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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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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
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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 9, 1996: 19,771,175
Transitional Small Business Disclosure Format (Check one): Yes __ No X .
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<PAGE>
ITEM 1. Financial Statements:
SOURCE SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1996 and June 30, 1995
<TABLE>
<CAPTION>
ASSETS
MARCH 31, 1996
(UNAUDITED) JUNE 30, 1995
------------ -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 16,000 $ 35,000
Accounts receivable, net 791,000 449,000
Inventories 1,352,000 1,269,000
Other current assets 233,000 180,000
--------- ---------
Total current assets 2,392,000 1,933,000
Property and equipment, net 45,000 121,000
Excess of cost over fair value of net assets
acquired, less accumulated amortization of
$20,000 (March, 1996); $12,000 (June, 1995) 69,000 78,000
Other assets, net 70,000 81,000
--------- ---------
Total assets $2,576,000 $2,213,000
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 838,000 $ 868,000
Accrued expenses 195,000 204,000
Notes payable, current portion 760,000 387,000
Deferred rent, current portion 2,000 2,000
Lease obligation, current portion 0 30,000
--------- ---------
Total current liabilities 1,795,000 1,491,000
Deferred rent 250,000 230,000
---------- --------- ---------
Total liabilities 2,045,000 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 per share; at March 31, 1996,
$17.93 per share 28,000 23,000
Shareholders' equity
Common stock; no par value, authorized 75,000,000 shares;
20,103,575 and 14,612,034 shares issued and outstanding
at March 31, 1996 and June 30, 1995, respectively 20,877,000 20,744,000
Accumulated deficit (20,051,000) (19,952,000)
Shareholder notes receivable (323,000) (323,000)
---------- ----------
Total shareholders' equity 503,000 469,000
--------- ---------
Total liabilities and shareholders' equity $2,576,000 $2,213,000
========= =========
</TABLE>
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended March 31, 1996 and March 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Product sales 1,172,000 $720,000 $2,505,000 $2,234,000
Research contract sales 28,000 0 62,000 184,000
Service contract sales 377,000 349,000 1,234,000 1,222,000
--------- --------- --------- ---------
Total net sales 1,577,000 1,069,000 3,801,000 3,640,000
--------- --------- --------- ---------
Cost of product sales* 706,000 546,000 1,644,000 1,674,000
Cost of research contract sales 16,000 0 32,000 112,000
Cost of service contract sales 214,000 180,000 648,000 564,000
------- ------- --------- ---------
Total cost of sales 936,000 726,000 2,324,000 2,350,000
------- ------- --------- ---------
Gross profit 641,000 343,000 1,477,000 1,290,000
Selling, general and administrative 333,000 529,000 1,098,000 1,667,000
Research and development* 138,000 84,000 409,000 305,000
------- ------- --------- ---------
Total operating expenses 471,000 613,000 1,507,000 1,972,000
------- ------- --------- ---------
Operating income (loss) 170,000 (270,000) (30,000) (682,000)
------- ------- ------ -------
Interest, net (59,000) (9,000) (70,000) (34,000)
------ ------- ------- -------
(Loss) from continuing operations 111,000 (279,000) (100,000) (716,000)
------- ------- ------- -------
Extraordinary items
Gain from reduction of Lease obligation 0 0 0 309,000
------- ------- ------- -------
Net (loss) $111,000 ($279,000) ($100,000) ($407,000)
======= ======= ======= =======
Per common share amounts
Continuing operations 0.01 (0.02) (0.01) (0.05)
Discontinued operations 0.00 0.00 0.00 0.02
---- ---- ---- ----
Net (loss) $0.01 ($0.02) ($0.01) ($0.03)
==== ==== ==== ====
Weighted average number of
common shares outstanding 18,096,000 15,401,000 18,096,000 15,401,000
========== ========== ========== ==========
</TABLE>
(See notes to consolidated financial statements.)
* 1995 numbers are restated to reflect cost allocation of Engineering Support
from Research and Development to Manufacturing overhead and Cost of Goods
Sold.
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 1996 and March 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months Ended
March 31
---------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($100,000) ($407,000)
-------- -------
Adjustments to reconcile income (loss) to net cash used
in operating activities
Depreciation and amortization 97,000 79,000
Effect on cash of changes in operating assets and liabilities
Accounts receivable (341,000) 333,000
Inventories (82,000) 262,000
Other current assets and other assets (62,000) (124,000)
Accounts payable and accrued expenses (14,000) 49,000
Other liabilities 0 (77,000)
Deferred rent and lease costs (10,000) (475,000)
------ -------
Total adjustments (412,000) 47,000
------- ------
Net cash used in operating activities (512,000) (544,000)
------- -------
Cash flows from investing activities:
Capital expenditures (12,000) (28,000)
------- ------
Net cash used in investing activities (12,000) (28,000)
------- -------
Cash flows from financing activities:
Proceeds (Payments) on long-term debt 0 112,000
Proceeds from notes payable 373,000 52,000
Proceeds from sale of common stock 133,000 376,000
------- -------
Net cash provided by financing activities 505,000 724,000
------- -------
Net increase in cash and cash equivalents (19,000) 152,000
Cash and cash equivalents at beginning of period 35,000 64,000
-------- ---------
Cash and cash equivalents at end of period $16,000 $216,000
====== =======
</TABLE>
Non-Cash Transactions
During the nine months ended March 31, 1996, 3,238,500 warrants were
exchanged for an equal number of shares of common stock; a debenture in the
amount of $14,959.00 and accrued interest in the amount of $1,385.00 was
converted into 164,185 shares of common stock at the rate of $0.13 per share;
275,000 Networld Unit Warrants and 275,000 Networld Underlying Warrants were
converted into 275,000 shares of common stock; 479,320 Dealer Warrants and
479,320 Dealer B Warrants were converted into 905,414 shares of common stock;
24,000 warrants were exercised for an equal number of shares of common stock in
consideration of cancellation of debenture interest in the amount of $4,320;
debentures in the amount of $20,680 were converted into 103,400 shares of common
stock; and options with an exercise price of of $1,075.00 were exercised for
134,375 shares of common stock.
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
NOTE 1 - INTERIM ACCOUNTING POLICY
The accompanying consolidated financial statements have not been audited by
independent certified public 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 March 31, 1996,
and the results of operations and changes in cash flow for the nine-month
periods ended March 31, 1996, and March 31, 1995. 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
nine-month period ended March 31, 1996 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 period into the relevant statement of
operations caption. Fully diluted and primary per common share amounts were the
same for the nine months ended March 31, 1996, while for the nine months ended
March 31, 1995, fully diluted per common share amounts would have been
anti-dilutive.
