SOURCE SCIENTIFIC, INC.
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
Wednesday, April 30, 1997, 11:00 a.m.
TO THE SHAREHOLDERS OF SOURCE SCIENTIFIC, INC.:
You are cordially invited to attend the Special Meeting of Shareholders
of SOURCE SCIENTIFIC, INC. (the "Company"), which will be held at 7390 Lincoln
Way, Garden Grove, California, on Wednesday, April 30, 1997, at 11:00 a.m.,
local time (the "Special Meeting"), for the following purposes, all of which are
more fully described in the accompanying Proxy Statement:
(1) To consider and vote upon a proposal (a) to approve the Asset
Purchase Agreement, for the acquisition of substantially all of
the assets of Source Scientific, Inc. (the "Company"), by BBI -
Source Scientific, Inc. (the "Buyer"), a wholly-owned subsidiary
of Boston Biomedica, Inc. and the related transactions
contemplated thereby, including the assumption by the Buyer of
substantially all of the Company's liabilities and a cash
payment to the Company, all as more fully described in the
accompanying Proxy Statement and the Asset Purchase Agreement, a
copy of which is attached as Exhibit A to the Proxy Statement;
and (b) thereafter to dissolve the Company and distribute its
net remaining assets in cash to the Company's shareholders of
record on the date of dissolution of the Company.
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
The Board of Directors of the Company (the "Board") has unanimously
approved the Asset Purchase Agreement and the other transactions, including a
dissolution of the Company, as set forth in the first proposal, above, believes
that the Asset Purchase Agreement and such related transactions and subsequent
dissolution are in the best interests of the Company and its shareholders, and
unanimously recommends that you vote FOR its approval and adoption.
The Board has fixed the close of business on March 7, 1997, as the
record date ("Record Date") for the determination of shareholders entitled to
notice of and to vote at the Special Meeting and any adjournments or
postponements thereof. Only shareholders of record at the close of business on
the Record Date will be entitled to vote at the Special Meeting or any
adjournments thereof. A list of the Company's shareholders entitled to vote at
the Special Meeting will be available for examination, during regular business
hours at the Company's offices during the 10 days prior to the Special Meeting.
THE MATTERS DISCUSSED IN THE ENCLOSED PROXY STATEMENT ARE OF EXTREME IMPORTANCE.
YOU ARE URGED TO CONSIDER CAREFULLY THE PROPOSALS BEING PRESENTED TO SHARE-
HOLDERS.
This Proxy Statement and the accompanying Proxy were mailed to
Shareholders of Source Scientific, Inc., by American Stock Transfer and Trust
Company, commencing April 7, 1997. The executive offices of the Company are
located at 7390 Lincoln Way, Garden Grove, California 92841. The telephone
number is (714) 898-9001.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON,
PLEASE DATE, SIGN AND RETURN THE ACCOMPANYING PROXY WITHOUT DELAY IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE. YOU ARE CORDIALLY INVITED TO ATTEND AND YOUR
PROXY WILL NOT BE USED IF YOU ARE PRESENT AND PREFER TO VOTE IN PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
7390 Lincoln Way Catherine Curtis
Garden Grove, California 92841 Secretary March 31, 1997
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TABLE OF CONTENTS
Page
Summary iii
The Parties iii
The Acquisition iii
The Special Meeting iii
Purpose of the Special Meeting 1
Exchange Act Filings; Forward Looking Statements 1
The Parties to the Acquisition and Dissolution 2
Source Scientific, Inc. 2
BBI - Source Scientific, Inc. 2
Background of the Acquisition and Dissolution 2
Uncertainties Regarding Continued Viability of the Company 2
Material Differences in the Rights of Security Holders 3
Approval of the Agreement and Dissolution 4
Dissenters' Rights 4
Information About the Acquisition and Dissolution 5
Summary of the Terms of the Asset Purchase Agreement 5
Related Transactions 6
Appraisal 7
Anticipated Accounting Treatment; Certain Federal Income
Tax Consequences to the Company 7
Certain Federal Income Tax Consequences
to the Company's Shareholders 7
Federal and State Regulatory Requirements 7
Pending Material Contracts 7
Market Price Data 7
Interest of Certain Persons 8
Principal Shareholders 8
Certain Information Concerning the Company 9
Product Applications 9
Services 9
Properties 10
Patents and Regulatory Affairs 10
Employees 10
Selected Financial Data 11
Source Scientific, Inc. Consolidated Financial Statements for the
Years Ended June 30, 1996 and 1995 Including Auditors' Report Thereon 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
Other Matters 26
Expenses 26
Annual Report to Shareholders 26
Appendix A - The Asset Purchase Agreement
Appendix B - Sections 1301 through 1304 of the California
General Corporation Law
<PAGE>
SUMMARY
The following is a brief summary of certain information contained in
the Proxy Statement. Certain terms not defined in the summary are defined in the
Proxy Statement. This summary is not intended to be complete and is qualified in
all respects by reference to the more detailed information appearing in the
Proxy Statement. Shareholders are urged to review carefully the entire Proxy
Statement, including the appendices.
The Parties
Source Scientific, Inc. (the "Company") designs, manufactures and
markets devices used in hospital, clinical, and analytical laboratories
worldwide. Additionally, the Company offers for sale its expertise in
manufacturing instruments using optical detection methods, robotics, fluidics
and software development to companies that need those technologies integrated
into state-of-the-art instrumentation systems that are resold to laboratories.
The Company's current sustaining business, the manufacture and service of
clinical diagnostic instruments, was founded in 1981.
BBI - Source Scientific, Inc. (the "Buyer"), a wholly-owned subsidiary
of Boston Biomedica, Inc., a Massachusetts corporation ("BBI"), was incorporated
in Massachusetts in 1997 for the purpose of effecting the acquisition and acting
as the owner of all the purchased assets and assumed liabilities of the Company.
The Acquisition
Terms of the Acquisition and Dissolution. On March 26, 1997, the
Asset Purchase Agreement was executed by the Company and the Buyer, providing
for the acquisition of substantially all of the assets of the Company, by the
Buyer. Following the Closing of the transaction with the Buyer (the
"Acquisition"), the Company will be dissolved (the "Dissolution") and its net
remaining assets in cash will be distributed to its shareholders of record on
the date of dissolution. The cash component of the purchase price is $2,144,000,
less certain adjustments (to a maximum of $250,000) and unassumed liabilities
currently estimated to be $70,000. Accordingly, management currently estimates
the aggregate per share distribution to be between $0.53 and $.056. The
Company's transfer agent will commence distribution of approximately $1,824,000
of the Purchase Price to such shareholders as soon as practicable after the
Company's certificate of dissolution is filed with the California Secretary of
State. Pursuant to the terms of the Asset Purchase Agreement, the remainder of
the funds held in escrow will be released after March 31, 1998, less any amounts
held in escrow that may be paid to Buyer, up to $250,000, as a result of the
Company's failure to meet $500,000 book value on the Closing Date, or as a
result of the fulfillment of certain indemnity requirements.
Closing Date. It is anticipated that the Acquisition will close on May
5, 1997, or as promptly as practicable thereafter.
