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, 1996 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 September 24, 1996, 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
$1,209,175
On September 24, 1996, there were issued and outstanding 20,152,919 shares of
the Common 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 used in hospital,
clinical, and analytical laboratories worldwide. Additionally, the Company
offers for sale its expertise in manufacturing instruments using optical
detection methods, robotics, fluidics and software development to companies that
need those technologies integrated into state-of-the-art instrumentation systems
that are resold to laboratories. The Company also markets instruments that can
be easily customized to meet the requirements of companies that are willing to
purchase a large number of such customized instruments.
The Company's current sustaining business, acquired by the Company in
January 1994, was founded in 1981 as Ocean Scientific, manufacturing clinical
diagnostic instruments. Ocean Scientific was acquired in 1986, by Quixote
Corporation, a diverse holding company, and the corporate name was changed in
1989, to Source Scientific Systems, Inc. Source became a subsidiary of
MicroProbe Corporation in 1991, manufacturing clinical diagnostic instruments
and biomedical (OEM) products.
In June 1991, the Company acquired the Alton Subsidiary and commenced the
design, manufacture and marketing of custom and proprietary electro-optic
instrument products for diagnostic and optical analysis applications in
biomedical, industrial process control applications and environmental
monitoring. In January 1995, the line of optical analysis products was
discontinued with resulting head count and cost reductions.
Until the Company's recapitalization in 1991 and the acquisition of
Velotec, the Company's primary business had been to manufacture and market a
line of computer peripherals under the name Wespercorp (the "Wespercorp
Business"). In November 1992, the Company sold the Wespercorp Business to a
third party, although the Company continued to manufacture and market the
Wespercorp Business under a license agreement until May 1994.
COMPANY PRODUCTS AND SERVICES
The Company's products are categorized for two business segments:
"Source-Specified " and "Contract Services." The concept, design, manufacture
and distribution of complete instrument-ation solutions are marketed as Source
Specified (the "commercial" business), primarily business to business. Certain
products are appropriate for catalog sales, based on price and market fit. The
production of instruments designed to support a customer's specific objectives,
e.g., marketing complete analytical systems, comprises the Company's Contract
Services OEM business. Each sale requires a contract and is handled as a
"project" during the pre-market phase. The client company is responsible for all
sales and marketing to end-user clients and distributor organizations.
Management believes that the Company's Contract Services OEM business assists
the Company in its commercialization of Source Specified products.
The Company uses a common hardware technology platform for its multiple
product lines, expanding its ability to apply the Company's technologies into
several different specialized applications, such as clinical diagnostics,
detection and quantification of environmental pesticides, testing for food and
beverage pathogens (toxins) and other related value-added applications. A
significant amount of the Company's design components are transferable from one
product line to another.
Product Applications
The Company's current products have been commercialized since 1985,
with the newest being available for production in late 1996. Management believes
the products address important market segments in biomedical and clinical
diagnostic testing, environmental monitoring and food testing research. The
Company's product line includes two photometers (MicroChem(TM) and
ChemStat(TM)), a luminometer (E/LUMINA(TM)), a pre-testing sample preparation
system (EXEC-WASH(TM)), a fluorescence polarization analyzer (Focus(TM)), a
fluorometer (FluoroStat(TM)) and a microwell plate reader (PlateMate(TM)).
Products
MicroChem(TM) Photometer. A compact, low-cost, photometer designed for
immunoassay and general chemistry applications.
ChemStat(TM) Automated Photometer. 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.
ChemStat(TM) Plus Automated Photometer. The ChemStat Plus is a second
generation photometer compatible with the EXEC-WASH Washing System that features
menu-driven software and optional on-board dispensers.
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.
E/LUMINA(TM)2E Automated Luminescence Analyzer. This detection system is
designed with the same features as the E/LUMINA Luminescence Analyzer that can
be used to detect faster "flash" luminescence techniques and adapts to various
formats, as well as to liquid phase assays.
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.
The EXEC-WASH is fully compatible with a variety of other Company products, such
as the ChemStat, the ChemStat Plus and the E/LUMINA Luminescence Analyzer.
PlateMate(TM) Reader. In mid 1996, the Company introduced the PlateMate
Reader, a micro-fluidics well-reading system combining robotics and fluidics.
The current design of the PlateMate Reader performs photometric assays in the
400 to 700 nm range for 96 samples at a time and prints out results directly on
a built-in printer.
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.
FluoroStat(TM) Reader. The FluoroStat is a compact fluorometer that is
highly sensitive and provides a broad dynamic range for tube-based fluorometric
assays. The instrument was introduced in September 1995 and is currently
available for Contract Services OEM manufacture.
Services
Design, Development 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, and was registered by TUV Reinland for ISO 9001
certification in April 1996. (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 Support Services
The Company's Technical Services department develops and distributes
materials and training programs for operation of its products and provides
training and updates for the Company's independent manufacturer's
representatives and international distributors. The Technical Services
department also provides technical support to its customers, and is responsible
for the opening and closing of customer complaint files for FDA purposes.
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.
In June 1996, the Company announced a joint development program with
Agen Biomedical, located in Australia, to provide instrument development
engineering and subsequent manufacturing services for early heart attack
diagnosis. The three Agen patented D-dimer markers are designed to provide
confirmation, in less than 15 minutes, of a heart attack in process. The Company
believes that the cardiac testing market is estimated to be worth $200 million
by the turn of the millenium, however, there can be no guarantee that any
commercially viable product will be developed from Agen's patented D-dimer
marker within a specific time period, if at all.
Research and Development
Research and development is often derived for Source-Specified products as
a peripheral benefit of the Company's OEM contracts. For the years ended June
30, 1996, and 1995, the Company expensed $873,000 and $952,000, respectively, on
research and development activities, of which $97,000 and $189,000 was borne
directly by the Company's customers in the fiscal years ended June 30, 1996, and
1995, 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 to perform measurements critical to their industrial
processes within 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, service contracts, and contract research
and development. The Company's OEM manufacturing agreements are with major
corporations established in the marketing of medical-related products. The
Company presents its products at national trade shows and develops leads to be
procured by its in-house and contract sales representatives.
The Company's plan to increase present revenues includes emphasis on
securing OEM manufacturing contracts for its new products, development and
management of appropriate additional distribution channels, and exploitation of
after-sales-services and supplies for the biomedical, research, environmental
and related markets. Additionally, the Company is currently negotiating with
corporate partners for development of commercially viable instrumentation, and
evaluating potential business combination transactions that management believes
may increase sales volume, although there can be no assurance the Company will
be successful in its negotiations regarding any such combinations.
Competition
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., as well as
smaller, single-product companies, such as Awareness Technology Inc. With the
increasing popularity of out-sourcing of design and manufacturing, competition
for contract manufacturing and research and development may increase from
contract manufacturers such as Kollsman Manufacturing Company, Inc., who bid
against the Company for particular projects. International competition for the
automated washer product line includes Dynatech Corp (U.K.), Pharmacia (Sweden),
GDV (Italy), Chemila (Italy), Roche (Switzerland), Berthold (Germany), and
Stratec (Germany).' Many of the Company's competitors in the industry have
exerted and will continue to exert extensive research and development efforts
that have resulted or may result in the introduction of a multitude of
sophisticated, commercially marketable products and services for the markets. In
view of the rapid changes taking place in the industry, there can be no
assurance that the products and services provided by the Company will retain the
current commercial acceptance identified by management.
<PAGE>
<TABLE>
Competition to the Company's Business and Comparison of Features
<CAPTION>
Private Contract Contract Contract Full Patents West Coast
Brand R&D Manuf. Service Regulatory Location
------- -------- --------- -------- ---------- ------- ----------
<S> <C> <C> <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
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. The Company currently has five 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 April 1996, the Company obtained registration of its manufacturing
procedures and policies with the International Standards Organization ("ISO").
The Company's ISO-9001 certification, registered by TUV Rheinland, encompasses
the established international standards and requirements that measure quality
principals and practices, including all aspects of Design, Manufacturing and
Service. Such certification of the Company's processes will enable the Company's
products to be sold in over 90 countries globally, and management believes will
be an advantage for the Company to attract new prospective OEM customers seeking
manufacturing and servicing facilities.
In order to be made available for sale in the United States, the Company's
products require approval by governmental agencies, primarily the United States
Food and Drug Administration ("FDA"). 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 files a listing of its products semi-annually. 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 governing reagent and
instrument manufacturing.
<PAGE>
Employees and Consultants
As of September 30, 1996, the Company had a total of 46 full-time employees
with an average of six years of service, one part-time employee, two temporary
employees and one consultant. 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.
ITEM 2. PROPERTIES.
The location of the facility, in Garden Grove,California, provides access
to an abundance of qualified local suppliers to meet the specific demands of
producing medical, scientific and industrial instrumentation. The facility is
comprised of 41,645 square feet of total space which includes a "wet
applications" laboratory and several secure areas for proprietary development of
customer projects. The Company has contracted with a real estate services
company for the purpose of subleting some excess office and open area space in
its facility.
The lease for the Company's facility expires January 31, 2002, with the
current rental of $29,131 having increased from $26,185 per month, on August 1,
1996. The rent will increase to $32,460 on February 1, 2000. Under a Settlement
Agreement effective February 15, 1996, a partial deferral of rent temporarily
reduced the monthly base rent to $20,592 per month for a six month period which
ended July 31, 1996. The difference between the normal monthly base rent and
reduced monthly base rent was deferred and is payable in equal increments, added
to the monthly base rent for the months of August 1, 1996, through July 31,
1997.
ITEM 3. LEGAL PROCEEDINGS.
1. On June 28, 1996, a complaint styled Electro-Mechanical Products, Inc. v.
Source Scientific Systems, Inc., Orange County Municipal Court Case No. 225251
was filed. The plaintiff alleges that the Company is indebted in the amount of
approximately $23,000 for goods, wares, and merchandise provided by plaintiff
during 1995. Plaintiff is seeking recovery of such amount, interest thereon at
the rate of 10% from and after May 1, 1995, and its attorney's fees. The Company
has answered the plaintiff's complaint, denies the plaintiff's allegations,
disputes the the existence of any debt due and owing, and intends to defend the
litigation vigorously.
2. The Company settled its lawsuit against Scientific Measurement Systems, Inc.
("SMS") pursuant to a settlement agreement dated July 18, 1996, for the total
payment, after offset, of $159,705.00 to the Company from SMS. As of the date of
this report, all payments have been made and a dismissal with prejudice has been
prepared for filing with the court.
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, and is also traded on the NASDAQ
Bulletin Board under the symbol "SSFE". 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.
Fiscal Year High Low
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
1996 First Quarter $0.94 $0.50
Second Quarter $0.56 $0.44
Third Quarter $0.22 $0.17
Fourth Quarter $0.75 $0.06
On September 24, 1996, the closing sale price reported by the BSE and the
Bulleting Board, for the Company's Common Stock, was $0.06. The Common Stock is
thinly traded: 39,400 shares reportedly were traded on the BSE during the
10-week period ended September 30, 1996; and additionally, 27,100 shares
reportedly were traded on the Bulletin Board for the same period. As of
September 30, 1996 the Company has approximately 740 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 any subsequently established series of Preferred Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
For the second consecutive year, the Company improved its overall financial
condition, and the last two consecutive quarters of fiscal year 1996 were
profitable, although there can be no assurance that such improvements or
profitability will be repeated in subsequent periods. During the fiscal year
ended June 30, 1996, the Company completed several transactions that improved
the financial operating condition and operations of the Company. In the 1996
fiscal year, the Company sold convertible debentures totaling $629,000 and
received an additional $130,014.50 from the exercise of Warrants and Options.
The Company retired all remaining A Warrants, Dealer Warrants and underlying
warrants through the issuance of Common Stock of the Company. Two of the
remaining convertible debentures previously sold in 1993, in the aggregate
principal amount of $40,000, were converted into Common Stock of the Company.
The remaining debenture was included in a settlement of mutual obligations
between the Company and a former executive of the Company.
The following table shows the results of operations between the 1996 and
1995 fiscal years. Amounts shown in the table below are in 000's.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED CHANGE FROM
JUNE 30, 1996 JUNE 30, 1995 JUNE 1995 TO JUNE 1996
------------------------ ---------------------- --------------------------
% %
of of %
Amount Sales Amount Sales Amount Change
----------- --------- ---------------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 5,324 100.0 4,877 100.0 447 9.2
Cost of goods sold 3,337 62.7 3,199 65.6 138 4.3
----- ---- ----- ---- --- ---
Gross profit 1,987 37.3 1,678 34.4 309 18.4
----- ---- ----- ---- --- ----
Selling, General & Admin 1,158 21.8 1,647 33.8 (489) -29.7
Research and development 821 15.4 839 17.2 (18) -2.1
Total operating expenses 1,979 37.2 2,486 51.0 (507) -20.4
----- ---- ----- ---- ----- -----
Operating income (loss) 8 0.2 (808) -16.6 816 -101.0
Interest, net 80 1.5 132 2.7 (52) -39.4
-- --- --- --- ---- -----
Loss before extraordinary items (72) -1.4 (940) -19.3 868 -92.3
Extraordinary item - gain from 0 - (309) -6.3 (309) -
--- - -- ----- ---- ----- - -
reduction of lease obligation
Net loss ($72) -1.4 ($631) -12.9 $559 -88.6
===== ====== ====
</TABLE>
Net Revenues. The increase in revenues of approximately 9% from the 1995 fiscal
year to the 1996 fiscal year was due to the increase in customer orders,
introduction of a new product line and the Company's ability to acquire
materials needed to manufacture and fulfill customer purchase orders through
infusion of cash from convertible debentures. On an ongoing basis, the Company
has an average of 20 quotes submitted to potential customers to provide research
and development, manufacturing and product service contracts, although there is
no assurance any 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.
Cost of Goods Sold. The decrease in cost of goods sold as a percentage of sales
of 63% in 1996 compared to 66% in 1995, was due to a decrease in manufacturing
labor and overhead, increase in manufacturing absorption, and a more favorable
product mix. The gross profit in 1996 compared to 1995, improved by
approximately 3% for the 12-month period.
Operating Expenses. Selling, general and administrative expenses declined as a
percentage of revenues from 34% for the fiscal year ended June 30, 1995, to 22%
for the fiscal year ended June 30, 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 fiscal year ended June 30, 1996,
the Company recognized approximately 30% reduction in selling, general and
administrative expenses, and a 2% decrease in research and development expenses
compared to the fiscal year ended June 30, 1995. Research and development costs
for the fiscal year 1996 reflect costs to develop the Company's new product,
PlateMate(TM), costs of 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.
Liquidity and Capital Resources and Plan of Operation
The Company significantly improved its liquidity during the fiscal year
ended June 30, 1996, due to convertible debentures issued by the Company in the
aggregate amount of $629,000. Management continues to seek improvement of the
Company's liquidity by: (i) restructuring old trade payables; (ii) offering
discounts in exchange for progress payments; (iii) negotiating facility cost
reductions with a suitable tenant, or sub-leasing a portion of its space, and
(iv) seeking equity capital. The Company's Management continues to seek other
cost reductions to enhance its operating income, although there can be no
assurance that the Company will be successful in reducing costs through any of
its intended methods for achieving improvements of the Company's liquidity.
At June 30, 1996, the Company's working capital was $1,237,000 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 and future operations. The
convertible debentures issued during the third quarter ended March 31, 1996,
helped to relieve the Company's shortage of cash to purchase raw materials.
The Company has continued to decrease its operating costs, through its
cost containment plan which included a further reduction in its workforce and a
combination of certain job functions throughout the fiscal year 1996 and up to
the date of this report. 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 sub-tenant suitable under the
conditions of a sub-lease which includes acceptance by the owners and property
managers of the facility.
The Company did not have any material commitments for capital
expenditures as of fiscal year ended June 30, 1996, or as of the date of this
Report.
On October 10, 1996, the Company entered into a financing agreement to
provide up to $1,000,000 of working capital based on eligible accounts
receivable for a period of 12 months. Management believes that the Company's
working capital at June 30, 1996, its financing facility obtained in October
1996, coupled with its cost reduction plan, will enable the Company to operate
as a going concern for a period in excess of 12 months.
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
assurances that any transaction between the Company and Lifestream will close.
Management does not currently expect that the Company will engage in any
material investing activities, with the possible exception of one potential
candidate. As of the date of this Report, Management is unable to determine the
net cash effect of any such possible acquisition or any complementary
acquisitional partnership.
.
Historical Financings
Redemption of Series C Preferred Stock, June 1996 - On June 28, 1996, the
Company redeemed 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. The aggregate Redemption Price paid by the Company on June 28,
1996, was $27,881.15 to five holders of such preferred stock, two of whom the
Company has been unsuccessful in contacting to receive their redemption payments
totaling $11,154.61.
Debt Conversion in June 1996 - In June 1996, the Company issued 100,000
shares of Common Stock to an otherwise unaffiliated entity as settlement of
capital raising services contracted with them (the "Exchange Shares"). The
holder of the Exchange Shares was granted "piggy-back" registration rights with
respect thereto.
Debentures Issued in February and March 1996 - In February 1996, the
Company issued debentures to four individuals unrelated to the Company, in the
aggregate amount of $310,000 at 12.0% interest (the "1996 A Debentures"). The
1996 A Debentures are convertible into Common Stock at the rate of $0.053 per
share. In March 1996, the Company debentures to four individuals unrelated to
the Company and one major shareholder, in the aggregate amount of $319,000 at
12.0% interest (the "1996 B Debentures"). The 1996 B Debentures are entitled to
conversion into Common Stock at the rate of $0.08 per share. The Company issued
an aggregate of 2,325,000 attached warrants with the 1996 A Debentures, and an
aggregate of 1,595,000 warrants with the 1996 B Debentures, each to purchase one
share of Common Stock (the "1996 Debenture Warrants Shares"), at an exercise
price of not less than $0.25 per share. Under the terms of these debentures, all
interest accrued in the first year will be added to the debenture principal, in
lieu of payment; and interest accrued in the second year will be convertible on
the same terms and conditions as the principal. The warrants are exerciseable
commencing the date of the debenture, for a period of three years. These
debentures, if not converted, are due on January 31, 1998.
