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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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Commission file number 1-8311
SOURCE SCIENTIFIC, INC.
(Exact name of small business issuer as specified in its charter)
California 95-2943936
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7390 Lincoln Way, Garden Grove, California 92641
(Address of principal executive offices) (Zip Code)
(714)898-9001
Issuer's telephone number
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No __.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of February 9, 1996: 18,758,976
Transitional Small Business Disclosure Format (Check one): Yes __ No X .
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<PAGE>
ITEM 1. Financial Statements:
SOURCE SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and June 30, 1995
ASSETS
DECEMBER 31, 1995
(UNAUDITED) JUNE 30, 1995
Current Assets:
Cash and cash equivalents $ 4,000 $ 35,000
Accounts receivable, net 302,000 449,000
Inventories 1,379,000 1,269,000
Other current assets 191,000 180,000
--------- ---------
Total current assets 1,876,000 1,933,000
Property and equipment, net 62,000 121,000
Excess of cost over fair value of net
assets acquired, less accumulated
amortization of $17,000 (December,
1995); $12,000 (June, 1995) 73,000 78,000
Other assets, net 74,000 81,000
---------- ---------
Total assets $2,085,000 $2,213,000
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 911,000 $ 868,000
Accrued expenses 237,000 204,000
Customer deposits 35,000
Notes payable, current portion 260,000 387,000
Deferred rent, current portion 2,000 2,000
Lease obligation, current portion 0 30,000
--------- ---------
Total current liabilities 1,445,000 1,491,000
eferred rent 240,000 230,000
--------- ---------
Total liabilities 1,685,000 1,721,000
--------- ---------
Redeemable Series C Convertible preferred
stock; no par value, authorized
1,000,000 shares, issued and
outstanding 1,555 shares, liquidation
value at June 30, 1995, $14 per share;
at December 31, 1995, $16.93 per share 26,000 23,000
Shareholders' equity
Common stock; no par value, authorized
75,000,000 shares; 15,520,476 and
14,612,034 shares issued and outstanding
at December 31, 1995 and June 30, 1995,
respectively 20,861,000 20,744,000
Accumulated deficit (20,164,000) (19,952,000)
Shareholder notes receivable (323,000) (323,000)
---------- ----------
Total shareholders' equity 374,000 469,000
---------- ----------
Total liabilities and
shareholders' equity $2,085,000 $2,213,000
========= =========
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended December 31, 1995 and December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six months Ended
December 31 December 31
---------------------- ------------------------
1995 1994 1995 1994
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Product sales $735,000 $605,000 $1,333,000 $1,514,000
Research contract sales 17,000 101,000 34,000 184,000
Service contract sales 369,000 470,000 857,000 873,000
--------- --------- --------- ---------
Total net sales 1,121,000 1,176,000 2,224,000 2,571,000
--------- --------- --------- ---------
Cost of product sales 483,000 316,000 938,000 1,028,000
Cost of research contract sales 8,000 66,000 16,000 112,000
Cost of service contract sales 210,000 283,000 434,000 384,000
------- ------- --------- ---------
Total cost of sales 701,000 665,000 1,388,000 1,524,000
------- ------- --------- ---------
Gross profit 420,000 511,000 836,000 1,047,000
Selling, general and administrative 332,000 436,000 630,000 957,000
Research and development 208,000 279,000 406,000 502,000
------- ------- ------- -------
Operating income (loss) (120,000) (204,000) (200,000) (412,000)
------- ------- -------- -------
Interest, net 10,000 10,000 11,000 25,000
------- ------- ------- -------
(Loss) from continuing operations (130,000) (214,000) (211,000) (437,000)
------- ------- -------- -------
Extraordinary items
Gain from reduction of
lease obligation 0 0 309,000
------- ------- ------0 -------
Net (loss) ($130,000) ($214,000) ($211,000) ($128,000)
======= ======= ======== =======
Per common share amounts
Continuing operations (.01) (.02) (.01) (.04)
Extraordinary item .00 .00 .00 .03
----- ---- ---- ----
Net (loss) ($0.01) ($0.02) ($0.01) ($0.01)
==== ==== ===== =====
Weighted average number of
common shares outstanding 15,401,000 9,871,000 15,401,000 9,871,000
========== ========= ========== =========
</TABLE>
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS For the Six Months Ended December 31, 1995
and December 31, 1994
(UNAUDITED)
Six months Ended
December 31
--------------------------
1995 1994
---------- ---------
Cash flows from operating activities
Net income (loss) ($212,000) ($128,000)
------- -------
Adjustments to reconcile income (loss)
to net cash used in operating activities
Depreciation and amortization 63,000 39,000
Effect on cash of changes in operating
assets and liabilities
Accounts receivable 147,000 47,000
Inventories (110,000) 225,000
Other current assets and other assets (3,000) (78,000)
Accounts payable and accrued expenses 76,000 135,000
Other liabilities 35,000 (485,000)
Deferred rent (20,000) (30,000)
------ ------
Total adjustments 188,000 (147,000)
------- -------
Net cash used in operating activities (24,000) (275,000)
------ -------
Cash flows from investing activities:
Capital expenditures 0 (26,000)
------ ------
Net cash used in investing activities 0 (26,000)
------ ------
Cash flows from financing activities:
Change in Redeemable Series C Preferred Stock 3,000
Change in common stock 117,000
Proceeds from notes 0 422,000
Payments or cancellation of notes (127,000) (35,000)
------- -------
Net cash provided by financing activities (7,000) 387,000
------- -------
Net increase (decrease) in cash and cash equivalents (31,000) 86,000
Cash and cash equivalents at beginning of period 35,000 64,000
------ -------
Cash and cash equivalents at end of period $4,000 $150,000
====== =======
Non Cash Transactions
During the six months ended December 31, 1995, 24,000 warrants were exercised
for an equal number of common shares of the Company's stock with debentures in
the amount of $4,320; and debentures in the amount of $20,680 were converted
into 103,400 common shares of the Company's stock.
During the six months ended December 31, 1995, options with a value of $1,075
were exercised.
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)
NOTE 1 - INTERIM ACCOUNTING POLICY
The accompanying consolidated financial statements have not been audited by
independent certified public accountants, but in the opinion of Source
Scientific, Inc. and its subsidiaries (the "Company"), such unaudited statements
include all adjustments necessary for a fair presentation of the financial
position of the Company and its consolidated subsidiaries as of December 31,
1995, and the results of operations and changes in cash flow for the six-month
periods ended December 31, 1995, and December 31, 1994. Although the Company
believes that the disclosures in these financial statements are adequate to make
the information presented not misleading, certain information normally included
in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of operations
for the six-month period ended December 31, 1995 are not necessarily indicative
of the results to be expected for the full year.
NOTE 2 - PER COMMON SHARE AMOUNTS
Per common share amounts are determined by dividing the weighted average number
of common shares outstanding during the period into the relevant statement of
operations caption. Fully diluted and primary per common share amounts were the
same for the six months ended December 31, 1995, while for the six months ended
December 31, 1994, fully diluted per common share amounts would have been
anti-dilutive.
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable are summarized as follows:
December 31, June 30,
1995 1995
Trade receivables $ 322,000 $ 469,000
Less: Allowance for doubtful accounts (20,000) (20,000)
-------- -------
Net accounts receivable $ 302,000 $ 449,000
======== ========
NOTE 4 - INVENTORIES:
Inventories are summarized as follows:
December 31, June 30,
1995 1995
Raw materials $1,164,000 $1,124,000
Work in process 285,000 180,000
Finished goods 125,000 171,000
--------- ---------
1,574,000 1,475,000
Less allowance for inventory obsolescence
and excess quantities (195,000) (206,000)
--------- ---------
Net inventories $1,379,000 $1,269,000
========= =========
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, June 30,
1995 1995
----------- ---------
Machinery, equipment and tooling $290,000 $290,000
Leasehold improvements 34,000 34,000
Furniture and fixtures 59,000 59,000
------- -------
383,000 383,000
Less accumulated depreciation and amortization (321,000) (262,000)
------- -------
Net property and equipment $62,000 $121,000
====== =======
<PAGE>
NOTE 6. NOTES PAYABLE:
Notes Payable include:
December 31, June 30,
1995 1995
----------- ---------
Note payable to Biopool International bearing
interest at 7%, all due and payable on $180,000 $ 0
March 28, 1996. The Company renegotiated
the Note to be paid on a payment schedule
with principal payments of $20,000 on February
15th and 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
accrued interest of $6,033.98 on December 15, 1996.
Loan payable to Silicon Valley Bank (the "Bank")
under a line of credit (the "Revolving Loan 0 $304,000
Facility") with a maximum amount of $500,000,
or $1,000,000 subject to the Company implementing
lockbox arrangements regarding its accounts
receivable, or 65% of qualifying accounts
receivable, collateralized by substantially
all assets of the Company, interest at 3%
over the Bank's reference rate (10.75% at
September 30, 1994; 9.6% at June 30, 1994),
payable monthly. During October, 1994, the
Bank agreed to increase the Company's availability
under the Revolving Loan Facility to $600,000.
In December, 1995, the revolving loan was repaid
by the Company.
Debentures payable to a former officer and two other
unaffiliated individuals in the face amount of 60,000 60,000
in the face amount of $20,000 each, convertible
at any time into shares of the Company's common
stock at the conversion price of $0.75 per share
or as adjusted in accordance with the agreement,
with warrants attached to purchase one share of
the Company's common stock for each $10.00 of
debentures at the amended price of $0.75 per share,
exercisable at any time through May 3, 1998,
principal and interest at 9.75%. The due dates
are being negotiated for two debentures due June
30, 1995, and the remaining debenture due October
30, 1995.
Notes payable uncollateralized, interest at 8%
to 10% with due dates ranging from January,
1997 to April, 1997. 20,000 23,000
-------- --------
$260,000 $387,000
======= =======
NOTE 7. LEASE OBLIGATION:
Lease obligation, amounting to $517,000 and $30,000 at June 30, 1994 and 1995,
respectively, represents the remaining cost, net of sublease income, of the
lease on the Company's prior premises. Subsequent to the acquisition of Source,
the Company vacated such premises and moved all operations to the Source
facility. In 1994, a portion of the net lease obligation was offset against
previously recorded deferred rent. The remaining $300,000 was charged to lease
obligation cost in the 1994 statement of operations. During 1995, the Company
negotiated a termination of the lease. In consideration of the termination and
all obligations thereunder, the Company paid its former landlord approximately
$150,000 and surrendered a claim to approximately $20,000 of deposit and
offsets. The remaining balance of $30,000 which was owed to the Company's former
landlord at June 30, 1995 was paid in full during the six months ended December
31, 1995. The settlement reduced the Company's accrued lease obligation at June
30, 1994 by $309,000, and an extraordinary gain of this amount is reflected in
the 1995 statement of operations.
The Company's current facility is located in Garden Grove, California. The
lease for the Company's facility was renegotiated, commencing January, 1995, and
expires January 31, 2002. The current rental is $26,185 per month and increases
to $29,131 per month on August 1, 1997, and to $32,460 on February 1, 2000. The
new lease agreement represents a current monthly savings to the Company of
<PAGE>
$3,400 through the end of the prior lease agreement. On February 7, 1996, the
owners of the property which is occupied and leased by the Company filed an
action against the Company for deliquent rent and possession of the real
property. The Plaintiff and the Company are currently finalizing the terms for a
Settlement Agreement (see Subsequent Events) to include the immediate payment of
amounts in arrears for half of the rent for November, 1995, and for the months
of December and January, plus a deferral of partial rent although there can be
no assurance that such agreement will enable the Company to meet the payment
terms with its current and projected cash flow and sources of cash. The Company
is seeking a sub-lease tenant for unoccupied space in the Company's facility
although there can be no assurance the Company will be successful in acquiring a
tenant suitable under the conditions of sub-lease which include acceptance by
the owners and property managers of the facility.
ITEM 2. Management's Discussion and Analysis of Operations and Results of
Operations
Results of Operations
Comparison of 1995 to 1994, 3-month and 6-month periods ended December 31
The following table shows the changes in operations between the 3-month and
6-month periods ended December 31, 1994 and December 31, 1995. During the second
quarter ended December 31, 1995, sales declined by approximately 5% compared to
the second quarter ended December 31, 1994. Sales also declined for the 6-month
period ended December 31, 1995, by approximately 10% compared to the 6-month
period ended December 31, 1994. For both the 3-month and 6-month periods,
the Company's liquidity problems which constrained procurement of components and
delayed shipments of product was a major factor. The decline was also due to the
soft sales of the Lamda product line, and decrease in research contract sales.
The total of back ordered products were $184,000 at December 31, 1995.