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---------- ---------
<S> <C> <C>
Trade receivables $ 811,000 $ 469,000
Less: Allowance for doubtful accounts (20,000) ( 20,000)
------- -------
Net accounts receivable $ 791,000 $ 449,000
======== ========
</TABLE>
NOTE 4 - INVENTORIES:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $1,119,000 $1,124,000
Work in process 326,000 180,000
Finished goods 105,000 171,000
--------- ---------
1,550,000 1,475,000
Less allowance for inventory obsolescence
and excess quantities (198,000) (206,000)
--------- ---------
Net inventories $1,352,000 $1,269,000
========= =========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
-------- --------
<S> <C> <C>
Machinery, equipment and tooling $293,000 $290,000
Leasehold improvements 34,000 34,000
Furniture and fixtures 59,000 59,000
------- -------
386,000 383,000
Less accumulated depreciation and amortization (341,000) (262,000)
------- -------
Net property and equipment $45,000 $121,000
====== =======
</TABLE>
<PAGE>
NOTE 6. NOTES PAYABLE:
Notes Payable include:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
-------- --------
<S> <C> <C>
Convertible Debentures payable to four unaffiliated individuals in the $310,000 $ 0
varying face amounts of $20,000 to $100,000 each, convertible at any time
into shares of the Company's common stock at the conversion price of $0.053
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 $0.133 of debentures at the amended price of $0.25 per share,
exercisable at any time through March 31, 1999, principal and interest at
12.0%.
Convertible Debentures payable to six unaffiliated individuals and one 240,000 0
individual owning more than 10% of the Company's common stock,
who is not an officer or director, in the varying face amounts of $10,000
to $75,000 each, convertible at any time into shares of the Company's
common stock at the conversion price of $0.08 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 $0.20 of debentures at the
amended price of $0.25 per share, exercisable at any time through March 31,
1999, principal and interest at 12.0%.
Note payable to Biopool International bearing interest at 7%, all due 145,000 0
and payable on March 28, 1996. The Company renegotiated the Note
to be paid on a payment schedule with principal payments of $20,000 on
February 15, 1996, and on each 15th day of the months July through November,
1996; a principal payment of $15,000 plus accrued interest of $5,688.22 on
March 15, 1996; principal payments of $5,000 each on the 15th day of the
months April through June, 1996; and a final principal payment of $30,000 and
interest of $6,033.98 on December 15, 1996.
Loan payable to Silicon Valley Bank (the "Bank") under a line of credit 0 304,000
(the "Revolving Loan Facility") with a maximum amount of $500,000, or
$1,000,000 subject to the Company implementing 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 other unaffiliated individuals in 45,000 60,000
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%. The Company settled one debenture
(See "Subsequent Events"); agreed to partial conversion of principle and interest
at $0.13 per share of common stock and repayment schedule for one debenture;
and is currently renegotiating terms on the remaining debenture.
Notes payable uncollateralized, interest at 8% to 10% with due dates ranging 20,000 23,000
from January, 1997, to April, 1997. ------- -------
$760,000 $387,000
======= =======
</TABLE>
NOTE 7. LEASE OBLIGATION:
Lease obligation, amounting to $30,000 at June 30, 1995, was paid in full during
the 9-month period ended March 31, 1996. The amount 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. The remaining balance of $30,000
which was owed to the Company's former landlord at June 30, 1995 was paid in
full during the nine months ended March 31, 1996. The settlement reduced the
Company's accrued lease obligation at June 30, 1994 by $309,000, and an
extraordinary gain of this amount is reflected in the 1995 statement of
operations.
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. On February 7, 1996, the
owners of the property which is occupied and leased by the Company filed an
action against the Company for delinquent rent and possession of the real
property. The Plaintiff and the Company signed an Agreement effective February
15, 1996, which included the immediate payment of amounts in arrears for half of
the rent for November, 1995, and for the months of December, 1995, and January,
1996. The Company also negotiated terms of a partial deferral of rent payments
for a 6-month period which commenced on February 1, 1996. The Company made all
payments pursuant to the Agreement, however there can be no assurance that such
agreement will enable the Company to meet the payment terms with its current and
projected cash flow and sources of cash. The Company is seeking a sub-lease
tenant for unoccupied space in the Company's facility although there can be no
assurance the Company will be successful in acquiring a tenant suitable under
the conditions of sub-lease which include acceptance by the owners and property
managers of the facility.
ITEM 2. Management's Discussion and Analysis of Operations and
Results of Operations
Results of Operations
Comparison of 1996 to 1995, 3-month and 9-month periods ended March 31
The following table shows the changes in operations between the 3-month and
9-month periods ended March 31, 1996 and March 31, 1995. During the third
quarter ended March 31, 1996, sales increased by approximately 48% compared to
the third quarter ended March 31, 1995. Sales also increased for the 9-month
period ended March 31, 1996, by approximately 5% compared to the 9-month period
ended March 31, 1995. The increase in sales and the profitability of the 3-month
and 9-month periods ended March 31, 1996, compared to the 3-month and 9-month
periods ended March 31, 1995, resulted from the improvement in the Company's
liquidity. During the prior period, liquidity problems had constrained
procurement of components and delayed shipments of product.