Promissory Note, September 1995 - On September 27, 1995, the Company signed
a letter of intent relating to a proposed acquisition of the Company by Biopool
International ("Biopool"). Subsequent to the letter of intent, on September 29,
1995 the Company executed a promissory note due on March 28, 1996 (the "Biopool
Note"), at the per annum interest rate of 7%, to Biopool as the holder. The
terms of the Biopool Note provided a repayment date of March 28, 1996 and
subordination to the rights of Silicon Valley Bank. On November 3, 1995, Biopool
executed an Agreement and Plan of Merger for the acquisition of Source, which
was terminated on December 4, 1995, by mutual release of both parties. The
agreement was subject to numerous significant conditions to closing. In February
1996, as the result of negotiations with Biopool, the Biopool Note was replaced
with a note payable 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 its term, and a payment schedule as follows: a principal payment 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.
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 (the "1995 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. The Company issued an aggregate of
172,050 attached warrants with such debentures, each to purchase one share of
Common Stock at an exercise price of $0.75 per share. In addition, 172,050
warrants were issued by the Company upon the conversion of the 1995 Debentures
to Common Stock by the holders of such debentures. The warrants were
exerciseable commencing July 1, 1995, for a period of five years. Certain
holders of the 1995 Debentures also held warrants which were previously issued
in January and March 1994 (the "A Warrants"). In March and April 1995, holders
of debentures who also held warrants applied $102,612.50 of their debentures to
exercise 684,084 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 its A Warrants a temporary
reduction in the exercise price from $0.60 to $0.15 per A Warrant. As a result,
in the first quarter of 1996, the Company received $318,425.00 from the exercise
of 2,122,833 A Warrants, 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 its A Warrants a temporary reduction in
the exercise price from $0.60 to $0.18 per A Warrant. As a result, the Company
received $116,280 from the exercise of 646,667 A Warrants, in addition to the
debentures which were converted for exercising A Warrants, previously described
herein.
Private Placement of Equity in January and March 1994 - 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 entitled the holder thereof to purchase one share of Common Stock (the
"A Warrants Shares") at an initial exercise price of $0.75. The Company
undertook to register the A Warrants Shares in a registration statement
effective October 21, 1994. In an attempt to relieve the Company's restrictive
cash flow, the Company reduced the warrant exercise price for a limited period
of time on two occasions, in March 1995, and in June 1995, to $0.18 and $0.15
respectively for each warrant exercised for one share of Common Stock. An
aggregate of 4,217,000 shares of common stock were issued, for which the Company
received $432,705 and converted debentures in the amount of $205,244 for the
purpose of exercising warrants held by the holders of such debentures. In
February 1996, in order for the Company to issue the 1996 A Debentures and 1996
B Debentures, the Company permanently reduced the exercise price of the A
Warrants to the market value of the Company's Common Stock, canceled all
remaining A Warrants and issued 3,238,500 shares of common stock to the holders
of the equivalent number of A Warrants. In addition, 905,414 shares of Common
Stock were issued to holders of 958,640 Dealer Warrants and B Warrants; and to
the holders of Networld Warrants and Networld Underlying Warrants, 275,000
shares of common stock were issued on an exchange basis of 2 warrants for each
share of Common Stock; thus eliminating all Warrants issued in the 1994 Private
Placement and which contained anti-dilution provisions.
Private Placement of Debt in September and December 1993 - First Equity
Capital Securities, Inc. arranged for two bridge loans (the "1993 Bridge Loans")
for the Company in September and December 1993, for $230,000 and $634,000,
respectively. The loans bore interest at the rate of eight percent per annum and
were due on January 31, 1994. On January 21, 1994, $230,000 of bridge loans
(made in October 1993) and $540,000 of bridge loans (made in December 1993) 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 - As the result of the acquisition
of the Source Subsidiary 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, including its
accounts receivable, inventory, furniture, fixtures and equipment and general
intangibles. 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 Note on the Revolving Loan Facility was paid off and the
Facility closed.
Acquisition of the Source Subsidiary in January 1994 - In January 1994, the
Company purchased all of the issued and outstanding capital stock of the Source
Subsidiary from MicroProbe. (See Item 12 - "Certain Relationships and
Transactions".)
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. In March 1996, one of the debentures
plus accrued interest was partially converted into 164,185 shares of Common
Stock when the Company reduced the conversion rate to $0.13, and the balance was
converted into 38,462 shares of Common Stock in June 1996 at the same conversion
rate. In April 1996, the Company reached an agreement with a former executive
officer of the Company regarding the disposition of certain mutual interests and
obligations which resulted in the elimination of the principal of that person's
1993 Debenture in the amount of $20,000 and accrued interest thereon In June
1996, the remaining debenture was converted into 142,857 shares of Common Stock
when the Company reduced the conversion rate to $0.14, and the parties agreed to
a payment schedule of the accrued interest thereon, in three payments of $1,856
per payment dated July 10, August 10 and September 10, 1996. In June 1996,
holders of 1993 Debenture Warrants exercised 12,000 warrants into equal shares
of common stock after the Company reduced the warrant exercise price from $0.75
to $0.14.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and Supplementary Data are included herein on
pages 15 through 41.
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>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended June 30, 1996 And 1995
with
INDEPENDENT AUDITORS' REPORT THEREON
--------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SOURCE SCIENTIFIC, INC. Page
Report Of Independent Accountants, Corbin & Wertz 16
Report Of Independent Accountants, Coopers & Lybrand, L.L.P. 17
Consolidated Balance Sheets - June 30, 1996 And 1995 18
Consolidated Statements Of Operations -
For The Years Ended June 30, 1996 And 1995 19
Consolidated Statements Of Shareholders' Equity -
For The Years Ended June 30, 1996 And 1995 20
Consolidated Statements Of Cash Flows -
For The Years Ended June 30, 1996 And 1995 21
Notes To Consolidated Financial Statements 23
- 15 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Source Scientific, Inc.
We have audited the accompanying consolidated balance sheet of Source
Scientific, Inc. and its subsidiaries (the "Company") as of June 30, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Source Scientific,
Inc. and its subsidiaries at June 30, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
CORBIN & WERTZ
Irvine, California
September 13, 1996, except for
Note 17 as to which the date is October 9, 1996.
- 16 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Source Scientific, Inc.
We have audited the consolidated financial statements of Source Scientific,
Inc. (formerly Alton Group, Inc.; the "Company") as of June 30, 1995, and for
the year then ended listed in the index on page 15 of this Form 10 KSB. These
consolidated financial statements are the responsibility of the Company's man-
agement. Our responsibility is the express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 misstate-
ment. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Source Scientific, Inc. for the year ended June 30, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
December 14, 1995
- 17 -
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
ASSETS 1996 1995
---------- ----------
Current assets:
Cash and cash equivalents $ 162,000 $ 35,000
Accounts receivable, net of allowance
for doubtful accounts of $13,000 and
$20,000 at June 30, 1996 and 1995,
respectively 791,000 449,000
Inventories 1,263,000 1,269,000
Other current assets 215,000 180,000
---------- ---------
2,431,000 1,933,000
Property and equipment, net 72,000 121,000
Goodwill, less accumulated amortization
of $24,000 and $12,000 at June 30,
1996 and 1995, respectively 66,000 78,000
Other assets, net 52,000 81,000
---------- ---------
$ 2,621,000 $ 2,213,000
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 691,000 $ 868,000
Accrued expenses 239,000 204,000
Convertible debentures --- 60,000
Notes payable and bank line of credit 228,000 327,000
Deferred rent 36,000 2,000
Lease obligation --- 30,000
--------- ---------
1,194,000 1,491,000
Convertible debentures 629,000 ---
Deferred rent, net of current portion 230,000 230,000
--------- ---------
Total liabilities 2,053,000 1,721,000
--------- ---------
Commitments and contingencies
Redeemable Series C convertible
preferred stock --- 23,000
Shareholders' equity:
Common stock; no par value, authorized
75,000,000 shares, issued and
outstanding 20,152,919 shares and
14,739,434 shares at June 30, 1996
and 1995, respectively 20,754,000 20,744,000
Accumulated deficit (20,024,000) (19,952,000)
Shareholder notes receivable from the
sale of common stock (162,000) (323,000)
----------- -----------
Total shareholders' equity 568,000 469,000
----------- -----------
$ 2,621,000 $ 2,213,000
========= =========
See accompanying notes to these consolidated financial statements
- 18 -
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1996 and 1995
1996 1995
--------- ---------
Revenues:
Product sales $ 3,630,000 $ 3,018,000
Research contracts 97,000 189,000
Service contracts 1,597,000 1,670,000
--------- ---------
5,324,000 4,877,000
--------- ---------
Cost of revenues:
Cost of product sales 2,364,000 2,268,000
Cost of research contracts 52,000 113,000
Cost of service contracts 921,000 818,000
--------- ---------
3,337,000 3,199,000
--------- ---------
Gross profit 1,987,000 1,678,000
--------- ---------
Operating expenses:
Selling, general and administrative 1,158,000 1,647,000
Research, development and engineering 821,000 839,000
--------- ---------
1,979,000 2,486,000
--------- ---------
Operating income (loss) 8,000 (808,000)
Interest expense, net 80,000 132,000
--------- ---------
Loss before extraordinary item (72,000) (940,000)
Extraordinary item - gain from
reduction of lease obligation --- 309,000
--------- --------
Net loss $ (72,000) $ (631,000)
========= =========
Per common share amounts:
Loss before extraordinary item $ (0.00) $ (0.09)
Extraordinary item --- 0.03
--------- ---------
Net loss $ (0.00) $ (0.06)
========== =========
Weighted average number of common
shares outstanding 20,110,501 10,658,540
=========== ===========
See accompanying notes to these consolidated financial statements
- 19 -
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
SHAREHOLDER
NOTES RECEIVABLE TOTAL
COMMON STOCK ACCUMULATED FROM THE SALE OF SHAREHOLDERS'
SHARES AMOUNT DEFICIT COMMON STOCK EQUITY
--------- ----------
<S> <C> <C> <C> <C> <C>
Balances, June 30, 1994 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 common stock purchase options 575 300 --- --- 300
Exercise of common stock purchase warrants
and conversion of debentures 4,868,746 772,700 --- --- 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 14,739,434 20,744,000 (19,952,000) (323,000) 469,000
Exercise of common stock purchase options
under Company Plan 78,425 11,000 --- --- 11,000
Exercise of other common stock
purchase options 134,375 1,000 --- --- 1,000
Exercise of common stock purchase warrants 658,667 118,000 --- --- 118,000
Common stock issued for cancellation of anti-
dilution provision 4,418,914 --- --- --- ---
Issuance of common stock for convertible
debentures and interest 345,504 41,000 --- --- 41,000
Issuance of common stock for capital
raising activity 100,000 --- --- --- ---
Cancellation of common stock issued for
shareholder note receivable forgiven (322,400) (161,000) --- 161,000 ---
Net loss --- --- (72,000) --- (72,000)
--------- --------- ------- -------- -------
Balances, June 30, 1996 20,152,919 $20,754,000 $(20,024,000) $(162,000) $ 568,000
========== ========== ========== ======== =======
</TABLE>
See accompanying notes to these consolidated financial statements
- 20 -
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1996 and 1995
1996 1995
---------- ----------
Cash flows from operating activities:
Net loss $ (72,000) $ (631,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary item --- (309,000)
Depreciation and amortization 124,000 147,000
Gain on sale of property and
equipment (2,000) ---
Changes in operating assets and
liabilities:
Accounts receivable, net (342,000) 273,000
Inventories (28,000) 373,000
Other assets (23,000) (66,000)
Accounts payable (94,000) 132,000
Accrued expenses 7,000 189,000)
Customer deposits, deferred revenue
and lease obligation (35,000) (322,000)
Deferred rent 34,000 28,000
--------- --------
Net cash used in operating activities (431,000) (564,000)
--------- -------
Cash flows from investing activities:
Capital expenditures (12,000) (31,000)
Proceeds from sale of property and
equipment 2,000 ---
--------- --------
Net cash used in investing activities (10,000) (31,000)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
debentures 629,000 ---
Proceeds from issuance of note payable 180,000 ---
Repayment of notes payable (57,000) (84,000)
Net borrowings on bank line of credit (305,000) 26,000
Proceeds from exercise of common stock
purchase options 3,000 300
Proceeds from exercise of common stock
purchase warrants 118,000 692,700
Stock issuance costs --- (69,000)
--------- --------
Net cash provided by financing
activities 568,000 566,000
--------- ---------
Continued
- 21 -
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Years Ended June 30, 1996 and 1995
1996 1995
---------- ----------
Net change in cash and cash equivalents $ 127,000 $ (29,000)
Cash and cash equivalents, beginning of
year 35,000 64,000
--------- ---------
Cash and cash equivalents, end of year $ 162,000 $ 35,000
========= ========
Supplemental disclosure of cash flow
information -
Cash paid during the year for:
Interest $ 83,000 $ 141,000
========= ========
Income taxes $ 2,000 $ ---
========= ========
Supplemental schedule of non-cash investing and financing activities:
1996
During 1996, the Company issued 345,504 shares of common stock for conversion of
debentures totaling $40,000 and accrued interest totaling $1,000.
During 1996, the Company issued notes payable in satisfaction of accounts
payable amounting to $83,000.
During 1996, the Company issued 66,093 shares of common stock through the
exercise of options for accrued vacation in the amount of $9,000.
During 1996, the Company canceled a note receivable from a shareholder amounting
to $161,000 for the return of 322,400 shares of common stock. In addition, the
Company concurrently canceled a $20,000 convertible debenture which was
outstanding at June 30, 1995.
See accompanying notes to these consolidated financial statements
- 22 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended June 30, 1996 and 1995
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
In January 1994, Source Scientific, Inc. ("Source"), a Delaware corporation,
then operating as Alton Group, Inc. ("Alton"), acquired from MircoProbe
Corporation ("MicroProbe") all of the issued and outstanding shares of common
stock of 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 noninterest-bearing
($865,000 net of imputed interest), subordinated promissory note due to
MicroProbe.
As part of the acquisition, Alton assumed a $360,000 joint MicroProbe and Source
revolving line of credit due to Silicon Valley Bank. In addition, Alton issued
to MicroProbe a five-year warrant to purchase 50,000 shares of Alton'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 Alton's common stock at an exercise
price of $1.00 per share.
In November 1994, Alton 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,
Alton's promissory note due to MicroProbe was canceled and the note balance of
$883,000 was recorded as a reduction to goodwill. Also pursuant to this
agreement, outstanding warrants to purchase 100,000 shares of Alton's common
stock were canceled.
In February 1995, Alton changed its name to Source.
Source designs, manufactures and markets devices and instrumentation used
worldwide in hospitals and laboratories for biomedical and industrial
applications. Source'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), Source offers for sale its expertise
in developing and manufacturing instruments to other companies for resale to
end-user customers. Revenues are generated from products sold and services
rendered through diagnostic systems suppliers (other instrument companies and
reagent companies), distribution networks, tradeshows and in-house
representatives.
Continued
- 23 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Source and its wholly-owned subsidiaries (collectively the "Company"). All
material intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
The consolidated financial statements contain financial instruments whereby the
fair market value of the financial instruments could be different than those
recorded on a historical basis in the accompanying consolidated financial
statements. The Company's financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, convertible debentures and
notes payable. The carrying amounts of the Company's financial instruments
approximate their fair values at June 30, 1996.
Concentrations of Credit Risk
The Company, at times, maintains cash balances at certain financial institutions
in excess of amounts insured by Federal agencies.
The Company sells its products throughout the United States and worldwide. The
Company extends credit to its customers and performs ongoing credit evaluations
of such customers. The Company does not obtain collateral to secure its accounts
receivable. The Company maintains allowances for potential credit losses and,
historically, such losses have been within management's estimates.
Two customers each accounted for approximately 22% of net sales for the year
ended June 30, 1996. Such customers accounted for 16% and 14%, respectively, of
accounts receivable at June 30, 1996. The Company had one customer which
accounted for approximately 37% of revenues for the year ended June 30, 1995.
Such customer accounted for approximately 22% of accounts receivable at June 30,
1995.
Continued
- 24 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The Company predominately sells its products in the biomedical and analytical
instruments industry. The Company's international sales were approximately 10%
and 12% of total revenues for the years ended June 30, 1996 and 1995,
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with a remaining
maturity, when purchased, of three months or less, to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or estimated
net realizable value.
The carrying value of Source's inventory represents management's estimate of its
net realizable value. Such value is based on forecasts for sales in the ensuing
years. The industry in which Source operates is characterized by rapid
technological advancement and change. Should demand for Source's products prove
to be significantly less than anticipated, the ultimate realizable value of such
products would be substantially less than the amount shown in the accompanying
consolidated balance sheet.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization, and are being depreciated on a straight-line basis over their
estimated useful lives, which range from three to ten years. Leasehold
improvements are being amortized using the straight-line method over the life of
the asset or the term of the lease, whichever is shorter. Major betterments and
renewals are capitalized, while routine repairs and maintenance are charged to
expense when incurred.
Software Development Costs
Software development costs incurred subsequent to establishing technological
feasibility are capitalized and amortized based on the anticipated units to be
shipped for the related products, with minimum annual amortization equal to the
straight-line amortization over the remaining economic life of the related
product not exceeding three 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 charged to operations.
Continued
- 25 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Goodwill
Goodwill, which represents the excess of cost over fair value of net assets
acquired, is being amortized on the straight-line method over ten years. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which goodwill impairment is
determined by management. Management believes no impairment has occurred as of
June 30, 1996.
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 are
charged to operations during the year the products are sold.
Patents
The Company capitalizes the cost of its patents and amortizes such costs over
the useful life of the patents not to exceed 17 years. At June 30, 1996, no
carrying value remains in the accompanying balance sheet for unexpired patents.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement No.
109"). Under the asset and liability method of Statement No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for a
portion or all of deferred tax assets if it is more likely than not that such
deferred tax assets will not be realized through future operations.
Continued
- 26 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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 the service and research and development
activities are performed under the terms of the related agreements.
Research and Development Costs
Research and development costs are expensed as incurred.
Per Common Share Information
Per common share amounts are computed based on weighted average number of common
shares outstanding during each period. Common stock equivalents and other
potentially dilutive securities were excluded from the per common share
calculations as their effect would have been antidilutive or in the case of the
extraordinary item per share, such amount would not be significant.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
NOTE 3 - ACCOUNTS RECEIVABLE FACTORING
In February 1995, the Company entered into an accounts receivable factoring
agreement with a bank for 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, was 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
totaling approximately $1,242,000, of which approximately $194,600 remained
uncollected by the bank at June 30, 1995 and represented the Company's maximum
exposure under the recourse provisions of the agreement. A finance fee of 2.5%
was charged monthly on the average outstanding accounts receivable balance as
defined by the agreement. An administrative fee of 1% was charged on the face
amount of each factored 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.