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED CHANGE FROM
DECEMBER 31, 1994 DECEMBER 31, 1995 DEC. 1994 TO DEC. 1995
----------------------------------------------------------------------------
(000's) %of (000's) %of (000's)
Amount Sales Amount Sales Amount % Change
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,176 100.0 $1,121 100.0 ($55) 0.0
Cost of goods sold 665 56.5 701 62.5 36 6.0
----- ---- ---- ---- -- ---
Gross profit 511 43.5 420 37.5 (91) -6.0
--- ---- ---- ---- -- ----
Selling, general and administration 436 37.1 332 29.6 (104) -7.5
Research and development 279 23.7 208 18.6 (71) -5.2
--- ---- --- ---- --- ----
Total operating expenses 715 60.8 540 48.2 (175) -12.6
--- ---- --- ---- --- -----
Operating income (loss) (204) -17.3 (120) -10.7 84 6.6
Interest, net 10 0.9 10 0.9 0 0.0
--- --- --- ----- -- ---
Income (loss) from continuing (214) -18.2 (130) -11.6 84 6.6
operations
Extraordinary items
Gain from reduction of Lease 0 0.0 0 0.0 0 0.0
obligation ---- --- --- ---- --- ---
Net income (loss) ($214) -18.2 ($130) -11.6 $84 6.6
==== ===== ==== ==== == ===
6 MONTHS ENDED 6 MONTHS ENDED CHANGE FROM
DECEMBER 31, 1994 DECEMBER 31, 1995 DEC. 1994 TO DEC 1995
----------------------------------------------------------------------------
(000's) %of (000's) %of (000's)
Amount Sales Amount Sales Amount % Change
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $2,571 100.0 $2,224 100.0 ($347) 0.0
Cost of goods sold 1,524 59.3 1,388 62.4 (136) -3.1
----- ---- ----- ---- --- ----
Gross profit 1,047 40.7 836 37.6 (211) -3.1
----- ---- --- ---- --- ----
Selling, general and administration 957 37.2 630 28.3 (327) -8.9
Research and development 502 19.5 406 18.3 (96) -1.3
----- ---- ---- ---- --- ----
Total operating expenses 1,459 56.7 1,036 46.6 (423) -10.2
----- ---- ----- ---- --- -----
Operating income (loss) (412) -16.0 (200) -9.0 212 7.0
Interest, net 25 1.0 11 0.5 (14) -0.5
----- --- ---- --- --- ----
Income (loss) from continuing (437) -17.0 (211) -9.5 226 7.5
operations
Extraordinary items
Gain from reduction of Lease 309 12.0 0 0.0 (309) -12.0
obligation --- ---- ---- --- --- -----
Net income (loss) ($128) -5.0 $211) -9.5 ($83) -4.5
==== ==== === ==== === ====
</TABLE>
<PAGE>
Net Sales. The decrease in net sales from the 3-month and 6-month periods ended
December 31, 1994, compared to the 3-month and 6-month periods ended December
31, 1995, was primarily due to the decline in sales of the Lamda product line
and the Company's inability in 1995 to acquire material needed to manufacture
and fulfill purchase orders due to the Company's liquidity problem. In the
absence of new research and development projects during the year, the Company's
research and development resources were directed to enhance the Company's
current products and develop new products which can be derived from the
technologies which the Company currently possesses. During the 1995 fiscal year,
the Company completed the development of one product which it started shipping
in September, 1995. A second product under development is expected to be
completed in September, 1996. There can be no assurance that the Company will
complete development of new products on schedule or commercialize such products
or systems, or, if developed, that such products will generate meaningful
revenues for the Company. On an ongoing basis an average of 25 quotes to provide
research and development, manufacturing and product service contracts to
potential customers are in various stages of contract negotiation. There is no
assurance such contracts will be awarded to the Company, or that in the event
any such contracts are awarded, sufficient economic value will be realized to
make a significant difference in the Company's profitability within the current
year.
Cost of Goods Sold. For the quarter ended December 31, 1995, the cost of goods
sold was 62.5% compared to 56.5% for the quarter ended December 31, 1994, and
was 62.4% for the 6-month period ended December 31, 1995, compared to 59.3% for
the 6-month period ended December 31, 1994. The increase was due to lower sales
volume which reduced the manufacturing absorption for the quarter, and the
decrease in the higher gross profit margin Research and Development Contracts
and Service Contracts which was not offset by the increase of lower gross profit
margin product sales.
Operating Expenses. Overall operating expenses declined as a percentage of sales
for the 3-month and 6-month periods ended December 31, 1995, due to management's
implementation of a cost reduction plan which included reduction in salary rates
for all employees, reduction in the number of employees, contracts renegotiation
and operating expense control. For the quarter ended December 31, 1995, the
Company realized approximately 24% reduction in selling, general and
administrative expenses and 25% reduction in research and development expenses,
compared to the quarter ended December 31, 1994.
Inventory Obsolescence. The allowance for inventory obsolescence and excess
quantities increased by approximately $8,000 during the quarter ended December
31, 1995. This change of 5% resulted from adjusting the reserve for slow moving
parts used in Lamda products. A large percentage of newly acquired inventory
will be used to build units for sales in the next quarter. Historically, most
materials in inventory have been used to build products under OEM contracts and,
therefore, the Company has had minimal inventory obsolescence.
Liquidity and Capital Resources and Plan of Operation
The Company continues to suffer a liquidity problem. As of the date of
this report, the backlog of firm orders is growing; however, the Company's
liquidity problems constrained procurement of components and delayed shipment of
product. Management continues to address the Company's liquidity issue by: (i)
restructuring trade debt; (ii) offering discounts in exchange for progress
payments; and (iii) seeking equity capital.
As of December 31, 1995, the operating capital is approximately
$431,000 which represents an increase in the working capital of $345,000 in the
last quarter. Management believes the increase in operating capital is an
indication of the Company's progress towards financial stability, however, the
Company still requires additional operating capital for its current operations.
In January, 1996, the Company was successful in issuing $310,000 in promissory
notes (See Subsequent Events) which helped to relieve the Company's critical
shortage of cash to purchase raw materials. There can be no assurance that the
additional operating capital obtained will be sufficient to achieve financial
stability for the Company. The Company did not have any material commitments for
capital expenditures as of the quarter ended December 31, 1995, or as of the
date of this Report.
The Company continued to decrease its operating costs, through its cost
containment plan during the first quarter ended December 31, 1995, which
included a further reduction in its workforce and combining certain job
functions.
<PAGE>
In June, 1995, the Company entered into a non-binding letter of intent
with Lifestream Technologies, Inc. ("Lifestream") pursuant to which the Company
would be granted certain production rights in professional and homecare markets
for Lifestream Diagnostic's product line. In addition, the Company may acquire
20% of Lifestream, for an amount and type of consideration to be negotiated. The
parties are continuing due diligence proceedings and there can be no assurance
that any transaction between the Company and Lifestream will close.
In January, 1994, the Company entered into a revolving loan facility
(the "Revolving Loan Facility") with Silicon Valley Bank (the "Bank"), pursuant
to which the Company assumed $360,000 of a formerly joint MicroProbe/Source
revolving loan obligation to the Bank. As security for its obligation to the
Bank, the Company granted to the Bank a security interest in substantially all
of the Company's assets, including its accounts receivable, inventory,
furniture, fixtures and equipment and general intangibles. In December, 1995,
the revolving loan was repaid by the Company.
In February 1995, the Company signed a factoring agreement with Silicon
Valley Financial Services, a subsidiary of Silicon Valley Bank, to finance 80%
of the face amount of the Company's accounts receivable, at a rate of 2.5% per
month, plus 1% administrative fees. On December 8, 1995, the factoring agreement
was revised to reduce the finance rates to 1.5% on $150,000 of receivables and
2.25% on receivables to a maximum of $250,000, plus 1% administrative fee. The
Company's objective is to minimize factoring of accounts receivable and seek a
line of credit with a commercial bank or finance institution. There can be no
assurance the Company will be successful in meeting its commitments by
minimizing factoring of its accounts receivable, or that a commercial banking or
finance institution will provide favorable terms to the Company's financing
needs.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
On February 7, 1996, the owners of the property which is occupied and
leased by the Company filed an action against the Company for deliquent rent and
possession of the real property. The litigation is entitled TR BRELL, CAL CORP
etc. versus Source Scientific, Inc., etc. et al, Orange County Superior Court
Case #759297. The Plaintiff and the Company are currently finalizing the terms
for a Settlement Agreement, which will include immediate payment of amounts in
arrears and deferral of partial rent due over a six-month period. Management
believes the that the final terms of settlement and the payment schedule for
payment of the delinquent rents and current rents going forward will be
acceptable to the Company. There can be no assurance that such agreement will
enable the Company to meet the payment terms with its current and projected cash
flow and sources of cash. The Company is seeking a sub-lease tenant for
unoccupied space in the Company's facility although there can be no assurance
the Company will be successful in acquiring a tenant suitable under the
conditions of sub-lease which include acceptance by the owners and property
managers of the facility.
On September 20, 1995, the Company filed litigation entitled Source
Scientific, Inc. et al versus Scientific Measurement Systems, Inc. et al,
("SMS") located in Colorado, Orange County Superior Court Case #751112, for
breach of contract and related actions. The defendant has answered and filed a
cross-complaint which the Company has answered. Cross-complainants sued for
breach of contract and damages. Management is continuing its negotiations with
SMS and believes that a favorable settlement of the litigation will be reached,
although there can be no assurance thereof.
ITEM 5. Other Information
Subsequent Events:
In January and February 1996, the Company received an aggregate of
$310,000 in two-year Promissory Notes bearing interest at eight percent per
annum, which were converted into Convertible Debentures on February 15, 1996.
The terms of the Debentures provide for conversion to shares of common stock at
the initial price of $0.05333 per share. With the issuance of the debentures,
the Company granted to each holder of the Promissory Notes 750,000 warrants for
each $100,000 of debenture into which the Promissory Notes were converted. Such
warrants are exerciseable at $0.25 per warrant into an equivalent number of
shares of common stock.
<PAGE>
In conjunction with the Company's proposed future placement of equity,
as to which placement there can be no assurance that the Company will receive
substantial operating funds, the Company issued 3,238,500 shares of common stock
to the holders of the equivalent number of A Warrants, thereby canceling all
outstanding A Warrants.
On January 26, 1996, the Company notified holders of its Series C
Preferred Stock that the Redemption Date of June 28, 1996 had been established
for redeeming the preferred shares at the Redemption Price of $17.93 in
accordance with the terms of the preferred certificates for the Series C
Preferred Stock. At the Redemption Date, the aggregate Redemption Price to be
paid by the Company is $27,881.15 to four holders of such preferred stock.
In February, 1996, as the result of negotiations with Biopool
International, the Company's Promissory Note in the amount of $180,000 due on
March 28, 1996, was replaced to provide an interest rate of 7% until March 15,
1996, and 8% through the balance of the term of the Note, and a payment schedule
as follows: a principal payment of $20,000 on February 15, and on each 15th day
of the months July through November, 1996; a principal payment of $15,000 plus
accrued interest of $5,688.22 on March 15, 1996; principal payments of $5,000
each on the 15th day of the months April through June, 1996; and a final
principal payment of $30,000 and interest of $6,033.98 on December 15, 1996.
ITEM 6. Exhibit and representation on Form 8K
(a) Exhibits:
*10.24(a) Replacement Promissory Note, dated as of September
29, 1995, between the Company and Biopool
International, Inc.
*10.25(a) 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.
*10.25(b) 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
*10.26 Form of Convertible Debenture, executed in February,
1996, between the Company and four individuals who
funded Promissory Notes in the aggregate amount of
$350,000 in the months of January and February, 1996
which were converted into Debentures.
27.2 Financial Data Schedule (included only with the
electronic filing for the Securities and Exchange
Commission, and not attached as an exhibit herein).
(b) Reports:
None
(Items marked with * are included herewith.)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
SOURCE SCIENTIFIC, INC.
By: /S/ RICHARD A. SULLIVAN
Date: 02-20-96 Richard A. Sullivan
President and Chief Executive Officer
By: /S/ MOKHTAR A. SHAWKY
Date: 02-20-96 Mokhtar A. Shawky
Chief Financial Officer
Exhibit 10.24(a)
PROMISSORY NOTE
$180,000.00 Garden Grove, California
As of September 29, 1995
FOR VALUE RECEIVED, Source Scientific, Inc. ("Maker") does hereby
promise to pay to the order of Biopool International, Inc. or assigns
(collectively, "Holder"), at such place as the Holder shall designate, the
principal sum of $180,000 in lawful money of the United States of America,
according to the terms and subject to the conditions set forth in this
promissory note (this "Note").
1. INTEREST; PAYMENTS. The principal balance of this Note shall accrue
simple interest at the rate per annum of seven percent (7 %) until March 15,
1996, and at the rate per annum of eight percent (8 %) thereafter, in each case
computed on the basis of a 365-day year. Payments of principal and interest on
this Note shall be made as follows: $20,000, applied to the principal balance
of-the Note shall be paid on February 15, 1996;
$15,000, applied to the principal balance of the Note,
together with accrued interest in the amount of $5,688.22,
shall be paid on March 15, 1996;
$5,000, applied to the principal balance of the Note shall be
paid on each of April 15, 1996, May 15, 1996, and June 15,
1996;
$20,000, applied to the principal balance of the Note shall be
paid on each of July 15, 1996, August 15, 1996, September 15,
1996, October 15, 1996 and November 15, 1996; and
$30,000, applied to the principal balance of the Note,
together with accrued interest in the amount of $6,033.98,
shall be paid on December 15, 1996
2. PREPAYMENT. The Maker may, at its option prepay the principal
amount hereof without penalty or premium, in whole or in part, at any time.
3. SECURITY AGREEMENT. This Note is secured by that certain Loan
and Security Agreement, dated as of September 29, 1995 between Maker and Holder
(the "Security Agreement"), and is subordinated to the rights of Silicon Valley
Bank against Maker as agreed therein.
SM\BIOPOOL\SOURCE.NTE 1
<PAGE>
4. DEFAULT AND REMEDIES.
(a) Events of Default. In the event that: (i) a default shall
be made in the payment of the principal amount of this Note or interest thereon,
as and when due and payable; or (ii) Maker shall have defaulted on any of its
obligations under the Security Agreement, and any such default has not been
cured to the reasonable satisfaction of Holder within five (5) business days
following delivery by Holder of notice of such default to Maker, then an "Event
of Default" shall exist.
(b) Remedies. At any time after an Event of Default exists,
the Holder may, by written notice sent to the Maker by registered or certified
mail, return receipt requested, declare the entire amount of principal and
interest on this Note to be forthwith due and payable, whereupon this Note shall
become forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are expressly waived, and ('U') Holder shall be
entitled to enforce all of its remedies hereunder against Guarantor.
5. MISCELLANEOUS.
(a) Waiver. Failure or delay on the part of the Holder to
enforce any provision of this Note shall not be deemed a waiver of any such
provision, nor shall the Holder be estopped from enforcing any such provision at
a later time. Any waiver of a provision hereof must be in writing.
(b) Governing Law. This Note shall be governed by, and
construed in accordance with, the laws of the State of California. Jurisdiction
and venue over any legal action brought hereunder shall reside exclusively in
the County of Los Angeles, State of California.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed by
its duly authorized officer as of the day and year first above written.
SOURCE SCIENTIFIC, INC.