Certain Federal Income Tax Consequences. A shareholder will recognize
gain (or loss) in the amount by which the cash received by the Shareholder
pursuant to the Dissolution is greater (or less) than the Shareholder's tax
basis in the shares of Company common stock held. Recognized gain or loss will
be capital gain or loss, assuming such shares are held as a capital asset, and
will be long-term capital gain or loss if such shares were held for more than
one year and short-term capital gain or loss if such Shares were held for one
year or less. (See "Information About the Acquisition and Dissolution -- Certain
Federal Income Tax Consequences to the Company's Shareholders.")
Dissenters' Rights. There will be no dissenters' rights under
California law available to shareholders of the Company in connection with the
Acquisition unless the holders of at least 5% of the issued and outstanding
shares of common stock file demands for payment in accordance with Chapter 13 of
the California General Corporation Law. (See "Dissenters' Rights.")
The Special Meeting
Date, Time and Place. A Special Meeting of Shareholders (the "Special
Meeting") is to be held on April 30, 1997, at 11:00 a.m., local time, at 7390
Lincoln Way, Garden Grove, California.
Purpose of the Special Meeting. The purposes of the Special Meeting
are:
(1) To consider and vote upon a proposal (a) to approve the Asset
Purchase Agreement, for the acquisition of substantially all of
the assets of Source Scientific, Inc. by BBI - Source Scientific,
Inc., a wholly-owned subsidiary of Boston Biomedica, Inc., and the
related transactions contemplated thereby, including the
assumption by the Buyer of substantially all of the Company's
liabilities and a cash payment to the Company, all as more fully
described in the accompanying Proxy Statement and the Asset
Purchase Agreement, a copy of which is attached as Exhibit A to
the Proxy Statement; and (b) thereafter to dissolve the Company
and distribute its net remaining assets in cash to the Company's
shareholders of record on the date of dissolution of the Company.
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
Record Date; Principal Shareholders. Only holders of record of the
outstanding shares of common stock at the close of business on March 7, 1997 are
entitled to vote at the Special Meeting. On that date, 34,540,004 shares were
outstanding, of which an aggregate of 162,111 shares were held by the Executive
Officers and Directors of the Company.
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Vote Required. The affirmative vote of the holders of a majority of the
outstanding Shares of the Company is required to approve the Asset Purchase
Agreement, the transactions contemplated thereby, and the subsequent dissolution
of the Company and distribution of its net remaining assets to its shareholders
of record on the date of dissolution.
Recommendation of the Board of Directors of the Company. The Board has
unanimously concluded that the Acquisition is fair and in the best interests of
the Company and its shareholders and unanimously recommends that Shareholders
vote FOR the approval and adoption of the Asset Purchase Agreement and related
transactions. In reaching this conclusion, the Board considered a number of
factors, including, among other things, the historical and recent market prices
of the Common Stock and the business and prospects of the Company. (See
"Background of the Acquisition and Dissolution--Uncertainties Regarding
Continued Viability of the Company.")
<PAGE>
SOURCE SCIENTIFIC, INC.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
To be held on April 30, 1997
This Proxy Statement is furnished in connection with the solicitation
of Proxies by the Board of Directors of SOURCE SCIENTIFIC, INC., a California
corporation, for use at a Special Meeting of the Shareholders of the Company to
be held at 7390 Lincoln Way, Garden Grove, California, at 11:00 a.m., local time
(the "Special Meeting"). A Proxy for the Special Meeting is enclosed, by means
of which you are requested to direct your vote as to each of the proposals
described in this Proxy Statement. All references to the "Company" are to Source
Scientific, Inc. and its two wholly-owned subsidiaries, Alton Instruments
Corporation and Source Scientific Systems, Inc.
All Proxies which are properly completed, signed and returned to the
Company prior to the Special Meeting, and which have not been revoked, will be
voted. A Shareholder may revoke his or her Proxy at any time before it is
exercised by filing with the Secretary of the Company at its executive office in
Garden Grove, California, a written notice of revocation or a duly executed
Proxy bearing a later date, or by appearing in person at the Special Meeting and
expressing a desire to vote his or her shares in person.
The date of March 7, 1997, has been fixed as the record date (the
"Record Date") for the determination of Shareholders entitled to notice of and
to vote at the Special Meeting or any adjournment of the Special Meeting. As of
that date, the outstanding voting securities of the Company consisted of
34,540,004 shares of Common Stock (the "Common Stock"). Holders of Common Stock
are entitled to one vote for each share of Common Stock upon all matters to be
considered at the Special Meeting. Unless the context otherwise requires, the
term "Shareholder," when used in this Proxy Statement, refers to holders of
shares of the Common Stock on the Record Date.
PURPOSE OF THE MEETING
At the Special Meeting, Shareholders will consider and vote upon a
proposal (a) to approve the Asset Purchase Agreement (the "Agreement"),
described herein, for the acquisition of substantially all of the assets and
assumption of ssubstantially all of the liabilities of the Company by BBI -
Source Scientific, Inc., a Massachusetts corporation (the "Buyer") and
wholly-owned subsidiary of Boston Biomedica, Inc. ("BBI"), and the related
transactions contemplated thereby; and (b) thereafter to dissolve the Company
and distribute its net remaining assets in cash to the Company's shareholders of
record on the date of dissolution of the Company. A summary of the Agreement and
related transactions is provided herein. The Agreement (as it may be amended,
modified, or supplemented from time to time) provides, subject to the
satisfaction or waiver of certain conditions, that Buyer will purchase the
assets of the Company in consideration of its assumption of substantially all of
the liabilities of the Company and a cash payment in the amount of $2,144,000
(the "Purchase Price"), which payment is subject to certain adjustments and
escrow provisions of the Agreement. Subsequent to the Closing, Buyer will file a
certificate of dissolution with the State of California for the dissolution of
the Company, and a cash distribution to the shareholders of record on the date
of the dissolution of the Company thereafter will occur based on the net
Purchase Price, less adjustments or retainer for contingent or unassumed
liabilities, divided by the total number of shares of common stock then issued
and outstanding.
Corbin & Wertz, the Company's independent accountants, will be
represented at the Special Meeting, and are expected to be available to respond
to appropriate questions.
EXCHANGE ACT FILINGS; FORWARD LOOKING STATEMENTS
The Company and BBI are subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file periodic reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC").
Copies of such reports, proxy statements and other information can be obtained,
upon payment of prescribed fees, at the Public Reference Room of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Such reports, proxy statements and
other information can also be inspected at the SEC's facilities referred to
above and at the SEC's Regional Offices at Suite 1400, 500 West Madison Street,
Chicago, Illinois 60621-2511, and at Room 1228, 75 Park Place, New York, New
York 10007. Electronic copies of all such reports are also available on the
World Wide Web at http://www.sec.gov/edgarhp.htm. BBI common stock is listed and
traded on the Nasdaq National Market under the trading symbol, "BBII" and such
reports, proxy statements and other information concerning BBII should be
available for inspection and copying at the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
All information contained or incorporated by reference in this Proxy
Statement relating to the Company and its subsidiaries has been supplied by the
Company, and all such information relating to Buyer and its parent has been
supplied by such parent. Certain statements contained herein, attributable to
the Company, constitute managements' and directors' evaluations based upon the
performance and financial condition of the Company, and information available at
the time. Such statements involve known and unknown risks, uncertainties, or
other factors. The making of a modifying or superseding statement shall not be
<PAGE>
deemed an admission that the modified or superseded statement, when made,
constituted an untrue statement of a material fact, an omission to state a
material fact necessary to make a statement not misleading, or the employment of
a manipulative, deceptive or fraudulent device, contrivance, scheme,
transaction, act, practice, course of business or artifice to defraud, as those
terms are used in the Securities Act of 1933, as amended (the "Securities Act"),
the Exchange Act or the rules and regulations thereunder. The delivery of this
Proxy Statement shall not, under any circumstances, create any implication that
there has been no change in the information set forth herein or in the affairs
of the Company or Buyer since the date hereof.