Continued
- 27 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 3 - ACCOUNTS RECEIVABLE FACTORING, continued
Subsequent to the termination of the previous agreement, in December 1995, the
Company entered into two accounts receivable factoring agreements with a bank,
both for one-year terms. The initial advance under each agreement was 80% of the
accounts receivable factored. Under each agreement, in no event shall the
aggregate amount of all purchased receivables outstanding at anytime exceed
$150,000 and $250,000, respectively. The remaining 20%, less administrative and
finance charges, as defined by the agreement, is remitted to the Company by the
bank upon the bank's collection of the factored accounts receivable balance.
During 1996, under the terms of each agreement, the Company sold, with recourse,
accounts receivable totaling approximately $1,085,000. At June 30, 1996, all
amounts have been collected by the bank. A finance fee under each agreement of
1.5% and 2.25%, respectively, is charged monthly on the average outstanding
accounts receivable balance as defined by the agreement. An administration fee
of 1.0% is charged on the face amount of each factored receivable under each
agreement. The Company ceased factoring accounts receivable under these
agreements in February 1996. Interest expense for the year ended June 30, 1996
amounted to approximately $67,000.
NOTE 4 - INVENTORIES
Inventories consist of the following at June 30:
1996 1995
---------- ----------
Raw materials $ 860,000 $ 18,000
Work in process 332,000 180,000
Finished goods 71,000 171,000
--------- ---------
$ 1,263,000 $ 1,269,000
========= =========
NOTE 5 - OTHER CURRENT ASSETS
Other current assets consist of the following at June 30:
1996 1995
---------- ----------
Reimbursable development
costs $ 126,000 $ 139,000
Supplies and inventory 68,000 23,000
Insurance 8,000 6,000
Other 13,000 12,000
--------- ---------
$ 215,000 $ 180,000
========= =========
Continued
- 28 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 5 - OTHER CURRENT ASSETS, continued
Reimbursable development costs are capitalized as incurred to the extent such
amounts are believed to be recoverable. The Company is reimbursed upon the
billing of units shipped. During the year ended June 30, 1996, collections of
approximately $13,000 were recorded as a reduction to such amounts to be
reimbursed. No amounts were collected in fiscal 1995.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
1996 1995
---------- ----------
Machinery, equipment and tooling $ 285,000 $ 330,000
Computer equipment and software 36,000 36,000
Furniture and fixtures 17,000 17,000
--------- ---------
338,000 383,000
Less accumulated deprecIation
and amortization (266,000 (262,000)
--------- ---------
$ 72,000 $ 121,000
========= =========
Depreciation and amortization expense for the years ended June 30, 1996 and
1995, amounted to $95,000 and $147,000, respectively, of which $39,000 and
$36,000, respectively, is included in cost of product sales in the accompanying
statements of operations.
NOTE 7 - OTHER ASSETS
Other assets consist of the following at June 30:
1996 1995
---------- ----------
Software development costs $ 106,000 $ 106,000
Less accumulated amortization (97,000) (80,000)
---------- ----------
9,000 26,000
Deposits 38,000 48,000
Other 5,000 7,000
---------- ----------
$ 52,000 $ 81,000
========== ==========
Amortization of software development costs was $17,000 and $21,000 for the years
ended June 30, 1996 and 1995, respectively.
Continued
- 29 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 8 - ACCRUED EXPENSES
Accrued expenses consist of the following at June 30:
1996 1995
---------- ----------
Professional fees $ 30,000 $ 30,000
Accrued payroll, vacation
and commissions 93,000 109,000
Interest 8,000 8,000
Warranties 18,000 18,000
Customer deposits 25,000 ---
Accrued redemption of redeemable
Series C convertible preferred
stock 23,000 ---
Other 42,000 39,000
---------- ----------
$ 239,000 $ 204,000
========== ==========
NOTE 9 - NOTES PAYABLE AND BANK LINE OF CREDIT
Notes payable consist of the following at June 30:
1996 1995
---------- -------
Notepayable to Biopool International
bearing interest at 7% per annum
until March 1996, at which time
the rate increased to 8% per annum,
unsecured, principal payments of
$20,000 on each 15th day of the
months July through November 1996;
with a final principal payment of
$30,000 together with interest of
$6,034, due on December 15, 1996. $ 130,000 ---
Bankline 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% at June 30,
1995), paid in December 1995.
Additionally, the Company issued
to the bank warrants to purchase
50,000 shares of its common stock. --- 304,000
Continued
- 30 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 9 - NOTES PAYABLE, continued
1996 1995
---------- ----------
Notes payable, unsecured, noninterest
bearing and interest bearing at
rates up to 10% per annum, with
due dates ranging from July
1996 to April 1997, certain of
which are past due and are in
technical default. 98,000 23,000
--------- --------
$ 228,000 $ 327,000
========= =========
NOTE 10 - CONVERTIBLE DEBENTURES
Convertible debentures consist of the following at June 30:
1996 1995
---------- ----------
Convertible debentures payable to
a former officer and two
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% per annum,
satisfied $40,000 by issuance
of 345,504 shares of common
stock and $20,000 satisfied
through an offset of amounts
due the Company in 1996 from
a former officer (see Note 15). --- 60,000
Continued
- 31 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 10 - CONVERTIBLE DEBENTURES, continued
1996 1995
---------- ----------
Convertible debentures payable to
three unaffiliated individuals,
convertible at any time into
shares of the Company's common
stock at the conversion price
of $0.053 per share at the
option of the Company, subject
to a downward adjustment in
the event the underlying common
stock is not registered with
the Securities and Exchange
Commission within ten (10)
months from the date of issuance
to a floor of $0.05 per share,
with warrants attached to
purchase one share of the
Company's common stock at
$0.25 per share (see Note 13),
interest at 12% per annum payable
annually, principal due on
January 31, 1998 (see Note 15). 310,000 ---
Convertible debentures payable to six
unaffiliated individuals and
one individual owning more than
10% of the Company's common stock,
who is not an officer or director,
convertible at any time into
shares of the Company's common
stock at the conversion price
of $0.08 per share at the option
of the Company, subject to a down-
ward adjustment in the event the
underlying common stock is not
registered with the Securities
and Exchange Commission within
ten (10) months from the date of
issuance to a floor of$0.05 per
share, with warrants attached
to purchase one share of the
Company's common stock at $0.25
per share (see Note 13), interest
at 12% per annum payable annually,
principal due on January 31, 1998
(see Note 15). 319,000 ---
--------- --------
629,000 60,000
Continued
- 32 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 10 - CONVERTIBLE DEBENTURES, continued
1996 1995
---------- ----------
Less current portion --- (60,000)
---------- ----------
$ 629,000 $ ---
========== =========
The convertible debentures issued in 1996 were issued at their estimated fair
value. Such estimate is based on the stated interest rate and the related
conversion price into the Company's common stock. The Board of Directors
estimated the fair value of the Company's common stock at the date of issuance
to be approximately $0.06 per share.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Obligation and Extraordinary Item
Lease obligation, amounting to approximately $30,000 at June 30, 1995,
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. 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 was owed to the Company's
former landlord at June 30, 1995 and was included in current liabilities. The
settlement reduced the Company's previously accrued lease obligation by
$309,000, and accordingly, an extraordinary gain of this amount is reflected in
the accompanying 1995 statement of operations.
Continued
- 33 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 11 - COMMITMENTS AND CONTINGENCIES, continued
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 annual
minimum lease payments under all noncancellable operating lease agreements as of
June 30, 1996:
Years Ending
June 30,
1997 $ 339,000
1998 349,000
1999 350,000
2000 366,000
2001 390,000
Thereafter 227,000
----------
$ 2,021,000
==========
Rent expense was $316,000 and $324,000 for the years ended June 30, 1996 and
1995, respectively.
Employment Contracts
The Company entered into two and three-year employment contracts with certain
officers, directors of the Company and key management of the Company, commencing
July 1, 1995. Prior to this date, the Company had certain employment agreements
which were in effect. The contracts effective July 1, 1995 provide for annual
compensation ranging from $52,000 to $124,000. Total compensation charged to
operations for the years ended June 30, 1996 and 1995, under agreements in
effect during such years amounted to $481,201 and $407,869, respectively. Future
annual compensation under all management agreements for fiscal years ending June
30, 1997 and 1998 are $521,619 and $103,021, respectively.
Continued
- 34 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 12 - INCOME TAXES
The Company has not incurred significant income taxes during the years ended
June 30, 1996 and 1995.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows:
June 30,
-------------------------
1996 1995
---------- ----------
Deferred tax assets:
Inventory reserve $ 86,000 $ 89,000
Warranty reserve 6,000 8,000
Vacation accrual 21,000 46,000
Allowance for bad debts 5,000 9,000
Credits 642,000 642,000
Other --- 2,000
Net operating loss carryforwards 8,393,000 8,345,000
---------- ----------
9,153,000 9,141,000
Valuation allowance (9,120,000) (9,103,000)
---------- ----------
Net deferred tax assets 33,000 38,000
Deferred tax liability -
Property and equipment (33,000) (38,000)
---------- ----------
Net deferred income taxes $ --- $ ---
========= =========
A reconciliation of the actual income tax expense to expected income tax benefit
computed by applying the Federal statutory income tax rate of 34% to net loss
for the year ended June 30, 1996 is as follows:
Amount %
Income tax benefit computed at
Federal statutory tax rate $ (24,000) (34)%
State income taxes 5,000 7
Other 2,000 3
Increase in the valuation allowance
for deferred tax assets 17,000 24
--------- ----
Income taxes $ --- -- %
========= ====
The difference between the federal statutory rate of 34% and the Company's
effective tax rate of 0% in 1995 is the result of incurring net operating losses
without current tax benefit.
Continued
- 35 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 12 - INCOME TAXES, continued
As of June 30, 1996, the Company had net operating loss carryforwards for
federal and state purposes of approximately $24,000,000 and $2,600,000,
respectively. In addition, the Company had general business and research and
development tax credit carryforwards of approximately $642,000. These
carryforwards generally expire through 2011. As a result of common stock
transactions of the Company, certain of its tax loss carryforwards are subject
to restrictions which place a maximum annual limitation on the utilization of
loss carryforwards arising prior to a change in ownership, as defined in the
Internal Revenue Code.
NOTE 13 - COMMON STOCK PURCHASE OPTIONS AND WARRANTS
Stock Option Plan
The Company amended its stock option plan (the "Plan") during 1995 whereby the
Board of Directors 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 to be granted under the Plan may be incentive
stock options intended to qualify under Section 422 of the Internal Revenue Code
and/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
value market value of the common stock on the date of grant, and the exercise
price for nonstatutory options must be at least 99% of such fair market value.
The incentive stock options vest ratably over five years. No incentive stock
options 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 common stock purchase option activity is as follows during the
years ended at June 30:
1996 1995
---------- ----------
Outstanding at beginning of year 628,250 749,116
Granted 2,036,000 150,000
Canceled (38,250) (456,416)
Exercised (78,425) (81,950)
Reissued --- 267,500
---------- ----------
Outstanding at end of year 2,547,575 628,250
---------- ----------
Continued
- 36 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 13 - COMMON STOCK PURCHASE OPTIONS AND WARRANTS, continued
In March 1996, the Board of Directors approved that all outstanding grants of
common stock purchase options, vested and non-vested, for current employees,
officers and directors, be re-priced to reflect the exercise price of $0.14.
During 1996, the Board of Directors granted options to purchase 2,036,000 shares
of common stock. Options to purchase 38,250 shares of common stock were
canceled.
At June 30, 1996, options to purchase 1,405,313 shares of common stock were
exercisable under the plan described above. Such options expire at various dates
through December 1999.
Other Options and Warrants
In addition to options issued under the Plan, the Company issued common stock
purchase options to nonaffiliated entities. These options are exercisable at
$0.008 to $0.75 per share over the terms ranging from one to five years and
vested at the date of grant. From time to time, the Company issued warrants in
connection with its financings (see Notes 9 and 10), expiring at various dates
through February 2000. During 1996, the activity of other common stock purchase
options and warrants was as follows:
Shares Price Range
Available Per Share
Balances, June 30, 1995 6,382,332 $0.008-$0.75
Warrants issued in connection
with convertible debentures 3,920,000 $0.25
Warrants canceled or expired (186,050) $0.75
Warrants exercised (658,667) $0.45
Other options exercised (134,375) $0.008
Canceled through issuance
of common stock (Note 15) (4,747,140) $0.45
----------
Balances, June 30, 1996 4,576,100 $0.25-$0.75
==========
At June 30, 1995, options to purchase 394,375 had been granted, of which 134,375
were exercised during 1996, and the remaining balance of options to purchase
260,000 shares of common stock were outstanding as of June 30, 1996, all of
which are exercisable at $0.75 per share.
Continued
- 37 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 13 - COMMON STOCK PURCHASE OPTIONS AND WARRANTS, continued
In connection with the Company's private placement of convertible debentures
totaling $629,000 in January and February 1996 (see Note 10), warrants to
purchase 3,920,000 shares of common stock were granted with an exercise price of
$0.25 per share and expire in January and February 1999. No value was ascribed
to such warrants since management believes the exercise price was substantially
in excess of fair value at the time of issuance.
During fiscal 1996, warrants to purchase 4,747,140 common shares, subject to
certain anti-dilution provisions, exercisable at $0.45 per share (subject to a
reduction of the exercise price to $0.30 per share), were canceled through the
issuance of 4,418,914 shares of common stock (see Note 15). During the current
year, warrants to purchase 646,667 shares of common stock, previously
exercisable at $0.45 per share, were exercised at $0.18 per share and 12,000
shares, previously exercisable at $0.45 per share, were exercised at $0.14 per
share. All remaining common stock purchase warrants outstanding at June 30, 1996
were exercisable.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25. The disclosure
requirements for the Company required by Statement No. 123 will be effective for
the Company's fiscal 1997 financial statements.
NOTE 14 - PREFERRED STOCK
The Company was required to redeem the shares of Series C Preferred Stock on
September 1, 1995 at $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 caused an increase in the price per share by
$4.00 per annum, based on a quarterly proration, to $18.93. The Notice also
indicated the Company's intent to establish a redemption date of January 3,
1996. Dividends accrue on the Series C Preferred Stock at $0.53 per share per
annum.
Continued
- 38 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 14 - PREFERRED STOCK, continued
On January 26, 1996, the Company notified holders of its Series C Preferred
Stock that the Redemption Date was changed to June 28, 1996 at a Redemption
Price of $17.93 in accordance with the terms of these stock certificates. As of
June 30, 1996, the holders of the stock certificates had not completed a
required acceptance and release agreement, nor had the certificates been
tendered to the Company. As a result, no payment was made for the redemption of
the Series C Preferred Stock as of June 30, 1996. Since the notice of redemption
on June 28, 1996 was tendered, such preferred shares are no longer validly
issued and outstanding. Such investors must claim their redemption monies within
two years from the date of redemption. Accordingly, $23,000, plus accrued
interest of $4,000, is included in accrued liabilities in the accompanying 1996
consolidated balance sheet.
NOTE 15 - COMMON STOCK
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 shares. The Company temporarily
reduced the warrant exercise price of such warrants from $0.60 to $0.15 and
$0.18, in February and June of 1995, respectively, 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, who were also debenture holders
in the aggregate amount of $200,354, plus accrued interest of $14,997, used
their debenture holdings for the exercise of their warrants into aggregate
amount of 1,423,500 shares of common stock during the reduced exercise price
periods.
In addition, in fiscal 1995, a retiring employee, who remains a director of the
Company, exercised options at $0.75 per share for 81,375 shares of common stock,
collateralized by a note.
In July 1995, the Company issued 646,667 shares of common stock in connection
with the exercise of warrants at an exercise price of $0.18 per share. In
addition, in June 1996, the Company issued 12,000 shares of common stock in
connection with the exercise of warrants at an exercise price of $0.14 per
share. Aggregate proceeds received in connection with these transactions, as
reflected in the accompanying consolidated statement of shareholders' equity,
totaled $118,000 (also see Note 13).
Continued
- 39 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 15 - COMMON STOCK, continued
As discussed in Note 13, in February 1996, the Company issued 4,418,914 shares
of its common stock for the cancellation of certain warrants (see Note 13)
exercisable at $0.45 per share (subject to a reduction of the exercise price of
$0.30 per share). These warrants contained an anti-dilution provision which
enabled the holders the right to purchase additional shares at the then exercise
price per share in the event the Company issued any additional shares of its
common stock in any unrelated transactions. The common stock issued in the
transactions discussed above were effected to cancel the anti-dilution provision
contained in the underlying warrants. No value was ascribed to common stock
issued to cancel these warrants at the time of issuance in February 1996.
During fiscal 1996, the Company issued 345,504 shares of the Company's common
stock valued at prices ranging from $0.10 to $0.14 upon conversion of debentures
issued in 1993. The aggregate reduction of convertible debentures in 1996
totaled $40,000, plus accrued interest of $1,000 (see Note 10).
In April 1996, the Company reached an agreement with a former officer of the
Company regarding the disposition of mutual interests and obligations between
the parties which resulted in the cancellation of a note receivable from the
sale of common stock totaling $161,000, as well as 332,400 shares of common
stock which collateralized the note receivable. In addition, the Company
canceled $20,000 of convertible debentures, plus accrued interest due to this
former officer (also see Note 10) offset by approximately $24,000 of accrued
interest on the note receivable referred to above.
In June 1996, the Company issued 100,000 shares of common stock to an
unaffiliated entity in connection with certain capital raising activities. The
holder of the shares were granted "piggy-back" registration rights with respect
thereto.
NOTE 16 - RETIREMENT SAVINGS PLAN
During 1991, Source established a profit-sharing plan (the "401(k) Plan"), which
is intended to qualify under Section 401(k) of the 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. No
employer contributions have been made since adoption of the 401(k) Plan.
Continued
- 40 -
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Years Ended June 30, 1996 and 1995
NOTE 17 - SUBSEQUENT EVENTS
On October 9, 1996, the Company entered into a financing arrangement with a
commercial lender to borrow up to $1,000,000. This line will allow the Company
to borrow up to 80% of its eligible receivables, as defined, at an interest rate
of prime plus 2.75% (subject to a 12% add-on in the event of default). The line
contains certain financial covenants and is secured by substantially all of the
Company's assets.