By:../s/ RICHARD A SULLIVAN
Richard A. Sullivan, President and CEO
SVA\BIOPOOL\SOURCE.NTE 2
Silicon Valley Financial Services
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
(408) 654-1000 - Fax (408) 980-641 0
FACTORING AGREEMENT
This Factoring Agreement (the 'Agreement') is made on this Eight day of
December, 1995, by and between Silicon Valley Financial Services (a division of
Silicon Valley Bank) ("Buyer") having a place of business at the address
specified above and Source Scientific, Inc., a California corporation, (the
"Parent"), and its wholly owned subsidiaries, Alton Instruments Corporation,
Source Scientific Systems, Inc. and Wespercorp (collectively the
'Subsidiaries'). The Parent and the Subsidiaries are jointly and severally
referred to herein as the 'Seller' having its principal place of business and
chief executive office at
Street Address: 7390 Lincoln Way
City: Garden Grove
County: Orange
State: California
Zip code: 92641
Fax: 714/891-1229
1. Definitions. When used herein, the following terms shall have the follow-
ing meanings.
1.1. 'Account Balance' shall mean, on any given day, the gross amount of
all Purchased Receivables unpaid on that day.
1.2. 'Account Debtor' shall have the meaning set forth in the California
Uniform Commercial Code and shall include any person liable on any Purchased
Receivable, including without limitation, any guarantor of the Purchased
Receivable and any issuer of a letter of credit or banker's acceptance.
1.3. 'Adjustments" shall mean all discounts, allowances, returns,
disputes, counter- claims, offsets, defenses, rights of recoupment, rights of
return, warranty claims, or short payments, asserted by or on behalf of any
Account Debtor with respect to any Purchased Receivable.
1.4. 'Administrative Fee' shall have the meaning as set forth in Section
3.3 hereof.
1.5. 'Advance' shall have the meaning set forth in Section 2.2 hereof.
1.6. 'Collateral' shall have the meaning set forth in Section 8 hereof.
1.7. 'Collections' shall mean all good funds received by Buyer from or
on behalf of an Account Debtor with respect to Purchased Receivables.
1.8 'Compliance Certificate' shall mean a certificate, in a form
provided by Buyer to Seller, which contains the certification of the chief
financial officer of Seller that, among other things, the representations and
warranties set forth in this Agreement are true and correct as of the date such
certificate is delivered.
1.9. 'Event of Default" shall have the meaning set forth in Section 9
hereof.
1.10. 'Finance Charges' shall have the meaning set forth in Section 3.2
hereof.
1.11. 'Invoice Transmittal' shall mean a writing signed by an authorized
representative of Seller which accurately identifies the receivables which
Buyer, at its election, may purchase, and includes for each such receivable the
correct amount owed by the Account Debtor, the name and address of the Account
Debtor, the invoice number, the invoice date and the account code.
1.12. 'Obligations' shall mean all advances, financial accommodations,
liabilities, obligations, covenants and duties owing, arising, due or payable by
Seller to Buyer of any kind or nature, present or future, arising under or in
connection with this Agreement or under any other document, instrument or
agreement, whether or not evidenced by any note, guarantee or other instrument,
whether arising on account or by overdraft, whether direct or indirect
(including those acquired by assignment) absolute or contingent, primary or
secondary, due or to become due, now owing or hereafter arising, and however
acquired; including, without limitation, all Advances, Finance Charges,
Administrative Fees, interest, Repurchase Amounts, fees, expenses, professional
fees and attorneys' fees and any other sums chargeable to Seller hereunder or
otherwise.
1.13. 'Purchased Receivables' shall mean all those accounts, receivables,
chattel paper, instruments, contract rights, documents, general intangibles,
letters of credit, drafts, bankers acceptances, and rights to payment, and all
proceeds thereof (all of the foregoing being referred to as 'receivables'),
arising out of the invoices and other agreements identified on or delivered with
any Invoice Transmittal delivered by Seller to Buyer which Buyer elects to
purchase and for which Buyer makes an Advance.
1.14. 'Refund' shall have the meaning set forth in Section 3.5 hereof.
1.15. 'Reserve" shall have the meaning set forth in Section 2.4 hereof.
1.16. 'Repurchase Amount" shall have the meaning set forth in Section 4.2
hereof.
1.17. 'Reconciliation Date' shall mean the last calendar day of each
Reconciliation Period.
1.18. 'Reconciliation Period' shall mean each calendar month of every
year.
2. Purchase and Sale of Receivables.
2.1. Offer to Sell Receivables. During the term hereof, and provided
that there does not then exist any Event of Default or any event that with
notice, lapse of time or otherwise would constitute an Event of Default, Seller
may request that Buyer purchase receivables and Buyer may, in its sole
discretion, elect to purchase receivables. Seller shall deliver to Buyer an
Invoice Transmittal with respect to any receivable for which a request for
purchase is made. An authorized representative of Seller shall sign each Invoice
Transmittal delivered to Buyer. Buyer shall be entitled to rely on all the
information provided by Seller to Buyer on or with the Invoice Transmittal and
to rely on the signature on any Invoice Transmittal as an authorized signature
of Seller.
2.2. Acceptance of Receivables. Buyer shall have no obligation to pur-
chase any receivable listed on an Invoice Transmittal. Buyer may exercise its
sole discretion in approving the credit of each Account Debtor before buying any
receivable. Upon acceptance by Buyer of all or any of the receivables described
on any Invoice Transmittal, Buyer shall pay to Seller 80 (%) percent of the face
amount of each receivable Buyer desires to purchase. Such payment shall be the
'Advance' with respect to such receivable. Buyer may, from time to time, in its
sole discretion, change the percentage of the Advance. Upon Buyer's acceptance
of the receivable and payment to Seller of the Advance, the receivable shall
become a 'Purchased Receivable.' It shall be a condition to each Advance that
(i) all of the representations and warranties set forth in Section 6 of this
Agreement be true and correct on and as of the date of the related Invoice
Transmittal and on and as of the date of such Advance as though made at and as
of each such date, and (ii) no Event of Default or any event or condition that
with notice, lapse of time or otherwise would constitute an Event of Default
shall have occurred and be continuing, or would result from such Advance.
Notwithstanding the foregoing, in no event shall the aggregate amount of all
Purchased Receivables outstanding at any time exceed One Hundred Fifty Thousand
and No/100 '*** Dollars ($150,000.00).
2.3. Effectiveness of Sale to Buyer. Effective upon Buyer's payment
of an Advance, and for and in consideration therefor and in consideration of the
covenants of this Agreement, Seller hereby absolutely sells, transfers and
assigns to Buyer, all of Seller's right, title and interest in and to each
Purchased Receivable and all Monies due or which may become due on or with
respect to such Purchased Receivable. Buyer shall be the absolute owner of each
Purchased Receivable. Buyer shall have, with respect to any goods related to the
Purchased Receivable, all the rights and remedies of an unpaid seller under the
California Uniform Commercial Code and other applicable law, including the
rights of replevin, claim and delivery, reclamation and stoppage in transit.
2.4. Establishment of a Reserve. Upon the purchase by Buyer of each Pur-
chased Receivable, Buyer shall establish a reserve. The reserve shall be the
amount by which the face amount of the Purchased Receivable exceeds the Advance
on that Purchased Receivable (the 'Reserve'); provided, the Reserve with respect
to all Purchased Receivables outstanding at any one time shall be an amount not
less than 20 (%) percent of the Account Balance at that time and may be set at a
higher percentage at Buyer's sole discretion. The reserve shall be a book
balance maintained on the records of Buyer and shall not be a segregated fund.
3. Collections, Charges and Remittances.
3.1. Collections. Upon receipt by Buyer of Collections, Buyer shall
promptly credit such Collections to Seller's Account Balance on a daily basis;
provided, that if Seller is in default under this Agreement, Buyer shall apply
all Collections to Seller's Obligations hereunder in such order and manner as
Buyer may determine. If an item of collection is not honored or Buyer does not
receive good funds for any reason, the amount shall be included in the Account
Balance as if the Collections had not been received and Finance Charges under
Section 3.2 shall accrue thereon.
3.2. Finance Charges. On each Reconciliation Date Seller shall pay to
Buyer a finance charge in an amount equal to 1.5(%) percent per month of the
average daily Account Balance outstanding during the applicable Reconciliation
Period (the 'Finance Charges'). Buyer shall deduct the accrued Finance Charges
from the Reserve as set forth in Section 3.5 below.
3.3. Administrative Fee. On each Reconciliation Date Seller shall pay
to Buyer an Administrative Fee equal to 1.0(%) percent of the face amount of
each Purchased Receivable first purchased during that Reconciliation Period (the
"Administrative Fee")- Buyer shall deduct the Administrative Fee from the
Reserve as set forth in Section 3.5 below.
3.4. Accounting. Buyer shall prepare and send to Seller after the close
of business for each Reconciliation Period, an accounting of the transactions
for that Reconciliation Period, including the amount of all Purchased
Receivables, all Collections, Adjustments, Finance Charges, and the
Administrative Fee. The accounting shall be deemed correct and conclusive unless
Seller makes written objection to Buyer within thirty (30) days after the Buyer
mails the accounting to Seller.
3.5. Refund to Seller. Provided that there does not then exist an Event
of Default or any event or condition that with notice, lapse of time or
otherwise would constitute an Event of Default, Buyer shall refund to Seller by
check after the Reconciliation Date, the amount, if any, which Buyer owes to
Seller at the end of the Reconciliation Period according to the accounting
prepared by Buyer for that Reconciliation Period (the 'Refund'). The Refund
shall be an amount equal to:
(A) (1) The Reserve as of the beginning of that Reconciliation
Period, plus
(2) The Reserve created for each Purchased Receivable purchased
during that Reconciliation Period, minus
(B) The total for that Reconciliation Period of: (1) the Admini-
strative Fee; (2) Finance Charges; (3) Adjustments; (4) Repur-
chase Amounts, to the extent Buyer has agreed to accept pay-
ment thereof by deduction from the Refund; (5) the Reserve for
the Account Balance as of the first day of the following Recon-
ciliation Period in the minimum percentage set forth in Section
2.4 hereof; and (6) all amounts due, including professional fees
and expenses, as set forth in Section 12 for which oral or
written demand has been made by Buyer to Seller during that
Reconciliation Period to the extent Buyer has agreed to accept
payment thereof by eduction from the Refund. In the event the
formula set forth in this Section 3.5 results in an amount due
to Buyer from Seller, Seller shall make such payment in the
same manner as set forth in Section 4.3 hereof for repurchases.
If the formula set forth in this Section 3.5 results in an
amount due to Seller from Buyer, Buyer shall make such payment
by check, subject to Buyer's rights under Section 4.3 and
Buyer's rights of offset and recoupment.
4. Recourse and Repurchase Obligations.
4.1. Recourse. Buyer's acquisition of Purchased Receivables from Seller
shall be with full recourse against Seller. In the event the Obligations exceed
the amount of Purchased Receivables and Collateral, Seller shall be liable for
any deficiency.
4.2. Seller's Agreement to Repurchase. Seller agrees to pay to Buyer on
demand, the full face amount, or any unpaid portion, of any Purchased
Receivable:
(A) which remains unpaid ninety (90) calendar days after the
invoice date; or
(B) which is owed by any Account Debtor who has filed, or has had
filed against it, any bankruptcy case, assignment for the
benefit of creditors, receivership, or insolvency proceed-
ing or who has become insolvent (as defined in the United
States Bankruptcy Code) or who is generally not paying its
debts as such debts become due; or
(C) with respect to which there has been any breach of warranty
or representation set forth in Section 6 hereof or any breach
of any covenant contained in this Agreement; or
(D) with respect to which the Account Debtor asserts any discount,
allowance, return, dispute, counterclaim, offset, defense,
right of recoupment, right of return, warranty claim, or short
payment; together with all reasonable attorneys' and pro-
fessional fees and expenses andall court costs incurred by Buy-
er in collecting such Purchased receivable and/or enforcing its
rights under, or collecting amounts owed by Seller in
connection with, this Agreement (collectively, the 'Repurchase
Amount').
4.3. Seller's Payment of the Repurchase Amount or Other Amounts Due
Buyer. When any Repurchase Amount or other amount owing to Buyer becomes due,
Buyer shall inform Seller of the manner of payment which may be any one or more
of the following in Buyer's sole discretion: (a) in cash immediately upon demand
therefor; (b) by delivery of substitute invoices and an Invoice Transmittal
acceptable to Buyer which shall thereupon become Purchased Receivables; (c) by
adjustment to the Reserve pursuant to Section 3.5 hereof; (d) by deduction from
or offset against the Refund that would otherwise be due and payable to Seller;
(e) by deduction from or offset against the amount that otherwise would be
forwarded to Seller in respect of any further Advances that may be made by
Buyer; or (o by any combination of the foregoing as Buyer may from time to time
choose.
4.4. Seller's Agreement to Repurchase All Purchased Receivables. Upon
and after the occurrence of an Event of Default, Seller shall, upon Buyer's
demand (or, in the case of an Event of Default under Section 9(B), immediately
without notice or demand from Buyer) repurchase all the Purchased Receivables
then outstanding , or such portion thereof as Buyer may demand. Such demand may,
at Buyer's option, include and Seller shall pay to Buyer immediately upon
demand, cash in an amount equal to the Advance with respect to each Purchased
Receivable then outstanding together with all accrued Finance Charges,
Adjustments, Administrative Fees, attorneys and professional fees, court costs
and expenses as provided for herein, and any other Obligations. Upon receipt of
payment in full of the Obligations, Buyer shall immediately instruct Account
Debtors to pay Seller directly, and return to Seller any Refund due to Seller.
For the purpose of calculating any Refund due under this Section only, the
Reconciliation Date shall be deemed to be the date Buyer receives payment in
good funds of all the Obligations as provided in this Section 4.4.
