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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 September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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Commission file number 1-8311
SOURCE SCIENTIFIC, INC.
(Exact name of small business issuer as specified in its charter)
California 95-2943936
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7390 Lincoln Way, Garden Grove, California 92841
(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 November 12, 1996: 20,236,919
Transitional Small Business Disclosure Format (Check one): Yes __ No X .
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<PAGE>
ITEM 1. Financial Statements:
SOURCE SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1996 and June 30, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------ -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 78,000 $ 162,000
Accounts receivable, net (Note 3) 477,000 791,000
Inventories (Note 4) 1,079,000 1,263,000
Other current assets 176,000 215,000
---------- -----------
Total current assets 1,810,000 2,431,000
Property and equipment, net (Note 5) 65,000 72,000
Excess of cost over fair value of net assets
acquired, less accumulated amortization of
$27,000 (September, 1996); $24,000 (June, 1996) 63,000 66,000
Other assets, net 48,000 52,000
------------ -----------
Total assets $1,986,000 $2,621,000
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 416,000 $ 691,000
Accrued expenses 202,000 239,000
Notes payable, current portion (Note 6) 131,000 228,000
Deferred rent, current portion 36,000 36,000
----------- -----------
Total current liabilities 785,000 1,194,000
Convertible debentures (Note 7) 629,000 629,000
Deferred rent 230,000 230,000
--------- ---------
Total liabilities 1,644,000 2,053,000
--------- ---------
Shareholders' equity:
Common stock; no par value, authorized 75,000,000 shares;
20,161,919 and 20,152,919 shares issued and outstanding
at September 30, 1996 and June 30, 1996, respectively 20,757,000 20,754,000
Accumulated deficit (20,253,000) (20,024,000)
Shareholder notes receivable (162,000) (162,000)
------------ ------------
Total shareholders' equity 342,000 568,000
------------ ------------
Total liabilities and shareholders' equity $1,986,000 $2,621,000
========= =========
</TABLE>
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended
September 30
1996 1995
------- -------
<S> <C> <C>
Product sales $ 833,000 $ 599,000
Research contract revenues 5,000 17,000
Service contract revenues 285,000 488,000
---------- ----------
Total net revenues 1,123,000 1,104,000
---------- ----------
Cost of product sales 667,000 456,000
Cost of research contract revenues 2,000 8,000
Cost of service contract revenues 168,000 224,000
-------- --------
Total cost of revenues 837,000 688,000
-------- --------
Gross profit 286,000 416,000
Selling, general and administrative expenses 311,000 298,000
Research and development expenses 190,000 198,000
-------- -------
Operating loss (215,000) (80,000)
-------- -------
Interest expense, net 11,000 1,000
-------- --------
Net loss ($226,000) ($81,000)
======= ======
Per common share amounts
Net loss ($0.01) ($0.01)
==== ====
Weighted average number of
common shares outstanding 20,152,919 15,278,663
========== ==========
</TABLE>
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss ($226,000) ($81,000)
------- ------
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 12,000 32,000
Effect on cash of changes in operating assets and liabilities:
Accounts receivable 314,000 146,000
Inventories 184,000 (86,000)
Other current assets 43,000 10,000
Accounts payable and accrued expenses (315,000) 69,000
Deferred rent 0 (11,000)
-------- ---------
Total adjustments 238,000 160,000
------- -------
Net cash provided by operating activities 12,000 79,000
------ ------
Cash flows from investing activities:
Capital expenditures (2,000) 0
----- --------
Net cash used in investing activities (2,000) 0
Cash flows from financing activities:
Repayment of notes payable (97,000) (210,000)
Common stock issued for exercise of warrants 3,000 113,000
-------- ---------
Net cash used in financing activities (94,000) (97,000)
------ -------
Net decrease in cash and cash equivalents (84,000) (18,000)
Cash and cash equivalents at beginning of period 162,000 35,000
-------- ---------
Cash and cash equivalents at end of period $78,000 $17,000
====== ======
</TABLE>
(See notes to consolidated financial statements.)