THE PARTIES TO THE ACQUISITION AND DISSOLUTION
Source Scientific, Inc.
The Company designs, manufactures and markets devices used in hospital,
clinical, and analytical laboratories worldwide. Additionally, the Company
offers for sale its expertise in manufacturing instruments using optical
detection methods, robotics, fluidics and software development to companies that
need those technologies integrated into state-of-the-art instrumentation systems
that are resold to laboratories. The Company also markets instruments that can
be easily customized to meet the requirements of companies that are willing to
purchase a large number of such customized instruments. The Company's current
sustaining business, the manufacture and service of clinical diagnostic
instruments, was founded in 1981 as Ocean Scientific, Inc. The Company's
technologies can be applied in several different specialized applications, such
as clinical diagnostics, detection and quantification of environmental
pesticides, testing for food and beverage pathogens (toxins) and other related
value-added applications. A significant amount of the Company's design
components are transferable from one product line to another.
Ocean Scientific, Inc. was acquired in 1986 by Quixote Corporation, a
diverse holding company and in 1989 the corporate name was changed in 1989, to
Source Scientific Systems, Inc. It became a subsidiary of MicroProbe Corporation
in 1991, manufacturing clinical diagnostic instruments and biomedical (OEM)
products, and was acquired by the Company in 1994.
In June 1991, the Company acquired Alton Instruments Corporation (the
"Alton Subsidiary") and commenced the design, manufacture and marketing of
custom and proprietary electro-optic instrument products for diagnostic and
optical analysis applications in biomedical, industrial process control
applications and environmental monitoring. In January 1995, active design, sales
and marketing efforts for the line of optical analysis products ceased, with
resulting head count and cost reductions.
Until the Company's recapitalization in 1991 and the acquisition of
Velotec (the former name of the Alton Subsidiary), the Company's primary
business had been to manufacture and market a line of computer peripherals under
the name Wespercorp (the "Wespercorp Business"). In November 1992, the Company
sold the Wespercorp Business to a third party, although the Company continued to
manufacture and market the Wespercorp Business under a license agreement until
May 1994.
BBI - Source Scientific, Inc.
The Buyer is a Massachusetts corporation and a wholly-owned subsidiary
of Boston Biomedica, Inc., a worldwide provider of proprietary quality control
products for use with in vitro diagnostic test kits ("test kits") for the
detection, analysis and monitoring of infectious diseases, including AIDS,
hepatitis and lyme disease. These products are used to develop test kits, to
permit the monitoring of laboratory equipment and personnel, and to help ensure
the accuracy of test results. BBI's products are derived from human plasma and
serum using proprietary manufacturing processes. BBI also manufactures
diagnostic test kit components and provides specialty laboratory services,
including clinical trials. To date, BBI has sold its products primarily to test
kit manufacturers and regulatory agencies, but it has recently begun selling
Quality Control Products directly to the emerging end-user market for quality
control products for infectious disease test kits.
Currently, BBI's products are used in connection with the detection of
more than 15 infectious diseases, and its specialty laboratory services are used
in connection with the detection of over 100 diseases. BBI's specialty clinical
laboratory services include both routine and sophisticated infectious disease
testing in microbiology, immunology and molecular biology.
The name and address of the Buyer is: BBI - Source Scientific, Inc.,
375 West Street, West Bridgewater, Massachusetts 02379. Its telephone number is
(508) 580-1900, and fax number is (508) 580-2202.
BACKGROUND OF THE ACQUISITION AND DISSOLUTION
BBI first contacted the Company in May 1996, to explore strategies to
merge with a public corporation. Preliminary discussions at that time between
executive officers of the Company and Buyer yielded no agreement to acquire or
merge the parties. BBI became a NASDAQ-traded public corporation in November
1996 through its public offering of 1.6 million shares of common stock. In
mid-January 1997, the Company and BBI again contacted each other, and reviewed
the Company's current business information and financial status. Following
further contact between executive officers of the parties, BBI presented a
letter of intent for acquisition of the Company's assets by Buyer, and for
extension of a loan to the Company by BBI.
<PAGE>
Uncertainties Regarding Continued Viability of the Company
Financial Condition of the Company at December 31, 1996. During the
quarter ended December 31, 1996, net revenues declined by approximately 32.5%
compared to the quarter ended December 31, 1995. Revenues also declined for the
6-month period ended December 31, 1996, by approximately 15.5% compared to the
6-month period ended December 31, 1995. For both the 3-month and 6-month
periods, revenues declined due to delayed renewals of several manufacturing
contracts, extended commencement dates for product service contracts and a less
profitable mix of products shipped and services provided by the Company. Because
average profit margins are greater on service contract revenues than on sales of
manufactured products, the overall cost of goods sold for the periods ended
December 31, 1996, reflects an overall higher cost associated with the types of
manufactured products sold during the period. (See "Selected Financial Data.")
Lack of Working Capital. The Company's working capital decreased from
$1,237,000 at June 30, 1996, to approximately $679,000 at December 31, 1996, and
the Company requires additional operating capital for its current operations.
The loan facility provided by the Company's primary lender, Concord Growth
Corporation ("Concord") has been inadequate to overcome the capital deficiency.
In addition, the Company's relationship with its suppliers has deteriorated due
to extended payment schedules, resulting in surcharges and cash advance payments
for orders, further hampering the Company's ability to procure materials to meet
production schedules or manufacture products with a reasonable profit margin.
(See "Selected Financial Data.")
BBI's Loans to the Company. On February 6, 1997, the Company borrowed
the sum of $500,000 from BBI and executed a demand note (the "BBI Demand Note")
therefor. The Company's payment obligations thereunder are secured by certain
of the Company's assets, which, previously, had served as security for the
Company's obligations to Concord. Concurrently with the execution of the BBI
Demand Note and the related security instruments, the Company paid in full one
promissory note to Concord, who partially subordinated its security interest in
certain of the Company's assets securing the Company's remaining obligations to
Concord. The BBI Demand Note, payable on demand, is payable at the rate of
fifteen percent (15%) per annum, and is secured by all of the Company's
inventory and equipment. On March 17, 1997, BBI advanced an additional $150,000
to the Company under the same terms and conditions as the BBI Demand Note. BBI
has discussed with the Company the possibility that, on or before the Closing
Date, BBI might lend additional funds to the Company for its operating capital
purposes. The terms under which such additional funds might be lent have not
been negotiated and there can be no assurances that any additional funds will be
lent to the Company. (See "Information About the Acquisition and Dissolution --
Related Transactions.")