5. Power of Attorney. Seller does hereby irrevocably appoint Buyer and its
successors and assigns as Seller's true and lawful attorney in fact, and hereby
authorizes Buyer, regardless of whether there has been an Event of Default, (a)
to sell, lawful attorney in fact, and hereby authorizes Buyer, regardless of
whether there has been an Event of Default, (a) to sell, assign, transfer,
pledge, compromise, or discharge the whole or any part of the Purchased
Receivables; (b) to demand, collect, receive, sue, and give releases to any
Account Debtor for the monies due or which may become due upon or with respect
to the Purchased Receivables and to compromise, prosecute, or defend any action,
claim, case or proceeding relating to the Purchased Receivables, including the
filing of a claim or the voting of such claims in any bankruptcy case, all in
Buyer's name or Seller's name, as Buyer may choose; (c) to prepare, file and
sign Sellers name on any notice, claim, assignment, demand, draft, or notice of
or satisfaction of lien or mechanics' lien or similar document with respect to
Purchased Receivables; (d) to notify all Account Debtors with respect to the
Purchased Receivables to pay Buyer directly; (e) to receive, open, and dispose
of all mail addressed to Seller for the purpose of collecting the Purchased
Receivables; (f) to endorse Sellers name on any checks or other forms of payment
on the Purchased Receivables; (g) to execute on behalf of Seller any and all
instruments, documents, financing statements and the like to perfect Buyers
interests in the Purchased Receivables and Collateral; and (h) to do all acts
and things necessary or expedient, in furtherance of any such purposes. If Buyer
receives a check or item which is payment for both a Purchased Receivable and
another receivable, the funds shall first be applied to the Purchased Receivable
and, so long as there does not exist an Event of Default or an event that with
notice, lapse of time or otherwise would constitute an Event of Default, the
excess shall be remitted to Seller. Upon the occurrence and continuation of an
Event of Default, all of the power of attorney rights granted by Seller to Buyer
hereunder shall be applicable with respect to all Purchased Receivables and all
Collateral.
6. Representations, Warranties and Covenants.
6.1. Receivables' Warranties, Representations and Covenants. To induce Buyer
to buy receivables and to render its services to Seller, and with full knowledge
that the truth and accuracy of the following are being relied upon by the Buyer
in determining whether to accept receivables as Purchased Receivables, Seller
represents, warrants, covenants and agrees, with respect to each Invoice
Transmittal delivered to Buyer and each receivable described therein, that:
(A) Seller is the absolute owner of each receivable set forth in the
Invoice Transmittal and has full legal right to sell, transfer
and assign such receivables;
(B) The correct amount of each receivable is as set forth in the
Invoice Transmittal and is not in dispute;
(C) The payment of each receivable is not contingent upon the
fulfillment of any obligation or contract, past or future and any
and all obligations required of the Seller have been fulfilled
as of the date of the Invoice Transmittal;
(D) Each receivable set forth on the Invoice Transmittal is based on
an actual sale and delivery of goods and/or services actually
rendered, is presently due and owing to Seller, is not past due
or in default, has not been previously sold, assigned, trans-
ferred, or pledged, and is free of any and all liens, securi-
ty interests and encumbrances other than liens, security interests
or encumbrances in favor of Buyer or any other division or affili-
ate of Silicon Valley Bank;
(E) There are no defenses, offsets, or counterclaims against any of
the receivables, and no agreement has been made under which the
Account Debtor may claim any deduction or discount, except as
otherwise stated in the Invoice Transmittal;
(F) Each Purchased Receivable shall be the property of the Buyer and
shall be collected by Buyer, but if for any reason it should
be paid to Seller, Seller shall promptly notify Buyer of such pay-
ment, shall hold any checks, drafts, or monies so received in
trust for the benefit of Buyer, and shall promptly transfer and
deliver the same to the Buyer;
(G) Buyer shall have the right of endorsement, and also the right to
require endorsement by Seller, on all payments received in connec-
tion with each Purchased Receivable and any proceeds of Coll-
ateral;
(H) Seller, and to Seller's best knowledge, each Account Debtor set
forth in the Invoice Transmittal, are and shall remain solvent
as that term is defined in the United States Bankruptcy Code
and the California Uniform Commercial Code, and no such Account
Debtor has filed or had filed against it a voluntary or involunt-
ary petition for relief under the United States Bankruptcy Code;
(I) Each Account Debtor named on the Invoice Transmittal will not
object to the payment for, or the quality or the quantity of the
subject matter of, the receivable and is liable for the amount set
forth on the Invoice Transmittal;
(J) Each Account Debtor shall promptly be notified,after acceptance by
Buyer, that the Purchased Receivable has been transferred to and
is payable to Buyer, and Seller shall not take or permit any ac-
tion to countermand such notification; and
(K) All receivables forwarded to and accepted by Buyer after the
date hereof, and thereby becoming Purchased Receivables,
shall omply with each and every one of the foregoing represen-
tations, warranties, covenants and agreements referred to above in
this Section 6.1.
6.2. Additional Warranties, Representations and Covenants. In addition to the
foregoing warranties, representations and covenants, to induce Buyer to buy
receivables and to render its services to Seller, Seller hereby represents,
warrants, covenants and agrees that:
(A) Seller will not assign, transfer, sell, or grant , or permit any
lien or security interest in any Purchased Receivables or Collat-
eral to or in favor of any other party, without Buyers prior
written consent;
(B) The Seller's name, form of organization, chief executive office,
and the place where the records concerning all Purchased
Receivables and Collateral are kept is set forth at the beginning
of this Agreement, Collateral is located only at the location set
forth in the beginning of this Agreement, or, if located at any
additional location, as set forth on a schedule attached to this
Agreement, and Seller will give Buyer at least thirty (30)
days prior written notice if such name, organization, chief
executive office or other locations of Collateral or records
concerning Purchased Receivables or Collateral is changed or
added and shall execute any documents necessary to perfect
Buyer's interest in the Purchased Receivables and the Collateral;
(C) Seller shall (i) pay all of its normal gross payroll for employ-
ees, and all federal and state taxes, as and when due,
including without limitation all payroll and withholding taxes
and state sales taxes: (ii) deliver at any time and from time to
time at Buyer's request, evidence satisfactory to Buyer that all
such amounts have been paid to the proper taxing authorities: and
(iii) if requested by Buyer, pay its payroll and related taxes
through a bank or an independent payroll service acceptable to
Buyer.
(D) Seller has not, as of the time Seller delivers to Buyer an
Invoice Transmittal, or as of the time Seller accepts any
Advance from Buyer, filed a voluntary petition for relief under
the United States Bankruptcy Code or had filed against it an
involuntary petition for relief;
(E) If Seller owns, holds or has any interest in, any copyrights
(whether registered, or unregistered), patents or trade-
marks, and licenses of any of the foregoing, such interest
has been disclosed to Buyer and is specifically listed and
identified on a schedule to this Agreement, and Seller shall
immediately notify Buyer if Seller hereafter obtains any interest
in any additional copyrights, patents, trademarks or licenses
that are significant in value or are material to the conduct of
its business; and (F) Seller shall provide Buyer with a
Compliance Certificate (i) on a quarterly basis to be received by
Buyer no later than the fifth calendar day following each
calendar quarter, and; (ii) on a more frequent or other basis if
and as requested by Buyer.
7. Adjustments. In the event of a breach of any of the representations,
warranties, or covenants set forth in Section 6.1, or in the event any
Adjustment or dispute is asserted by any Account Debtor, Seller shall promptly
advise Buyer and shall, subject to the Buyer's approval, resolve such disputes
and advise Buyer of any adjustments. Unless the disputed Purchased Receivable is
repurchased by Seller and the full Repurchase Amount is paid, Buyer shall remain
the absolute owner of any Purchased Receivable which is subject to Adjustment or
repurchase under Section 4.2 hereof, and any rejected, returned, or recovered
personal property, with the right to take possession thereof at any time. If
such possession is not taken by Buyer, Seller is to resell it for Buyer's
account at Seller's expense with the proceeds made payable to Buyer. While
Seller retains possession of said returned goods, Seller shall segregate said
goods and mark them 'property of Silicon Valley Financial Services.'
8. Security Interest. To secure the prompt payment and performance to Buyer of
all of the Obligations, Seller hereby grants to Buyer a continuing lien upon and
security interest in all of Seller's now existing or hereafter arising rights
and interest in the following , whether now owned or existing or hereafter
created, acquired, or arising, and wherever located (collectively, the
'Collateral'):
(A) All accounts, receivables, contract rights, chattel paper,
instruments, documents, letters of credit, bankers
acceptances, drafts, checks, cash, securities, and general
intangibles (including, without limitation, all claims, causes of
action, deposit accounts, guaranties, rights in and claims under
insurance policies (including rights to premium refunds), rights
to tax refunds, copyrights, patents, trademarks, rights in and
under license agreements, and all other intellectual property);
(B) All inventory, including Seller's rights to any returned or rej-
ected goods, with respect to which Buyer shall have all the
rights of any unpaid seller, including the rights of replevin,
claim and delivery, reclamation, and stoppage in transit;
(C) All monies, refunds and other amounts due Seller, including,
without limitation, amounts due Seller under this Agreement
(including Seller's right of offset and recoupment);
(D) All equipment, machinery, furniture, furnishings, fixtures,
tools, supplies and motor vehicles;
(E) All farm products, crops, timber, minerals and the like
(including oil and gas);
(F) All accessions to, substitutions for, and replacements
of, all of the foregoing;
(G) All books and records pertaining to all of the foregoing;
and
(H) All proceeds of the foregoing, whether due to voluntary
or involuntary disposition, including insurance proceeds. Seller
is not authorized to sell, assign, transfer or otherwise
convey any Collateral without Buyer's prior written consent,
except for the sale of finished inventory in the Sellers usual
course of business. Seller agrees to sign UCC financing
statements, in a form acceptable to Buyer, and any other
instruments and documents requested by Buyer to evidence,
perfect, or protect the interests of Buyer in the Collateral.
Seller agrees to deliver to Buyer the originals of all
instruments, chattel paper and documents evidencing or related to
Purchased Receivables and Collateral.
9. Default. The occurrence of any one or more of the following shall con-
stitute an Event of Default hereunder.
(A) Seller fails to pay any amount owed to Buyer as and when due;
(B) There shall be commenced by or against Seller any voluntary or
involuntary case under the United States Bankruptcy Code, or
any assignment for the benefit of creditors, or appointment of a
receiver or custodian for any of its assets;
(C) Seller shall become insolvent in that its debts are greater
than the fair value of its assets, or Seller is generally not
paying its debts as they become due or is left with unreasonably
small capital;
(D) Any involuntary lien, garnishment, attachment or the like is
issued against or attaches to the Purchased Receivables or any
Collateral;
(E) Seller shall breach any covenant, agreement, warranty, or rep-
resentation set forth herein, and the same is not cured to
Buyer's satisfaction within ten (1 0) days after Buyer has given
Seller oral or written notice thereof; provided, that if such
breach is incapable of being cured it shall constitute an
immediate default hereunder;
(F) Seller is not in compliance with, or otherwise is in default
under, any term of any document, instrument or agreement
evidencing a debt, obligation or liability of any kind or
character of Seller, now or hereafter existing, in favor of Buyer
or any division or affiliate of Silicon Valley Bank, regardless
of whether such debt, obligation or liability is direct or
indirect, primary or secondary, joint, several or joint and
several, or fixed or contingent, together with any and all
renewals and extensions of such debts, obligations and
liabilities, or any part thereof
(G) An event of default shall occur under any guaranty executed
by any guarantor of the Obligations of Seller to Buyer under
this Agreement, or any material provision of any such
guaranty shall for any reason cease to be valid or enforceable or
any such guaranty shall be repudiated or terminated, including by
operation of law;
(H) A default or event of default shall occur under any agreement
between Seller and any creditor of Seller that has entered
into a subordination agreement with Buyer; or
(I) Any creditor that has entered into a subordination agreement with
Buyer shall breach any of the terms of or not comply with such
subordination agreement.
10. Remedies Upon Default. Upon the occurrence of an Event of Default, (1)
without implying any obligation to buy receivables, Buyer may cease buying
receivables or extending any financial accommodations to Seller; (2) all or a
portion of the the obligations shall be, at the option of and upon demand by
Buyer, or with respect to an Event of Default described in Section g(B),
automatically and without notice or demand, due and payable in full; and (3)
Buyer shall have and may exercise all the rights and remedies under this
Agreement and under applicable law, including the rights and remedies of a
secured party under the California Uniform Commercial Code, all the power of
attorney rights described in Section 5 with respect to all Collateral, and the
right to collect, dispose of, sell, lease, use, and realize upon all Purchased
Receivables and all Collateral in any to be reasonable if given five (5) days
prior to the date on or after which the sale may be held. In the event that the
Obligations are accelerated hereunder, Seller shall repurchase all of the
Purchased Receivables as set forth in Section 4.4.
11. Accrual of Interest. If any amount owed by Seller hereunder is not paid when
due, including, without limitation, amounts due under Section 3.5, Repurchase
Amounts, amounts due under Section 12, and any other Obligations, such amounts
shall bear interest at a per annum rate equal to the per annum rate of the
Finance Charges until the earlier of (i) payment in good funds or (ii) entry of
a final judgment thereof, at which time the principal amount of any money
judgment remaining unsatisfied shall accrue interest at the highest rate allowed
by applicable law.
12. Fees, Costs and Expenses: Indemnification. The Seller will pay to Buyer
immediately upon demand all fees, costs and expenses (including fees of
attorneys and professionals and their costs and expenses ) that Buyer incurs or
may from time to time impose in connection with any of the following: (a)
preparing, negotiating . administering, and enforcing this Agreement or any
other agreement executed in connection herewith, including any amendments,
waivers or consents in connection with any of the foregoing, (b) any litigation
or dispute (whether instituted by Buyer, Seller or any other person) in any way
relating to the Purchased Receivables, the Collateral, this Agreement or any
other agreement executed in connection herewith or therewith, (d) enforcing any
rights against Seller or any guarantor, or any Account Debtor, (e) protecting or
enforcing its interest in the Purchased Receivables or the Collateral, (f)
collecting the Purchased Receivables and the Obligations, and (g) the
representation of Buyer in connection with any bankruptcy case or insolvency
proceeding involving Seller, any Purchased Receivable, the Collateral, any
Account Debtor, or any guarantor. Seller shall indemnify and hold Buyer harmless
from and against any and all claims, actions, damages, costs, expenses, and
liabilities of any nature whatsoever arising in connection with any of the
foregoing.