<PAGE>
SOURCE SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NOTE 1 - INTERIM ACCOUNTING POLICY
The accompanying consolidated financial statements are unaudited, but in the
opinion of the Management of Source Scientific, Inc. and its subsidiaries (the
"Company"), such unaudited statements include all adjustments consisting of
normal recurring accruals necessary for a fair presentation of the financial
position of the Company and its consolidated subsidiaries as of September 30,
1996, and the results of operations and changes in cash flow for the three-month
periods ended September 30, 1996, and September 30, 1995. Although the Company
believes that the disclosures in these financial statements are adequate to make
the information presented not misleading, certain information normally included
in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of operations
for the three-month period ended September 30, 1996 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - PER COMMON SHARE AMOUNTS
Per common share amounts are determined by dividing the weighted average number
of common shares outstanding during the period by the relevant net loss. Fully
diluted per share information is not included in this Report, as the effect
would be anti-dilutive for the periods presented.
NOTE 3 -INVENTORIES:
Inventories are summarized as follows:
September 30, June 30,
1996 1996
Raw materials $ 784,000 $ 860,000
Work in process 233,000 322,000
Finished goods 62,000 71,000
----------- -----------
Net inventories $1,079,000 $1,263,000
========= =========
NOTE 4. NOTES PAYABLE:
Notes Payable consist of the following: September 30, June 30,
1996 1996
Note payable in the original principal
amount of $180,000 dated September, 1995,
to Biopool International ("Biopool"),
bearing interest at 7% per annum until
March 1996, at which time the rate
increased to 8% per annum, unsecured,
principal payments of $20,000 on each
15th day of the months July through
November 1996; with a final principal
payment of $30,000 together with
interest of $6,034, due on December 15,
1996 (the "Biopool Note"). $ 70,000 $ 130,000
On October 22, 1996, the Company fully
paid the Biopool Note. (See
ITEM 5. "Subsequent Events.")
Notes payable, unsecured, non-interest
bearing and interest bearing at rates up
to 10% per annum, with due dates ranging
from July 1996 to April 1997, certain of
which are past due and are in technical
default. $ 61,000 $ 98,000
-------- --------
$ 131,000 $ 228,000
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<PAGE>
NOTE 5. CONVERTIBLE DEBENTURES:
Convertible Debentures consist of the following:
September 30, June 30,
1996 1996
------------ ----------
Convertible debentures payable to three
unaffiliated individuals, convertible at
any time into shares of the Company's
common stock at the conversion price of
$0.053 per share at the option of
the Company, subject to a downward
adjustment in the event the underlying
common stock is not registered with
the Securities and Exchange Commission
within ten (10) months from the date
of issuance, to a floor of $0.05 per
share, with warrants attached to
purchase one share of the Company's
common stock at $0.25 per share, interest
at 12% per annum payable annually,
principal due on January 31, 1998. $ 310,000 $ 310,000
Convertible debentures payable to six
unaffiliated individuals and one,
individual owning more than 10% of the
Company's common stock, who is not an
officer or director, convertible at
any time into shares of the Company's
common stock at the conversion price
of $0.08 per share at the option of the
Company, subject to a downward adjustment
in the event the underlying common stock
is not registered with the Securities
and Exchange Commission within ten (10)
months from the date of issuance, to
a floor of $0.05 per share, with warrants
attached to purchase one share of the
Company's common stock at $0.25 per share,
interest at 12% per annum payable annually,
principal due on January 31, 1998. 319,000 319,000
------- -------
$ 629,000 $ 629,000
========= =========
ITEM 2. Management's Discussion and Analysis of Operations and Results of
Operations
Results of Operations
Comparison of 1996 to 1997 first quarterly periods
The following table shows the changes in operations between the first
quarters ended September 30, 1996 and September 30, 1995. Historically the first
quarter of the Company's fiscal year reflects weaker sales performance than
other quarters, however, revenues improved slightly during the first quarter
ended September 30, 1996, compared to the first quarter ended September 30,
1995. The Company is continuing to broaden its customer base for product service
contracts to lessen its dependence on one or two major contracts. At the date of
this Report, the Company has booked in excess of one million dollars in new and
renewed product services contracts since June 30, 1996. Three such contracts
which were expected to commence during the period, were delayed, partially due
to rescheduling by customers, and for delays in receiving materials. As a
result, product service revenues for the period were lower than for the same
period last year. Generally speaking, profit margins on product service
contracts are higher than other sales categories of the Company. Although
product sales were higher for the quarter compared to the same period last year,
profit margins suffered due to weak product service revenues and the shipment of
unprofitable Lamda products to conclude a settlement agreement.