Further Transactions Between BBI and the Company. In the event that the
Agreement is not consummated, BBI may be unwilling to provide any further
financings to the Company or to enter into any further relationships with the
Company in respect of developing markets and product lines. In addition, BBI has
stated that it will probably demand immediate repayment of the BBI Demand Note
and any other demand obligations of the Company in favor of BBI if the Agreement
and the transactions contemplated thereby are not consummated. (See "Information
About the Acquisition and Dissolution -- Related Transactions.")
Shareholder Value. On February 26, 1997, the Boston Stock Exchange
("BSE") delisted the Company's Common Stock. BSE claims that the Company does
not currently meet the BSE's listing requirements related to shareholders'
equity and market value of the float. The trading price of the Company's common
stock from September 1996, to January 16, 1997 (the day of the trade prior to
the announcement of the Agreement), was $0.03125 per share. (See "Information
About the Acquisition and Dissolution -- Market Price Data.")
Delinquency in Rent. In February 1996, a claim against the Company
(the "Action"), for delinquency in rents was satisfied by a settlement agreement
between the Company and its landlord, the terms of which included reinstatement
of the Company's lease, a repayment schedule, the deferral of a portion of each
month's rent for a six-month period, the stipulation to waive all periods of
limitation to bringing the Action to trial following any occurrence of an
uncured default, and the authorization for possession of the premises with a
24-hour notice provided by facsimile to the Company. The stipulation also
provided that in the event of default, the landlord could demand immediate
payment of all deferred rent. The Company paid approximately one-third of its
rent due for the month of December 1996, and was delinquent in paying the rent
due for the month of January 1997. On January 31, 1997, the Company received a
24-hour notice for possession of the premises due to delinquent rents. On
February 3, 1997, the landlord agreed to a 24-hour extension of the notice, on
the condition that all rents would be brought current immediately upon the
funding of the BBI Demand Note. (See "Information About the Acquisition and
Dissolution -- Related Transactions -- BBI Demand Note.") All lease payments
were brought current on February 6, 1997, and the Company continues to be
current on lease payments.
Material Differences in the Rights of Security Holders as a Result of This Tran-
saction
Dissolution. Following approval of the Agreement by the Shareholders,
the Company will pay all outstanding liabilities and thereafter the remaining
net Purchase Price ("Remaining Purchase Funds") will be distributed to the
Company's shareholders of record as of the date of the dissolution of the
Company. Management currently estimates the aggregate per share distribution to
be between $0.053 and $.056.
Method of Distribution of the Remaining Purchase Funds. The Company
has agreed to employ its transfer agent, American Stock Transfer and Trust
Company (the "Transfer Agent"), for the distribution of the Remaining Purchase
Funds to the shareholders of record of the Company as of the date of
dissolution. Shareholders with fewer than 500 shares will be required to sign a
letter of acknowledgment in order to receive a distribution. Shareholders owning
more than 500 shares will be required to surrender their stock certificate(s)
prior to receipt of distribution. The Transfer Agent will commence distribution
of approximately $1,824,000 of the Purchase Price to such shareholders as soon
<PAGE>
as practicable after the Company's certificate of dissolution is filed with the
California Secretary of State. Pursuant to the terms of the Agreement, the
Remainding Purchase funds held in escrow will be released after March 31, 1998,
less any amounts held in escrow that may be paid to Buyer, up to $250,000, as a
result of the Company's failure to meet $500,000 in book value on the Closing
Date, or as a result of the fulfillment of certain indemnity requirements.
Shareholders should not send any stock certificates until they receive the
letter of transmittal and related instructions from the Transfer Agent.
APPROVAL OF THE AGREEMENT AND DISSOLUTION
During the past two years, the Company's negotiations with entities for
the purpose of merging with or being acquired by a financially supportive
company which presented synergy with the Company's product lines and
technologies failed to achieve any viable agreement and solution for the
Company's financial needs. The Board pursued, and instructed the executive
officers of the Company to pursue, various potential opportunities. During this
period, no proposal (other than the current proposal) to acquire or recapitalize
the Company successfully completed the Company's preliminary evaluations and due
diligence.
At a special meeting held on January 28, 1997, the Board considered the
current financial constraints facing the Company. As a result of implementation
of the Company's business combination transaction strategies during the
preceding two years, the Board has determined that the terms and conditions of
the proposed Acquisition, and resultant dissolution of the Company, are fair and
equitable to, and in the best interest of, the Company's shareholders. Thus, the
Board has determined not to obtain either a fairness opinion or an appraisal of
the proposed Acquisition. The Board unanimously recommends that Shareholders
vote to approve the Agreement and the transactions contemplated, as follows:
(1) To consider and vote upon a proposal (a) to approve the Asset
Purchase Agreement, for the acquisition of substantially all of
the assets of Source Scientific, Inc., by BBI-Source Scientific,
Inc., a wholly-owned subsidiary of Boston Biomedica, Inc. and
the related transactions contemplated thereby, including the
assumption by the Buyer of substantially all of the Company's lia-
bilities and a cash payment to the Company, all as more fully
described in this Proxy Statement and the Asset Purchase Agree-
ment, a copy of which is attached as Exhibit A hereto; and (b)
thereafter to dissolve the Company and distribute its net re-
maining assets in cash to the Company's shareholders of record on
the date of dissolution of the Company.
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
APPROVAL OF THE ASSET PURCHASE AGREEMENT ALSO IS AN APPROVAL OF THE
DISSOLUTION OF THE COMPANY. AFTER THE CLOSING OF THE ACQUISITION, ONE OR
MORE CASH DISTRIBUTIONS WILL BE SENT TO THE SHAREHOLDERS OF RECORD ON THE DATE
OF DISSOLUTION OF THE COMPANY.
DISSENTERS' RIGHTS
Under Chapter 13 of the California General Corporation Law,
shareholders of the Company will not have dissenters' rights and the right to
receive the appraised value of their Common Stock, unless demands for payment in
accordance with Section 1300 of Chapter 13 are filed with respect to at least
1,727,000 Shares (5% of the outstanding Shares). Notwithstanding the limitation
provided by the California General Corporation law, a condition precedent of the
Buyer is that holders of not more than one-half percent of the shares of the
Common Stock shall have taken steps to preserve their rights as dissenting
shareholders. (See Exhibit B - Section 6.2.)
The following is a summary of the procedural requirements of Sections
1301 through 1304 of Chapter 13:
Dissenting shareholders may receive a cash payment equal to the fair
market value of their shares, determined exclusive of any appreciation or
depreciation of value arising from accomplishment or expectations of the
Agreement, but adjusted for any stock split, reverse stock split or share
dividend which becomes effective thereafter. To be entitled to such cash payment
if the Acquisition is consummated, a shareholder (i) must not vote his or her
shares in favor of the Agreement and (ii) must deliver a written demand for
appraisal of his or her shares not later than the date of the Special Meeting.
The written demand must state the number of shares held by the shareholder and
statement of the price such shareholder deems to be the fair value of the shares
as of March 7, 1997. The fair value statement will constitute an offer to sell
the shares at that price. Written demands must be filed with the Company,
attention: Catherine Curtis, Secretary, 7390 Lincoln Way, Garden Grove,
California 92841. Within 10 days after the shareholder approval of the
Agreement, the Company is required to give notice of such approval to
shareholders who have made written demands, and provide them with a copy of
Sections 1300 through 1304 of Chapter 13, a brief description of the procedure
to be followed, and a statement of the price the Company deems to be the fair
value of the Shares, which statement will constitute an offer to buy the Shares
at that price.