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED CHANGE FROM
MARCH 31, 1995 MARCH 31, 1996 MAR. 1995 TO MAR. 1996
-----------------------------------------------------------------------------
% of % of
Amount Sales Amount Sales Amount %
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,069 100.0 1,577 100.0 $508 0.0
Cost of goods sold* 726 67.9 936 59.4 210 -8.6
--- ----- ----- ----- --- ----
Gross profit 343 32.1 641 40.6 298 8.6
--- ----- ----- ----- --- ----
Selling, general and administrative 529 49.5 333 21.1 (196) -28.4
Research and development* 84 7.9 138 8.8 54 0.9
--- ---- --- --- ---- ----
Total operating expenses 613 57.3 471 29.9 (142) -27.5
--- ---- --- ---- ----- -----
Operating income (loss) (270) -25.3 170 10.8 440 36.0
Interest, net (9) (0.8) (59) (3.7) (50) (2.9)
--- ---- --- ---- --- ----
Income (loss) from continuing (279) -26.1 111 7.0 390 33.1
operations
Discontinued operations
Income from operations 0 0.0 0 0.0 0 0.0
--- ---- --- --- --- ----
Net income (loss) ($279) -26.1 $111 7.0 $390 33.1
==== ==== ==== === ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED CHANGE FROM
MARCH 31, 1995 MARCH 31, 1996 MAR. 1995 TO MAR. 1996
-----------------------------------------------------------------------------
% of % of
Amount Sales Amount Sales Amount %
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $3,640 100.0 3,801 100.0 $161 0.0
Cost of goods sold* 2,350 64.6 2,324 61.1 (26) -3.4
----- ----- ----- ---- --- ---
Gross profit 1,290 35.4 1,477 38.9 187 3.4
----- ---- ----- ---- --- ---
Selling, general and administrative 1,667 45.8 1,098 28.9 (569) -16.9
Research and development* 305 8.4 409 10.8 104 2.4
----- ---- ----- ---- --- ---
Total operating expenses 1,972 54.2 1,507 39.6 (465) -14.5
----- ---- ----- ---- ---- ----
Operating income (loss) (682) -18.7 (30) -0.8 652 17.9
Interest, net (34) 0.9 (70) 1.8 (36) 0.9
----- --- --- --- ---- ---
Income (loss) (716) -19.7 (100) -2.6 616 17.0
Extraordinary items
Gain from reduction 309 8.5 0 0.0 (309) -8.5
---- --- ---- --- ---- ----
Net income (loss) ($407) -11.2 ($100) -2.6 $307 8.6
==== ==== ==== ==== ==== ===
</TABLE>
* 1995 numbers are restated to reflect cost allocation of Engineering Support
from Research and Development to Manufacturing overhead and Cost of Goods
Sold.
Net Sales. The increase in sales for the 3-month and 9-month periods ended March
31, 1996 compared to the 3-month and 9-month periods ended March 31, 1995, was
due to the increase in customer orders, introduction of a new product line and
the infusion of cash from convertible debentures which allowed the Company to
acquire material needed to manufacture and fulfill customer purchase orders. As
of March 31, 1996, the Company had backorders of $314,000 and a total backlog of
$2,595,000, compared to backorders of $118,000 and a total backlog of $2,916,000
as at March 31, 1995. On an ongoing basis, the Company has an average of 25
quotes submitted to potential customers to provide research and development,
manufacturing and product service contracts, although there is no assurance such
contracts will be achieved by the Company, or that in the event any of such
contracts are awarded, sufficient economic value will be realized to make a
significant difference in the Company's profitability within the current fiscal
year.
Cost of Goods Sold. The decrease in cost of goods sold as a percentage of sales
from the 3-month and 9-month periods ended March 31, 1996, compared to the
3-month and 9-month periods ended March 31, 1995, was due to the increase in
manufacturing absorption, and a more favorable product mix. The gross profit in
1996 compared to 1995, improved by approximately 9% for the 3-month period and
3.5% for the 9-month period. This Report reflects the Company's restatement of
its 1995 numbers for cost allocation of Engineering Support from Research and
Development to Manufacturing Overhead and Cost of Goods Sold. In order to
accurately allocate costs of engineering support directly attributable to the
manufacturing process, 1995 numbers were restated to reflect proper cost
allocation of Engineering Support, from Research and Development to
Manufacturing Overhead and Cost of Goods Sold.
Operating Expenses. Overall operating expenses and selling, general and
administrative expenses declined as a percentage of sales from 55% for the
nine-month period ended March 31, 1995, to 40% for the nine-month period ending
March 31, 1996. The decline was due to the management's implementation of a cost
reduction plan which included reduced salary rates for all employees, a
workforce reduction, renegotiation of lease and service related contracts, and
operating cost controls. For the 3-month period ended March 31, 1996, the
Company recognized approximately 37% reduction in selling, general and
administrative expenses, and a 64% increase in research and development expenses
compared to the 3-month period ended March 31, 1995. The increase in research
and development costs is due to the Company's successful effort in obtaining the
ISO9001 certification, as well as its qualification of the Company's major
products for the CE quality mark (required for products sold in the countries
belonging to European Free Trade Association). Management believes the
achievement of such certification will enhance the Company's ability to
manufacture and sell its products worldwide, although there can be no assurance
that such certification will result in profitable contracts for the Company.
Inventory Obsolescence. The allowance for inventory obsolescence and excess
quantities as a percentage of total inventory decreased slightly from 18% as of
March 31, 1995 to 17.7% as of March 31, 1996. The decrease reflected the
decrease in slow-moving inventory in raw materials and finished goods of the
Lamda product line. 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's liquidity improved during the third quarter ended March
31, 1996, due to convertible debentures issued by the Company in the aggregate
amount of $550,000, in addition to cash generated from operations. 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.
At March 31, 1996, the Company's working capital was $597,000 in
comparison to the working capital of $442,000 at June 30, 1995. Management
believes the increase in working capital is an indication of the Company's
progress towards financial stability, however, the Company still requires
additional operating capital for its current operations. In April, 1996, the
Company issued $79,000 in convertible debentures (See "Subsequent Events")
which, in addition to the convertible debentures issued during the third quarter
ended March 31, 1996, helped to relieve the Company's critical shortage of cash
to purchase raw materials. There can be no assurance that the additional
operating 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 March 31, 1996, or as of the date of this
Report.
The Company continued to decrease its operating costs, through its cost
containment plan during the nine-month period ended March 31, 1996, which
included a further reduction in its workforce and a combination of certain job
functions. The Company is seeking a sub-lease tenant for unoccupied space in the
Company's facility although there can be no assurance the Company will be
successful in acquiring a tenant suitable under the conditions of sub-lease
which include acceptance by the owners and property managers of the facility.
In March, 1996, a convertible debenture in the original amount of
$19,959 was amended for the new principle amount of $5,000 subsequent to the
partial conversion of the debenture into 164,185 shares of common stock at the
rate of $0.13 per share.
During the month of February, 1996, in preparation for future sales of
the Company's securities, as to the result of which sales there can be no
assurance that the Company will receive substantial operating funds, the Company
issued 3,238,500 shares of common stock to the holders of the equivalent number
of A Warrants; 275,000 shares of common stock to the holders of Networld
Warrants and Networld Underlying Warrants on the basis of 2 warrants for each
share of common stock; and 905,414 shares of common stock to the holders of
958,640 Dealer Warrants and B Warrants, thereby canceling all outstanding A
Warrants, Networld Warrants, Networld Underlying Warrants, Dealer Warrants and B
Warrants.