<PAGE>
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED CHANGE FROM
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 1995 to 1996
----------------------------------------------------------------------------
(000's) % of (000's) % of (000's)
Amount Sales Amount Sales Amount % Change
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $1,123 100.0 $1,104 100.0 $19 1.7
Cost of revenues 837 74.5 688 62.3 (149) 21.7
---- ---- --- ---- ---- ----
Gross profit 286 25.5 416 37.7 (130) -31.3
--- ---- --- ---- ---- -----
Selling, general and administration 311 27.7 298 27.0 13 4.4
expenses
Research and development expenses 190 16.9 198 17.9 (8) -4.0
--- ------- --- ---- --- ----
Total operating expenses 501 44.6 496 44.9 5 1.0
--- ------- --- ---- - ---
Operating loss (215) -19.1 (80) -7.2 (135) 168.8
Interest expense, net 11 1.0 1 0.1 10 1000.0
-- --- -- --- ---- ------
Net loss ($226) -20.1 ($81) -7.3 ($145) 179.0
===== ===== ==== ==== ===== =====
</TABLE>
Net Revenues. Net sales increased by 1.7% during the quarter ended September 30,
1996 compared to the quarter ended September 30, 1995. At the date of this
Report, the Company has booked in excess of one million dollars in new and
renewed sales contracts since June 30, 1996, most of which is expected to
commence generating receivables for the Company in the second and third fiscal
quarters. On an ongoing basis, the Company has an average of 20 quotes submitted
to potential customers to provide research and development, manufacturing and
product service contracts, although there is no assurance 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.
Cost of Revenues. The increase of cost of revenues as a percentage of revenues,
to 74.5% in 1996 compared to 62.3% in 1995, was due to selling a large portion
of raw materials and finished goods of Lamda product line at standard cost, as
part of a settlement agreement with a previous customer, and due to a less
profitable mix of products shipped and services provided. During the quarter
ended September 30, 1996, sales of manufactured products were higher compared to
the same period last year; however, commencement dates of new and renewal
service contracts were delayed, resulting in a lower volume of product services
provided, compared to the same period last year. Since averaged profit margins
are greater on service contract revenues than on sales of manufactured products,
the overall cost of goods sold for the quarter ended September 30, 1996 reflect
an overall higher cost associated with the types of manufactured products sold
during the period.
Operating Expenses. Overall operating expenses as a percentage of revenues
increased one percent during the quarter ended September 30, 1996, compared to
same period last year. For the quarter ended September 30, 1996, the Company's
selling, general and administrative expenses increased 4.4% over the same period
last year. Of the three major clinical chemistry trade shows and exhibits
attended by the Company in 1996, expenses for the two largest exhibits were
carried in the first quarter ended September 30, 1996. For the same period last
year, such expenses were substantially less due to the close proximity of a
major trade show to the Company's location. In addition, international travel
related to major new business contributed to the higher costs incurred in the
first quarter ended September 30, 1996.
Interest Expense. Interest costs increased in the quarter ended September 30,
1996, compared to the same period last year due largely to the issuance of
convertible debentures totaling $629,000 in February 1996.
<PAGE>
Liquidity and Capital Resources and Plan of Operation
The Company significantly improved its liquidity during the fiscal year
ended June 30, 1996, due to convertible debentures issued by the Company in the
aggregate amount of $629,000. Consistent with the repayment terms of the
debentures, such amounts are considered long-term in the quarter ended September
30, 1996. Management continues to seek improvement of the Company's liquidity
by: (i) restructuring old trade payables; (ii) offering discounts in exchange
for progress payments; (iii) negotiating facility cost reductions with a
suitable tenant, or sub-leasing a portion of its space, and (iv) seeking equity
capital. The Company's Management continues to seek other cost reductions to
enhance its operating income, although there can be no assurance that the
Company will be successful in reducing costs through any of its intended methods
for achieving improvements of the Company's liquidity.
Although the Company's working capital decreased from $1,237,000 at
June 30, 1996, to approximately $1,025,000 at September 30, 1996, the working
capital at the end of the first quarter represents an increase of $501,000 over
the same period last year. During the three months ended September 30, 1996, the
Company paid $60,000 of the Biopool Note. Management believes the Company
will continue to improve its overall financial condition, however, the Company
requires additional operating capital for its current operations. There can be
no assurance that the Company will obtain additional working capital.