- 41 -
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
<TABLE>
The Company's directors and executive officers are as follows:
<CAPTION>
Name Age Positions Director Since
<S> <C> <C> <C>
Richard A. Sullivan 55 Chairman of the Board, Director 1984
President and Chief Executive Officer
John A. Karsten (2) 64 Director 1975
Susan L. Preston (2) 42 Director 1984
Thomas J. White (1) 37 Director 1996
Bruce Popko (1) 51 Director 1996
Jerry Gallwas (2) 59 Director 1996
Barry D. Plost (2) 50 Director 1996
Mokhtar A. Shawky 52 Chief Financial Officer n/a
Catherine Curtis 49 Secretary n/a
<FN>
(1) Member of the Compensation Committee
(2) Member of the Audit and Ethics Committee
</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 each receive $500 cash compensation per
meeting attended as directors. 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.
Richard A. Sullivan, Chairman of the Board,
President and Chief Executive Officer
Mr. Sullivan was appointed Member of the Board, President and Chief Executive
Officer on April 28, 1994, and Chairman of the Board in April 1996. He is
responsible for full operations of Source Scientific, Inc. He held the position
of Executive Vice President and General Manager of Source since April 1993, and
was Vice President Sales & Marketing for MicroProbe Corporation and Source from
May 1989. Previously, he was President of LAB2000 in Florida, a company
specialized in import and export of clinical and industrial products worldwide.
Mr. Sullivan holds a BS in Medical Technology from the University of Buffalo,
New York and an MBA from Pace University, New York.
John A. Karsten, Director
Mr. Karsten was the Vice President and Chief Financial Officer of the Company
from 1990 through Fiscal 1994. He was instrumental in directing the Company's
reorganization from computer peripheral manufacturer to analytic instrumentation
manufacturer in 1991. He has served as a Member of the Board of Directors of the
Corporation since its inception in 1975, participating in the Initial Public
Offering of the Company.
Susan L. Preston, Director and General Counsel
Ms. Preston is a part-time employee of the Company for corporate legal issues
involving contracts, intellectual property, employment and regulatory
compliance. She also has her own law practice in the State of Washington.
Previously, she was Vice President and General Counsel for MicroProbe
Corporation from 1992 to 1994, where she handled all legal issues of the
corporation. From 1991 to 1992, as Regional General Counsel, she provided legal
and technical background to EMCON Northwest, a national environmental consulting
firm involved in hydrogeology, remediation and analytical services.
Thomas J. White, Director
Mr. White is CEO of VLSystems, Inc., of Irvine, California, a software systems
integration firm, a position he has held since 1992. As a CPA, he has held
Senior Tax Specialist positions with Coopers & Lybrand in Denver, and with Peat
Marwick in Decatur, Illinois. Mr. White has been a certified public accountant
since 1981, and holds a B.S. in Accounting from Illinois State University.
Jerry Gallwas, Director
Jerry Gallwas is a retired Director of Program Management for Beckman
Instruments. His career with Beckman was from 1964 to 1994. As a member of the
original team that founded and managed Beckman's diagnostic business from the
mid-1960's, Mr. Gallwas contributed to the definition, design and development of
Beckman's clinical laboratory systems. Mr. Gallwas holds a BS from San Diego
State College.
Bruce Popko, Director
Bruce Popko is Chairman/CEO of ARRISystems, Inc., a publication, telecom and
design consulting company located in Irvine, California, a position he has held
since 1993. Previously, he held executive management positions a Scitex American
Corp, and at Dymo Industries/Photon in Boston, Massachusetts. Mr. Popko has a BS
from Akron University and has attended the Accelerated MBA series at Harvard
Business School - Advanced Studies.
Barry D. Plost, Director
Barry Plost is currently Chairman, President/CEO of SeraCare, Inc., in Los
Anageles. He was formerly with David Barrett, Inc. as a management consultant,
and President/CEO of Country Wide Transport Services, Inc., a NASDAQ listed
company. He holds a BA degree from University of Illinois and an MBA from Loyola
University in Chicago.
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. He has 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 became the Secretary of the Company in 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 Manager,
positions she has held since October 1992. Previously she held executive and
personnel management positions in high technology, manufacturing and public
service companies. Ms. Curtis is a certificated California Paralegal.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding compensation paid by
the Company to its Chief Executive Officer during each of the Company's last
three fiscal years. No executive officer of the Company received salary and
bonus payments in excess of $100,000 during the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Long Term Compensation
Awards (2)
Name and Principal Position (1) Annual Compensation Securities Underlying
- ------------------------------- ------------------- Options (#)
Year Salary ($)
<S> <C> <C> <C>
Richard A. Sullivan 1996 97,428(3) 330,000
President and Chief Executive Officer 1995 103,021 0
and Chairman of the Board 1994 103,021 200,000
<FN>
(1) Mr. Sullivan became President and Chief Executive Officer on May 1, 1994.
(2) The Company has no stock appreciation rights plan. The Company has an
incentive stock option plan which was amended by a vote of the shareholders
in December 1994, to include options to directors and advisors.
(3) Mr. Sullivan's compensation for fiscal 1996 reflects a salary reduction
of 12 1/2% which was implemented throughout the Company on August 1, 1995.
</FN>
</TABLE>
Options Exercises and Year-End Value Table
The table below sets forth information regarding stock options of the Chief
Executive Officer including (i) the exercise of stock options during the fiscal
year ended June 30, 1996, (ii) the number of unexercised options as of June 30,
1996, and (iii) the value as of June 30, 1996, of unexercised in-the-money
options.
<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 11,830 1,656 348,170/170,000 - / -
<FN>
(1) Value per share is based on the difference between the option exercise
price per share and the then current market price per share of Common Stock
as of June 30, 1996.
</FN>
</TABLE>
Director Compensation
Commencing April 1, 1996, the Members of the Board of Directors who qualify
as outside directors receive cash compensation of $500 for each meeting
attended, plus reimbursement for expenses incurred in meetings of the Board of
Directors of the Company.
<PAGE>
Consulting and Related Agreements
The Company has employment agreements with the following directors:
<TABLE>
<CAPTION>
Dates of Agreement/
Name of Director Working Relationship Compensation Scope of Services Provided
<S> <C> <C> <C>
Richard A. Sullivan July 1, 1995 to $103,021 President and Chief Executive Officer
June 30, 1998 per annum
Susan L. Preston July 1, 1995 to $54,340 General Counsel and
June 30, 1997 per annum (1) Director of Legal Affairs
<FN>
(1) Ms. Preston is employed by the Company on a part-time basis.
</FN>
</TABLE>
The Company has no consulting agreements with any of its officers or
directors, and has employment agreements effective July 1, 1995 and terminating
June 30, 1997, with 2 officers who are not directors: Mokhtar A. Shawky, Chief
Financial Officer and Catherine Curtis, Secretary, at per annum rates of $72,348
and $52,000, respectively. The Company has employment agreements with three key
employees who are not directors or officers of the Company.
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
24, 1996, (i) assuming the exercise of all exerciseable outstanding Warrants and
Options; and (ii) 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.
Beneficial Ownership (1)
--------------------------
Shareholder Name Number of
Shares Percent
John E McConnaughy Jr (2) 6,316,509 23.86
Rompos Ltd (3) 2,636,792 11.57
Stanley Becker (4) 2,562,916 12.50
Barry Nathanson (5) 2,055,755 9.34
Max Goldring Trust (6) 1,334,000 6.21
Richard Sullivan (7) 375,590 1.83
John Karsten (8) 496,614 2.46
Susan Preston (9) 89,990 *
Thomas White (10) 15,000 *
Bruce Popko (10) 15,000 *
Jerry Gallwas (10) 15,000 *
Barry Plost (10) 15,000 *
All officers and directors
as a group (7persons) (11) 1,148,884 5.52
* Less than one percent
1. Includes all options and warrants which are exerciseable, and all debentures
that are convertible, within 60 days of the date of this Annual Report.
2. Includes 2,641,509 shares reserved for the conversion of 1996 A Debentures;
1,875,000 shares reserved for the conversion of 1996 B Debentures; 1,800,000
shares reserved forthe exercise of 1996 Debenture Warrants. Mr.McConnaughy's
address is 1011 High Ridge Road, Stanford, CT 06905.
3. Includes 1,886,792 shares reserved for the conversion of 1996 A Debentures
and 750,000 shares reserved for the exercise of 1996 Debenture Warrants.
Rompos Ltd.'s address is Chateau Routaf, Rouvier Place, SARL Chateau Vert,
83149 BRAS, France.
4. Includes 2,215,416 shares owned of record by such individual; 250,000
shares reserved for the conversion of 1996 B Debentures and 97,500 shares
reserved for the exercise of 1995 Debenture Warrants. Mr. Becker's
address is 55 East End Avenue, Apt. 7, New York, New York 10028.
5. Includes 210,000 shares owned of record by such individual; 1,320,755 shares
reserved for the conversion of 1996 A Debentures and 525,000 shares reserved
for the exercise of 1996 Debenture Warrants. Mr. Nathanson's address is 6
Shore Cliff Place, Great Neck, NY 11023.
6. Max Goldring Trust's address is c/o Paul Garrett, Trustee, 11920 Currituck
Drive, Los Angeles, California 90049.
7. Includes 27,430 shares of stock owned of record by Mr. Sullivan, 11,830 of
which resulted from the exercise of options granted under the ISO Plan; and
348,160 shares reserved for the exercise of additional options granted to
such individual under the ISO Plan. Mr. Sullivan's address is c/o the
Company at 7390 Lincoln Way, Garden Grove, CA 92641.
8. Includes 451,614 shares of Common Stock owned of record by such individual;
and 45,000 shares reserved for the exercise of options that have vested
pursuant to the July 1994 and July 1995 grants to such individual, each such
grant consisting of 30,000 Directors Options. Mr. Karsten's address is c/o
the Company at 7390 Lincoln Way, Garden Grove, CA 92641.
9. Includes shares reserved for the exercise of options granted to such
individual under the ISO Plan. Ms. Preston's address is c/o the Company a
7390 Lincoln Way, Garden Grove, California 92641.
10. Includes shares reserved for the exercise of options that have vested
pursuant to grants of Directors Options to each such individual. The address
of each such individual is c/o the Company at 7390 Lincoln Way, Garden
Grove, California 92641.
11. Includes all shares referenced in notes 7 through 10, inclusive, and shares
reserved for the exercise of options granted under the ISO Plan to two
individuals who are executive officers, but not directors, of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Restructure of Union Bank Loan
In January 1988, the Company executed a series of agreements that resulted
in a restructuring of substantially all of the Company's debt and capital, which
included a secured note in favor of Union Bank, collateralized by substantially
all of the assets of the Company (the "1988 Union Bank Note"), and conversion of
debt into shares of Series B Preferred Stock, Series D Preferred Stock and
Common Stock. Pursuant to the Company's 1991 Recapitalization, Union Bank
converted all of the shares of Series B Preferred Stock and Series D Preferred
Stock into shares of Common Stock.
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. On June 28, 1996, the remaining 1,555 shares of Series C
Preferred Stock were redeemed by the Company at the redemption price of $17.93
per share, according to the provisions of the Certificate of Determination of
Preferences, Rights and Limitations of Preferred Stock of Wespercorp as filed
with the Secretary of State of California on January 20, 1988. (See "Redemption
of Series C Preferred Stock" below.)
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 41,116 shares of Common Stock and provided a one-year, deferred minimum
market price guarantee. In the Company's 1989 fiscal year, the market value of
the Common Stock was below the minimum market price guarantee and, accordingly,
the Company recorded an additional $135,000 in excess of the then-existing
$250,000 accrued liability under such guarantee. In June 1990, Fireman's Fund
filed a lawsuit against the Company to enforce such guarantee. Concurrently with
the 1991 Recapitalization, Fireman's Fund dismissed the lawsuit and the Company
granted it the Fireman's Fund Option to purchase an additional 134,380 shares of
Common Stock at an exercise price of $0.008 per share. The option was exercised
on December 12, 1995.
<PAGE>
1991 Recapitalization
Immediately prior to the 1991 Recapitalization, Union Bank owned 100,000
shares of each of Series B Preferred Stock and Series D Preferred Stock. As part
of the 1991 Recapitalization, Union Bank converted the 1988 Union Bank Note, the
then-owing principal balance of which was $244,000 into a long-term note
maturing in January 1996, and exchanged 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. Union Bank subsequently transferred such shares
into a voting trust (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 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
convertible debentures in the aggregate amount of $500,000, 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).
Concurrently with the purchase of the 1991 Debentures, the persons became
executive officers of the Company. In addition, each of such persons purchased
262,500 shares of the Company's Common Stock 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.
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, required amendment. The Company believed such
amendment would be completed within a few months, restoring registration
privileges to the Selling Security Holders. In June 1994, the Company again
temporarily reduced the warrant exercise price, from $0.60 to $0.18 for a period
of 30 days, which delayed the Company's ability to amend the registration
statement. 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 was terminated on December 4, 1995, by mutual
release of both parties. The agreement was subject to numerous significant
conditions to closing.
Properties
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.
Business Acquisitions
On January 21, 1994, the Company acquired all of the capital stock of the
Source Subsidiary from MicroProbe Corporation, of Bothell, Washington
("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
was in the form of the non-interest-bearing, subordinated, collateralized Note,
all due and payable on March 27, 1995 (the "MicroProbe Note"). In addition, the
Company issued to MicroProbe 50,000 warrants which were exercisable at $0.50 per
share and 50,000 of which were exercisable at $1.00 per share (the "MicroProbe
Warrants").
Concurrently with the acquisition of the Source Subsidiary, the Company and
MicroProbe entered into the five-year MicroProbe Supply Agreement, pursuant to
which the Company was obligated to supply to MicroProbe the Affirm(R) Processors
and the Affirm(R) Scanners. Under such Agreement, MicroProbe was to provide the
Company with firm quarterly orders with monthly delivery schedules. In May 1994,
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, which resulted in the cancellation
of the MicroProbe Note and cancellation of the MicroProbe Warrants, as well as a
reduction of royalty payments. The MicroProbe 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 was originally established to expire in March
2000, and provided for the Company to pay up to a maximum of $375,000 on future
shipments of Source-manufactured products that utilized 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 provides for an increase to two and one-half percent effective 12
months later. The Company's cost-of-goods-sold increased on all products on
which a royalty is to be paid, and price adjustments were made to compensate for
royalty payments. However, MicroProbe was sold in 1995. The royalty agreement
cannot be assigned without the Company's express written consent, which was not
sought or granted. The Company considers the royalty agreement null and void due
to a material breach of terms by MicroProbe.
Wespercorp Business
In November 1992, the Company entered into an agreement with a private
group 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 Wespercorp Business
were terminated. In May 1994, the Company transferred certain assets and
inventory to Wesper. 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.
Redemption of Series C Preferred Stock
In accordance with the terms and conditions of the Certificate of
Registration of the Preferred Stock of the Company, 1,555 shares of Series C
Preferred Stock were redeemed for an aggregate amount of $27,881.15 on June 28,
1996, to five holders of such Preferred Stock. As a condition of releasing the
redemption payments, holders of such Preferred Stock were required to tender the
Preferred Stock certificates to the Company and sign an acceptance and release
agreement. As of the date of this Report, two such holders of an aggregate of
622 shares of Preferred Stock had not claimed their redemption payments despite
extensive attempts by the Company to contact them. Under the terms of the
certificates, the Company is required to honor such redemption payments for a
period of two years after the redemption date.
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 $4,166.33, 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 was collateralized by such shares. The
Company also extended the term to June 30, 1996, for payment of Mr. Yeung's
Recapitalization Shares Note, the principal balance of which as of June 30,
1995, was $66,250. In April 1996, the Company reached an agreement with Mr.
Yeung regarding the disposition of mutual interests and obligations 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 principal 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 interests and obligations between the parties.
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
June 30, 1995, was $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 (7%) 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 electronics manufacturer specializing in custom
integrated data input and display subsystems and components. The business
combination agreement was anticipated by August 30, 1995, contingent upon
certain accomplishments by both parties relating to additional funding and
financial improvements. No formal agreement for combining the companies
materialized, however the parties mutually agreed to remain strategic alliance
partners, although there can be no assurance that such alliance between the
companies will yield any benefit to the Company.
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 be acquiring a 20% interest in
Lifestream. Although both managements anticipated completion of a definitive
agreement by August 15, 1995, the agreement was contingent on the successful
completion of certain conditions which have not been completed at the date of
this report, which were not limited to FDA approval of the subject Lifestream
instrument.
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),
which develops, manufactures, and markets a full range of test kits to assess
and diagnose blood disorders and chemistry controls used to monitor and measure
the presence of therapeutic drugs and drugs of abuse. The merger was dependent
upon several conditions precedent being met by both parties which did not occur,
and subsequently, the Plan of Merger was terminated on December 4, 1995. (See
"Historical Financings".)
Subsequent Events
Line of Credit with Concorde Growth Bank
On October 10, 1996, the Company entered into a financing arrangement with
a commercial lender to borrow up to $1,000,000. This line will allow the Company
to borrow up to 80% of its eligible receivables, as defined, at an interest rate
of prime plus 2.75% (subject to a 12% add-on in the event of default). The line
contains certain financial covenants and is secured by substantially all of the
Company's assets.
<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 egis-
trant 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.
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.)
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. (Incorporated by reference
from Exhibit (a) to the Registrant's Quarterly Report on Form 10-QSB,
dated May 18, 1995.)
10.21 Form of debenture with issuance of warrants, executed by the
Registrant for eight debentures issued in November, 1994 through
February, 1995. (Incorporated by reference from Exhibit (a) 10.23 to
the Registrant's Annual Report on Form 10-KSB, dated December 18,
1995.)
10.22 Form of debenture executed by the Registrant for six debentures issued
in May and June, 1995. (Incorporated by reference from Exhibit (a)
10.23 to the Registrant's Annual Report on Form 10-KSB, dated December
18, 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. (Incorporated by reference from Exhibit (a) 10.23
to the Registrant's Annual Report on Form 10-KSB, dated December 18,
1995.)
10.24 Promissory Note, dated September 29, 1995, by the Registrant in favor
of Biopool International, Inc. (Incorporated by reference from Exhibit
(a) 10.23 to the Registrant's Annual Report on Form 10-KSB, dated
December 18, 1995.)
10.25 Agreement and Plan of Merger, dated November 3, 1995, between the
Registrant and Biopool International, Inc., for the acquisition of
Source Scientific, Inc. (Incorporated by reference from Exhibit (a)
10.1 to the Registrant's Annual Report on Form 10-QSB, dated December
22, 1995.)
10.26 New release issued by the Registrant on December 5, 1995, announcing
the termination of the Agreement and Plan of Merger with Biopool.
(Incorporated by reference from Exhibit (a) 99.1 to the Registrant's
Annual Report on Form 10-QSB, dated December 22, 1995.)