Within 30 days after the notice of shareholder approval is mailed, a
dissenting shareholder must submit the certificates for the Common Stock that
the shareholder demands that the Company purchase, to be identified, by stamp or
legend, as dissenting shares. If the Company agrees that the Common Stock
constitutes dissenting shares and agrees with the dissenting shareholder about
the fair value of the Common Stock, then within 30 days after the Agreement or
within 30 days after any statutory or contractual conditions to the Agreement
are satisfied, which is later, the Company shall pay the dissenting shareholder
the agreed price with interest from the date of the Agreement.
<PAGE>
If the Company denies that the Common Stock constitutes dissenting
shares, or fails to agree with the dissenting shareholder on the fair value
thereof, then within six months after the notice of shareholder approval is
mailed, such shareholder or the Company may file an action in Superior Court of
the proper county, seeking a determination of whether the Common Stock are
Dissenting Shares or a determination of the value of the shares. If no such
action if filed within six months after the date on which notice of shareholder
approval is mailed, the right of appraisal of all dissenting shareholders will
terminate. Regardless of whether an appraisal proceeding is instituted, any
dissenting shareholder has the right, with the consent of the Company, to
withdraw his or her demand for appraisal.
Under California law, only holders of record of the Common Stock are
entitled to appraisal rights as described above, and the procedures to perfect
such rights must be carried out by and in the name of holders of record. Persons
who are beneficial but not record owners of the Common Stock and who wish to
exercise appraisal rights with respect to the Agreement should consult promptly
with the record holders of such shares as to the exercise of such rights.
Any shareholder who is given dissenters' rights is prohibited from
attacking the Agreement at law or in equity in any other respect, except to test
whether the required number of shares were legally voted in favor of the
Agreement. This prohibition does not apply if one of the parties is controlled
by or is under common control with another party to the Agreement. In that case,
a shareholder can attack the validity of the Agreement; if he or she does, his
or her appraisal rights will have been waived, but the controlling parties will
have the burden of proving that the transaction is just and reasonable as to the
Shareholders of any controlled party.
The foregoing does not purport to be a complete statement of the
provisions of Chapter 13 of the California General Corporation Law and is
qualified in its entirety by reference to that Chapter Sections 1301 through
1304 of which are reproduced in full as Appendix B to this Proxy Statement.
INFORMATION ABOUT THE ACQUISITION AND DISSOLUTION
The following summary of the Agreement, Acquisition and Dissolution is
qualified in its entirety by reference to the full text of the Asset Purchase
Agreement, a copy of which is attached as Exhibit A to this Proxy Statement.
Summary of the Terms of the Asset Purchase Agreement
1. Purchase and Sale. Buyer will purchase and the Company will sell all of
the assets and business of the Company (the "Company Assets"), and Buyer will
assume the following liabilities (collectively, the "Assumed Liabilities"): (i)
those liabilities as derived from the Company's unaudited balance sheet as of
December 31, 1996, and liabilities arising in the ordinary course of business
thereafter and through the Closing Date and (ii) such other liabilities Buyer
agrees in writing to assume, to the extent the Assumed Liabilities remain unpaid
and outstanding as of the Closing Date.
2. Consideration. The Purchase Price for the Company Assets shall consist
of (i) $2,144,000, paid by Buyer in the form of certified check or by federal
funds wire transfer (the "Purchase Funds") and (ii) the assumption by Buyer of
the Assumed Liabilities. The Purchase Funds, less remaining liabilities, will be
deposited with the Transfer Agent for distribution to the shareholders of record
of the Company on the date of dissolution. (See "Material Differences in the
Rights of Shareholders--Method of Distribution of the Remaining Purchase Funds",
and "Purchase Price Adjustment; Escrow Account.")
3. Purchase Price Adjustment; Escrow Account. The Purchase Funds are
subject to adjustment on the basis of an audit of the Company's balance sheet to
be conducted as of the date of the Closing by the Buyer's auditors, Coopers &
Lybrand L.L.P. If the Company's tangible book value, as determined by reference
to the balance sheet audit, is less than $500,000, the Purchase Price will be
reduced on a dollar-for-dollar basis accordingly. For the purpose of such
adjustment, or any indemnity claims, $250,000 of the cash portion of the
Purchase Funds shall be deposited at the Closing into an interest-bearing escrow
account. Any balance remaining in such escrow account at March 31, 1998, shall
be distributed to the Shareholders of the Company by the transfer agent.
4. Conduct of Business. Until the Closing, the Company is required to (i)
conduct the Company's business only in the ordinary course, consistent with
prior practices and use its best efforts to preserve the good-will of all
parties having business relations with it; (ii) refrain from paying any
dividend, making any extraordinary distribution or granting any executive salary
adjustment or bonus other than pursuant to compensation programs existing on
March 26, 1997; (iii) refrain from making any capital expenditures, any material
sale or other disposition of assets or encumbering any of its properties or
assets; (iv) refrain from incurring any obligations except in the ordinary
course of business; and (v) keep the Company's assets insured under the terms of
its current insurance.
5. The Agreement. Pursuant to the terms of the Agreement, the Company is
required, among other things, to: (i) perfect Buyer's title to the Company
Assets, (ii) disclose any liens and encumbrances, litigation or threatened
claims; (iii) complete the preparation and filing of all required Federal and
state income and other tax returns and proper payment of taxes in accordance
therewith; (iv) indemnify Buyer against damages and expenses relating to breach
of representations, warranties, and covenants and other liabilities; and (v)
comply with such other terms and conditions as are customary in a transaction of
this type and/or are reasonably requested by Buyer and the Company. The Company
has provided Buyer with usual and customary representations and warranties,
including those related to its (a) legal status and capitalization; (b)
compliance with laws and regulations; (c) ownership and condition of tangible,
intangible, and intellectual properties; (d) inventories; (e) contracts and
employee relations; and (f) financial statements and conditions.
<PAGE>
6. Conditions. Consummation of the Acquisition transactions is subject to
satisfaction or waiver by Buyer of certain conditions precedent: (i) employment
and non-competition agreements shall have been signed by the Company's key
personnel, all existing employment contracts to which the Company is a party
shall have been terminated, and no new or revised compensation plans with
respect to any and all management personnel shall have been entered; (ii) there
shall not be any litigation of any nature pending, or threatened to be filed or
initiated, which in the opinion of counsel for Buyer is likely to result in the
restraint or prohibition of the consummation of the Agreement transactions;
(iii) the lease with respect to the Company's facility shall have been reduced
to reflect a decrease in the amount of space leased to 25,000 square feet
and the payments due thereunder shall have been proportionately reduced; (iv) a
satisfactory report from the Buyer's auditors, Coopers & Lybrand L.L.P.
regarding the Company's business and financial condition shall have been
obtained, as well as approval of the transaction by the Buyer's Board of
Directors and BBI's lending bank, The First National Bank of Boston; (v) the
Company shall have complied with California bulk sales law provisions; (vi) the
Company shall suspend transactions involving a) capital stock, b) new debt, c)
contracts, d) capital expenditure, e) disposal of any asset, except in the
normal course of business, without the Buyer's prior knowledge and consent;
(vii) Shareholders of the Company shall have approved the Agreement and holders
of not more than one-half percent (.5%) of the outstanding securities shall have
exercised any dissenter's appraisal rights (See "Dissenters' Rights."); and
(viii) Buyer shall have obtained an opinion from a recognized investment banking
firm to the effect that the purchase price is fair to BBI's stockholders from a
financial point of view.