On January 26, 1996, the Company notified holders of its Series C
Preferred Stock that the Redemption Date of June 28, 1996 had been established
for redeeming the preferred shares at the Redemption Price of $17.93 in
accordance with the terms of the preferred certificates for the Series C
Preferred Stock. At the Redemption Date, the aggregate Redemption Price to be
paid by the Company is $27,881.15 to four holders of such preferred stock.
In February, 1996, as the result of negotiations with Biopool
International, the Company's promissory note in the amount of $180,000 due on
March 28, 1996, was replaced with a Note through calendar year 1996 (the "New
Note"). The New Note provides an interest rate of 7% until March 15, 1996, and
8% through the balance of the term of the Note, and a payment schedule as
follows: a principal payment of $20,000 on February 15, and on each 15th day of
the months July through November, 1996; a principal payment of $15,000 plus
accrued interest of $5,688.22 on March 15, 1996; principal payments of $5,000
each on the 15th day of the months April through June, 1996; and a final
principal payment of $30,000 and interest of $6,033.98 on December 15, 1996.
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 have not further progressed toward a final agreement and there can be no
assurance that any transaction between the Company and Lifestream will close.
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.
In February 1995, the Company signed a factoring agreement with Silicon
Valley Financial Services, a subsidiary of Silicon Valley Bank, to finance 80%
of the face amount of the Company's accounts receivable, at a rate of 2.5% per
month, plus 1% administrative fees. On December 8, 1995, the factoring agreement
was revised to reduce the finance rates to 1.5% on $150,000 of receivables and
2.25% on receivables to a maximum of $250,000, plus 1% administrative fee. The
Company's objective is to minimize factoring of accounts receivable and seek a
line of credit with a commercial bank or finance institution. There can be no
assurance the Company will be successful in meeting its commitments by
minimizing factoring of its accounts receivable, or that a commercial banking or
finance institution will provide favorable terms to the Company's financing
needs.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
On February 7, 1996, the owners of the property which is occupied and
leased by the Company filed an action against the Company for delinquent rent
and possession of the real property, under TR Brell Corp. an Illinois company v.
Source Scientific, Inc. etc. et al, Orange County Superior Court Case #759297.
The Plaintiff and the Company reached a Settlement Agreement, which provided for
an immediate payment of amounts in arrears and deferral of partial rent due over
a six-month period. At the date of this report, the Company has complied with
the payment terms and is current with its monthly lease obligations.
On September 20, 1995, the Company filed litigation under Source
Scientific, Inc. etc. et al v. Scientific Measurement Systems, Inc. etc. et al,
Orange County Superior Court Case #751112, for breach of contract and related
actions. Scientific Measurement Systems ("SMS") is located in Colorado.
Management has reached an understanding of terms of settlement in which SMS will
purchase from the Company finished goods, WIP and parts in the aggregate amount
of $189,705. SMS has claimed offsetting damages of $30,000. The parties
anticipate execution of a mutual release and settlement agreement and dismissal
document in the next few weeks.
ITEM 5. Other Information
Subsequent Events:
In April 1996, the Company issued four convertible debentures (the
"Debentures") totaling $79,000 the terms of which provide for conversion to
shares of common stock at the initial price of $0.08 per share. With the
issuance of the debentures, the Company granted to each holder of the Debentures
five warrants for each $10.00 of Debenture, which warrants are exerciseable at
$0.25 per warrant into an equivalent number of shares of common stock.
In April 1996, the Company reached an agreement with Mr. Peter C. Yeung
regarding the disposition of mutual interests between the parties which resulted
in the cancellation of Mr. Yeung's Notes due to the Company in the aggregate
amount of $166,200 and accrued interest thereon, as well as 332,400 shares of
Common Stock of the Company which acted as collateral security for the Notes. In
addition, the principle of Mr. Yeung's 1993 Debenture in the amount of $20,000
and accrued interest thereon was eliminated as well as a remaining balance of
$4,166.33 in severance due to Mr. Yeung. As the result, the Company paid
$4,650.78 to Mr. Yeung on April 12, 1996, which completed the mutual obligations
between the parties.
On April 23, 1996, the Company registered its Source Scientific, Inc.
1981 Stock Option Plan (Post effective Amendment No. 1), with the Securities and
Exchange Commission, on Form S-8. The aggregate number of securities registered
is 3,500,000 under the Plan as amended and previously approved by the
shareholders of the Company at the Annual Shareholders Meeting on December 14,
1994. The Company issued grants to all of its employees as at March 1, 1996, in
the aggregate amount of 1,886,000 options, each for one share of common stock,
at the exercise price of $0.14 per share.
ITEM 6. Exhibit and representation on Form 8K
(a) Exhibits:
*10.26 Form of Convertible Debenture, executed in February
and March, 1996, between the Company and six
individuals, in the aggregate amount of $279,000.
*10.27 Settlement Agreement, effective February 18, 1996,
between TR Brell, Cal Corp and the Company regarding
settlement of claims, repayment schedule and deferred
rents for the Company's facility in Garden Grove.
27.2 Financial Data Schedule (included only with the
electronic filing for the Securities and Exchange
Commission, and not attached as an exhibit herein).
(b) Reports:
None
(Items marked with * are included herewith.)
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: 05-14-96 Richard A. Sullivan
President and Chief Executive Officer
By: /s/ MOKHTAR A. SHAWKY
Date: 05-14-96 Mokhtar A. Shawky
Chief Financial Officer
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, ASSIGNED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED OR QUALIFIED THEREUNDER OR UNLESS AN
EXEMPTION THEREFROM IS AVAILABLE.
SOURCE SCIENTIFIC, INC.
12.0% Convertible Debenture
Debenture No. 96F-XXX
$XXX,000.00 Debenture Date: ____________, 1996.
FOR VALUE RECEIVED, Source Scientific, Inc. (herein the "Company"), a
corporation organized and existing under the laws of California with its
principal office at 7390 Lincoln Way, Garden Grove, California 92641, hereby
promises to pay to or the registered assigns, (the "Holder") the principal sum
of Dollars ($XXX,000.00) on March 31, 1998, in the manner more
specifically set forth below. Interest at the rate of twelve percent (12.0%) per
annum (computed on the basis of a 365-day year) on the unpaid balance of
principal thereof shall be paid on the first and second anniversaries of the
Debenture Date in the manner set forth below.
