30, 1995.
Notes payable uncollateralized, interest at 20,000 23,000
8% to 10% with due dates ranging
from October, 1994, to April, 1997. ------- -------
$178,000 $387,000
------- -------
------- -------
NOTE 7. 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.
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.
<PAGE>
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 Company is two months
in arrears in its lease payments and has received a notice of delinquency and
default of its lease agreement with its landlord. Management believes it will be
able to negotiate a grace period for the delinquent lease payments which will
enable the Company to continue occupancy of its facility, although there can be
no assurance that such grace period will be allowed by the landlord.
ITEM 2. Management's Discussion and Analysis of Operations and
Results of Operations
Results of Operations
Comparison of 1995 to 1994 first quarterly periods
The following table shows the changes in operations between the first
quarterly periods ended September 30, 1994 and September 30, 1995. During the
1995 first quarterly period, sales declined by approximately 20% due to a
decrease in the sales of the Lamda product line of approximately $100,000,
completion of a manufacturing contract in 1994 and backorders of approximately
$160,000 at September 30, 1995, due to the Company's liquidity problems which
constrained the procurement of components and shipment of product
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED CHANGE FROM
SEPTEMBER 30, 1994 SEPTEMBER 30, 1995 SEPT 1994 TO SEPT 1995
--------------------- -------------------- ------------------------
(000's) % of (000's) % of (000's)
Amount Sales Amount Sales Amount % Change
-------- -------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,395 100.0 $1,103 100.0 ($292) 0.0
Cost of goods sold 859 61.6 687 62.3 (172) 0.7
----- ----- ----- ---- --- -----
Gross profit 536 38.4 416 37.7 (120) -0.7
----- ----- ----- ---- --- -----
Selling, general and administration 521 37.3 298 27.0 (223) -10.3
Research and development 223 16.0 198 18.0 (25) 2.0
----- ----- ----- ---- --- -----
Total operating expenses 744 53.3 496 45.0 (248) -8.4
----- ----- ----- ---- --- -----
Operating income (loss) (208) 14.9 (80) -7.3 128 7.7
Interest, net 15 1.1 1 0.1 14 -1.0
----- ----- ----- ---- --- -----
Loss before extraordinary item (223) -16.0 (81) -7.3 142 8.6
Extraordinary item - gain from 309 22.2 0 0.0 (309) -22.2
reduction of lease obligations ----- ----- ----- ---- --- -----
Net income (loss) $86 6.2 ($81) -7.3 ($167) 13.5
----- ----- ----- ---- --- -----
----- ----- ----- ---- --- -----
</TABLE>
Net Sales. The decrease in net sales from the 1994 first quarterly period to the
1995 first quarterly period was primarily due to the decline of the sales of the
Lamda product line and the Company's inability to complete and ship products
because of the Company's liquidity problems. 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. 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 guarantee 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 significant difference in
the Company's profitability within the current year.
<PAGE>
Cost of Goods Sold. For the quarter ended September 30, 1995, the cost of goods
sold was 62.3% compared to 61.6% for the quarter ended September 30, 1994. The
increase was due to lower sales volume which reduced the manufacturing
absorption for the quarter.
Operating Expenses. Overall operating expenses declined as a percentage of sales
due to management's implementation of a cost reduction plan which included
reduction in salary rates for all employees, reduction in the number of
employees, contracts renegotiation and operating expense control. For the
quarter ended September 30, 1995, the Company realized approximately 43%
reduction in selling, general and administrative expenses and 11% reduction in
research and development expenses, compared to the quarter ended September 30,
1994. Research and development expenses reduced at a lower rate in order to
complete development of new products.
Inventory Obsolescence. The allowance for inventory obsolescence and excess
quantities declined by approximately $19,000 during the quarter ended September
30, 1995. This change of 9% resulted from the reduction in slow moving parts
during the quarter. A large percentage of newly acquired inventory will be used
to build units for sales in the next quarter. Historically, most materials in
inventory have been used to build products under OEM contracts and, therefore,
the Company has had minimal inventory obsolescence.
Liquidity and Capital Resources and Plan of Operation
The Company continues to suffer a liquidity problem. As of the date
of this report, the backlog of firm orders is growing; however, the Company's
liquidity problems constrained procurement of components and shipment of
product. 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.
As of September 30, 1994, the Company had a working capital deficiency
of approximately $618,000. As of September 30, 1995, the working capital is
approximately $522,000 which represents an increase in the operating capital of
$1,140,000. Management believes the increase in working capital is a indication
of the Company's progress toward financial stability, however, the Company
still requires additional working capital for its current operations. There can
be no assurance that the Company will obtain additional working capital, or that
such additional working capital obtained will be sufficient to achieve financial
stability for the Company. The Company did not have any material commitments for
capital expenditures as of the quarter ended September 30, 1995, or as of the
date of this Report.
To decrease its operating costs, the Company implemented a cost
containment plan during the quarterly period ending September 30, 1995, which
included a reduction in its workforce, reduction in its salary rates and a
temporarily reduced work week for some departments.
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 continuing due diligence proceedings and there can be no assurance
that any transaction between the Company and Lifestream will be closed.
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.
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. Exhibits and representation on Form 8K
(a) Exhibits:
10.1 Agreement and Plan of Merger, dated November 3, 1995,
between the Company and Biopool International, Inc.,
for the acquisition of Source Scientific, Inc.
27.2 Financial Data Schedule (included only with the elect-
ronic filing to Securities and Exchange Commission)
99.1 News release issued by the Registrant on December 5,
1995, announcing the termination of the Agreement and
Plan of Merger with Biopool.
(b) Reports:
Current report on Form 8-K was filed on September 30, 1995,
describing a non-binding letter of intent signed by the
Registrant on September 27, 1995, for the acquisition of the
Company by Biopool International, Inc. The Report also announced
the resignation of Dr. Jacob Y. Terner from the Board of
Directors of Source Scientific, Inc.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SOURCE SCIENTIFIC, INC.
By: /S/ RICHARD A. SULLIVAN
Date: 12-21-95 ----------------------------
Richard A. Sullivan
President and Chief Executive Officer
By: /S/ MOKHTAR A. SHAWKY
Date: 12-21-95 ----------------------------
Mokhtar A. Shawky
Chief Financial Officer