13. Severability, Waiver, and Choice of Law. In the event that any provision of
this Agreement is deemed invalid by reason of law, this Agreement will be
construed as not containing such provision and the remainder of the Agreement
shall remain in full force and effect. Buyer retains all of its rights. even if
h makes an Advance after a default. If Buyer waives a default, R may enforce a
later default. Any consent or waiver under, or amendment of, this Agreement must
be in writing. Nothing contained herein, or any action taken or not taken by
Buyer at any time, shall be construed at any time to be indicative of any
obligation or willingness on the part of Buyer to amend this Agreement or to
grant to Seller any waivers or consents. This Agreement has been transmitted by
Seller to Buyer at Buyer's office in the State of California and has been
executed and accepted by Buyer in the State of California. This Agreement shall
be governed by and interpreted in accordance with the internal laws of the State
of California.
14. Account Collection Services. Certain Account Debtors may require or prefer
that all of Seller's receivables be paid to the same address and/or party, or
Seller and Buyer may agree that all receivables with respect to certain Account
Debtors be paid to one party. In such event Buyer and Seller may agree that
Buyer shall collect all receivables whether owned by Seller or Buyer and
(provided that there does not then exist an Event of Default or event that with
notice, lapse or time or otherwise would constitute an Event of Default, and
subject to Buyer's rights in the Collateral) Buyer agrees to remit to Seller the
amount of the receivables collections it receives with respect to receivables
other than Purchased Receivables. It is understood and agreed by Seller that
this Section does not impose any affirmative duty on Buyer to do any act other
than to turn over such amounts. All such receivables and collections are
Collateral and in the event of Seller's default hereunder, Buyer shall have no
duty to remit collections of Collateral and may apply such collections to the
obligations hereunder and Buyer shall have the rights of a secured party under
the California Uniform Commercial Code.
15. Notices. All notices shall be given to Buyer and Seller at the addresses or
faxes set forth on the first page of this Agreement and shall be deemed to have
been delivered and received: (a) if mailed. three (3) calendar days after
deposited in the United States mail, first class, postage pre-paid, (b) one (1)
calendar day after deposit with an overnight mail or messenger service; or (c)
on the same date of confirmed transmission if sent by hand delivery, telecopy,
telefax or telex.
16. Jury Trial. SELLER AND BUYER EACH HEREBY (a) WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL ON ANY CLAIM OR ACTION ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, ANY RELATED AGREEMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY; (b) RECOGNIZE AND AGREE THAT THE FOREGOING WAIVER CONSTITUTES
A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT; AND (c) REPRESENT AND
WARRANT THAT IT HAS REVIEWED THIS WAIVER, HAS DETERMINED FOR ITSELF THE
NECESSITY TO REVIEW THE SAME WITH ITS LEGAL COUNSEL, AND KNOWINGLY AND
VOLUNTARILY WAIVES ALL RIGHTS TO A JURY TRIAL.
17.Term and Termination. The term of this Agreement shall be for one (1) year
from the date hereof, and from year to year thereafter unless terminated in
writing by Buyer or Seller. Seller and Buyer shall each have the right to
terminate this Agreement at any time. Notwithstanding the foregoing, any
termination of this Agreement shall not affect Buyers security interest in the
Collateral and Buyer's ownership of the Purchased Receivables, and this
Agreement shall continue to be effective, and Buyer's rights and remedies
hereunder shall survive such termination, until all transactions entered into
and Obligations incurred hereunder or in connection herewith have been completed
and satisfied in full. Terms of the letter dated 12/7/95 from G. Michael Walsh
to Mokhtar A. Shawky '\are incorporated into this factoring agreement.
18.Titles and Section Headings. The titles and section headings used herein are
for convenience only and shall not be used in interpreting this Agreement.
19.Other Agreements. The terms and provisions of this Agreement shall not
adversely affect the rights of Buyer or any other division or affiliate of
Silicon Valley Bank under any other document, instrument or agreement. The terms
of such other documents, instruments and agreements shall remain in full force
and effect notwithstanding the execution of this Agreement. In the event of a
conflict between any provision of this Agreement and any provision of any other
document, instrument or agreement between Seller on the one hand, and Buyer or
any other division or affiliate of Silicon Valley Bank on the other hand, Buyer
shall determine in its sole discretion which provision shall apply. Seller
acknowledges specifically that any security agreements, liens and/or security
interests currently securing payment of any obligations of Seller owing to Buyer
or any other division or affiliate of Silicon Valley Bank also secure Seller's
obligations under this Agreement, and are valid and subsisting and are not
adversely affected by execution of this Agreement. Seller further acknowledges
that (a) any collateral under other outstanding security agreements or other
documents between Seller and Buyer or any other division or affiliate of Silicon
Valley Bank secures the obligations of Seller under this Agreement and (b) a
default by Seller under this Agreement constitutes a default under other
outstanding agreements between Seller and Buyer or any other division or
affiliate of Silicon Valley Bank.
IN WITNESS have executed this Agreement on the day and year above written.
SELLER: Source Scientific, Inc. SELLER: Alton Instruments
Corporation
By: s/M. A. Shawky By: s/M. A. Shawky
Title: C.F.O. Title: C.F.O.
SELLER: Source Scientific Systems, Inc. SELLER: Wespercorp
By: s/M. A. Shawky By: s/M. A. Shawky
Title: C.F.O. Title: C.F.O.
BUYER: SILICON VALLEY FINANCIAL SERVICES
A division of Silicon Valley Bank
By:
Title:
Silicon Valley Financial Services
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
(408) 654-1000 - Fax (408) 980-641 0
FACTORING AGREEMENT
This Factoring Agreement (the 'Agreement') is made on this Eight day of
December, 1995, by and between Silicon Valley Financial Services (a division of
Silicon Valley Bank) ("Buyer") having a place of business at the address
specified above and Source Scientific, Inc., a California corporation, (the
"Parent"), and its wholly owned subsidiaries, Alton Instruments Corporation,
Source Scientific Systems, Inc. and Wespercorp (collectively the
'Subsidiaries'). The Parent and the Subsidiaries are jointly and severally
referred to herein as the 'Seller' having its principal place of business and
chief executive office at
Street Address: 7390 Lincoln Way
City: Garden Grove
County: Orange
State: California
Zip code: 92641
Fax: 714/891-1229
1. Definitions. When used herein, the following terms shall have the follow-
ing meanings.
1.1. 'Account Balance' shall mean, on any given day, the gross amount of
all Purchased Receivables unpaid on that day.
1.2. 'Account Debtor' shall have the meaning set forth in the California
Uniform Commercial Code and shall include any person liable on any Purchased
Receivable, including without limitation, any guarantor of the Purchased
Receivable and any issuer of a letter of credit or banker's acceptance.
1.3. 'Adjustments" shall mean all discounts, allowances, returns,
disputes, counter- claims, offsets, defenses, rights of recoupment, rights of
return, warranty claims, or short payments, asserted by or on behalf of any
Account Debtor with respect to any Purchased Receivable.
1.4. 'Administrative Fee' shall have the meaning as set forth in Section
3.3 hereof.
1.5. 'Advance' shall have the meaning set forth in Section 2.2 hereof.
1.6. 'Collateral' shall have the meaning set forth in Section 8 hereof.
1.7. 'Collections' shall mean all good funds received by Buyer from or
on behalf of an Account Debtor with respect to Purchased Receivables.
1.8 'Compliance Certificate' shall mean a certificate, in a form
provided by Buyer to Seller, which contains the certification of the chief
financial officer of Seller that, among other things, the representations and
warranties set forth in this Agreement are true and correct as of the date such
certificate is delivered.
1.9. 'Event of Default" shall have the meaning set forth in Section 9
hereof.
1.10. 'Finance Charges' shall have the meaning set forth in Section 3.2
hereof.
1.11. 'Invoice Transmittal' shall mean a writing signed by an authorized
representative of Seller which accurately identifies the receivables which
Buyer, at its election, may purchase, and includes for each such receivable the
correct amount owed by the Account Debtor, the name and address of the Account
Debtor, the invoice number, the invoice date and the account code.
1.12. 'Obligations' shall mean all advances, financial accommodations,
liabilities, obligations, covenants and duties owing, arising, due or payable by
Seller to Buyer of any kind or nature, present or future, arising under or in
connection with this Agreement or under any other document, instrument or
agreement, whether or not evidenced by any note, guarantee or other instrument,
whether arising on account or by overdraft, whether direct or indirect
(including those acquired by assignment) absolute or contingent, primary or
secondary, due or to become due, now owing or hereafter arising, and however
acquired; including, without limitation, all Advances, Finance Charges,
Administrative Fees, interest, Repurchase Amounts, fees, expenses, professional
fees and attorneys' fees and any other sums chargeable to Seller hereunder or
otherwise.
1.13. 'Purchased Receivables' shall mean all those accounts, receivables,
chattel paper, instruments, contract rights, documents, general intangibles,
letters of credit, drafts, bankers acceptances, and rights to payment, and all
proceeds thereof (all of the foregoing being referred to as 'receivables'),
arising out of the invoices and other agreements identified on or delivered with
any Invoice Transmittal delivered by Seller to Buyer which Buyer elects to
purchase and for which Buyer makes an Advance.
1.14. 'Refund' shall have the meaning set forth in Section 3.5 hereof.
1.15. 'Reserve" shall have the meaning set forth in Section 2.4 hereof.
1.16. 'Repurchase Amount" shall have the meaning set forth in Section 4.2
hereof.
1.17. 'Reconciliation Date' shall mean the last calendar day of each
Reconciliation Period.
1.18. 'Reconciliation Period' shall mean each calendar month of every
year.
2. Purchase and Sale of Receivables.
2.1. Offer to Sell Receivables. During the term hereof, and provided
that there does not then exist any Event of Default or any event that with
notice, lapse of time or otherwise would constitute an Event of Default, Seller
may request that Buyer purchase receivables and Buyer may, in its sole
discretion, elect to purchase receivables. Seller shall deliver to Buyer an
Invoice Transmittal with respect to any receivable for which a request for
purchase is made. An authorized representative of Seller shall sign each Invoice
Transmittal delivered to Buyer. Buyer shall be entitled to rely on all the
information provided by Seller to Buyer on or with the Invoice Transmittal and
to rely on the signature on any Invoice Transmittal as an authorized signature
of Seller.
2.2. Acceptance of Receivables. Buyer shall have no obligation to pur-
chase any receivable listed on an Invoice Transmittal. Buyer may exercise its
sole discretion in approving the credit of each Account Debtor before buying any
receivable. Upon acceptance by Buyer of all or any of the receivables described
on any Invoice Transmittal, Buyer shall pay to Seller 80 (%) percent of the face
amount of each receivable Buyer desires to purchase. Such payment shall be the
'Advance' with respect to such receivable. Buyer may, from time to time, in its
sole discretion, change the percentage of the Advance. Upon Buyer's acceptance
of the receivable and payment to Seller of the Advance, the receivable shall
become a 'Purchased Receivable.' It shall be a condition to each Advance that
(i) all of the representations and warranties set forth in Section 6 of this
Agreement be true and correct on and as of the date of the related Invoice
Transmittal and on and as of the date of such Advance as though made at and as
of each such date, and (ii) no Event of Default or any event or condition that
with notice, lapse of time or otherwise would constitute an Event of Default
shall have occurred and be continuing, or would result from such Advance.
Notwithstanding the foregoing, in no event shall the aggregate amount of all
Purchased Receivables outstanding at any time exceed Two Hundred Fifty Thousand
and No/100 '*** Dollars ($250,000.00).
2.3. Effectiveness of Sale to Buyer. Effective upon Buyer's payment
of an Advance, and for and in consideration therefor and in consideration of the
covenants of this Agreement, Seller hereby absolutely sells, transfers and
assigns to Buyer, all of Seller's right, title and interest in and to each
Purchased Receivable and all Monies due or which may become due on or with
respect to such Purchased Receivable. Buyer shall be the absolute owner of each
Purchased Receivable. Buyer shall have, with respect to any goods related to the
Purchased Receivable, all the rights and remedies of an unpaid seller under the
California Uniform Commercial Code and other applicable law, including the
rights of replevin, claim and delivery, reclamation and stoppage in transit.
2.4. Establishment of a Reserve. Upon the purchase by Buyer of each Pur-
chased Receivable, Buyer shall establish a reserve. The reserve shall be the
amount by which the face amount of the Purchased Receivable exceeds the Advance
on that Purchased Receivable (the 'Reserve'); provided, the Reserve with respect
to all Purchased Receivables outstanding at any one time shall be an amount not
less than 20 (%) percent of the Account Balance at that time and may be set at a
higher percentage at Buyer's sole discretion. The reserve shall be a book
balance maintained on the records of Buyer and shall not be a segregated fund.
3. Collections, Charges and Remittances.
3.1. Collections. Upon receipt by Buyer of Collections, Buyer shall
promptly credit such Collections to Seller's Account Balance on a daily basis;
provided, that if Seller is in default under this Agreement, Buyer shall apply
all Collections to Seller's Obligations hereunder in such order and manner as
Buyer may determine. If an item of collection is not honored or Buyer does not
receive good funds for any reason, the amount shall be included in the Account
Balance as if the Collections had not been received and Finance Charges under
Section 3.2 shall accrue thereon.
3.2. Finance Charges. On each Reconciliation Date Seller shall pay to
Buyer a finance charge in an amount equal to 2.5(%) percent per month of the
average daily Account Balance outstanding during the applicable Reconciliation
Period (the 'Finance Charges'). Buyer shall deduct the accrued Finance Charges
from the Reserve as set forth in Section 3.5 below.