Upon the first anniversary of the Debenture Date, all accrued interest
shall be added to the initial principal balance of this Debenture. Upon the
second anniversary of the Debenture Date, all interest that shall have accrued
during the year then ended shall be payable in Common Stock at the Conversion
Price then in effect; provided that such accrued interest shall be payable in
cash only if the Holder hereof shall have requested in writing such form of
payment not earlier than forty-five (45) days before such second anniversary and
not later than fifteen (15) days before such second anniversary.
The Company shall have the option to prepay in full the principal
amount of this Debenture from time to time, along with interest accrued on the
amount prepaid to the prepayment date, at any time after giving the Holder a
thirty (30) day written notice prior to prepayment. Upon receipt of any such
notice, the Holder has the right to convert the Debenture into Common Stock
within the thirty (30) day period, at the conversion rate set forth in paragraph
2.1 hereof.
In the event of a dissolution, liquidation, sale or merger of the
Company in which the Company is not the surviving entity, the outstanding
principal amount of the Debenture plus any accrued and unpaid interest shall
become due and payable immediately, in the manner set forth below, unless
otherwise agreed to in writing with the Holder. The Company shall be considered
the surviving corporation following a merger or consolidation involving the
Company if the holders of outstanding voting securities of the Company
immediately prior to the merger or consolidation own equity securities
possessing more than fifty percent (50%) of the voting power of the resulting
corporation existing following the merger or consolidation; provided, however,
that (i) in making the determination of ownership of equity securities by the
shareholders of the resulting corporation existing immediately after a merger or
consolidation, equity securities which the shareholders of the Company owned
immediately before the merger or consolidation as shareholders of another party
to the transaction shall be disregarded; and (ii) voting securities of a
corporation shall be calculated by assuming the conversion of all equity
securities convertible (immediately or at some future time) into shares entitled
to vote, including outstanding warrants and options.
<PAGE>
1. GENERAL.
1.1 Definitions.
(a) Holder. The term "Holder" shall mean the registered holder of
the Debenture.
(b) Maturity Date. Date upon which the principal and any accrued,
but unpaid cash interest is due.
(c) Debenture Date. Date, as noted above, upon which the Debenture
is executed by the Company in receipt of funds for the full
amount of the Debenture.
(d) Common Stock. The term "Common Stock" as used in this Debenture
shall include any class of capital stock of the Company, now or hereafter
authorized, the right of which to share in distributions of earnings and assets
of the Company is without limit as to any amount or percentage; provided,
however, that Common Stock issuable upon conversion of this Debenture shall
include only shares of Common Stock of the Company authorized on the date hereof
and Common Stock or other securities issued in substitution or exchange for the
presently authorized Common Stock in connection with a reorganization,
reclassification, merger or sale of assets.
(e) Conversion Price. The term "Conversion Price" shall mean the
conversion price per share to be applied upon Conversion and shall be the
conversion price in effect at the date of delivery of notice of conversion to
the company determined as provided herein.
(f) Registrable Securities. The term "Registrable Securities" shall
mean (i) Common Stock issuable upon conversion of the Debenture; and (ii) Common
Stock issuable pursuant to the Attached Warrants, subject to granting and
exercise under paragraph 3.1 of this Debenture; provided, however, that shares
of Common Stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction, or (B) sold or are available for sale in the opinion of counsel to
the Company in a single transaction exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended, (the
"Securities Act") so that all transfer restrictions and restrictive legends with
respect thereto are or may be removed upon the consummation of such sale.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing with the Securities and Exchange
Commission (the "Commission") a registration statement in compliance with the
Securities and Exchange Act of 1933, as amended (the "Securities Act,") and the
declaration or ordering of the effectiveness of such registration statement by
the Commission.
1.2 Series of Debentures. This Debenture is one of a series of twelve
percent (12.0%) Convertible Subordinated Debentures (the "Debentures") that may
be issued by the Company, up to the aggregate amount of Eight Hundred Fifty
Thousand Dollars ($850,000).
1.3 Waivers. The Company hereby waives demand, presentment for payment,
notice of dishonor, protest, notice of protest and diligence, and agrees that
the Holder hereof may extend the time for payment or accept partial payment
without discharging or releasing the Company.
1.4 Subordination. This Debenture will remain subordinate to the
Company's factoring agreement with Silicon Valley Bank until the Company works
out of such factoring arrangement with Silicon Valley Bank. The Company provides
a security agreement in favor of the Holder of the Debenture, regarding which
filings will be made pursuant to and under the Uniform Commercial Code (UCC). A
security interest was also granted in favor of Biopool International pursuant to
which a UCC filing was made, and such security arrangement will remain until the
loan provided by Biopool International is satisfied. A majority (51%) of the
Holders of Debentures for this series may agree to amend the terms of all
Debentures in the series to allow the Company to establish a relationship with a
financial institution for purposes of providing the Company with a line of
credit or otherwise.
2. CONVERSION.
2.1 Conversion Right. At any time after the Debenture Date, the sum of
the initial principal, and all interest added thereto, if any, may be converted
into Common Stock at the Conversion Price of eight cents ($0.08) per share or
five cents ($0.05) per share (in the event that the Company has not earned,
before interest, taxes, depreciation, and amortization, the sum of Two Hundred
Fifty Thousand Dollars ($250,000) in the aggregate for the first two full fiscal
quarters following the Company's sale of not less than Five Hundred Thousand
Dollars ($500,000) of this series of Debentures), or each as adjusted in
accordance with paragraph 2.2.
2.2 Adjustment to Conversion Price. The conversion price, number and
kind of securities to be issued upon exercise of the conversion rights shall be
subject to adjustment from time to time upon the happening of certain events, as
follows:
(a) Stock Combinations and Splits. In case the Company shall combine
all of the outstanding Common Stock of the Company proportionately into a
smaller number of shares, the Conversion Price hereunder in effect immediately
prior to such combination shall be proportionately increased and in case the
Company shall subdivide its Common Stock into a greater number of shares of
Common Stock, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced.