7. Indemnification by the Company. The Company has agreed to indemnify the
Buyer and BBI from and against all losses, damages, liabilities, payments and
obligations resulting from any breach of any of the Company's representations,
warranties, covenants and related issues. Such right to indemnification shall
terminate unless Buyer or BBI provides notice of such breach not later than
March 31, 1998. The maximum of such indemnification is $250,000.
8. Non-Solicitation. The Company is required not to, directly or
indirectly, encourage, solicit, initiate, engage or participate in discussions
or negotiations with any person or entity (other than the Buyer) concerning any
merger, consolidation, sale of material assets, proxy solicitation or other
business combination, or provide any nonpublic information concerning the
business, properties or assets of the Company or any subsidiary to any person or
entity (other than the Buyer) other than in connection with the sale of product
in the ordinary course of business.
9. The Closing. The Closing of the Agreement (the "Closing") will be held
at the offices of Brown, Rudnick, Freed & Gesmer, counsel to the Buyer, at its
offices at One Financial Center, Boston, Massachusetts, on or before May 5, 1997
(the "Closing Date").
10. Fees and Expenses. All fees and expenses incurred in connection with
the Agreement and the transactions contemplated thereby shall be paid by the
party incurring such fees or expenses, whether or not the Acquisition is
consummated. Further, Buyer and the Company will make cross-representations and
warranties, and each will hold the others harmless for any brokerage fee arising
on its account with respect to the transactions described herein.
11. Termination; Termination Fees. Notwithstanding approval by the
Company's shareholders, the Agreement may be terminated by mutual consent of the
Company and the Buyer, or by either such party if there has been a material
misrepresentation, breach of warranty or covenant, or if the conditions
precedent to Closing have not been satisfied have not been satisfied at or prior
to the Closing. The Company shall pay to the Buyer, upon demand, a termination
fee if (i) after the Agreement is executed, the Company's shareholders do not
approve the Acquisition by the requisite vote; (ii) the conditions to the
Acquisition are not satisfied (other than regulatory approvals and breach by the
Buyer); (iii) the Company materially breaches the Asset Purchase Agreement; or
(iv) the Company terminates for any reason, other than as a result of a willful
and material breach of the Agreement by the Buyer. The termination fee shall be
an amount equivalent to the Buyer's expenses. In addition, if, on or before
March 26, 1998, the Company (or any affiliate) enters into an acquisition with a
person other than the Buyer, the Company is obligated to pay a $250,000
termination fee to the Buyer.
Related Transactions
Concord Growth Corporation. In contemplation of the Agreement, Concord
agreed to reduce the minimum interest payment under the terms and conditions of
the Company's line of credit agreements with Concord to $2,500 per month, in
return for an increase in the interest rate to prime rate plus five percent
(5%), and a reduction in advancement to seventy percent (70%). Upon repayment of
the line of credit and accrued interest thereon, by April 30, 1997, Concord has
represented that it will waive its right to prepayment penalties of any kind.
BBI Demand Note. On February 6, 1997, the Company received a loan of
$500,000 from BBI, secured by all of the Company Assets, including a first
priority security position in all of the Company's inventory and equipment. The
BBI Demand Note, bearing an interest rate of fifteen percent (15%) per annum, is
payable on demand. Concord subordinated its security interest in the Company's
inventory and equipment, in exchange for payment from the proceeds of the BBI
Demand Note of its Accommodation Note dated October 1, 1996 (the "Accommodation
Note") of $200,000. On March 17, 1997, BBI advanced an additional $150,000 to
the Company under the same terms and conditions as the BBI Demand Note.
<PAGE>
Cancellation of Certain Stock-related Transactions. Pursuant to the
exercise of stock options in 1994 and acquisition of shares of Common Stock in
the Company's 1990 reorganization, Mr. John Karsten (Director and former Chief
Financial Officer of the Company) acquired 323,875 shares of Common Stock. As
payment for the shares, Mr. Karsten issued notes to the Company in the aggregate
amount of $161,937.50. The notes were collateralized under a security agreement
between Mr. Karsten and the Company by the 323,875 shares. The Board has
determined that collectibility of the notes is doubtful and that a condition
incident to the Agreement requires the Company to retain funds incident to the
costs of collection. Therefore, the Board approved the cancellation of the notes
and the return of 323,875 shares of Common Stock to the Company. The funds which
would otherwise have been distributed to Mr. Karsten upon dissolution of the
Company related to such returned shares will be distributed among the remaining
shares.
Appraisal
The Company is not intending to obtain an appraisal. (See "Approval of
the Agreement and Dissolution.")
Anticipated Accounting Treatment; Certain Federal Income Tax Consequences to the
Company
The Company will account for the Acquisition as a purchase and sale of
its assets. The sale of the Company Assets to the Buyer will be a taxable
transaction, and the Company will recognize gain or loss with respect to each
asset measured by the difference between the sales price allocable to the asset
and the basis of the asset. It is anticipated that the Company will have
sufficient net operating losses to offset any net gain on sale. Accordingly, no
income tax liabilities should be incurred by the Company with respect to the
sale. Sales tax may be incurred with respect to the sale of tangible personal
property which is not held by Buyer for resale or is not otherwise exempt from
sales tax.
Certain Federal Income Tax Consequences to the Company's shareholders
The following is a summary of the Federal income tax consequences that
an individual shareholder who is a U.S. citizen or resident alien may incur in
connection with the dissolution of the Company and the resultant distribution.
Such summary is based on the presently applicable Internal Revenue Code (the
"Code"), and the related regulations, rulings and decisions currently in effect.
The summary does not reflect any tax laws (whether related to income, property,
transfer or other forms) of any jurisdiction other than the Federal income tax
laws of the United States.
A shareholder will recognize gain (or loss) in the amount by which the
cash received by the shareholder pursuant to the Dissolution is greater (or
less) than the shareholder's tax basis in the shares held. Recognized gain or
loss will be capital gain or loss, assuming the shares are held as a capital
asset, and will be long-term capital gain or loss if the Shares were held for
more than one year and short-term capital gain or loss if the Shares were held
for one year or less.
Each shareholder should seek advice from his or her respective tax
advisor as to the particular tax consequences of the Agreement and the
distribution of the Remaining Purchase Funds, including the application of
state, local and foreign tax laws and possible future changes in Federal Income
Tax Laws and the interpretation thereof, which can have retroactive effects.
Federal and State Regulatory Requirements
No federal or state regulatory requirements or approvals are applicable
to the transactions contemplated by the Agreement between Buyer and the Company.
The Dissolution will be in accordance with California law. Following approval of
the Agreement and the transactions contemplated thereby, the Company will make
arrangements for its remaining liabilities and will thereafter file such
documents with the California Franchise Tax Board and the Secretary of State's
office as are required to dissolve the Company.