10.27 Replacement Promissory Note, dated as of September 29, 1995, between
the Company and Biopool International, Inc. (Incorporated by reference
from Exhibit (a) 10.24 (a), to the Registrant's Quarterly Report on
Form 10-QSB, dated February 20, 1996.)
10.28 Factoring Agreement between the Registrant and Silicon Valley Bank,
dated December 2, 1995, at a financing charge of 1.5% to an aggregate
of $150,000 of Purchased Receivables. (Incorporated by reference from
Exhibit (a) 10.25 (a), to the Registrant's Quarterly Report on Form
10-QSB, dated February 20, 1996.)
10.29 Factoring Agreement between the Registrant and Silicon Valley Bank,
dated December 2, 1995, at a financing charge of 2.5% to an aggregate
of $250,000 of Purchased Receivables. (Incorporated by reference from
Exhibit (a) 10.25 (b), to the Registrant's Quarterly Report on Form
10-QSB, dated February 20, 1996.)
10.30 Form of debenture executed by the Registrant for four debentures
issued in February, 1996 who funded promissory notes in the aggregate
amount of $350,000 in the months of January and February, 1996, which
were converted into Debentures. (Incorporated by reference from
Exhibit (a) 10.26 to the Registrant's Quarterly Report on Form 10-QSB,
dated February 20, 1996.)
10.31 Form of Convertible Debenture with issuance of warrants, executed by
the Registrant in February and March, 1996, between the Company and
six individuals. (Incorporated by reference from Exhibit (a) to the
Registrant's Quarterly Report on Form 10-QSB, dated May 14, 1995.)
10.32 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. (Incorporated by reference from Exhibit (a) 10.27 to the
Registrant's Quarterly Report on Form 10-QSB, dated May 14, 1995.)
*10.32 Form of Line of Credit Agreements, including Secured Promissory Note,
Loan Agreement, Accomodation Note, Copy of Resolutions and Security
Agreement, executed by the Registrant with Concord Bank.
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 Corbin & Wertz, Certified Public Accountants.
*23.2 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, 1996:
None.
REPORTS FILED ON FORM 8-K SUBSEQUENT TO FISCAL YEAR ENDED JUNE 30, 1996:
None.
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
October 9, 1996 Source Scientific, Inc.
By: /s/ Richard A. Sullivan
Richard A. Sullivan
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 DATE
/s/ Richard A. Sullivan President, Chief Executive October 9, 1996
- ------------------------ Officer, Chairman of the Board
Richard A. Sullivan and Director
/s/ John A. Karsten Director October 9, 1996
- ------------------------
John A. Karsten
/s/ Susan L. Preston Director of Legal Affairs October 9, 1996
- ------------------------
Susan L. Preston Director
/s/ Thomas J. White Director October 9, 1996
- ------------------------
Thomas J. White
/s/Bruce Popko Director October 9, 1996
- ------------------------
Bruce Popko
/s/ Jerry Gallwas Director October 9, 1996
- ------------------------
Jerry Gallwas
/s/ Barry Plost Director October 9, 1996
- ------------------------
Barry Plost
/s/ Moktar A. Shawky Chief Financial Officer, October 9, 1996
- ------------------------ Principal Financial Officer,
Mokhtar A. Shawky and Principal Accounting Officer
SECURED PROMISSORY NOTE
$1,000,000 Date: October 1, 1996
---------
FOR VALUE RECEIVED, Source Scientific, Inc. (the "Borrower") hereby absolutely
and unconditionally promises to pay to Concord Growth Corporation (the
"Lender"), or order, on demand but in no event later than the date specified in
the Loan Agreement (as defined below) as the date on which all amounts owing by
the Borrower to the Lender are due and payable, in immediately available funds,
the principal amount of One Million Dollars ($1,000,000) (the Maximum Credit)
or, if less, the aggregate principal amount of this Note outstanding on such
date, and to pay interest and fees on the unpaid principal amount hereof, in
immediately available funds, monthly in arrears on the first day of each
calendar month for the immediately preceding month in the amounts specified in
the Loan Agreement (as defined below). This note evidences loans and other
credit accommodations made or to be made by the Lender to the Borrower pursuant
to the Security Agreement dated October 1, 1996 and the Loan Agreement dated
October 1, 1996, by and between Lender and Borrower (as amended and in effect
from time to time, the "Loan Agreement"). Capitalized terms defined in the Loan
Agreement, whether directly or indirectly by reference, shall have the
respective meanings herein assigned to such terms in the Loan Agreement.
The principal amount of this Note is subject to prepayment in whole or in part
in the manner and to the extent specified in the Loan Agreement. Upon the
occurrence of any Event of Default, the entire unpaid principal balance of this
Note, all of the unpaid interest and fees accrued thereon or with respect
thereto and all other amounts payable by Borrower to Lender under the Loan
Agreement or hereunder may automatically become immediately due and payable,
without demand, in the manner and with the effect provided in the Loan
Agreement.
This Note is secured by the security interests in, liens on and rights of setoff
against, the assets of the Borrower granted as collateral security pursuant to
the Loan Agreement and any other documents, instruments and agreements executed
and delivered from time to time in connections therewith.
No delay or omission on the part of the Lender or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or any
other right of the Lender or of such holder, nor shall any delay, omission or
waiver of any one occasion be deemed a bar to or waiver of the same or any other
right or any other occasion. The Borrower and every endorser and guarantor of
this Note regardless of the time, order or place of signing hereby waives
presentment, demand, protest and notice of every kind, and assents to any
extension or postponement of the time for payment or any other indulgence, to
any substitution, exchange or release of collateral, and to the addition or
release of any other party or person or entity primarily or secondarily liable.
All expenses of enforcement of the Lender's rights hereunder and other costs and
expenses in respect hereof (including reasonable court costs and legal and other
professional fees) shall be for the account of the Borrower.
Borrower acknowledges that Lender may assign and sell participations in its
rights and obligations under this Note, the Loan Agreement and any other
agreements. Lender may include its repayment rights under the Loan Agreement,
this Note and the other agreements in a pool of loan receivables in which Lender
sells undivided interests as part of a securitization program. Borrower
understands that Lender may from time to time transfer and assign its rights
under the Loan Agreement and this Note to one or more assignees. Borrower hereby
consents to these transfers and assignments by Lender to one or more assignees.
Borrower hereby agrees that any such assignee may exercise the rights of Lender
hereunder. Borrower hereby consents and acknowledges that any and all defenses,
claims or counterclaims that it may have against Lender shall be limited to, and
may only be brought against, Lender and shall not extend to any assignee.
Borrower and Lender intend that any and all direct or indirect assignees of the
Lender of the type set forth above shall be third party beneficiaries of this
Note.
This Note shall be binding upon the Borrower's successors and assigns, and shall
inure to the benefit of the Lender's successors and assigns.
THIS NOTE SHALL FOR ALL PURPOSES BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO CONFLICTS OF
LAW).
BORROWER, LENDER AND, BY ITS ACCEPTANCE HEREOF, EACH HOLDER, EACH WAIVE ALL
RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF
THEM AGAINST THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THE LOAN
AGREEMENT, THIS NOTE, THE OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTUOUS
CONTACT BY BORROWER OR LENDER, OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY,
ARISES FROM OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO
EVENT WILL LENDER OR ANY HOLDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR
CONSEQUENTIAL DAMAGES.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its duly
authorized officer to take effect as of the date first hereinabove written.
BORROWER:
SOURCE SCIENTIFIC, INC.
By:
<PAGE>
ACCOMMODATION NOTE
$250,000 Date: October 1, 1996
- --------
FOR VALUE RECEIVED, the undersigned (hereinafter "Borrower"), hereby promises to
pay to the order of CONCORD GROWTH CORPORATION, a California corporation
(hereinafter "Lender"), or its assigns, at 1170 East Meadow Drive, Palo Alto, CA
94303, or at such other place as the holder of this Accommodation Note (the
"Note") may designate from time to time in writing, in such coin or currency of
the United States which shall be legal tender in payment of all the debts and
dues, public and private, at the time of payment, the principal sum of Two
Hundred Fifty Thousand DOLLARS ($250,000), or such lesser principal amount as
may be from time to time outstanding pursuant to the terms of this Note,
together with interest from and after the date hereof on the unpaid principal
balance outstanding at the rate and payable in the manner set forth below.
All capitalized terms used in this Note, unless otherwise specifically defined
in this Note, shall have the meanings ascribed to them in that certain Loan
Agreement between Borrower and Lender dated as of October 1, 1996, as amended,
supplemented, extended or restated from time to time (the "Loan Agreement").
Lender may make advances from time to time, in its sole discretion, under this
Note in increments of not less than $25,000 (each an "Accommodation") up to a
maximum aggregate amount not to exceed the lesser of: (a) Two Hundred Fifty
Thousand Dollars ($250,000) or (b) the amount by which the Maximum Credit
exceeds the sum of all outstanding Advances and Accommodations.
In the event the aggregate outstanding Accommodations shall at any time exceed
the limitations provided in this Note, Borrower shall immediately repay the
Accommodations in the amount of such excess.
Each payment shall be first applied to interest and other charges due
hereunder, with remaining amounts being applied to principal.
This Note is an "Accommodation Note" referred to in, and is issued pursuant to,
that certain Loan Agreement, evidences one or more "Accommodations" referred to
in the Loan Agreement, and is entitled to all of the benefits and security of
the Loan Agreement, the Security Agreement and the other Loan Documents. All of
the terms, covenants, and conditions of the Loan Agreement, Security Agreement
and the other Loan Documents are hereby made a part of this Note and are deemed
incorporated herein in full. In the event there exists any actual conflict
between the terms of this Note and the terms of the Loan Documents, the
provisions of this Note shall control.
Accommodation Fee. Borrower shall pay Lender on the date hereof a facility fee
(the "Accommodation Fee") in the amount of NA percent (NA%) of the Principal Sum
of this Note, which fee is fully earned and non-refundable as of the date such
payment is due.
Interest. Interest shall accrue on the principal balance outstanding under this
Note at a floating rate per annum equal to the Prime Rate (as defined below)
plus two and three quarters percent (Prime + 2.75%) (the "Accommodation Interest
Rate"), which interest shall be payable and calculated as hereinafter set forth.
Borrower shall pay such interest to Lender on the first day of each month in an
amount equal to (a) the quotient obtained by dividing the sum of the daily
unpaid principal balance outstanding on each day during the immediately
preceding month by the actual number of days in such month (the "Average
Accommodation Daily Balance"), multiplied by (b) the quotient obtained by
dividing the Accommodation Interest Rate by 360, multiplied by (c) the actual
number of days in the immediately preceding month. The Accommodation Interest
Rate shall increase or decrease monthly, on the first day of each month, by the
amount of any increase or decrease in the Prime Rate. For purposes of this
Agreement, the "Prime Rate" is the prime rate of interest publicly listed by the
Western Edition of the Wall Street Journal on the first day of each month or, if
the first day of such month is not a business day, on the last business day of
the immediately preceding month. In the event the prime commercial interest rate
listed by the Wall Street Journal is a range, the highest rate in the range
shall be the "Prime Rate".
Administrative Fee. Borrower shall pay Lender on the first day of each month an
administrative fee (the "Accommodation Administrative Fee") in an amount equal
to (a) the Average Accommodation Daily Balance for the immediately preceding
month, multiplied by (b) one quarter of one percent ( .25%).
All obligations under this Note, including all Accommodations, and all accrued
and unpaid interest and Accommodation Administrative Fees and Accommodation
Fees, constitute Obligations secured by the Collateral, and shall be due and
payable in full on the date the Loan Agreement is terminated if it is terminated
prior to expiration of the Term (the "Maturity Date"). Each individual
Accommodation shall be paid in full, no later than sixty (60) days after such
Accommodation has been made to Borrower. All obligations and payments due herein
under this Note, may be applied to the revolving loans contemplated in the Loan
Agreement.
In no event shall charges constituting interest under this Note exceed the
highest rate permitted under applicable law. In the event that a court of
competent jurisdiction makes a final determination that Lender has received
interest under this Note in excess of the maximum lawful rate, then such excess
shall be deemed a payment of principal and applied against the principal under
this Note, and the interest payable under this Note shall be deemed amended to
the amount payable under the maximum lawful rate. It is the intent hereof that
Borrower not pay or contract to pay, and that Lender not receive or contract to
receive, directly or indirectly in any manner whatsoever, interest in excess of
that which may be paid by Borrower under applicable law.
Upon the occurrence of an Event of Default, this Note may, and without demand,
notice or legal process of any kind, be declared, and upon such declaration
immediately shall become, or upon certain circumstances set forth in the Loan
Agreement may become without declaration, due and payable. Without limiting the
terms of the Loan Agreement, Security Agreement and the other Loan Documents, if
Lender takes any action to collect this Note, then Borrower shall be obligated
to pay any reasonable fees and expenses in connection with such action, which
fees and expenses constitute Obligations secured by the Collateral.
Time is of the essence of this Note. To the fullest extent permitted by
applicable law, Borrower, for itself and its legal representatives, successors
and assigns, expressly waives presentment, demand, protest, notice of dishonor,
notice of non-payment, notice of maturity, notice of protest, presentment for
the purpose of accelerating maturity, diligence in collection, and the benefit
of any exemption or insolvency laws.
Wherever possible each provision of this Note shall be interpreted in such a
manner as to be effective and valid under applicable law, but if any provision
of this Note shall be prohibited or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or remaining provisions of this
Note. No delay or failure on the part of Lender in the exercise of any right or
remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in
any default, nor shall any single or partial exercise by Lender of any right or
remedy preclude any other right or remedy. Lender, at its option, may enforce
its rights against any collateral securing this Note without enforcing its
rights against Borrower, any guarantor of the indebtedness evidenced hereby, or
any other property or indebtedness due or to become due to Borrower. Borrower
agrees that, without releasing or impairing Borrower's liability hereunder,
Lender may at any time release, surrender, substitute or exchange any collateral
securing this Note and may at any time release any party primarily or
secondarily liable for the indebtedness evidenced by this Note.
This Note shall be governed by, and construed and enforced in accordance with,
the laws of the State of California. Sections of the Loan Agreement relating to
waiver of jury trial, consent to jurisdiction, no implied waiver, and release
apply to this Note, and are hereby incorporated into this Note by reference.
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered on the date first above written.
"Borrower":
SOURCE SCIENTIFIC, INC.
By:
Name:
Title:
"Lender":
CONCORD GROWTH CORPORATION
By:
Name:
Title:
<PAGE>
SECURITY AGREEMENT
This Security Agreement (the "Agreement") is entered into as of October 1, 1996,
between Source Scientific, Inc., ("Borrower") and Concord Growth Corporation
("Lender"), in connection with various loans and other credit accommodations by
Lender to Borrower pursuant to the Loan Agreement dated October 1, 1996
[concurrently herewith] between Borrower and Lender, as the same may be amended,
restated, supplemented, extended, or replaced from time to time (collectively,
the "Loan Agreement").
Capitalized terms used in this Agreement shall have either (a) the meanings
assigned to them in Section 6.6 of this Agreement, or (b) if such terms are not
otherwise defined in this Agreement, the respective meanings assigned to them in
the Loan Agreement.
1. GRANT OF SECURITY INTEREST
1.1 Grant of Security Interest. To secure the payment and performance
in full of all Obligations, Borrower hereby grants to Lender a
continuing security interest in and lien upon, and a right of
setoff against, and Borrower hereby assigns and pledges to Lender
for security purposes, all of Borrower's right, title and interest
in and to the following property, whether now owned or existing or
hereafter acquired or arising, wherever located, (collectively,
the "Collateral"), including any Collateral not deemed eligible
for lending purposes: (a) All accounts; (b) All chattel paper; (c)
All general intangibles, including, without limitation, all rights
to payment, causes of action,
rights to receive tax refunds, contract rights, customer
lists, guaranties, deposit accounts, cash, rights in and
claims under insurance policies (including rights to
unearned premiums), copyrights, patents, trademarks,
tradenames, rights under license agreements and rights
thereunder, all other intellectual property, and goodwill
(including the goodwill associated with trademarks and
trademark licenses);
(d) All investment property (as defined in the Uniform Commercial
Code); (e) All inventory; (f) All equipment and fixtures; (g) All
documents, instruments, letters of credit and bankers'
acceptances; (h) All consumer goods, farm products, crops, timber,
minerals or the like (including oil and gas); (i) All books and
records relating to any of the above, including, without
limitation, all computer
programs, printed output and computer readable data in the
possession or control of the Borrower, any computer service
bureau or other third party; and
(j) All accessions, substitutions for and all replacements,
products, and cash and non-cash proceeds of the foregoing,
in whatever form, including all insurance proceeds and all
claims against third parties for loss or destruction of or
damage to any of the foregoing.
2. APPOINTMENT AS ATTORNEY-IN-FACT; PRESERVATION OF COLLATERAL
2.1. Attorney-in-Fact. Borrower hereby appoints Lender and any designee
of Lender as Borrower's attorney-in-fact and authorizes Lender or
such designee, at Borrower's sole expense, to exercise at any
times in Lender's or such designee's discretion all or any of the
following powers, which powers, being coupled with an interest,
shall be irrevocable until all Obligations have been paid and sat-
isfied in full:
(a) receive, endorse, assign, deliver, and deposit, in the name
of Lender or Borrower, any and all cash, checks, commercial
paper, drafts, remittances and other instruments and docu-
ments relating to the Collateral or the proceeds thereof;
(b) notify account debtors, other obligors or any bailees of the
interest of Lender in the Collateral or request from account
debtors or such other obligors or bailees at any time, in
the name of Borrower or Lender or any designee of Lender,
information concerning the Collateral and any amounts owing
with respect thereto;
(c) notify account debtors or other obligors to make payment
directly to Lender, or notify bailees as to the disposition
of Collateral;
(d) execute in the name of Borrower and file against Borrower in
favor of Lender financing statements, deeds of trust,
mortgages, or other assignment documents, as well as any
amendments with respect to any portion of the Collateral;
(e) obtain insurance at Borrower's expense and, after an Event
of Default, to adjust or settle any claim or other matter
arising pursuant to Borrower's insurance or to amend or
cancel such insurance;
(f) after an Event of Default, take or bring, in the name of
Lender or Borrower, all steps, actions, suits or proceedings
deemed by Lender necessary or desirable to direct collection
of or other realization upon the accounts and other
Collateral;
(g) after an Event of Default, change the address for delivery
of mail to Borrower and to receive and open mail addressed
to Borrower; and
(h) after an Event of Default, extend the time of payment of,
compromise or settle for cash, credit, return of
merchandise, and upon any terms or conditions, any and all
accounts or other Collateral which includes a monetary
obligation and discharge or release the account debtor or
other obligor, without affecting any of the Obligations.