(b) Reorganizations. If any capital reorganization or reclassification
of the capital stock of the Company, or consolidation or merger of the Company
with another corporation (other than a merger or reorganization with another
corporation in which the Company is the surviving corporation and which does not
result in any reclassification or change in the capital stock of the Company,
provided, however, that any issuances of Common Stock in connection with such
merger or reorganization shall be subject to the other provisions of this
Section 2.2, if applicable), or the sale of all or substantially all of its
assets to another corporation shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby each Holder of a Debenture shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
of the Company immediately theretofore issuable upon conversion of such
Debenture, such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock immediately
theretofore issuable upon conversion of such Debenture had such reorganization,
reclassification, consolidation, merger of sale not taken place; and in any such
case appropriate provisions shall be made with respect to the rights and
interest of the holders of the Debentures to the end that the provisions hereof
(including without limitation provisions for adjustment of the Conversion Price
and of the number of shares issuable upon the conversion of any Debenture) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by a written instrument executed
and mailed by registered mail or delivered to each of such holders at the last
address thereof appearing on the books of the Company, the obligation of the
Company to deliver to such holders such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holders may be entitled to
upon such conversion of the Debentures.
<PAGE>
(c) Should the Company fail to use its best efforts to cause a
registration statement to be declared effective within nine (9) months after the
Debenture Date, the Conversion Price shall be reduced by one cent ($0.01) per
month, starting in the tenth (10th) month after the Debenture Date and
continuing until the Company has caused a registration statement to be declared
effective or until the Conversion Price is five cents ($0.05), whichever is
first.
2.3 Reservation of Shares. The Company agrees that, so long as any of
the Debentures shall remain outstanding, the Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized capital
stock, for the purpose of issue upon conversion of the Debentures, the full
number of shares of Common Stock then issuable upon conversion of all
outstanding Debentures. If the Common Stock shall be listed on any national
stock exchange, the Company at its expense shall include in its listing
application all of the shares of Common Stock reserved for issuance upon
conversion of the Debentures (subject to issuance upon notice of issuance to the
exchange).
2.4 Validity of Shares. The Company agrees that all shares of Common
Stock to be issued upon conversion of the Debentures will, upon issuance, be
legally and validly issued, fully paid and non-assessable and free to the Holder
thereof from all taxes, liens and charges with respect to the issue thereof.
2.5 Reports to Holder. The Company shall promptly provide to the Holder
all reports on Form 10-KSB and Form 10-QSB, and any other reports sent to
holders of the Company's Common Stock.
3. WARRANTS.
3.1 Attached Warrants. This Debenture is issued with warrants on the
basis of Five Hundred Thousand (500,000) warrants per $100,000 of Debenture (the
"Attached Warrants"), each Attached Warrant entitling the holder thereof to
purchase one (1) share of Common Stock at an exercise price of Twenty-five Cents
($0.25). If the Debenture principal amount is less than $100,000 or contains a
fractional amount of $100,00, the amount of Attached Warrants shall be
proportional based on the above original ratio. The Attached Warrants are
exercisable commencing on the Debenture Date and expire three (3) years from the
Debenture Date.
4. REGISTRATION.
4.1 Notice of Registration. If at any time within the period commencing
on the Debenture Date and ending three years after the Debenture Date, the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(a) give the Holder written notice within twenty (20) days of filing
an applicable registration statement with the Commission; and
(b) include in such registration (and any related qualification under
blue sky laws, or other compliance), and in any underwriting involved therein,
all of the Registrable Securities specified in a written request by the Holder
made within twenty (20) days after receipt of the Company's written notice under
paragraph 4.1(a) above, subject to the terms of paragraph 4.2 below. The Company
shall use its best efforts to cause such registration statement to be declared
effective.
4.2 Underwriting. If the registration of which the Company provides
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice given
pursuant to paragraph 4.1 (a), above. In such event, the right of the Holder to
<PAGE>
registration pursuant to this paragraph 4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided in this
Debenture. If the Holder proposes to distribute its Registrable Securities
through a registered offering involving an underwriter, the Holder, together
with the Company, shall enter into an underwriting agreement in customary form
with the managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this paragraph 4, if the managing
underwriter determines that marketing factors require a standard and customary
limitation of the number of shares to be underwritten, the managing underwriter
may limit the Registrable Securities, fairly and reasonably proportionally among
all shares anticipated for registration, to be included in such registration,
and the Company shall promptly so advise the Holder. If the Holder disapproves
of the terms of any such underwriting, the Holder may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration, and shall not be transferred in a public or private
distribution prior to 90 days after the effective date of the registration
statement relating thereto, or such other shorter period of time as the managing
underwriter may require. The Company may include shares of Common Stock held by
shareholders, other than the Holder, in such registration statement, provided
that, if the number of shares includible in such registration statement is not
sufficient to accommodate the Registrable Securities specified in the written
request of the Holder and the shares of Common Stock held by such other
shareholders including Common Stock held by officers, directors, employees, and
other insiders, and Common Stock held by consultants to the Company
(collectively the "Remaining Shareholders"), the Registrable Securities and the
shares of Common Stock of the Remaining Shareholders shall be appropriately
reduced on a pro rata basis.
The Company shall have the right to terminate or withdraw any registration
initiated by it under this paragraph 4 prior to the effectiveness of such
registration whether or not the Holder has elected to include securities in such
registration.
5. DEFAULT.
5.1 Events of Default. If and whenever any of the following events or
action (herein "Events of Default") shall occur, namely:
(a) The Company, after exhaustion of all appellate rights, is subject
to a final judgment, or enters into an agreement and settlement of any pending
or threatened litigation or similar proceeding, which requires the Company to
pay more than $500,000 in satisfaction of such final judgment or in settlement
of such pending or threatened litigation or similar proceeding or subjects the
Company to any levy of attachment or like process in excess of $500,000; or
(b) The Company makes an assignment for the benefit of creditors or
admits in writing its inability to pay its debts generally as they become due;
or an order for relief or judgment or decree is entered adjudicating the Company
bankrupt or insolvent; or the Company petitions or applies to any tribunal for
the appointment of a trustee, receiver, custodian or liquidator of the Company
or any substantial part of the assets of the Company; or the Company commences
any proceeding for a voluntary reorganization, liquidation or dissolution; or
any such petition or application is filed, or any such proceeding is commenced
against the Company and the Company by any act, consents thereto or acquiesces
therein, or such petition, application or proceeding is not dismissed within 60
days following receipt by the Company of notice thereof;
(c) The Company fails to pay the principal amount, and any cash
interest due, on the Maturity Date, if Holder chooses not to convert the
Debenture to Common Stock,
<PAGE>
then and in any such event the Holder may at any time (unless all defaults
theretofore have been remedied) at the Holder's option, by written notice to the
Company, declare the principal of and the accrued interest on the Debenture to
be immediately due and payable, without presentment, demand, protest, or any
notice (other than as required by this Debenture), all of which are hereby
waived by the Company. Payment thereof shall be made in the manner specified in
Section 2, above.