3.3. Administrative Fee. On each Reconciliation Date Seller shall pay
to Buyer an Administrative Fee equal to 1.0(%) percent of the face amount of
each Purchased Receivable first purchased during that Reconciliation Period (the
"Administrative Fee")- Buyer shall deduct the Administrative Fee from the
Reserve as set forth in Section 3.5 below.
3.4. Accounting. Buyer shall prepare and send to Seller after the close
of business for each Reconciliation Period, an accounting of the transactions
for that Reconciliation Period, including the amount of all Purchased
Receivables, all Collections, Adjustments, Finance Charges, and the
Administrative Fee. The accounting shall be deemed correct and conclusive unless
Seller makes written objection to Buyer within thirty (30) days after the Buyer
mails the accounting to Seller.
3.5. Refund to Seller. Provided that there does not then exist an Event
of Default or any event or condition that with notice, lapse of time or
otherwise would constitute an Event of Default, Buyer shall refund to Seller by
check after the Reconciliation Date, the amount, if any, which Buyer owes to
Seller at the end of the Reconciliation Period according to the accounting
prepared by Buyer for that Reconciliation Period (the 'Refund'). The Refund
shall be an amount equal to:
(A) (1) The Reserve as of the beginning of that Reconciliation
Period, plus
(2) The Reserve created for each Purchased Receivable purchased
during that Reconciliation Period, minus
(B) The total for that Reconciliation Period of: (1) the Admini-
strative Fee; (2) Finance Charges; (3) Adjustments; (4) Repur-
chase Amounts, to the extent Buyer has agreed to accept pay-
ment thereof by deduction from the Refund; (5) the Reserve for
the Account Balance as of the first day of the following Recon-
ciliation Period in the minimum percentage set forth in Section
2.4 hereof; and (6) all amounts due, including professional fees
and expenses, as set forth in Section 12 for which oral or
written demand has been made by Buyer to Seller during that
Reconciliation Period to the extent Buyer has agreed to accept
payment thereof by eduction from the Refund. In the event the
formula set forth in this Section 3.5 results in an amount due
to Buyer from Seller, Seller shall make such payment in the
same manner as set forth in Section 4.3 hereof for repurchases.
If the formula set forth in this Section 3.5 results in an
amount due to Seller from Buyer, Buyer shall make such payment
by check, subject to Buyer's rights under Section 4.3 and
Buyer's rights of offset and recoupment.
4. Recourse and Repurchase Obligations.
4.1. Recourse. Buyer's acquisition of Purchased Receivables from Seller
shall be with full recourse against Seller. In the event the Obligations exceed
the amount of Purchased Receivables and Collateral, Seller shall be liable for
any deficiency.
4.2. Seller's Agreement to Repurchase. Seller agrees to pay to Buyer on
demand, the full face amount, or any unpaid portion, of any Purchased
Receivable:
(A) which remains unpaid ninety (90) calendar days after the
invoice date; or
(B) which is owed by any Account Debtor who has filed, or has had
filed against it, any bankruptcy case, assignment for the
benefit of creditors, receivership, or insolvency proceed-
ing or who has become insolvent (as defined in the United
States Bankruptcy Code) or who is generally not paying its
debts as such debts become due; or
(C) with respect to which there has been any breach of warranty
or representation set forth in Section 6 hereof or any breach
of any covenant contained in this Agreement; or
(D) with respect to which the Account Debtor asserts any discount,
allowance, return, dispute, counterclaim, offset, defense,
right of recoupment, right of return, warranty claim, or short
payment; together with all reasonable attorneys' and pro-
fessional fees and expenses andall court costs incurred by Buy-
er in collecting such Purchased receivable and/or enforcing its
rights under, or collecting amounts owed by Seller in
connection with, this Agreement (collectively, the 'Repurchase
Amount').
4.3. Seller's Payment of the Repurchase Amount or Other Amounts Due
Buyer. When any Repurchase Amount or other amount owing to Buyer becomes due,
Buyer shall inform Seller of the manner of payment which may be any one or more
of the following in Buyer's sole discretion: (a) in cash immediately upon demand
therefor; (b) by delivery of substitute invoices and an Invoice Transmittal
acceptable to Buyer which shall thereupon become Purchased Receivables; (c) by
adjustment to the Reserve pursuant to Section 3.5 hereof; (d) by deduction from
or offset against the Refund that would otherwise be due and payable to Seller;
(e) by deduction from or offset against the amount that otherwise would be
forwarded to Seller in respect of any further Advances that may be made by
Buyer; or (o by any combination of the foregoing as Buyer may from time to time
choose.
4.4. Seller's Agreement to Repurchase All Purchased Receivables. Upon
and after the occurrence of an Event of Default, Seller shall, upon Buyer's
demand (or, in the case of an Event of Default under Section 9(B), immediately
without notice or demand from Buyer) repurchase all the Purchased Receivables
then outstanding , or such portion thereof as Buyer may demand. Such demand may,
at Buyer's option, include and Seller shall pay to Buyer immediately upon
demand, cash in an amount equal to the Advance with respect to each Purchased
Receivable then outstanding together with all accrued Finance Charges,
Adjustments, Administrative Fees, attorneys and professional fees, court costs
and expenses as provided for herein, and any other Obligations. Upon receipt of
payment in full of the Obligations, Buyer shall immediately instruct Account
Debtors to pay Seller directly, and return to Seller any Refund due to Seller.
For the purpose of calculating any Refund due under this Section only, the
Reconciliation Date shall be deemed to be the date Buyer receives payment in
good funds of all the Obligations as provided in this Section 4.4.
5. Power of Attorney. Seller does hereby irrevocably appoint Buyer and its
successors and assigns as Seller's true and lawful attorney in fact, and hereby
authorizes Buyer, regardless of whether there has been an Event of Default, (a)
to sell, lawful attorney in fact, and hereby authorizes Buyer, regardless of
whether there has been an Event of Default, (a) to sell, assign, transfer,
pledge, compromise, or discharge the whole or any part of the Purchased
Receivables; (b) to demand, collect, receive, sue, and give releases to any
Account Debtor for the monies due or which may become due upon or with respect
to the Purchased Receivables and to compromise, prosecute, or defend any action,
claim, case or proceeding relating to the Purchased Receivables, including the
filing of a claim or the voting of such claims in any bankruptcy case, all in
Buyer's name or Seller's name, as Buyer may choose; (c) to prepare, file and
sign Sellers name on any notice, claim, assignment, demand, draft, or notice of
or satisfaction of lien or mechanics' lien or similar document with respect to
Purchased Receivables; (d) to notify all Account Debtors with respect to the
Purchased Receivables to pay Buyer directly; (e) to receive, open, and dispose
of all mail addressed to Seller for the purpose of collecting the Purchased
Receivables; (f) to endorse Sellers name on any checks or other forms of payment
on the Purchased Receivables; (g) to execute on behalf of Seller any and all
instruments, documents, financing statements and the like to perfect Buyers
interests in the Purchased Receivables and Collateral; and (h) to do all acts
and things necessary or expedient, in furtherance of any such purposes. If Buyer
receives a check or item which is payment for both a Purchased Receivable and
another receivable, the funds shall first be applied to the Purchased Receivable
and, so long as there does not exist an Event of Default or an event that with
notice, lapse of time or otherwise would constitute an Event of Default, the
excess shall be remitted to Seller. Upon the occurrence and continuation of an
Event of Default, all of the power of attorney rights granted by Seller to Buyer
hereunder shall be applicable with respect to all Purchased Receivables and all
Collateral.
6. Representations, Warranties and Covenants.
6.1. Receivables' Warranties, Representations and Covenants. To induce Buyer
to buy receivables and to render its services to Seller, and with full knowledge
that the truth and accuracy of the following are being relied upon by the Buyer
in determining whether to accept receivables as Purchased Receivables, Seller
represents, warrants, covenants and agrees, with respect to each Invoice
Transmittal delivered to Buyer and each receivable described therein, that:
(A) Seller is the absolute owner of each receivable set forth in the
Invoice Transmittal and has full legal right to sell, transfer
and assign such receivables;
(B) The correct amount of each receivable is as set forth in the
Invoice Transmittal and is not in dispute;
(C) The payment of each receivable is not contingent upon the
fulfillment of any obligation or contract, past or future and any
and all obligations required of the Seller have been fulfilled
as of the date of the Invoice Transmittal;
(D) Each receivable set forth on the Invoice Transmittal is based on
an actual sale and delivery of goods and/or services actually
rendered, is presently due and owing to Seller, is not past due
or in default, has not been previously sold, assigned, trans-
ferred, or pledged, and is free of any and all liens, securi-
ty interests and encumbrances other than liens, security interests
or encumbrances in favor of Buyer or any other division or affili-
ate of Silicon Valley Bank;
(E) There are no defenses, offsets, or counterclaims against any of
the receivables, and no agreement has been made under which the
Account Debtor may claim any deduction or discount, except as
otherwise stated in the Invoice Transmittal;
(F) Each Purchased Receivable shall be the property of the Buyer and
shall be collected by Buyer, but if for any reason it should
be paid to Seller, Seller shall promptly notify Buyer of such pay-
ment, shall hold any checks, drafts, or monies so received in
trust for the benefit of Buyer, and shall promptly transfer and
deliver the same to the Buyer;
(G) Buyer shall have the right of endorsement, and also the right to
require endorsement by Seller, on all payments received in connec-
tion with each Purchased Receivable and any proceeds of Coll-
ateral;
(H) Seller, and to Seller's best knowledge, each Account Debtor set
forth in the Invoice Transmittal, are and shall remain solvent
as that term is defined in the United States Bankruptcy Code
and the California Uniform Commercial Code, and no such Account
Debtor has filed or had filed against it a voluntary or involunt-
ary petition for relief under the United States Bankruptcy Code;
(I) Each Account Debtor named on the Invoice Transmittal will not
object to the payment for, or the quality or the quantity of the
subject matter of, the receivable and is liable for the amount set
forth on the Invoice Transmittal;
(J) Each Account Debtor shall promptly be notified,after acceptance by
Buyer, that the Purchased Receivable has been transferred to and
is payable to Buyer, and Seller shall not take or permit any ac-
tion to countermand such notification; and
(K) All receivables forwarded to and accepted by Buyer after the
date hereof, and thereby becoming Purchased Receivables,
shall omply with each and every one of the foregoing represen-
tations, warranties, covenants and agreements referred to above in
this Section 6.1.
6.2. Additional Warranties, Representations and Covenants. In addition to the
foregoing warranties, representations and covenants, to induce Buyer to buy
receivables and to render its services to Seller, Seller hereby represents,
warrants, covenants and agrees that:
(A) Seller will not assign, transfer, sell, or grant , or permit any
lien or security interest in any Purchased Receivables or Collat-
eral to or in favor of any other party, without Buyers prior
written consent;
(B) The Seller's name, form of organization, chief executive office,
and the place where the records concerning all Purchased
Receivables and Collateral are kept is set forth at the beginning
of this Agreement, Collateral is located only at the location set
forth in the beginning of this Agreement, or, if located at any
additional location, as set forth on a schedule attached to this
Agreement, and Seller will give Buyer at least thirty (30)
days prior written notice if such name, organization, chief
executive office or other locations of Collateral or records
concerning Purchased Receivables or Collateral is changed or
added and shall execute any documents necessary to perfect
Buyer's interest in the Purchased Receivables and the Collateral;
(C) Seller shall (i) pay all of its normal gross payroll for employ-
ees, and all federal and state taxes, as and when due,
including without limitation all payroll and withholding taxes
and state sales taxes: (ii) deliver at any time and from time to
time at Buyer's request, evidence satisfactory to Buyer that all
such amounts have been paid to the proper taxing authorities: and
(iii) if requested by Buyer, pay its payroll and related taxes
through a bank or an independent payroll service acceptable to
Buyer.
(D) Seller has not, as of the time Seller delivers to Buyer an
Invoice Transmittal, or as of the time Seller accepts any
Advance from Buyer, filed a voluntary petition for relief under
the United States Bankruptcy Code or had filed against it an
involuntary petition for relief;
(E) If Seller owns, holds or has any interest in, any copyrights
(whether registered, or unregistered), patents or trade-
marks, and licenses of any of the foregoing, such interest
has been disclosed to Buyer and is specifically listed and
identified on a schedule to this Agreement, and Seller shall
immediately notify Buyer if Seller hereafter obtains any interest
in any additional copyrights, patents, trademarks or licenses
that are significant in value or are material to the conduct of
its business; and (F) Seller shall provide Buyer with a
Compliance Certificate (i) on a quarterly basis to be received by
Buyer no later than the fifth calendar day following each
calendar quarter, and; (ii) on a more frequent or other basis if
and as requested by Buyer.
7. Adjustments. In the event of a breach of any of the representations,
warranties, or covenants set forth in Section 6.1, or in the event any
Adjustment or dispute is asserted by any Account Debtor, Seller shall promptly
advise Buyer and shall, subject to the Buyer's approval, resolve such disputes
and advise Buyer of any adjustments. Unless the disputed Purchased Receivable is
repurchased by Seller and the full Repurchase Amount is paid, Buyer shall remain
the absolute owner of any Purchased Receivable which is subject to Adjustment or
repurchase under Section 4.2 hereof, and any rejected, returned, or recovered
personal property, with the right to take possession thereof at any time. If
such possession is not taken by Buyer, Seller is to resell it for Buyer's
account at Seller's expense with the proceeds made payable to Buyer. While
Seller retains possession of said returned goods, Seller shall segregate said
goods and mark them 'property of Silicon Valley Financial Services.'