2.2. Limitations Upon Written Notice or After Event of Default.
Borrower shall not, without the prior written consent of Lender,
(1) absent an Event of Default, after receiving written notice
from Lender, or (2) after an Event of Default:
(a) grant any extension of time of payment of any of the
accounts or any of the other Collateral that includes a
monetary obligation;
(b) compromise or settle any of the accounts or any such other
Collateral for less than the full amount thereof;
(c) release in whole or in part any account debtor or other
person liable for the payment of any of the accounts or any
such other Collateral; or
(d) grant any credits, discounts, allowances, deductions, return
authorizations or the like with respect to any of the
accounts or any such other Collateral.
2.3. Lender's Right to Cure. Lender may, at its option, cure any
default by Borrower under any agreement with a third party or pay
or bond on appeal any judgment entered against Borrower, discharge
taxes, liens, security interest or other encumbrances t any time
levied on or existing with respect to the Collateral and pay any
amount or perform any act which, in Lender's sole judgment, is
necessary or appropriate to preserve, protect, insure, or realize
upon the Collateral. Lender may charge Borrower's loan account for
any amounts so expended, such amounts to be repayable by Borrower
on demand. Lender shall be under no obligation to effect such
cure, payment, bonding or discharge, and shall not, by doing so,
be deemed to have assumed any obligation or liability of Borrower.
2.4. Inspection; Access to Collateral. Lender or its designee shall
have access at any time to all of the premises where Collateral
is located for the purposes of inspecting the Collateral and
making copies of Borrower's books and records. Lender may use such
of Borrower's personnel, equipment, including computer equipment,
programs, printed output and computer readable media, supplies and
premises for the collection of accounts and realization on other
Collateral as Lender deems appropriate. Borrower hereby irrevo-
cably authorizes all accountants and third parties to disclose
and deliver to Lender all financial and other information in their
possession regarding Borrower. All such inspection, copying,
use of personnel, equipment and premises, and disclosure of infor-
mation, shall be at Borrower's sole expense.
3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Borrower hereby represents, warrants and covenants to Lender the
following, the truth and accuracy of which, and compliance with which,
shall be continuing conditions of the making of loans or other credit
accommodations by Lender to Borrower under the Loan Agreement:
3.1. Trade Names. Borrower may from time to time render invoices to
account debtors under its trade names set forth in Schedule A
hereto; provided, that (a) each such trade name does not refer to
another corporation or other legal entity, and (b) all accounts
and proceeds thereof (including any returned merchandise) invoiced
under any such trade names are owned exclusively by Borrower and
are subject to the security interest of Lender.
3.2. Locations of Collateral. Borrower's books and records concerning
accounts and its chief executive office are and shall be
maintained only at the address set forth below Borrower's
signature. Borrower's only other places of business and the only
other locations of Collateral, if any, are and shall be the
addresses set forth in Schedule A, except Borrower may change such
locations or open a new place of business after thirty (30) days
prior written notice to Lender. Prior to any change in location or
opening of any new place of business, Borrower shall execute and
deliver or cause to be executed and delivered to Lender such
financing statements and other agreements as Lender may require.
3.3. Encumbrances Against Collateral. Borrower has and at all times
will continue to have good and marketable title to all of the
Collateral, free and clear of all liens, security interests,
claims or encumbrances of any kind except, if any, those set forth
on Schedule A hereto. The liens and security interests granted by
Borrower to Lender in the Collateral are first priority liens and
security interests, subject only to those liens and security
interests set forth on Schedule A, unless the holder of any such
liens and security interests subordinates to Lender.
3.4. Insurance. Borrower shall at all times maintain, with financially
sound and reputable insurers, casualty insurance with respect to
the Collateral and other assets. Borrower shall at the request
of Lender, name Lender as loss payee of such insurance. All
such insurance policies shall be in such form, substance,
amounts and coverage as may be satisfactory to Lender and shall
provide for thirty (30) days' prior written notice to Lender of
cancellation or reduction of coverage. Borrower shall deliver to
Lender, in kind, all payments or instruments representing proceeds
of insurance received by Borrower. Insurance proceeds received
by Lender, at any time, may be applied, at Lender's option, to
repay any of the Obligations, whether or not due (and in any order
determined by Lender), or held as security therefor, or employed
to replace or repair any portion of the Collateral.
3.5. Supplemental Documentation. Upon Lender's request, at any time,
Borrower shall execute and deliver such agreements, documents and
instruments, and do such further acts as Lender in its discretion,
deems necessary or appropriate to create, preserve, perfect or
evidence any security interest of Lender, or the priority thereof,
in the Collateral.
3.6. Other Fees and Expenses. Borrower shall pay to Lender immediately
upon Lender's demand, all fees and expenses, including reasonable
fees and expenses of attorneys and other professionals, incurred
by Lender in connection with any and all of the following:
(a) preparing, amending, supplementing, restating, negotiating
or enforcing the Loan Agreement, any of the other Loan Documents
or any waivers or consents in connection with the foregoing, (b)
perfecting, protecting or enforcing Lender's interest in the Coll-
ateral, (c) collecting the Obligations, or (d) defending or in
any way addressing any claims made or litigation initiated by or
against Lender as a result of Lender's relationship with Borrower
or any guarantor. All such fees and expenses shall be payable to
Lender whether incurred before, during or after any bankruptcy
case or insolvency proceeding involving Borrower, any guarantor
or any account debtor. Borrower shall be exempt from payment of
such fees and expenses in the event of willful misconduct and
gross negligence on the part of the Lender.
3.7. Copyrights, Patents and Trademarks. Borrower owns or possesses
all of the copyrights, patents, trademarks and licenses necessary
to conduct its business. All such copyrights, patents, trademarks
and licenses are listed on Schedule A hereto.
4. EVENTS OF DEFAULT AND REMEDIES
4.1. Events of Default. The occurrence of an "Event of Default" under
the Loan Agreement constitutes an Event of Default under this
Agreement.
4.2. Remedies. Upon the occurrence of an Event of Default and at any
time thereafter, Lender shall have all rights and remedies prov-
ided in this Agreement, the Loan Agreement, any other Loan
Documents, he Uniform Commercial Code as in effect in California
or other applicable law, all of which rights and remedies may be
exercised without notice to Borrower, all such notices being
hereby waived, except such notice as is expressly provided for
hereunder or is not waivable under applicable law. All rights and
remedies of Lender are cumulative and not exclusive and are
enforceable, in Lender's discretion, alternatively, successively,
or concurrently on any one or more occasions and in any order
Lender any determine. Without limiting the foregoing, Lender may:
(a) terminate the facility under the Loan Agreement with respect
to further Advances and other loans and Accommodations,
whereupon no further Advances, loans or other Accommod-
ations will be made thereunder or pursuant to any Inventory
Rider;
(b) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender whereupon all
Obligations shall become immediately due and payable without
demand, presentation, protest, or further notice of any
kind;
(c) with or without judicial process or the aid or assistance of
others, enter upon any premises on or in which any of the
Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair
of all or any portion of the Collateral;
(d) require Borrower, at Borrower's expense, to assemble and
make available to Lender all or any portion of the
Collateral at any place and time designated by Lender;
(e) collect, foreclose, receive, appropriate, setoff and realize
upon, compromise or settle for cash, credit, return of
merchandise, and upon any terms or conditions, any and all
accounts or other Collateral which includes a monetary
obligation and discharge or release the account debtor or
other obligor, without affecting any of the Obligations;
(f) sell, lease, transfer, assign, deliver or otherwise dispose
of any and all Collateral, at such prices or terms as Lender
may deem reasonable, for cash, upon credit or for future
delivery, with Lender having the right to purchase the whole
or any part of the Collateral at any public sale and, to the
extent authorized by applicable law, at any private sale.
If any of the Collateral is sold or leased by Lender upon
credit terms or for future delivery, the Obligations shall
not be reduced as a result thereof until payment therefor is
finally collected by Lender. If notice of disposition of
Collateral is required by law, seven (7) days prior notice
by Lender to Borrower designating the time and place of any
public sale or the time after which any private sale or
other intended disposition of Collateral is to be made,
shall be deemed to be reasonable notice thereof and Borrower
waives any other notice. If Lender institutes any action
to recover any Collateral or seeks recovery of any Colla-
teral by way of prejudgment remedy, Borrower waives the
posting of any bond which might otherwise be required.
4.3. Application of Collateral Proceeds. Lender may apply the cash
proceeds of Collateral actually received by Lender from any sale,
lease, foreclosure or other disposition of the Collateral to
payment of any of the Obligations, in whole or in part (including
reasonable attorneys' fees and legal expenses incurred by Lender
with respect thereto or otherwise chargeable to Borrower) and in
such order as Lender may elect, whether or not then due. Borrower
shall remain liable to Lender for the payment of any deficiency,
together with interest at the rate provided in the Loan Agreement
plus the Default Rate as defined in the Loan Agreement, and all
costs and expenses of collection or enforcement, including
reasonable attorneys' fees and expenses.
4.4. Grant of License to Use Patents and Trademarks. To enable Lender
to exercise rights and remedies under Section 4.2 hereof Borrower
hereby grants to Lender an irrevocable, non-exclusive license
(exercisable without payment of royalty or other compensation to
Borrower) to use, license or sublicense any patent, trademark,
trade secret, or copyright now owned or hereafter acquired by
Borrower, and including in such license reasonable access to all
media in which any of the licensed items may be recorded or stored
and to all computer and automatic machinery software and programs
used for the compilation or printout thereof.
5. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; AND RELEASE
5.1. Governing Law. This Agreement, the Loan Agreement and the other
Loan Documents shall be governed by, and construed in accordance
with, the laws of the State of California (without giving effect
to principles of conflicts of laws).
5.2. WAIVER OF JURY TRIAL. BORROWER HEREBY IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY OF ANY ACTION OR PROCEEDING ASSERTING ANY CAUSE
OF ACTION, CLAIM, THIRD PARTY CLAIM OR COUNTERCLAIM (COLLECTIVELY,
"CLAIMS") ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE LOAN
AGREEMENT, ANY OTHER LOAN DOCUMENT, OR THE COLLATERAL. THIS WAIVER
EXTENDS TO ALL SUCH CLAIMS, INCLUDING, WITHOUT LIMITATION, CLAIMS
WHICH INVOLVE PERSONS OR ENTITIES OTHER THAN LENDER, CLAIMS WHICH
ARISE OUT OF OR ARE IN ANY WAY CONNECTED TO THE RELATIONSHIP
BETWEEN LENDER AND BORROWER, AND ANY CLAIMS FOR DAMAGES, BREACH OF
CONTRACT, SPECIFIC PERFORMANCE, TORT OR ANY EQUITABLE OR LEGAL
RELIEF OF ANY KIND.
5.3. Jurisdiction. Borrower hereby irrevocably submits to the juris-
diction of any California State or Federal court sitting in San
Francisco County in any action or proceeding arising out of or
relating to this Agreement, the Loan Agreement or any of the Loan
Documents, and Borrower hereby irrevocably agrees that all claims
with respect to such action or proceeding may be heard and deter-
mined in such California State court or, to the extent permitted
by law, in such Federal court. Borrower hereby irrevocably
waives, to the fullest extent Borrower may effectively do so,
the defense of inconvenient forum to the maintenance of such
action or proceeding. Borrower irrevocably consents to the
service of any and all process in any such action or proceeding
by the mailing of copies of such process to Borrower's address
specified in the Loan Agreement. Borrower agrees that a final
judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment
or in any other matter provided by law. Nothing in this Section
5.3 shall affect Lender's right to serve legal process in any
other manner permitted by law or affect Lender's right to bring an
action or proceeding against Borrower or Borrower's property in
the courts of other jurisdictions.
5.4. No Implied Waiver. Lender shall not, by any act, delay, omission
or otherwise be deemed to have expressly or impliedly waived any
of its rights or remedies unless such waiver shall be in writing
and signed by an authorized officer of Lender. A waiver by Lender
of any right or remedy on any one occasion shall not be construed
as a bar to or waiver of any such right or remedy which Lender
would otherwise have on any future occasion, whether similar in
kind or otherwise.
5.5. Release. Borrower hereby releases and exculpates Lender, its
officers, employees and designees, from any liability arising from
any acts under this Agreement, the Loan Agreement or any other
Loan Documents, or in furtherance thereof, whether as
attorney-in-fact or otherwise, whether of omission or commission,
and whether based upon any error of judgment or mistake of law or
fact, except for willful misconduct or gross negligence. In no
event will Lender have any liability to Borrower for lost profits
or other special, consequential, exemplary, or punitive damages.
6. TERM OF AGREEMENT: MISCELLANEOUS
6.1. Term. This Agreement shall remain in effect unless and until
Lender receives full, final and indefeasible payment of all
Obligations, the Loan Agreement shall be terminated and of no
further force and effect, and Lender notifies Borrower in writing
that the foregoing have occurred.
6.2. Notices. Except as otherwise provided, all notices, requests and
demands hereunder shall be made in the manner and shall have the
effect provided in the Loan Agreement.
6.3. Severability. If any provision of this Agreement is held to be
invalid or unenforceable, such provision shall not affect the
Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be
invalid or unenforceable.
6.4. Headings. All title and section headings used in this Agreement
are for convenience only and shall not be used in interpreting
this Agreement.
6.5. Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall be an original but all
of which shall constitute one and the same agreement.
6.6. Definitions. All terms used herein which are defined in the
Uniform Commercial Code as in effect in California shall have the
meanings given therein unless otherwise defined in this Agreement.
All references to the singular or plural herein shall include the
singular and plural, unless the context otherwise requires. The
term "including" is not limiting or exclusive. Capitalized terms
used in this Agreement shall have the following respective
meanings when used herein:
"Collateral" shall have the meaning set forth in Section 1.1.
"Event of Default" shall have the meaning se forth in Section 4.1.
"Loan Agreement" shall have the meaning set forth in the
introductory paragraph of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date stated above.
"Borrower"
Source Scientific, Inc.
By:
Title:
Address of Borrower's Chief Executive Office and Principal Place of Business:
7390 Lincoln Way
Garden Grove, CA 92641
Telephone: 714 898-9001
Facsimile: 714 891-1229
"Lender"
CONCORD GROWTH CORPORATION
By:
Title:
Address:
1170 East Meadow Drive
Palo Alto, California 94303
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT
1. Trade Names (Section 3.1)
Alton Instruments
Source Scientific Systems, Inc.
2. Locations of Collateral (Section 3.2)
7390 Lincoln Way, Garden Grove, CA 92641
3. Intentionally omitted.
4. Encumbrances Against Collateral (Section 3.3)
See Exhibit B
<PAGE>
EXHIBIT B
TO
SECURITY AGREEMENT
FILING FILING SECURED DESCRIPTION OF
NUMBER DATE JURISDICTION PARTY COLLATERAL
94-095748 05.13.94 CA Eaton Financial Corp Equipment
94-144647 07.15.94 CA AT&T Capital Equipment
Services
94-156287 08.01.94 CA Eaton Financial Corp Equipment
<PAGE>
LOAN AGREEMENT
This Loan Agreement (the "Agreement") is entered into as of October 1, 1996,
between Source Scientific, Inc., a Corporation ("Borrower"), with its chief
executive office and principal place of business located at the address set
forth below Borrower's signature line, and Concord Growth Corporation
("Lender"), concerning loans and other credit accommodations to be made by
Lender to Borrower.
Capitalized terms used in this Agreement shall have the meanings assigned to
them in Section 8.11, Definitions, or in such other Section of this Agreement as
is identified in Section 8.11.
1. LOANS AND OTHER CREDIT ACCOMMODATIONS
1.1. Loans. Subject to the terms and conditions in this Agreement,
Lender shall make revolving loans to Borrower from time to time
against Eligible Accounts (each, an "Advance") up to a maximum
aggregate amount outstanding at any time not to exceed the lesser
of (a) eighty percent (80%) (the "Advance Rate") of the aggregate
amount of all Eligible Accounts, or (b) one million Dollars
($1,000,000) (the "Maximum Credit"). Except as otherwise provided
in this Agreement, Advances may be borrowed, repaid and
reborrowed.
In the event the aggregate outstanding Advances shall at any time
exceed the foregoing limitation, Borrower shall immediately repay
the Advances in the amount of such excess.
1.2. Eligible Accounts. "Eligible Accounts" are accounts which are and
remain acceptable to Lender as Collateral for lending purposes.