6. MISCELLANEOUS.
6.1 This Debenture shall be governed and enforced under and in accor-
dance with the laws of the State of California.
6.2 Notices, requests, demands and other communications (collectively,
"Notices") given or made pursuant to this Debenture shall be in writing and
shall be deemed to have been duly given if sent by registered or certified mail,
return receipt requested, postage and fees prepaid, or otherwise actually
delivered as follows: (a) if to the Company, to its principal corporate address;
and (b) if to the Holder, to the Holder's address on the Debenture register
maintained by the Company.
6.3 Notice shall be deemed duly given when received by the addressee
thereof. The Company and the Holder may from time to time change their
respective addresses for receiving Notices by giving written notice thereof in
the manner set forth above.
IN WITNESS WHEREOF this Debenture has been executed and delivered as a
sealed instrument at the place and on the date set forth above by the duly
authorized representatives of the Company.
SOURCE SCIENTIFIC, INC.
By:
Richard A. Sullivan
Its President and Chief Executive Officer
Debenture Holders:
Name:
SSN: __________________________
Address:
- -------------------------------
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (the "Agreement") is made and entered into as
of the Effective Date stated in paragraph 18 herein below, by and between TR
Brell, Cal Corp, an Illinois corporation ("TRB"), on the one hand, and SOURCE
SCIENTIFIC, INC., a California corporation ("SSI") on the other hand, and is
based upon the following recitals:
RECITALS
A. Pursuant to a lease agreement dated January 30, 1995 (the "Lease"),
TRB leased the premises more commonly known as 7390 Lincoln Way, Garden Grove,
California (the "Premises") to SSI, for a period of seven (7) years, commencing
February 1, 1995. A true and correct copy of the Lease is attached hereto as
Exhibit A and incorporated herein by this reference as if fully set forth
hereat.
B. TRB is the plaintiff and SSI is the defendant in the action entitled
TR Brell. Cal Corp, an Illinois corporation v. Source Scientific, Inc., a
California corporation, et. al., Orange County Superior Court, Case No. 759297,
filed February 7, 1996 (the "Action").
C. Without admission of any liability, fact, claim or defense by any
party hereto, the parties to this Agreement are now desirous of settling all of
the issues and/or disputes now existing between them on the terms and conditions
herein set forth below.
NOW, THEREFORE, in consideration of the mutual terms, performances,
conditions, warranties and covenants herein set forth below, and for good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
AGREEMENT
1. Incorporation of Recitals.
a. The Recitals set forth above are hereby incorporated by
this reference and made a part of the settlement terms of this Agreement.
2. Settlement of Claims
a. This Agreeement and any other documents executed in
connection herewith, together constitute a fully executed settlement agreement
between the parties hereto. This Agreement is made without admission of any
liability, fact, claim or defense by any party to this Agreement.
3. Court's Retention of Jurisdiction
a. The parties to this Agreement hereby expressly agree and
consent that the Superior Court of the Sate of California for the County of
Orange shall retain jurisdiction over the Action for purpose of enforcement of
the provisions of this Agreement, pursuant to California Code of Civil
Procedure, Section 664.6.
4. Terms of Settlement
a. TRB and SSI agree to comply with all terms of this Agree-
ment and perform as follows:
(1) TRB agrees to reinstate the Lease with all
its terms, conditions and/or obligations,
except as modified by this Agreement. In the
event of any conflict between the Lease and
this Agreement, this Agreement shall govern;
(2) SSI shall immediately pay by wire transfer
to TRB the amount of $78,456.36, which
represents the payment of amounts in
arrears, less late charges conditionally
waived by TRB;
(3) TRB agrees to reduce the monthly base rent
to $20,592.00 per month ($0.50/sq.
ft./month) for the months of February 1,
1996, through July 31, 1996. The difference
between the normal monthly base rent
($26,185.00) and the reduced monthly base
rent ($20,592.00) for the aforementioned
period of time (6 months) will be deferred
and payable in equal increments, which
increments shall be added to the monthly
base rent for the months of August 1, 1996,
through July 31, 1997. Thus:
Difference Between Monthly Rent and
Reduced Rent (Monthly Deferred
2/l/96 - 7/31/96):
$26,185.00 - $20,592= $5,593.00
Total of Monthly Deferred Amounts:
$5,593.00 x 6 months = $'33,558.00
Calculation of Deferred Monthly
Incremental Increase (Payable Monthly
Commencing 8/l/96 through 7/31/97):
$33,558.00 - 12 months = $2,796.50 added
to monthly base rent for the period of
8/l/96 7/01/97
Recalculated Monthly Base rent for 8/l/96
- 7/31/97:
$26,185.00 + $2,796.50 = $28,981.50
monthly base rent due TRB for the period
of 8/l/96 through 7/31/97.
(4) SSI agrees to stipulate with TRB to waive
all periods of limitation with respect to
bringing, the Action to trial or otherwise,
as provided by the California Code of Civil
Procedure or other applicable law(s). To
this end, SSI also agrees to cooperate with
TRB with respect to execution of documents
required by TRB to effectuate said
stipulation;
(5) For the duration of the Lease, SSI agrees to
pay all monthly base rent, Operational
Expenses as defined by the Lease, and all
other expenses, fees and charges required by
the Lease in a punctual manner and in accord
with the timely payment requirements of the
Lease and this Agreement;
(6) In the event of a default in payment of
monthly base rent and/or Operational
Expenses and/or other expense, charge or fee
due under the Lease, TRB grants SSI a
ten-day grace period to cure any default,
subject to imposition of a Late Charge as
defined and called for in the Lease;
(7) Upon the occurrence of an uncured default,
SSI will immediately incur the following
obligations, as well as all other
obligations provided in the Lease to the
extent said obligations are consistent with
this Agreement, all of which will be
enforceable by TRB's resort to the Court
pursuant to its retention of jurisdiction as
provided in this Agreement, and by way of
the procedure stated in item (8) below:
(a) SSI's Payment of $56,715 to TRB
for commissions paid by TRB with
respect to the Lease;
(b) Immediate payment to TRB of the con-
ditionally waived late charges, in
the amount of $7,855.50;
(c) Immediate payment of all amounts in
default;
(8) Upon the occurrence of an uncured default,
TRB shall be authorized to proceed with an
ex parte application on at least 24 hours
notice provided by facsimile or mail to SSI
at 7390 Lincoln Way, Garden Grove,
California 92641 and its general counsel,
Susan Preston, Esq. at 2000 Pike Tower, 520
Pike Street, Seattle, Washington 98101, for
an order of possession of the premises, and
fixing damages, including but not limited
to, the amounts stated in Item (7) above,
attorney's fees and costs incurred by TRB as
a result of the uncured default, and any
other amount due TRB under the terms of the
Lease and/or this Agreement, to the fullest
extent permitted by California law, together
with interest thereon at the legal rate on
all sums due as of the date of the default.