8. Security Interest. To secure the prompt payment and performance to Buyer of
all of the Obligations, Seller hereby grants to Buyer a continuing lien upon and
security interest in all of Seller's now existing or hereafter arising rights
and interest in the following , whether now owned or existing or hereafter
created, acquired, or arising, and wherever located (collectively, the
'Collateral'):
(A) All accounts, receivables, contract rights, chattel paper,
instruments, documents, letters of credit, bankers
acceptances, drafts, checks, cash, securities, and general
intangibles (including, without limitation, all claims, causes of
action, deposit accounts, guaranties, rights in and claims under
insurance policies (including rights to premium refunds), rights
to tax refunds, copyrights, patents, trademarks, rights in and
under license agreements, and all other intellectual property);
(B) All inventory, including Seller's rights to any returned or rej-
ected goods, with respect to which Buyer shall have all the
rights of any unpaid seller, including the rights of replevin,
claim and delivery, reclamation, and stoppage in transit;
(C) All monies, refunds and other amounts due Seller, including,
without limitation, amounts due Seller under this Agreement
(including Seller's right of offset and recoupment);
(D) All equipment, machinery, furniture, furnishings, fixtures,
tools, supplies and motor vehicles;
(E) All farm products, crops, timber, minerals and the like
(including oil and gas);
(F) All accessions to, substitutions for, and replacements
of, all of the foregoing;
(G) All books and records pertaining to all of the foregoing;
and
(H) All proceeds of the foregoing, whether due to voluntary
or involuntary disposition, including insurance proceeds. Seller
is not authorized to sell, assign, transfer or otherwise
convey any Collateral without Buyer's prior written consent,
except for the sale of finished inventory in the Sellers usual
course of business. Seller agrees to sign UCC financing
statements, in a form acceptable to Buyer, and any other
instruments and documents requested by Buyer to evidence,
perfect, or protect the interests of Buyer in the Collateral.
Seller agrees to deliver to Buyer the originals of all
instruments, chattel paper and documents evidencing or related to
Purchased Receivables and Collateral.
9. Default. The occurrence of any one or more of the following shall con-
stitute an Event of Default hereunder.
(A) Seller fails to pay any amount owed to Buyer as and when due;
(B) There shall be commenced by or against Seller any voluntary or
involuntary case under the United States Bankruptcy Code, or
any assignment for the benefit of creditors, or appointment of a
receiver or custodian for any of its assets;
(C) Seller shall become insolvent in that its debts are greater
than the fair value of its assets, or Seller is generally not
paying its debts as they become due or is left with unreasonably
small capital;
(D) Any involuntary lien, garnishment, attachment or the like is
issued against or attaches to the Purchased Receivables or any
Collateral;
(E) Seller shall breach any covenant, agreement, warranty, or rep-
resentation set forth herein, and the same is not cured to
Buyer's satisfaction within ten (1 0) days after Buyer has given
Seller oral or written notice thereof; provided, that if such
breach is incapable of being cured it shall constitute an
immediate default hereunder;
(F) Seller is not in compliance with, or otherwise is in default
under, any term of any document, instrument or agreement
evidencing a debt, obligation or liability of any kind or
character of Seller, now or hereafter existing, in favor of Buyer
or any division or affiliate of Silicon Valley Bank, regardless
of whether such debt, obligation or liability is direct or
indirect, primary or secondary, joint, several or joint and
several, or fixed or contingent, together with any and all
renewals and extensions of such debts, obligations and
liabilities, or any part thereof
(G) An event of default shall occur under any guaranty executed
by any guarantor of the Obligations of Seller to Buyer under
this Agreement, or any material provision of any such
guaranty shall for any reason cease to be valid or enforceable or
any such guaranty shall be repudiated or terminated, including by
operation of law;
(H) A default or event of default shall occur under any agreement
between Seller and any creditor of Seller that has entered
into a subordination agreement with Buyer; or
(I) Any creditor that has entered into a subordination agreement with
Buyer shall breach any of the terms of or not comply with such
subordination agreement.
10. Remedies Upon Default. Upon the occurrence of an Event of Default, (1)
without implying any obligation to buy receivables, Buyer may cease buying
receivables or extending any financial accommodations to Seller; (2) all or a
portion of the the obligations shall be, at the option of and upon demand by
Buyer, or with respect to an Event of Default described in Section g(B),
automatically and without notice or demand, due and payable in full; and (3)
Buyer shall have and may exercise all the rights and remedies under this
Agreement and under applicable law, including the rights and remedies of a
secured party under the California Uniform Commercial Code, all the power of
attorney rights described in Section 5 with respect to all Collateral, and the
right to collect, dispose of, sell, lease, use, and realize upon all Purchased
Receivables and all Collateral in any to be reasonable if given five (5) days
prior to the date on or after which the sale may be held. In the event that the
Obligations are accelerated hereunder, Seller shall repurchase all of the
Purchased Receivables as set forth in Section 4.4.
11. Accrual of Interest. If any amount owed by Seller hereunder is not paid when
due, including, without limitation, amounts due under Section 3.5, Repurchase
Amounts, amounts due under Section 12, and any other Obligations, such amounts
shall bear interest at a per annum rate equal to the per annum rate of the
Finance Charges until the earlier of (i) payment in good funds or (ii) entry of
a final judgment thereof, at which time the principal amount of any money
judgment remaining unsatisfied shall accrue interest at the highest rate allowed
by applicable law.
12. Fees, Costs and Expenses: Indemnification. The Seller will pay to Buyer
immediately upon demand all fees, costs and expenses (including fees of
attorneys and professionals and their costs and expenses ) that Buyer incurs or
may from time to time impose in connection with any of the following: (a)
preparing, negotiating . administering, and enforcing this Agreement or any
other agreement executed in connection herewith, including any amendments,
waivers or consents in connection with any of the foregoing, (b) any litigation
or dispute (whether instituted by Buyer, Seller or any other person) in any way
relating to the Purchased Receivables, the Collateral, this Agreement or any
other agreement executed in connection herewith or therewith, (d) enforcing any
rights against Seller or any guarantor, or any Account Debtor, (e) protecting or
enforcing its interest in the Purchased Receivables or the Collateral, (f)
collecting the Purchased Receivables and the Obligations, and (g) the
representation of Buyer in connection with any bankruptcy case or insolvency
proceeding involving Seller, any Purchased Receivable, the Collateral, any
Account Debtor, or any guarantor. Seller shall indemnify and hold Buyer harmless
from and against any and all claims, actions, damages, costs, expenses, and
liabilities of any nature whatsoever arising in connection with any of the
foregoing.
13. Severability, Waiver, and Choice of Law. In the event that any provision of
this Agreement is deemed invalid by reason of law, this Agreement will be
construed as not containing such provision and the remainder of the Agreement
shall remain in full force and effect. Buyer retains all of its rights. even if
h makes an Advance after a default. If Buyer waives a default, R may enforce a
later default. Any consent or waiver under, or amendment of, this Agreement must
be in writing. Nothing contained herein, or any action taken or not taken by
Buyer at any time, shall be construed at any time to be indicative of any
obligation or willingness on the part of Buyer to amend this Agreement or to
grant to Seller any waivers or consents. This Agreement has been transmitted by
Seller to Buyer at Buyer's office in the State of California and has been
executed and accepted by Buyer in the State of California. This Agreement shall
be governed by and interpreted in accordance with the internal laws of the State
of California.
14. Account Collection Services. Certain Account Debtors may require or prefer
that all of Seller's receivables be paid to the same address and/or party, or
Seller and Buyer may agree that all receivables with respect to certain Account
Debtors be paid to one party. In such event Buyer and Seller may agree that
Buyer shall collect all receivables whether owned by Seller or Buyer and
(provided that there does not then exist an Event of Default or event that with
notice, lapse or time or otherwise would constitute an Event of Default, and
subject to Buyer's rights in the Collateral) Buyer agrees to remit to Seller the
amount of the receivables collections it receives with respect to receivables
other than Purchased Receivables. It is understood and agreed by Seller that
this Section does not impose any affirmative duty on Buyer to do any act other
than to turn over such amounts. All such receivables and collections are
Collateral and in the event of Seller's default hereunder, Buyer shall have no
duty to remit collections of Collateral and may apply such collections to the
obligations hereunder and Buyer shall have the rights of a secured party under
the California Uniform Commercial Code.
15. Notices. All notices shall be given to Buyer and Seller at the addresses or
faxes set forth on the first page of this Agreement and shall be deemed to have
been delivered and received: (a) if mailed. three (3) calendar days after
deposited in the United States mail, first class, postage pre-paid, (b) one (1)
calendar day after deposit with an overnight mail or messenger service; or (c)
on the same date of confirmed transmission if sent by hand delivery, telecopy,
telefax or telex.
16. Jury Trial. SELLER AND BUYER EACH HEREBY (a) WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL ON ANY CLAIM OR ACTION ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, ANY RELATED AGREEMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY; (b) RECOGNIZE AND AGREE THAT THE FOREGOING WAIVER CONSTITUTES
A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT; AND (c) REPRESENT AND
WARRANT THAT IT HAS REVIEWED THIS WAIVER, HAS DETERMINED FOR ITSELF THE
NECESSITY TO REVIEW THE SAME WITH ITS LEGAL COUNSEL, AND KNOWINGLY AND
VOLUNTARILY WAIVES ALL RIGHTS TO A JURY TRIAL.
17.Term and Termination. The term of this Agreement shall be for one (1) year
from the date hereof, and from year to year thereafter unless terminated in
writing by Buyer or Seller. Seller and Buyer shall each have the right to
terminate this Agreement at any time. Notwithstanding the foregoing, any
termination of this Agreement shall not affect Buyers security interest in the
Collateral and Buyer's ownership of the Purchased Receivables, and this
Agreement shall continue to be effective, and Buyer's rights and remedies
hereunder shall survive such termination, until all transactions entered into
and Obligations incurred hereunder or in connection herewith have been completed
and satisfied in full. Terms of the letter dated 12/7/95 from G. Michael Walsh
to Mokhtar A. Shawky '\are incorporated into this factoring agreement.
18.Titles and Section Headings. The titles and section headings used herein are
for convenience only and shall not be used in interpreting this Agreement.
19.Other Agreements. The terms and provisions of this Agreement shall not
adversely affect the rights of Buyer or any other division or affiliate of
Silicon Valley Bank under any other document, instrument or agreement. The terms
of such other documents, instruments and agreements shall remain in full force
and effect notwithstanding the execution of this Agreement. In the event of a
conflict between any provision of this Agreement and any provision of any other
document, instrument or agreement between Seller on the one hand, and Buyer or
any other division or affiliate of Silicon Valley Bank on the other hand, Buyer
shall determine in its sole discretion which provision shall apply. Seller
acknowledges specifically that any security agreements, liens and/or security
interests currently securing payment of any obligations of Seller owing to Buyer
or any other division or affiliate of Silicon Valley Bank also secure Seller's
obligations under this Agreement, and are valid and subsisting and are not
adversely affected by execution of this Agreement. Seller further acknowledges
that (a) any collateral under other outstanding security agreements or other
documents between Seller and Buyer or any other division or affiliate of Silicon
Valley Bank secures the obligations of Seller under this Agreement and (b) a
default by Seller under this Agreement constitutes a default under other
outstanding agreements between Seller and Buyer or any other division or
affiliate of Silicon Valley Bank.
IN WITNESS have executed this Agreement on the day and year above written.
SELLER: Source Scientific, Inc. SELLER: Alton Instruments
Corporation
By: s/M. A. Shawky By: s/M. A. Shawky
Title: C.F.O. Title: C.F.O.
SELLER: Source Scientific Systems, Inc. SELLER: Wespercorp
By: s/M. A. Shawky By: s/M. A. Shawky
Title: C.F.O. Title: C.F.O.
BUYER: SILICON VALLEY FINANCIAL SERVICES
A division of Silicon Valley Bank
By:
Title:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, ASSIGNED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED OR QUALIFIED THEREUNDER OR UNLESS AN
EXEMPTION THEREFROM IS AVAILABLE.
SOURCE SCIENTIFIC, INC.
12.0% Convertible Debenture
Debenture No. XXXXX
$XXX,000.00 Debenture Date: February ___, 1996.
FOR VALUE RECEIVED, Source Scientific, Inc. (herein the "Company"), a
corporation organized and existing under the laws of California with its
principal office at 7390 Lincoln Way, Garden Grove, California 92641, hereby
promises to pay to or the registered assigns, (the "Holder") the principal sum
of
($XXX,000.00) on February 1, 1998, in the manner more specifically set forth
below. Interest at the rate of twelve percent (12.0%) per annum (computed on the
basis of a 365-day year) on the unpaid balance of principal thereof shall be
paid on the first and second anniversaries of the Debenture Date in the manner
set forth below.
Upon the first anniversary of the Debenture Date, all accrued interest
shall be added to the initial principal balance of this Debenture. Upon the
second anniversary of the Debenture Date, all interest that shall have accrued
during the year then ended shall be payable in Common Stock at the Conversion
Price then in effect; provided that such accrued interest shall be payable in
cash only if the Holder hereof shall have requested in writing such form of
payment not earlier than forty-five (45) days before such second anniversary and
not later than fifteen (15) days before such second anniversary.
The Company shall have the option to prepay in full the principal
amount of this Debenture from time to time, along with interest accrued on the
amount prepaid to the prepayment date, at any time after giving the Holder a
thirty (30) day written notice prior to prepayment. Upon receipt of any such
notice, the Holder has the right to convert the Debenture into Common Stock
within the thirty (30) day period, at the conversion rate set forth in paragraph
2.1 hereof.
In the event of a dissolution, liquidation, sale or merger of the
Company in which the Company is not the surviving entity, the outstanding
principal amount of the Debenture plus any accrued and unpaid interest shall
become due and payable immediately, in the manner set forth below, unless
otherwise agreed to in writing with the Holder. The Company shall be considered
the surviving corporation following a merger or consolidation involving the
Company if the holders of outstanding voting securities of the Company
immediately prior to the merger or consolidation own equity securities
possessing more than fifty percent (50%) of the voting power of the resulting
corporation existing following the merger or consolidation; provided, however,
that (i) in making the determination of ownership of equity securities by the
shareholders of the resulting corporation existing immediately after a merger or
consolidation, equity securities which the shareholders of the Company owned
immediately before the merger or consolidation as shareholders of another party
to the transaction shall be disregarded; and (ii) voting securities of a
corporation shall be calculated by assuming the conversion of all equity
securities convertible (immediately or at some future time) into shares entitled
to vote, including outstanding warrants and options.
<PAGE>
1. GENERAL.
1.1 Definitions.
(a) Holder. The term "Holder" shall mean the registered holder of
the Debenture.