Pending Material Contracts
BBI has discussed with the Company the possibility that, on or before
the Closing Date, BBI might lend additional funds to the company for its
operating capital purposes. The terms under which such additional funds might be
lent have not been negotiated and there can be no assurances that any additional
funds will be lent to the Company.
Market Price Data
The Company's Common Stock has been traded on the Boston Stock Exchange
under the trading symbol "SSF" and quoted on the Electronic Bulletin Board under
the trading symbol "SSFE". Due to the Company's apparent inability to maintain
minimum listing requirements associated with its shareholder equity and market
value of the Common Stock, the BSE delisted the Company's Common Stock effective
February 26, 1997. The following table sets forth, for the periods indicated,
the high and low closing prices per share of Common Stock, combined as reported
by the BSE and OTC trades reported as the result of the quotes on the Electronic
<PAGE>
Bulletin Board. The quotations shown below, to the extent that they are not
reported by the BSE, represent interdealer prices without adjustment for retail
markups, markdowns or commissions, and do not necessarily reflect actual
transactions. On January 16, 1997, the day that the Company's stock was traded
before the Company announced the proposed Acquisition, the closing price of the
Company's common stock was $0.031. As of March 7 1997, the Company had
approximately 738 shareholders of record and approximately 900 beneficial
holders.
<TABLE>
<CAPTION>
Fiscal Year High Low
<S> <C> <C> <C>
1994 First Quarter $1.50 $0.50
Second Quarter $1.25 $0.75
Third Quarter $1.75 $1.00
Fourth Quarter $1.50 $0.75
1995 First Quarter $0.75 $0.72
Second Quarter $0.59 $0.34
Third Quarter $0.44 $0.31
Fourth Quarter $0.56 $0.31
1996 First Quarter $0.94 $0.50
Second Quarter $0.56 $0.44
Third Quarter $0.22 $0.17
Fourth Quarter $0.75 $0.06
1997 First Quarter $0.25 $0.06
Second Quarter $0.05 $0.03
Third Quarter, to 2/28/97 $0.20 $0.03
</TABLE>
INTEREST OF CERTAIN PERSONS
As a condition precedent to the transactions contemplated by the
Agreement, each senior executive employee of the Company has waived performance
of his or her respective employment agreement with the Company. Employment
agreements and non-competition agreements may be signed by BBI and selected
senior management of the Company.
BBI has represented to the Company that, effective upon the Closing or
shortly thereafter, employees of the Company who become employees of BBI or its
subsidiaries will be immediately eligible for stock options under BBI's employee
stock option plan, subject to registration of the stock underlying the options.
No proportional or other exchange of options for options between the Company's
and BBI's stock option plans is intended. BBI has not indicated any plan to
nominate any of the Company's directors to BBI's Board of Directors.
The Agreement does not provide for consideration or exchange of
unexercised stock options granted to employees of the Company under its
incentive stock option plan. The Buyer has informed the employees of the Company
that BBI's stock plan will provide eligibility for all individuals who become
employees of BBI or its subsidiaries. No consideration or exchange of any of the
currently outstanding warrants or options, including not yet vested or exercised
directors' and consultants' non-qualified stock options granted under the
Company's incentive stock option plan, is required under the terms of the
Agreement.
The Company's Directors and Officers are as follows:
<TABLE>
<CAPTION>
Name (1) Capacity Director Since
<S> <C> <C>
Jerry Gallwas Director 1996
John A. Karsten Director 1975
Barry Plost Director 1996
Bruce Popko Director 1996
Susan L. Preston (2) Director, General Counsel 1994
Richard A. Sullivan (2) President, CEO, and Chairman of the Board 1994
Thomas J. White Director 1996
Mokhtar A. Shawky CFO
Catherine Curtis Secretary
<FN>
(1) No director or executive officer has any arrangement or understanding
whereby he or she has been or will be selected as a director. Further, no
director is related to any other director or executive officer. All outside
directors received or are entitled to per meeting fees of $500.00 per
director, and directors' grants of 30,000 stock options per director per
annum, vesting quarterly, under the Company's stock option plan.
(2) Employees of the Company who are also directors are not entitled to and did
not receive compensation for attending meetings of the Board of Directors,
nor received directors' stock option grants.
</FN>
</TABLE>
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's outstanding Common Stock as of February
28, 1997, assuming the exercise of all exerciseable outstanding warrants and
options, (a) by each person who is known by the Company to own beneficially more
than five percent of the shares of the Company's Common Stock; (b) by each
director and/or executive officer of the Company; and (c) by all directors and
officers as a group.
<TABLE>
<CAPTION>
Number of Common Shares Beneficially Owned (1)
Shareholder Name Number of Shares Percent
<S> <C> <C>
John E McConnaughy Jr (2) 5,800,000 16.64
Stanley Becker (3) 2,515,416 7.21
Rompos Ltd (4) 2,000,000 5.74
Richard Sullivan (5) 375,590 1.08
John Karsten (6) 172,739 *
Susan Preston (7) 89,990 *
Thomas White (8) 15,000 *
Bruce Popko (8) 15,000 *
Jerry Gallwas (8) 15,000 *
Barry Plost (8) 15,000 *
All officers and directors as a group (7 977,748 2.80
persons) (9)
<FN>
* Less than one percent
1. Includes all vested options at the date of this Proxy Statement.
2. Includes 5,800,000 shares of common stock issued February 1, 1997, upon the
conversion of 1996 Debentures and accrued interest thereon to January 31,
1997. Mr. McConnaughy's address is 1011 High Ridge Road, Stanford, CT 06905.
3. Includes 400,000 shares of common stock issued February 1, 1997, upon the
conversion of 1996 Debentures and accrued interest thereon to January 31,
1997. Mr. Becker's address is 55 East End Avenue, Apt.7, New York, NY 10028.
4. Includes 2,000,000 shares of common stock issued February 1, 1997, upon the
conversion of 1996 Debentures and accrued interest thereon to January 31,
1997. Rompos Ltd.'s address is Chateau Routaf, Rouvier Place, SARL Chateau
Vert, 83149 BRAS, France.
5. Includes 27,430 shares of stock owned of record by Mr. Sullivan, 11,830 of
which resulted from the exercise of options granted under the ISO Plan; and
348,160 shares reserved for the exercise of additional options granted to
such individual under the ISO Plan. Mr. Sullivan's address is c/o the
Company at 7390 Lincoln Way, Garden Grove, CA 92841.
6. Includes 45,000 shares reserved for the exercise of options that have vested
pursuant to the July 1994 and July 1995 grants to such individual, each such
grant consisting of 30,000 Directors Options. Mr. Karsten's address is c/o
the Company at 7390 Lincoln Way, Garden Grove, CA 92841.
7. Includes shares reserved for the exercise of options granted to such in-
dividual under the ISO Plan., which options will be canceled as discussed
above. Ms. Preston's address is c/o the Company at 7390 Lincoln Way, Garden
Grove, California 92841.
8. Includes shares reserved for the exercise of options that have vested
pursuant to grants of Directors Options to each such individual. The address
of each such individual is c/o the Company at 7390 Lincoln Way, Garden
Grove, California 92841.
9. Includes all shares referenced in notes 5 through 8, inclusive, and shares
reserved for the exercise of options granted under the ISO Plan to two
individuals who are executive officers, but not directors, of the Company.