(9) TRB's resort to the procedures stated in
item (8) above, in the event of SSI's
uncured default, shall be in lieu of any
other procedure or period of notice required
by California law, all of which are hereby
knowingly and voluntarily WAIVED by SSI.
(10) In the event of any bankruptcy filed by
SSI, SSI agrees not to oppose any motion by
TRB seeking relief from any stay imposed by
operation of said bankruptcy.
(11) SSI shall immediately pay all attorneys'
fees and costs incurred by TRB in
connection with this Action, in the amount
of $3,000.00.
5 . Cumulative Remedies:
a. All remedies available to TRB under the terms of the Lease
and/or this Agreement are cumulative and shall not be construed as exclusive,
exhaustive, or otherwise preclude TRB from availing itself to any other remedy
available at law or other-wise.
6. Execution of Documents:
a. All parties to this Agreement agree to execute any and all
additional documents necessary to carry out the terms and/or purposes of this
Agreement.
7. Warranty of Authority to Execute Agreement
a. Each of the parties to this Agreement hereby warrants and
represents that it is authorized to enter into this Agreement and any other
documents executed in connection herewith,
8. Counterparts and Duplicate Originals.
a. This Agreement may be executed in one or more duplicate
originals, and in one or more original counterparts, each of which when fully
executed by each of the parties hereto shall be deemed an original.
9. Governing Law.
a. This Agreement shall be deemed to have been negotiated and
entered into in the County of Orange, State of California. It shall be governed
by, construed and enforced in accordance with the laws of the State of
California in effect as of the date of the Agreement and according to its fair
meaning, as if prepared jointly and equally by all parties hereto.
10. Survival.
a. All representations and warranties set forth in this Agree-
ment shall be deemed continuing and shall survive the execution date of this
Agreement.
11. Benefits and Burdens.
a. This Agreement shall be binding upon the undersigned, and
inure to the benefit of, their respective officers, directors, employees,
representatives, agents, attorneys, predecessors, successors, assigns,
partners', joint venturers and/or any individual or entity in any way associated
with each and any party to this Agreement.
12. Amendment.
a. This Agreement may be amended only by writing executed
by the undersigned or their successors in interest at the time of the
modification.
13. Captions and Interpretations.
a. Titles or captions herein are inserted as a matter of con-
venience and for reference, and in no way define, limit. extend or describe the
scope of this Agreement or any provision hereof.
14. Representations of Parties.
a. Each of the undersigned have entered into this Accruement
voluntarily and not in reliance upon any covenant, representation, warranty,
consideration or inducement, not expressly recited herein.
15. Investigation and Consultation.
a. Each party represents and warrants that it has performed
such investigation of the subject matter of this Agreement that it deems
necessary and prudent, that it has had the right and opportunity to consult
legal counsel of its own choosing in this matter and that it fully understands
that nature and effect of each and every term of this Agreement. The terms and
provisions of this Agreement shall not be construed against any one of the
parties, but instead shall be construed to give broad effect to enforce the
release provisions set forth herein.
16. Severance
a. If any part or portion of this agreement is determined by
a court of competent jurisdiction to be void and/or unenforceable, such a
determination shall have no effect on the remaining parts or portions of this
Agreement, which shall remain operative on the parties to this Agreement and
in/of full force and effect.
17. Integration.
a. This Agreement, including all exhibits thereto, sets
forth the entire agreement between the parties with regard to the subject
matter hereof. All agreements, covenants, representations and warranties of
the parties, express and implied, oral and written, with regard to any subject
matter are contained herein and in the documents referred to herein, attached
hereto or implementing the provisions hereof. No other agreements, covenants,
representations or warranties, express or implied, oral or written, have been
made by either party to the other with respect to the subject matter of this
Agreement. All prior and contemporaneous conversations, negotiations, possible
and alleged agreements and representations, covenants and warranties with
respect to the subject matter hereof are waived, merged herein and superseded
by this Agreement. This is an integrated Agreement.
18. Effective Date.
a. The Effective Date of this Agreement shall be February 15,
1996.
IN WITNESS WHEREOF, the parties have executed this Settlement Agreement and
Mutual Release as of the day and year stated in Paragraph 18 above.
SOURCE SCIENTIFIC, INC.,
a California corporation
By: /s/ Richard A. Sullivan
Richard A. Sullivan,
President and CEO, Source
Scientific, Inc.
APPROVED AS TO FORM:
By: /s/ Susan Preston
Susan Preston, Esq.
General Counsel, Source Scientific, Inc.
TR BRELL, CAL CORP,
an Illinois corporation
By:/s/ David Zak
David Zak, Vice President,
TR Brell, Cal Corp
APPROVED AS TO FORM:
Newmeyer & Dillion
By:- /s Michael G. Dibb -
Michael G. Dibb, Esq
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 811
<ALLOWANCES> (20)
<INVENTORY> 1,352
<CURRENT-ASSETS> 2,392
<PP&E> 386
<DEPRECIATION> (341)
<TOTAL-ASSETS> 2,392
<CURRENT-LIABILITIES> 1,795
<BONDS> 0
28 <F1>
0
<COMMON> 20,877
<OTHER-SE> (20,051)
<TOTAL-LIABILITY-AND-EQUITY> 2,576
<SALES> 3,801
<TOTAL-REVENUES> 3,801
<CGS> 2,324
<TOTAL-COSTS> 2,324
<OTHER-EXPENSES> 1,507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100)
<EPS-PRIMARY> (0.010)
<EPS-DILUTED> (0.010)
<FN>
<F1> The Preferred Mandatory amount is not included in equity. Under the terms
of the Series C Preferred Stock certificate, the shares were required to be
redeemed by the Company after September 1, 1995.
</FN>
</TABLE>