(b) Maturity Date. Date upon which the principal and any accrued,
but unpaid cash interest is due.
(c) Debenture Date. Date, as noted above, upon which the Debenture
is executed by the Company in receipt of funds for the full amount of the
Debenture.
(d) Common Stock. The term "Common Stock" as used in this Debenture
shall include any class of capital stock of the Company, now or hereafter
authorized, the right of which to share in distributions of earnings and assets
of the Company is without limit as to any amount or percentage; provided,
however, that Common Stock issuable upon conversion of this Debenture shall
include only shares of Common Stock of the Company authorized on the date hereof
and Common Stock or other securities issued in substitution or exchange for the
presently authorized Common Stock in connection with a reorganization,
reclassification, merger or sale of assets.
(e) Conversion Price. The term "Conversion Price" shall mean the
conversion price per share to be applied upon Conversion and shall be the
conversion price in effect at the date of delivery of notice of conversion to
the company determined as provided herein.
(f) Registrable Securities. The term "Registrable Securities" shall
mean (i) Common Stock issuable upon conversion of the Debenture; and (ii) Common
Stock issuable pursuant to the Attached Warrants, subject to granting and
exercise under paragraph 3.1 of this Debenture; provided, however, that shares
of Common Stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction, or (B) sold or are available for sale in the opinion of counsel to
the Company in a single transaction exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended, (the
"Securities Act") so that all transfer restrictions and restrictive legends with
respect thereto are or may be removed upon the consummation of such sale.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing with the Securities and Exchange
Commission (the "Commission") a registration statement in compliance with the
Securities and Exchange Act of 1933, as amended (the "Securities Act,") and the
declaration or ordering of the effectiveness of such registration statement by
the Commission.
1.2 Series of Debentures. This Debenture is one of a series of twelve
percent (12.0%) Convertible Subordinated Debentures (the "Debentures") that may
be issued by the Company, up to the aggregate amount of Eight Hundred Fifty
Thousand Dollars ($850,000).
1.3 Waivers. The Company hereby waives demand, presentment for payment,
notice of dishonor, protest, notice of protest and diligence, and agrees that
the Holder hereof may extend the time for payment or accept partial payment
without discharging or releasing the Company.
1.4 Subordination. This Debenture will remain subordinate to the
Company's factoring agreement with Silicon Valley Bank until the Company works
out of such factoring arrangement with Silicon Valley Bank. The Company provides
a security agreement in favor of the Holder of the Debenture, regarding which
filings will be made pursuant to and under the Uniform Commercial Code (UCC). A
security interest was also granted in favor of Biopool International pursuant to
which a UCC filing was made, and such security arrangement will remain until the
loan provided by Biopool International is satisfied. A majority (51%) of the
Holders of Debentures for this series may agree to amend the terms of all
Debentures in the series to allow the Company to establish a relationship with a
financial institution for purposes of providing the Company with a line of
credit or otherwise.
2. CONVERSION.
2.1 Conversion Right. At any time after the Debenture Date, the sum of
the initial principal, and all interest added thereto, if any, may be converted
into Common Stock at the Conversion Price of 5.3 cents ($0.053) per share or
five cents ($0.05) per share (in the event that the Company has not earned,
before interest, taxes, depreciation, and amortization, the sum of Two Hundred
Fifty Thousand Dollars ($250,000) in the aggregate for the first two full fiscal
quarters following the Company's sale of not less than Five Hundred Thousand
Dollars ($500,000) of this series of Debentures), or each as adjusted in
accordance with paragraph 2.2.
2.2 Adjustment to Conversion Price. The conversion price, number and
kind of securities to be issued upon exercise of the conversion rights shall be
subject to adjustment from time to time upon the happening of certain events, as
follows:
(a) Stock Combinations and Splits. In case the Company shall combine
all of the outstanding Common Stock of the Company proportionately into a
smaller number of shares, the Conversion Price hereunder in effect immediately
prior to such combination shall be proportionately increased and in case the
Company shall subdivide its Common Stock into a greater number of shares of
Common Stock, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced.
(b) Reorganizations. If any capital reorganization or reclassification
of the capital stock of the Company, or consolidation or merger of the Company
with another corporation (other than a merger or reorganization with another
corporation in which the Company is the surviving corporation and which does not
result in any reclassification or change in the capital stock of the Company,
provided, however, that any issuances of Common Stock in connection with such
merger or reorganization shall be subject to the other provisions of this
Section 2.2, if applicable), or the sale of all or substantially all of its
assets to another corporation shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby each Holder of a Debenture shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
of the Company immediately theretofore issuable upon conversion of such
Debenture, such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock immediately
theretofore issuable upon conversion of such Debenture had such reorganization,
reclassification, consolidation, merger of sale not taken place; and in any such
case appropriate provisions shall be made with respect to the rights and
interest of the holders of the Debentures to the end that the provisions hereof
(including without limitation provisions for adjustment of the Conversion Price
and of the number of shares issuable upon the conversion of any Debenture) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by a written instrument executed
and mailed by registered mail or delivered to each of such holders at the last
address thereof appearing on the books of the Company, the obligation of the
Company to deliver to such holders such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holders may be entitled to
upon such conversion of the Debentures.
<PAGE>
(c) Should the Company fail to use its best efforts to cause a
registration statement to be declared effective within nine (9) months after the
Debenture Date, the Conversion Price shall be reduced by one tenth of one cent
($0.001) per month, starting in the tenth (10th) month after the Debenture Date
and continuing until the Company has caused a registration statement to be
declared effective or until the Conversion Price is five cents ($0.05),
whichever is first.
2.3 Reservation of Shares. The Company agrees that, so long as any of
the Debentures shall remain outstanding, the Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized capital
stock, for the purpose of issue upon conversion of the Debentures, the full
number of shares of Common Stock then issuable upon conversion of all
outstanding Debentures. If the Common Stock shall be listed on any national
stock exchange, the Company at its expense shall include in its listing
application all of the shares of Common Stock reserved for issuance upon
conversion of the Debentures (subject to issuance upon notice of issuance to the
exchange).
2.4 Validity of Shares. The Company agrees that all shares of Common
Stock to be issued upon conversion of the Debentures will, upon issuance, be
legally and validly issued, fully paid and non-assessable and free to the Holder
thereof from all taxes, liens and charges with respect to the issue thereof.
2.5 Reports to Holder. The Company shall promptly provide to the Holder
all reports on Form 10-KSB and Form 10-QSB, and any other reports sent to
holders of the Company's Common Stock.
3. WARRANTS.
3.1 Attached Warrants. This Debenture is issued with warrants on the
basis of Seven Hundred and Fifty Thousand (750,000) warrants per $100,000 of
Debenture (the "Attached Warrants"), each Attached Warrant entitling the holder
thereof to purchase one (1) share of Common Stock at an exercise price of
Twenty-five Cents ($0.25). If the Debenture principal amount is less than
$100,000 or contains a fractional amount of $100,000, the amount of Attached
Warrants shall be proportional based on the above original ratio. The Attached
Warrants are exercisable commencing on the Debenture Date and expire three (3)
years from the Debenture Date.
4. REGISTRATION.
4.1 Notice of Registration. If at any time within the period commencing
on the Debenture Date and ending three years after the Debenture Date, the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(a) give the Holder written notice within twenty (20) days of filing
an applicable registration statement with the Commission; and
(b) include in such registration (and any related qualification under
blue sky laws, or other compliance), and in any underwriting involved therein,
all of the Registrable Securities specified in a written request by the Holder
made within twenty (20) days after receipt of the Company's written notice under
paragraph 4.1(a) above, subject to the terms of paragraph 4.2 below. The Company
shall use its best efforts to cause such registration statement to be declared
effective.
4.2 Underwriting. If the registration of which the Company provides
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice given
pursuant to paragraph 4.1 (a), above. In such event, the right of the Holder to
<PAGE>
registration pursuant to this paragraph 4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided in this
Debenture. If the Holder proposes to distribute its Registrable Securities
through a registered offering involving an underwriter, the Holder, together
with the Company, shall enter into an underwriting agreement in customary form
with the managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this paragraph 4, if the managing
underwriter determines that marketing factors require a standard and customary
limitation of the number of shares to be underwritten, the managing underwriter
may limit the Registrable Securities, fairly and reasonably proportionally among
all shares anticipated for registration, to be included in such registration,
and the Company shall promptly so advise the Holder. If the Holder disapproves
of the terms of any such underwriting, the Holder may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration, and shall not be transferred in a public or private
distribution prior to 90 days after the effective date of the registration
statement relating thereto, or such other shorter period of time as the managing
underwriter may require. The Company may include shares of Common Stock held by
shareholders, other than the Holder, in such registration statement, provided
that, if the number of shares includible in such registration statement is not
sufficient to accommodate the Registrable Securities specified in the written
request of the Holder and the shares of Common Stock held by such other
shareholders including Common Stock held by officers, directors, employees, and
other insiders, and Common Stock held by consultants to the Company
(collectively the "Remaining Shareholders"), the Registrable Securities and the
shares of Common Stock of the Remaining Shareholders shall be appropriately
reduced on a pro rata basis.
The Company shall have the right to terminate or withdraw any registration
initiated by it under this paragraph 4 prior to the effectiveness of such
registration whether or not the Holder has elected to include securities in such
registration.
5. DEFAULT.
5.1 Events of Default. If and whenever any of the following events
or action (herein "Events of Default") shall occur, namely:
(a) The Company, after exhaustion of all appellate rights, is subject
to a final judgment, or enters into an agreement and settlement of any pending
or threatened litigation or similar proceeding, which requires the Company to
pay more than $500,000 in satisfaction of such final judgment or in settlement
of such pending or threatened litigation or similar proceeding or subjects the
Company to any levy of attachment or like process in excess of $500,000; or
(b) The Company makes an assignment for the benefit of creditors or
admits in writing its inability to pay its debts generally as they become due;
or an order for relief or judgment or decree is entered adjudicating the Company
bankrupt or insolvent; or the Company petitions or applies to any tribunal for
the appointment of a trustee, receiver, custodian or liquidator of the Company
or any substantial part of the assets of the Company; or the Company commences
any proceeding for a voluntary reorganization, liquidation or dissolution; or
any such petition or application is filed, or any such proceeding is commenced
against the Company and the Company by any act, consents thereto or acquiesces
therein, or such petition, application or proceeding is not dismissed within 60
days following receipt by the Company of notice thereof;
(c) The Company fails to pay the principal amount, and any cash
interest due, on the Maturity Date, if Holder chooses not to convert the
Debenture to Common Stock.
<PAGE>
then and in any such event the Holder may at any time (unless all defaults
theretofore have been remedied) at the Holder's option, by written notice to the
Company, declare the principal of and the accrued interest on the Debenture to
be immediately due and payable, without presentment, demand, protest, or any
notice (other than as required by this Debenture), all of which are hereby
waived by the Company. Payment thereof shall be made in the manner specified in
Section 2, above.
6. MISCELLANEOUS.
6.1 This Debenture shall be governed and enforced under and in
accordance with the laws of the State of California.
6.2 Notices, requests, demands and other communications (collectively,
"Notices") given or made pursuant to this Debenture shall be in writing and
shall be deemed to have been duly given if sent by registered or certified mail,
return receipt requested, postage and fees prepaid, or otherwise actually
delivered as follows: (a) if to the Company, to its principal corporate address;
and (b) if to the Holder, to the Holder's address on the Debenture register
maintained by the Company.
6.3 Notice shall be deemed duly given when received by the addressee
thereof. The Company and the Holder may from time to time change their
respective addresses for receiving Notices by giving written notice thereof in
the manner set forth above.
IN WITNESS WHEREOF this Debenture has been executed and delivered as a
sealed instrument at the place and on the date set forth above by the duly
authorized representatives of the Company.
SOURCE SCIENTIFIC, INC.
By:
Richard A. Sullivan
Its President and Chief Executive Officer
Debenture Holder:
- -------------------------------
Name: _________________________
SSN: __________________________
Address:
- -------------------------------
<PAGE>
SOURCE SCIENTIFIC, INC.
CONVERTIBLE DEBENTURE
February, 1996
Outline of Terms
Maximum Funding: $850,000
Terms of Each Convertible Debenture:
Funding Period: February, 1996.
Due: February 15, 1998.
Interest: 12.0% per annum.
Interest paid: Annually, in arrears; first
year's interest to be added to the
principal at the conclusion of year
one; second year's interest payable
in Common Stock or cash, as set
forth in Debenture.
Initial
Conversion price: $0.053 per share of Common Stock.
Convertible: At the option of the Holder on and
after February 15, 1996.
Attached Warrants: 750,000 warrants per
$100,000 of Debenture. Each Attached
Warrant entitles the Holder thereof
to the purchase one (1) share of
Common Stock at an exercise price of
Twenty-five Cents ($0.25) per share,
on Debenture Date through and
including three years after the
Debenture Date.
Registration Rights: Piggy-back to first available or any
subsequent registration statement.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 322
<ALLOWANCES> (20)
<INVENTORY> 1,379
<CURRENT-ASSETS> 1,876
<PP&E> 383
<DEPRECIATION> (321)
<TOTAL-ASSETS> 2,085
<CURRENT-LIABILITIES> 1,445
<BONDS> 0
<COMMON> 20,861
26 <F1>
0
<OTHER-SE> (20,164)
<TOTAL-LIABILITY-AND-EQUITY> 2,085
<SALES> 2,224
<TOTAL-REVENUES> 2,224
<CGS> 1,388
<TOTAL-COSTS> 1,388
<OTHER-EXPENSES> 1,036
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (211)
<INCOME-TAX> 0
<INCOME-CONTINUING> (211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (211)
<EPS-PRIMARY> (0.014)
<EPS-DILUTED> (0.010)
<FN>
<F1> The Preferred Mandatory amount is not included in equity. Under the terms
of the Series C Preferred Stock certificate, the shares were required to be
redeemed by the Company after September 1, 1995.
</FN>
</TABLE>