General criteria for Eligible Accounts are set forth below but
may be revised from time to time by Lender, in its sole judgment,
upon notice to Borrower; provided, that Lender may, in its sole
sole discretion, make exceptions to any of the general criteria
described below on a case by case basis without implying changes
to such criteria:
(a) such account was created in the ordinary course of
Borrower's business;
(b) such account is represented by an invoice in form acceptable
to Lender;
(c) the invoice that is delivered by Borrower to the account
debtor with respect to such account instructs
the account debtor to make payment directly to the Lockbox;
(d) Borrower has delivered to Lender such original documents as
Lender may have requested pursuant to Section 3.2 in
connection with such account and, if requested by Lender,
Lender shall have received from the account debtor a
verification of such account, satisfactory to Lender;
(e) the amount of such account represented by the invoice is
absolutely owing to Borrower [except for any discounts for
prompt payment provided by Borrower to account debtors in
the normal course of Borrower's business which are approved
in advance by Lender];
(f) the goods giving rise to such account were not at the time
of the sale subject to any liens except those permitted in
the Security Agreement;
(g) such account is not evidenced by chattel paper or an
instrument of any kind; (h) such account is due not more
than thirty (30) days from the date of the invoice; i) such
account arises from a bona fide completed sale of goods or
performance of services, which goods and services have been
delivered to, or performed for, and in either case accepted
by, the account debtor;
(j) such account does not arise from the delivery of any tool-
ings, samples, trial merchandise, promotional or demonstra-
tion material;
(k) such account does not arise from a sale to an individual
acting with respect to his or her own personal, family or
household consumption;
(l) such account does not arise from progress billings (i.e.,
billings representing a percentage of the amount due upon
completion or achievement of a contractual milestone but
where failure to complete or deliver the remaining work or
goods may constitute an offset, defense or counterclaim to
payment);
(m) such account does not arise from a retention (i.e., a
percentage of the amount payable to Borrower pursuant to the
contract which is withheld by the account debtor until a
time after completion) nor is such account subject to
holdbacks for retention;
(n) such account does not arise from a bill and hold sale (i.e.,
a sale in which the account debtor has been invoiced without
either delivery or acceptance of the goods or services or
transfer of title of the goods, even when the goods are held
and the invoices are issued at the account debtor's
request);
(o) such account does not arise from a sale on consignment,
"sale or return" or "sale on approval" (i.e., sales in which
title purports not to pass or has not passed to the account
debtor until payment, resale, acceptance or otherwise);
(p) such account does not arise from a guaranteed sale (i.e., a
sale in which the account debtor reserves the right to
return any unsold goods even if title purports to pass to
the account debtor);
(q) such account does not arise on terms under which payment
may be conditional or contingent in any way; (r) there are
no contra relationships (i.e., a situation in which the
Borrower owes the account debtor money), setoffs, de-
ductions, allowances, counterclaims or disputes existing
with respect to such account and there are no other facts
existing or threatened which would impair or delay the coll-
ectibility of all or any portion thereof;
(s) neither the account debtor nor any officer or employee of
the account debtor is an officer, employee or agent of or is
affiliated with Borrower, directly or indirectly;
(t) the account debtor is neither the United States nor any
State, subdivision, municipality, department or agency of
the United States, unless there has been compliance with the
Federal Assignment of Claims Act or any similar State or
local law, if applicable;
(u) the account debtor's chief executive office and principal
place of business are located in the United States;
(v) the account debtor is not the subject of any bankruptcy
or insolvency proceeding of any kind; (w) such account is
owed by an account debtor deemed creditworthy at all times
by Lender;
(x) there are no facts existing or threatened which might result
in any adverse change in the account debtor's financial con-
dition;
(y) such account has not remained unpaid for more than ninety (90)
days after the original invoice date; (z) such account is not owed
by an account debtor who is or whose affiliates are past due upon
other
accounts owed to Borrower comprising more than twenty-five
percent (25%) of the accounts of such account debtor or its
affiliates owed to Borrower;
(aa) such account is owed by an account debtor whose total
indebtedness to Borrower does not exceed the amount of any
customer credit limit as established, and changed, from time
to time by Lender on notice to Borrower (accounts excluded
from Eligible Accounts solely by reason of this subsection
(aa) shall nevertheless be considered Eligible Accounts in
an amount not to exceed the customer credit limits);
(bb) the aggregate amount of all accounts owed by the account
debtor and/or such account debtor's affiliates does not
exceed twenty percent (20%) of the aggregate amount of all
otherwise Eligible Accounts (accounts excluded from Eligible
Accounts solely by reason of this subsection (bb) shall
nevertheless be considered Eligible Accounts in an amount
not to exceed twenty percent (20%) of the aggregate face
amount of all otherwise Eligible Accounts).
1.3. Accommodations. Lender may, in its sole discretion, provide
additional loans or financial accommodations (the
"Accommodations") to Borrower. Such Accommodations, if made, shall
be evidenced by, and repayable in accordance with, one or more
secured promissory notes in form and substance acceptable to
Lender (each, an "Accommodation Note"), and shall constitute
Obligations under this Agreement.
1.4. Inventory Loans. In the event Lender has agreed or hereafter
agrees to provide loans to Borrower against any inventory of
Borrower, such loans shall be upon the terms and conditions set
forth in an Inventory Rider signed by Borrower and Lender (the
"Inventory Rider") and shall constitute Obligations under this
Agreement. Any such inventory loans shall not, when added to the
outstanding Advances exceed the Maximum Credit.
1.5. Reserves. Lender shall have the right to establish reserves
against the amount of the Advances available under Section 1.1 to
the extent necessary, in Lender's credit judgment, to ensure
payment of the Obligations (the "Reserves"). Lender may, at its
option, implement Reserves by either (i) designating as ineligible
a sufficient amount of accounts that would otherwise be Eligible
Accounts so as to reduce Borrower's availability by the amount of
the intended Reserve, (ii) changing the Advance Rate set forth in
Section 1.1, [or (iii) establishing a cash collateral account in
Lender's name to hold collections as Lender's cash collateral].
2. INTEREST AND FEES
2.1. Facility Fee. Borrower shall pay Lender on the date hereof, and on
each anniversary of the date of this agreement, a facility fee
(the "Facility Fee") in the amount of one percent (1%) of the
Maximum Credit, which fee is fully earned and non-refundable as of
the date each such payment is due.
2.2. Interest. Borrower shall pay interest to Lender on the outstand-
ing Advances under this Agreement at floating rate per annum
equal to the Prime Rate plus two and three quarters percent (Prime
+ 2.75%) (the "Interest Rate"), which interest shall be payable
and calculated as hereinafter set forth. Borrower shall pay such
interest to Lender on the first day of each month in an amount
equal to (a) the quotient obtained by dividing the sum of the
daily unpaid Advances outstanding on each day during the immed-
iately preceding month by the actual number of days in such month
(the "Average Daily Balance"), multiplied by (b) the quotient
obtained by dividing the Interest Rate by 360, multiplied by (c)
the actual number of days in the immediately preceding month. The
Interest Rate shall increase or decrease monthly, on the first day
of each month, by the amount of any increase or decrease in the
Prime Rate. For purposes of this Agreement, the "Prime Rate" is
the prime rate of interest publicly listed by the Western Edition
of the Wall Street Journal on the first day of each month or, if
the first day of such month is not a business day, on the last
business day of the immediately preceding month. In the event the
prime commercial interest rate listed by the Wall Street Journal
is a range, the highest rate in the range shall be the "Prime
Rate".
2.3. Default Rate. Upon and after either (a) notification to Borrower
of the occurrence of an Event of Default, or (b) termination of
this Agreement, until the date that all Obligations are
indefeasibly paid and satisfied in full, interest shall accrue on
all Obligations at a rate equal to the sum of the Interest Rate
otherwise payable to Lender plus __twelve percent (_12%).
2.4. Administrative Fee. Borrower shall pay Lender on the first day
of each month an administrative fee (the "Administrative Fee")
in an amount equal to (a) the Average Daily Balance for the immed-
iately preceding month, multiplied by (b) one quarter of one per-
cent (_0.25%).
2.5. Monthly Minimum Fee. Lender would not have entered into this
Agreement and agreed to provide Borrower with the financing here-
under unless Borrower guaranteed Lender that the sum of the
interest as set forth in Section 2.2, in any Inventory Rider and
in any Accommodation Note, and the administrative fees set forth
in Section 2.4, in any Inventory Rider and in any Accommodation
Note, paid to Lender in each month would be at least four thousand
Dollars ($4,000) (the "Monthly Minimum Fee"). In the event the
aggregate amount of such interest and administrative fees payable
on the first day of any month is less than the Monthly Minimum Fee
then Borrower shall pay to Lender on the first day of such month
the Monthly Minimum Fee in satisfaction of the interest and ad-
ministrative fees payable during such month.
2.6. Early Termination Fee. In the event either (a) Borrower termin-
ates this Agreement prior to the end of any Term, (b) Lender ter-
minates this Agreement with respect to further Advances, inven-
tory loans and other Accommodations upon and after the occurrence
of any Event of Default, or (c) this Agreement automatically
terminates upon the occurrence of an Event of Default under
Sections 6.1(i) or (j) as set forth in Section 6.2, in view of
the impracticality and extreme difficulty of ascertaining actual
damages and by mutual agreement of the parties as to a reasonable
calculation of Lender's lost profits, in addition to all other Ob-
ligations, Borrower shall pay to Lender, upon the effective date
of any such termination, an early termination fee equal to the
Minimum Monthly Fee multiplied by the number of months remain-
ing in the then-current Term (the "Early Termination Fee"). Any
partial month remaining in such Term shall constitute a full month
for the purpose of calculating the Early Termination Fee.
2.7. Audit Fees. Lender or its designee may conduct Quarterly
examinations of the Collateral and Borrower's operations, unless
an Event of Default has occurred and is continuing, in which event
the number of audits conducted will be in Lender's reasonable
discretion. Borrower shall pay Lender audit fees not to exceed
__five hundred ninety five Dollars ($595__) per person per day
plus expenses per audit but no more than $1,500 per audit. Audit
fees shall be payable upon demand by Lender.
2.8. Maximum Lawful Rate. In no event shall charges constituting
interest under this Agreement exceed the highest rate permitted
under applicable law. In the event that a court of competent
jurisdiction makes a final determination that Lender has received
interest under this Agreement in excess of the maximum lawful
rate, then such excess shall be deemed a payment of principal and
applied against the principal under this Agreement, and the
interest payable under this Agreement shall be deemed amended to
the amount payable under the maximum lawful rate.
2.9. Calculations Based on 360 Day Year. Interest and any other amounts
payable by Borrower to Lender based on a per annum rate shall be
calculated on the basis of actual number of days elapsed over a
360-day year.
2.10. Charges to Loan Account. At Lender's option, all principal,
interest, fees, costs, expenses and other charges provided for in
this Agreement, or in any other Loan Documents may be charged to
any loan account of Borrower maintained by Lender either by (a)
deducting such amounts from any Advance requested by Borrower and
made by Lender, or (b) treating such amounts as additional
Advances.
3. ADMINISTRATION AND COLLECTION
3.1. Delivery of Invoices. Borrower shall deliver a copy of each
invoice to Lender as such invoice is generated and delivered to an
account debtor or at least once per week in a batch. Borrower's
granting of credits, discounts, allowances, deductions, return
authorizations or the like with respect to any account will be
promptly reported to Lender in writing.
3.2. Delivery of Evidence of Shipment and Other Account Information.
Borrower shall deliver to Lender proof of rendition of services,
shipment, and delivery of goods at the same time Borrower delivers
the invoices to Lender with respect to such services or goods
pursuant to Section 3.1. Borrower shall deliver to Lender such
other agreements and documents relating to the accounts or other
Collateral, including assignments to Lender, at such times as
Lender may request and in the manner specified by Lender.
3.3. Lockbox; Collection of Collateral. Borrower shall instruct each
account debtor to make all payments owed to Borrower in Borr-
ower's name or properly registered trade name as set forth in the
Security Agreement directly to a lockbox acceptable to Lender (the
"Lockbox"). Borrower shall include on each invoice delivered to
an account debtor a notice of assignment to Lender to make all
payments directly to the Lockbox. Such instructions shall not be
changed without Lender's prior written consent. Payments on
all Borrower's accounts and all other proceeds of Collateral shall
be made directly to the Lockbox, whether or not Lender is provid-
ing financing for such account. All payments received in the
Lockbox by 10:00 a.m. on any business day shall be deposited in
an account designated by and acceptable to Lender on the same day
and credited to Borrower's loan account as set forth in Section
3.5. At Lender's request, all invoices and statements sent to
any account debtor, other obligor or bailee, shall state that the
accounts and such other Collateral have been assigned to Lender
and are payable directly and only to Lender. Upon demand by
Lender, Borrower shall reimburse Lender for the costs incurred by
Lender in establishing and maintaining the Lockbox.
3.4. Payment in Kind; Delivery to Lender. Notwithstanding Borrower's
instructions to account debtors and other persons, in the event
Borrower receives any payments on accounts or other proceeds of
Collateral, Borrower will hold such payments in trust and
safekeeping for Lender and immediately turn over to Lender the
identical check or other form of payment received by Borrower with
any necessary endorsement or assignment.
3.5. Crediting of Payments. All Obligations shall be payable at
Lender's office set forth below, at Lender's bank as identified
to Borrower, or at such other place as Lender may expressly desig-
nate from time to time. For purposes of determining availa-
bility under this Agreement, payments on financed accounts and
other payments with respect to the Collateral and Obligations
will be credited to the loan account of Borrower upon the date of
Lender's receipt of advice from Lender's bank that such payments
have been credited to Lender's account or in the case of payments
received directly in kind by Lender, upon the date of Lender's
deposit thereof at Lender's bank, subject in either case to final
payment and collection. Solely for the purpose of calculating
interest and fees under this Agreement, including interest
and fees under any Inventory Rider and any Accommodation Note,
payments on financed accounts and other payments with respect to
Collateral and Obligations shall be deemed received by Lender
three (3) business days after the date of Lender's receipt of
advice from Lender's bank that such payments have been credited
to Lender's account or in the case of payments received directly
in kind by Lender, three (3) business days after the date of Len-
der's deposit thereof at Lender's bank, subject in either case to
final payment and collection.
3.6. Intentionally omitted.
3.7. Account Verification. Lender may at any time, but without any
duty to do so, whether or not an Event of Default has occurred,
and without notice to or assent of Borrower, in Lender's own name,
pseudonymously, or by its designee: (a) request any account
debtor, other obligor or bailee by telephone or in writing for
verification of accounts and other Collateral; (b) notify any
account debtor that the accounts and other Collateral that
includes a monetary obligation have been assigned to Lender by
Borrower and that payment thereof is to be made directly to Len-
der; and (c) demand, collect or enforce payment of any accounts
or such other Collateral. Upon Lender's request, Borrower shall
assist Lender in connection with any request, notification or
demand hereunder.
3.8. Loan Account. Lender shall render to Borrower monthly a loan
account statement. Each statement shall be considered correct and
binding upon Borrower as an account stated, except to the extent
that Lender receives, within thirty (30) days after the mailing of
such statement, written notice from Borrower of any specific
exceptions by Borrower to that statement.
4. INTENTIONALLY OMITTED.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Borrower hereby represents, warrants and covenants to Lender the
following, the truth and accuracy of which, and compliance with which,
shall be continuing conditions to making any Advances, inventory and
other loans and Accommodations by Lender to Borrower:
5.1. Account Representations and Warranties. Each account submitted
to Lender meets each of the eligibility requirements in Section
1.2, except as either (a) disclosed in writing to Lender at the
time Borrower submits such account to Lender, or (b) is evident
on the invoice representing such account. Each account, inclu-
ding Eligible and non-Eligible Accounts, (i) is a bona fide
account, (ii) represents indebtedness owed to Borrower, and
(iii) is in all respects what it purports to be. All state-
ments made and all unpaid balances and other information appear-
ing in the invoices, agreements, proofs of rendition of services
and delivery of goods and other documentation relating to the
accounts, and all confirmatory assignments, schedules, state-
ments of account and books and records with respect thereto, are
true and correct and in all respects what they purport to be.
5.2. Use of Proceeds; Single Loan. Borrower shall use the proceeds of
Advances and other loans or Accommodations made by Lender to
Borrower for legal and proper business purposes, and not for any
personal, family, or household purposes. All Advances and other
loans and Accommodations shall constitute one general Obligation
and shall be secured by Lender's security interest in all of the
Collateral.
5.3. Compliance with Laws; Payment of Taxes. Borrower is and at all
times will continue to be in compliance with the requirements of
all material laws, rules, regulations and orders of any governmen-
tal authority relating to its business, including those relat-
ing to taxes (including payment and withholding of payroll taxes,
employer and employee contributions and similar items), sec-
urities, employee retirement and welfare benefits, employee
health and safety, labor and environmental matters, and all mater-
ial agreements or other instruments binding on Borrower or its
property. Borrower shall pay all taxes, assessments and govern-
mental charges against Borrower or any Collateral prior to the
date on which penalties are imposed or liens attach with respect
thereto, unless the same are being contested in good faith and,
at Lender's option, Reserves are established for the amount
contested and penalties which may accrue thereon.
5.4. Delivery of Agings and Financial Information. Borrower shall
keep and maintain its books and records in accordance with gener-
ally accepted accounting principles, consistently applied. Borr-
ower shall, at its sole expense, deliver to Lender (a) on or
before the thirtieth (30th ) day of each month, true and com-
plete monthly agings of its accounts receivable and accounts and
notes payable, and monthly inventory reports and bank statements
for the prior month-end, and (b) on or before the thirtieth (30th)
day of each month, true and correct monthly internally prepared
interim financial statements for the prior month-end. Annually,
Borrower shall, at its sole expense, deliver to Lender true and
correct (a) financial statements of Borrower prepared according to
generally accepted accounting principles, as soon as available,
but in no event later than ninety (90) days after the end of Borr-
ower's fiscal year, and (b) tax returns within ten (10) days
after such tax returns are filed with the appropriate taxing au-
thorities. Lender may require that annual financial statements
be prepared and certified by an independent certified public acc-
ountant acceptable to Lender. Borrower shall also cause each
person or entity that is or becomes a guarantor to deliver to Len-
der year end financial statements of such guarantor within thir-
ty (30) days after the end of each such period.
All of the information required above shall be in such form, and
together with such other information with respect to the business
of Borrower or any guarantor, as Lender may request.
5.5. No Sale of Collateral, Merger or Acquisition of Interest. Borrower
shall not, directly or indirectly, without the prior written
consent of Lender: (a) sell, lease, transfer, assign, or otherwise
dispose of any part of the Collateral or any material portion of
its other assets other than sales of inventory to buyers in the
ordinary course of business; (b) consolidate with or merge with or
into any other entity; or (c) form or acquire any interest in any
corporation or other entity.
5.6. No Loans, Dividends, Transactions With Affiliates. Borrower shall
not, directly or indirectly, without the prior written consent of
Lender: (a) lend money or property to, guarantee, pay or assume
indebtedness of, or invest in (by capital contribution or other-
wise), any person, corporation or other entity (including any
officer, director, employee, shareholder or affiliate of Borr-
ower); (b) declare or pay any dividends on, redeem, or otherwise
make any distributions on account of, any shares of any class of
stock or other equity interest of Borrower now or hereafter out-
standing; or (c) enter into any sale, lease or other transaction
with any officer, director, employee, shareholder or affiliate of
Borrower on terms that are less favorable to Borrower than those
which might be obtained at the time from persons who are not an
officer, director, employee, shareholder or affiliate of Borrower.
5.7. Replacement of Officers and General Partners. If Borrower
is a corporation and the chief executive officer, chief oper-
ating officer or chief financial officer existing on the date
of this Agreement shall resign or otherwise cease to be actively
employed by Borrower in such capacity, Borrower shall appoint a
replacement or substitution reasonably satisfactory to Lender
within fifteen (15) days after the effective date of such resign-
ation or the date such person ceases to be actively employed by
Borrower. If Borrower is a partnership and any general partner
withdraws or ceases to perform its duties in such capacity, such
general partner shall be replaced with a new general partner
reasonably satisfactory to lender within fifteen (15) days after
the effective date of such withdrawal or the date such general
partner ceases to perform its duties.
5.8. Financial Covenants. Borrower shall:
(a) at all times maintain working capital of not less than NA
Dollars ($NA), as determined in accordance with generally
accepted accounting principles in effect on the date hereof,
consistently applied;
(b) at all times maintain net worth of not less than NA Dollars
($NA), as determined in accordance with generally accepted
accounting principles in effect on the date hereof,
consistently applied; and
(c) not, directly or indirectly, expend or commit to expend, for
fixed or capital assets (including capital lease
obligations) an amount in excess of NA Dollars ($NA) in any
fiscal year of Borrower.