On October 10, 1996, the Company secured a line of credit for borrowing
up to $1,000,000 based on eligible accounts receivable. Subsequent to September
30, 1996, the Company has borrowed $175,000 against the line of credit. Such
funds were used to repay the Biopool Note and provide working capital.
Management believes the line of credit is sufficient to enable its continuing
operations in slower fiscal periods, although there can be no assurance that the
line of credit will be sufficient for the Company's current operations.
The Company has continued to decrease its operating costs, through its
cost containment plan which included a further reduction in its workforce and a
combination of certain job functions in the first quarter ended September 30,
1996 and up to the date of this Report. The Company is seeking a sub-lease
tenant for unoccupied space in the Company's facility although there can be no
assurance the Company will be successful in acquiring a sub-tenant suitable
under the conditions of a sub-lease which includes acceptance by the owners and
property managers of the facility.
The Company did not have any material commitments for capital
expenditures as of September 30, 1996, or as of the date of this Report.
Management does not currently expect that the Company will engage in
any material investing activities, with the possible exception of one or two
potential acquisition candidates, although no letter of intent or understanding
exists at this time. As of the date of this Report, Management is unable to
determine the net cash effect of any such possible acquisition or any
complementary acquisitional partnership. There can be assurance that the Company
will enter into any letter of intent, or that if entered, such letter would
result in an acquisitional partnership.
PART II -- OTHER INFORMATION
ITEM 5. Subsequent Events
On October 10, 1996, the Company entered into a financial arrangement
with Concord Growth Corporation to borrow up to $1,000,000 (the "Concord Growth
Agreement"). This line will allow the Company to borrow up to 80% of its
eligible receivables, as defined, at an interest rate of prime plus 2.75%
(subject to a 12% add-on in the event of default). The line contains certain
financial covenants and is secured by substantially all of the Company's assets.
At the date of this Report, the Company has drawn advances in the aggregate of
approximately $175,000 on the Concord Growth Agreement.
The shipment of Lamda products and inventories to Scientific
Measurement Systems, in September 1996, completed the Company's obligations
under a settlement agreement relating to the litigation between the parties.
Payment in full was received by the Company at the time of shipment, and the
final documentation in conclusion of the matter and dismissal of the action has
been filed with the court.
On October 22, 1996, the Company paid $75,589 to Biopool for the
remaining principal balance plus accrued interest due on the Biopool Note. The
payment fully released the Company from its obligations and indebtedness to
Biopool.
On October 22, 1996, the Company applied a portion of an account
payable for certain consulting fees owed to its former Chairman of the Board and
Director, Robert B. Lyons, as the aggregate exercise price of $10,500 by which
Mr. Lyons exercised 75,000 Director Options previously granted to him under the
Company's incentive stock option plan.
The Company is currently undertaking the registration on Form SB-2 (the
"Registration") of certain of the Company's unregistered securities and Common
Stock underlying the Company's debentures and warrants outstanding. Management
anticipates that the Registration will be initially be filed with the Securities
and Exchange Commission (the "Commission") in the month of November, 1996.
Management believes that the Registration will be effective in a timely manner
to be in compliance with the terms and conditions of certain outstanding
debentures to avoid a downward adjustment of the conversion price of such
debentures. (See "NOTE 5. Convertible Debentures.")
Concurrently with filing the Registration with the Commission, the
Company will be registering the securities with the Boston Stock Exchange; and
subsequent to the effective date of the Registration, with certain states to
comply with blue sky law. Under the terms of the listing maintenance
requirements of Boston Stock Exchange (the "Exchange"), the Company's financial
results of the first quarter ended September 30, 1996 falls below the equity
requirements. However, Management believes that its confirmed and pending
contracts, and its overall financial improvement during the last fiscal year,
may defer the concerns of the Exchange pending results of the second quarterly
fiscal period ending December 31, 1996, however, there can be no assurance that
the Exchange will defer the delisting of the Company's Common Stock due to a
shortage of equity under listing maintenance requirements.
ITEM 6. Exhibits and representation on Form 8K
(a) Exhibits:
None
(b) Reports:
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this Report to be signed on its behalf by the undersigned, thereto duly
authorized.
SOURCE SCIENTIFIC, INC.
By: /S/ RICHARD A. SULLIVAN
Date: 11-12-96 Richard A. Sullivan
President and Chief Executive Officer
By: /S/ MOKHTAR A. SHAWKY
Date: 11-12-96 Mokhtar A. Shawky
Chief Financial Officer