(d) maintain positive cash flow (defined as Earnings Before
Interest, Taxes, Depreciation, Amortization) on a quarterly
basis, as determined in accordance with generally accepted
accounting principles in effect on the date hereof,
consistently applied.
(e) maintain profitability on a quarterly basis, as determined
in accordance with generally accepted accounting principles
in effect on the date hereof, consistently applied.
5.9. Litigation. There are no actions, suits, proceedings,
investigations or claims pending, or to the knowledge of Borrower
threatened, against Borrower or any of Borrower's assets, except
as disclosed to Lender in writing before the date of this
Agreement. Borrower shall promptly notify Lender in writing of any
loss, damage, suit, proceeding, investigation, or claim relating
to a material portion of the Collateral or that may result in a
material adverse change in Borrower's business, assets,
liabilities or condition.
5.10. No Payments to Subordinated Creditors. Borrower shall not make any
payments to any of the Subordinated Creditors on account of
principal, interest or any other indebtedness, other than
permitted payments as consented to by Lender in writing, unless
and until all of the Obligations are indefeasibly paid and
satisfied in full. Borrower may make payments to Subordinated
Creditors unless and until an Event of Default occurs.
5.11. Survival and Continuation of Representations. Each representation
and warranty contained in this Agreement and the other Loan
Documents shall be continuous and shall remain accurate, complete
and not misleading during the Term of this Agreement, and all such
representations and warranties shall survive the execution and
delivery by Borrower and Lender of this Agreement and the other
Loan Documents.
5.12. Organization and Qualification. Borrower is, and shall continue to
be, a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation.
Borrower is qualified and authorized to do business and is, and
shall continue to be, in good standing as a foreign corporation in
each State where is conducts business and in which the failure to
so qualify would have a material adverse effect on the financial
condition, business or properties of Borrower.
5.13. Corporate Power and Authority. Borrower is duly authorized and
empowered to enter into, execute, deliver and perform this
Agreement and each of the other Loan Documents to which it is a
party. The execution, delivery and performance of this Agreement
and each of the other Loan Documents have been duly authorized by
all necessary corporate action and do not and will not contravene
Borrower's charter, articles or certificate of incorporation or
by-laws or result in a breach of or constitute a default under any
indenture, loan agreement or any other agreement, lease or
instrument to which Borrower is a party or by which it or its
properties may be bound.
5.14. Legally Enforceable Agreement. This Agreement is, and each of
the other Loan Documents when delivered under this Agreement will
be, a legal, valid and binding obligation of Borrower enforce-
able against it in accordance with its terms.
6. EVENTS OF DEFAULT AND REMEDIES
6.1. Events of Default. The occurrence of any one or more of the
following shall constitute an "Event of Default" under this Agree-
ment:
(a) Borrower fails to pay as and when due any of the Obligations
(b) Borrower fails to perform or breaches any of the material
covenants or terms of this Agreement, the Security Agreement
or any other Loan Document (other than a covenant or term
which is dealt with specifically elsewhere in this Section
6.1);
(c) Any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the Security Agreement
or any other Loan Document or otherwise, or to any affiliate
of Lender, shall be inaccurate or misleading in any material
respect;
(d) Any guarantor revokes, terminates or fails to perform any of
the terms of any guaranty, endorsement or other agreement of
such party in favor of Lender or any affiliate of Lender;
(e) Notice of a federal tax lien is filed against Borrower or
Borrower fails to pay any payroll or withholding taxes;
(f) Any judgment, writ of attachment or similar process
involving an amount in excess of ten thousand Dollars
($10,000__) is obtained against Borrower or any guarantor,
or any of their representative assets, and remains
undischarged for thirty (30) days after it is obtained;
(g) Borrower or any guarantor (if Borrower or guarantor is a
partnership or corporation) or any general partner of
Borrower or any guarantor (if such general partner is a
corporation), is dissolved, or Borrower or any guarantor (if
Borrower or guarantor is a corporation) fails to maintain
its corporate existence in good standing, or the usual
business of Borrower or any guarantor ceases or is
suspended;
(h) Borrower (if Borrower is a natural person), any guarantor
(if such guarantor is a natural person) or any general
partner of Borrower or any guarantor (if Borrower or such
guarantor is a partnership and the general partner is a
natural person), dies and, with respect to the death of a
guarantor or a general partner such guarantor or general
partner has not been replaced within ten (10) days of the
death of such guarantor or general partner by another person
as creditworthy in Lender's reasonable judgment as the
original guarantor or general partner;
(i) Borrower or any guarantor becomes insolvent, makes an
assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a general meeting of its
creditors or principal creditors;
(j) Any petition or application for any relief under the
bankruptcy laws of the United States now or hereafter in
effect or under any insolvency, reorganization,
receivership, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or
hereafter in effect (whether at law or in equity) is filed
by or against Borrower or any guarantor;
(k) The indictment of Borrower or any guarantor under any
criminal statute, or commencement of criminal or civil
proceedings against Borrower or any guarantor, pursuant to
which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the
property of Borrower or such guarantor;
(l) Any default or event of default exists under any agreement,
document or instrument at any time executed and/or delivered
to Lender or any of its affiliates, by an affiliate of
Borrower;
(m) If Borrower is a corporation, any change in the controlling
ownership of Borrower occurs; (n) Borrower makes any payment to a
Subordinated Creditor in violation of the terms of any agreement
entered into between such Subordinated Creditor and Lender,
a copy of which has been delivered to Borrower.
6.2. Remedies. Upon the occurrence of an Event of Default and at
any time thereafter, Lender may, without notice, exercise
any or all of the rights and remedies provided in the Security
Agreement, the other Loan Documents or under applicable law,
including the immediate termination of any further Advances, in-
ventory and other loans and Accommodations, the declaration of
all Obligations to be immediately due and payable, and the enfor-
cement of Lender's security interest in all or any portion of the
Collateral; provided, that immediately upon the occurrence of
an Event of Default of a type described in Section 6.1(i) or (j),
this Agreement shall automatically terminate without notice or
demand of any kind and the Obligations shall be immediately due
and payable.
7. GOVERNING LAW; WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION;
OTHER WAIVERS.
7.1. Incorporation of Security Agreement Provisions Relating to
Governing Law, Waiver of Jury Trial, Consent to Jurisdiction No
Implied Waiver and Release. Sections 5.1, 5.2, 5.3, 5.4 and 5.5 of
the Security Agreement relating to governing law, waiver of jury
trial, consent to jurisdiction, no implied waiver and release
apply to this Agreement and to the Security Agreement and other
Loan Documents, and are hereby incorporated into this Agreement by
reference.
7.2. Waiver of Setoff. Borrower hereby irrevocably waives any right
to offset against amounts owed by Borrowerto Lender under the Loan
Documents any claims or counterclaims that may be asserted by
Borrower.
8. OTHER FEES AND EXPENSES; TERM OF AGREEMENT; MISCELLANEOUS
8.1. Other Fees and Expenses. Borrower shall pay Lender immediately
upon demand, those fees and expenses described in Section 3.6
of the Security Agreement.
8.2. Effectiveness; Term. This Agreement shall only become effective
upon execution and delivery by Borrower and Lender and, unless
earlier terminated as provided in this Agreement, shall continue
in full force and effect for an initial term of twelve (12) months
from the date of this Agreement as set forth in the introductory
paragraph hereof and shall be deemed automatically renewed for
successive twelve-(12) month periods.
Unless earlier terminated as provided in this Agreement, all Obli-
gations shall be due and payable in full at the expiration of the
last renewal Term. This Agreement may be terminated prior to
the end of the initial or any renewal term (each, a "Term") as
follows:
(a) Borrower or Lender may terminate this Agreement as of the
end of any Term by either party giving the other written
notice at least thirty (30) days prior to the end of such
Term. If either Borrower or Lender so notifies the other,
all Obligations shall be due and payable in full
at the end of such Term;
(b) In addition to being able to terminate this Agreement at the
end of each Term, Borrower may terminate this Agreement at
any other time after giving Lender at least thirty (30) days
prior written notice and paying Lender an Early Termination
Fee as set forth in Section 2.6. Any such termination shall
be effective upon payment to Lender in full of all
Obligations, including the Early Termination Fee; and
(c) Lender shall also have the right to terminate this Agreement
as set forth in Section 6.2 upon and after the occurrence of
an Event of Default or, as set forth in Section 6.2, this
Agreement shall automatically terminate following the
occurrence of an Event of Default under Section 6.1(i) or
(j). Upon any such termination following an Event of
Default, all Obligations, including the Early Termination
Fee, shall be due and payable in full.
8.3. Deposit to Allow for Open Accommodations and Remittance Items.
Upon termination of this Agreement by Borrower, as permitted
herein, in addition to payment of all Obligations, Borrower shall
deposit such amount of cash collateral as Lender determines is
necessary to secure Lender from loss or expense, including
reasonable attorneys' fees, in connection with any open
Accommodations or remittance items or other payments provisionally
credited to the Obligations and/or to which Lender has not yet
received final and indefeasible payment.
8.4. Continuing Obligations Upon Termination. No termination of this
Agreement, including any termination set forth in Section 8.2 or
6.2, shall relieve or discharge Borrower of its obligations,
duties and covenants hereunder until such time as all Obligations
to Lender have been indefeasibly paid and satisfied in full.
Without limiting the generality of the foregoing, all security
interests and liens of Lender in and upon all then-existing and
thereafter-arising or acquired Collateral, and all warranties,
representations, covenants, agreements and waivers of Borrower,
shall continue in full force and effect until released and
terminated by Lender in writing after full and final payment of
all Obligations.
8.5. Notices. Except as otherwise provided, all notices, requests and
demands hereunder shall be (a) made to Lender at its address set
forth below its signature line and to Borrower at its chief
executive office set forth below its signature line, or to such
other address as either party may designate by written notice to
the other in accordance with this provision, and (b) deemed to
have been given or made: if by hand, immediately upon delivery; if
by telex, telegram or telecopy, immediately upon receipt; if by
overnight delivery service, one business day after dispatch; and
if by first class or certified mail, three (3) calendar days after
mailing.
8.6. Participations; securitization. Lender may assign and sell par-
ticipations in its rights and obligations under this agreement
and the other loan documents. Lender may include the loans made
pursuant to this agreement and the other loan documents in a pool
of loans in which lender sells undivided interests as part of a
securitization program.
(a) Assignment of Loans. Borrower understands that Lender
may from time to time transfer and assign Loans and its
rights under this Agreement to one or more
assignees. Borrower hereby consents to these transfers and
assignments by Lender to one or more assignees. Borrower
hereby consents that any such assignee may exercise the
rights of Lender hereunder. Borrower further hereby consents
and acknowledges that any and all defenses, claims or
counterclaims that it may have against Lender shall be
limited to, and may only be brought against, Lender and
shall not extend to any assignee, including but not limited
to funding obligations.
(b) Borrower and Lender intend that any and all direct or
indirect assignees of the Lender of the type set forth above
shall be third party beneficiaries of this Agreement.
8.7. Severability. If any provision of this Agreement is held to be
invalid or unenforceable, such provision shall not affect
the Agreement as a whole, but this Agreement shall be
construed as though it did not contain the particular provision
held to be invalid or unenforceable.
8.8. Integration. This Agreement, the Security Agreement and the
other Loan Documents contain the entire agreement of the par-
ties as to the subject matter hereof. All prior commitments, pro-
posals and negotiations concerning the subject matter hereof are
merged herein. Neither this Agreement, the Security Agreement
nor any of the other Loan Documents shall be amended, modified
or discharged orally or by course of conduct,but only by a written
agreement signed by an authorized officer of Lender and Borrower.
This Agreement shall be binding upon and inure to the benefit
of each of the parties hereto and their respective successors
and assigns, except that Borrower shall not assign this Agree-
ment or any of its rights hereunder without the prior written
consent of Lender.
8.9. Headings. All title and section headings used in this Agreement
are for convenience only and shall not be used in interpreting
this Agreement.
8.10. Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall be an original but all
of which shall constitute one and the same agreement.
8.11. Definitions. All terms used herein which are defined in the
Uniform Commercial Code as in effect in California shall have the
meanings given therein unless otherwise defined in this Agreement.
All references to the singular or plural herein shall include the
singular and plural, unless the context otherwise requires. Unless
otherwise specified any reference to a "Section" shall refer to
the relevant Section of this Agreement. The term "including" is
not limiting or exclusive. Capitalized terms used in this
Agreement shall have the following respective meanings when used
herein:
"Accommodations" shall have the meaning set forth in Section 1.3.
"Accommodation Note" shall have the meaning set forth in Section
1.3.
"Administrative Fee" shall have the meaning set forth in Section
2.4.
"Advance" shall have the meaning set forth in Section 1.1.
"Advance Rate" shall have the meaning set forth in Section 1.1.
"Agreement" shall mean this Loan Agreement, as the same may be
amended, supplemented, extended or restated from time to time.
"Average Daily Balance" shall have the meaning set forth in
Section 2.2.
"Borrower" shall mean the Borrower as identified in the
introductory paragraph of this Agreement, and its successors and
assigns.
"Collateral" shall have the meaning set forth in the Security
Agreement.
"Early Termination Fee" shall have the meaning set forth in Sec-
tion 2.6.
"Eligible Accounts" shall have the meaning set forth in Section
1.2.
"Event of Default" shall have the meaning set forth in Section
6.1.
"Facility Fee" shall have the meaning set forth in Section 2.1.
"Interest Rate" shall have the meaning set forth in Section 2.2.
"Inventory Rider" shall have the meaning set forth in Section 1.4.
"Lender" shall mean the Lender as identified in the introductory
paragraph of this Agreement, and its successors and assigns. "Loan
Documents" shall mean this Agreement, any Inventory Rider, any
Accommodation Notes, the Security Agreement, and all instruments,
documents, agreements and other writings signed by Borrower or any
Guarantor and delivered to Lender in connection with this
Agreement or otherwise, whether now existing or hereafter arising,
as the same may be amended, supplemented, extended or restated
from time to time.
"Lockbox" shall have the meaning set forth in Section 3.3.
"Maximum Credit" shall have the meaning set forth in Section 1.1.
"Monthly Minimum Fee" shall have the meaning set forth in Section
2.5.
"Obligations" shall mean any and all loans, advances, fees,
charges, indebtedness and obligations of every kind owing by
Borrower to Lender, and/or Lender's affiliates, or incurred by
Lender on behalf of Borrower, however evidenced, whether arising
under this Agreement, the Security Agreement, any other Loan
Documents or otherwise, and whether now existing or hereafter
arising, including all Advances, inventory loans, Accommodations,
Finance Fees, interest, Administrative Fees, Early Termination
Fees, Facility Fees, attorneys' fees and expenses.
"Reserves" shall have the meaning set forth in Section 1.5.
"Security Agreement" shall mean the Security Agreement executed by
Borrower and Lender dated October 1, 1996 , pursuant to which
Borrower grants to Lender a security interest in and lien upon its
personal property, as the same may be amended, supplemented,
extended or restated from time to time.
"Subordinated Creditors" shall mean NA.
"Term" shall have the meaning set forth in Section 8.2.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first stated above.
"Borrower"
Source Scientific, Inc.
By:
Title:
Address of Borrower's Chief Executive Office and Principal Place of Business
7390 Lincoln Way
Garden Grove,CA 92641
Telephone:714 898-9001
Facsimile:714 891-1229
"Lender"
CONCORD GROWTH CORPORATION
By:
Title:
Address:
1170 East Meadow Drive
Palo Alto, CA 94303-4234
Telephone: 415-493-0921
Facsimile: 415-857-0900
CERTIFIED COPY OF RESOLUTIONS
RESOLVED, that the Concord Growth Corporation Loan Agreement of the date
specified below between this company and Concord Growth Corporation (herein
"Lender") and all other agreements and documents connected therewith be, and the
same hereby are, approved on the terms and conditions as set forth therein;
RESOLVED, that any officer of this company is authorized and directed to
enter into said agreement and all other agreements and documents connected
therewith and to execute the same for and on behalf of this company on the terms
and conditions set forth therein;
RESOLVED, that any officer of this company is authorized and directed to
negotiate, agree upon, execute and deliver, from time to time, in the name of,
and on behalf of, this company, such agreements, amendments and supplements to
said agreement or any other agreement or document connected therewith,
documents, instruments, certificates, notices, and further assurances, and to
perform any and all such acts and things as may be required by Lender in
connection with said agreement or any other agreement or document connected
therewith, or may to him seem necessary or proper to implement and effect
complete consummation of said agreement or any other agreement or document
connected therewith in all respects and the purposes set forth in these
resolutions;
RESOLVED, that a schedule of account submitted and signed by any employee
of the company will authorize the sale, transfer or assignment of, for full face
value or at a discount therefrom, accounts, notes, trade acceptances, drafts,
contracts, leases or other instruments owned or held by the company and
guarantee payment thereof on the company's behalf.
RESOLVED, that these resolutions shall remain in full force and effect
until written notice of their amendment or repeal shall be received by Lender
and until all indebtedness and obligations arising out of said agreement and all
other agreements and documents connected therewith shall have been paid and
satisfied in full.
The undersigned, as the duly constituted Secretary of this company does hereby
certify that the foregoing is a true and correct copy of the resolutions duly
adopted at a meeting of the Board of Directors of this company, duly called,
noticed and held on the date specified below, at which meeting there was at all
times present and acting a quorum of the members of said Board; that said
resolutions are in full force and effect; and that the following is a true and
correct list of the present officers of this company:
Date of Loan Agreement: October 1, 1996
President's Name: Richard Sullivan
Vice-President's Name: ______________________________
Corp. Secretary's Name: ______________________________
CFO/Treasurer's Name: M. A. Shawky
Corporate Secretary's Signature:
Name of Company: Source Scientific, Inc.
(seal)
Date company's Board of Directors adopted above resolutions:
CONSENT OF INDEPENDENT AUDITORS
Source Scientific, Inc.
We hereby consent to the incorporation by reference in the
Registration Statement No. 33-42609 on Form S-8 of our report dated
September 13, 1996 appearing in the Company's Annual Report on Form
10-KSB for the year ended June 30, 1996.
Corbin & Wertz
Irvine, California
October 10, 1996
(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 (File No. 33-42609) of our report, dated December 14, 1995, on our audit
of the consolidated financial statements as of June 30, 1995, and for the
year 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
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<PERIOD-START> JUL-01-1995
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