</FN>
</TABLE>
CERTAIN INFORMATION CONCERNING THE COMPANY
The Company's products and services are offered to the medical, industrial,
environmental and other technology-related businesses, which have a broad range
of detection requirements to perform measurements critical to their industrial
processes within legal and regulatory restrictions or requirements. The
Company's sales are generated via strategic alliances, OEM relationships,
contract manufacturing, service contracts, and contract research and
development. The Company's OEM manufacturing agreements are with major
corporations established in the marketing of medical-related products. The
Company manufactures all of its products at its facility in Garden Grove,
California. Systems are assembled from component parts and high-level
sub-assemblies in a minimum amount of time, utilizing completed surface mount
boards and electronic components purchased from a number of electronic component
distributors.
The Company uses a common hardware technology platform for its multiple
product lines, expanding its ability to apply the Company's technologies into
several different specialized applications, such as clinical diagnostics,
detection and quantification of environmental pesticides, testing for food and
beverage pathogens (toxins) and other related value-added applications. A
significant amount of the Company's design components are transferable from one
product line to another.
<PAGE>
Product Applications
The Company's current products have been commercialized since 1985, with
the newest being available for production in late 1996. The Company's product
line includes two photometers (MicroChem(TM) and ChemStat(TM)), a luminometer
(E/LUMINA(TM)), a pre-testing sample preparation system (EXEC-WASH(TM)), a
fluorescence polarization analyzer (Focus(TM)), a fluorometer (FluoroStat(TM))
and a microwell plate reader (PlateMate(TM)).
Services
Design, Development and Manufacturing Services
The Company offers design, development and manufacturing services to
companies seeking to market biomedical products manufactured under
government-approved manufacturing practices. The Company's OEM services range in
complexity from contract manufacturing to full system development and
distribution. Source's manufacturing facility is approved by governmental
agencies as an FDA/GMP facility, and was registered by TUV Reinland for ISO 9001
certification in April 1996. (See "Patents and Regulatory Affairs".)
After-Sales-Service
Management believes that after-sales service is a major marketing advantage
in various of the Company's market segments, since many of the Company's
customers do not maintain their own full service departments. A key element in
the Company providing service is Servi-Trak(TM), a proprietary software tracking
program. The Company's Service department is located in the same facility as its
research and development and manufacturing operations. A fully functional
service center located in Giessen, Germany, is contracted by the Company to
provide European service and support.
Technical Support Services
The Company's Technical Services department develops and distributes mat-
erials and training programs for operation of its products and provides train-
ing and updates for the Company's independent manufacturer's representatives
and international distributors. The Technical Services department also pro-
vides technical support to its customers, and is responsible for the opening
and closing of customer complaint files for FDA purposes.
Properties
The location of the facility, in Garden Grove, California, is comprised of
41,645 square feet of total space which includes a "wet applications" laboratory
and several secure areas for proprietary development of customer projects. The
Company has contracted with a real estate services company for the purpose of
subletting some excess office and open area space in its facility.
Patents and Regulatory Affairs
The Company currently has five issued U.S. patents, and one U.S. patent
application on file, covering significant aspects of the Company's core
technology techniques, as well as several electronic and mechanical designs
employed in the Company's existing products.
In April 1996, the Company obtained registration of its manufacturing
procedures and policies with the International Standards Organization ("ISO").
The Company's ISO-9001 certification, registered by TUV Rheinland, encompasses
the established international standards and requirements that measure quality
principals and practices, including all aspects of Design, Manufacturing and
Service. Such certification of the Company's processes will enable the Company's
products to be sold in over 90 countries globally, and management believes will
be an advantage for the Company to attract new prospective OEM customers seeking
manufacturing and servicing facilities. In order to be made available for sale
in the United States, the Company's products require approval by governmental
agencies, primarily the FDA. The Company's facility is an FDA Good Manufacturing
Practices ("FDA/GMP") facility.
Employees
The Company has a total of 45 full-time employees with an average of six
years of service, one part-time employee, one temporary employee and one
consultant. The Company is not a party to any collective bargaining agreements
and believes it has a good relationship with its employees.
<PAGE>
SELECTED FINANCIAL DATA
The following tables present selected consolidated financial data of
the Company, incorporated from the Company's Annual Reports for 1993 through
1996, and the six months ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended June 30 Six Months Ended
------------------------------------------------- -------------------------
December 31, December 31
1993(*1) 1994(*2) 1995 1996 1995 1996
------------- ----------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:Revenue:
Product sales................................ $1,089 $3,131 $3,018 $3,630 $1,333 $1,223
Research contract sales...................... 230 189 97 34 42
Services..................................... 135 514 1,670 1,597 857 615
Total revenue............................ 1,224 3,875 4,877 5,324 2,224 1,880
Costs and Expenses:
Cost of product sales........................ 682 2,254 2,268 2,364 938 987
Cost of research contract sales.............. - 161 113 52 16 24
Cost of services............................. 67 176 818 921 434 391
Research and development..................... 210 734 839 821 406 375
Selling general and administrative........... 646 1,623 1,647 1,158 630 640
Lease obligation cost........................ - 300 - - - -
Operating income (loss).................. (381) (1,373) (808) 8 (200) (537)
Interest expense, net........................ 32 52 132 80 11 42
Income (loss) on discontinued operations..... 211 (15) - - - -
Loss on disposal of discontinued operations.. - (66) - - - -
Extraordinary item - gain from reduction
of lease obligation .................. - - 309 - - -
Net income (loss)................ ($ 202) ($1,506) ($ 631) ($ 72) ($ 211) ($ 579)
Net income (loss) per share...................... ($0.06) ($0.25) ($0.06) $0.00 ($0.01) ($0.01)
Weighted average common and common
equivalent shares outstanding.................. 3,276 5,947 10,659 20,111 15,401 20,220
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended June 30 Six Months Ended
------------------------------------------------- -------------------------
December 31, December 31
1993(*1) 1994(*2) 1995 1996 1995 1996
------------- ----------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $28 $64 $35 $162 $4 $44
Total Current Assets............................. 457 2,494 1,933 2,431 1,876 1,636
Current Liabilities.............................. 672 2,869 1,491 1,194 1,445 957
Deferred rent, Notes payable, Lease obligation (9)
(10) (11) 352 512 230 859 240 851
Total liabilities................................ 1,024 3,381 1,721 2,053 1,685 1,808
Redeemable Series C Preferred Stock.............. 15 15 23 - 26 -
Total shareholders' equity....................... ($188) 419 469 568 374 (1)
<FN>
(*1)The Financial Statements for June 30, 1993 are for the then business and
operations of Alton Group, Inc., the former name of Source Scientific,
Inc., and its wholly-owned subsidiary, Alton Instruments Corporation.
(*2) Alton Group acquired Source Scientific Systems, Inc. in January 1994.
The Financial Statements are for the then combined business and operations
of Alton Group, Inc. and its wholly-owned subsidiaries, Source Scienti-
fic Systems, Inc. and Alton Instruments Corporation.
Going Concern Considerations and Management's Plans: For June 30, 1993,
1994 and 1995, the Company's financial statement included the following
statement: The Company has incurred net operating losses and deficiencies in
working capital in 1993 and 1994 which raise substantial doubt about the
Company's ability to continue as a going concern.
Acquisition: On January 21, 1994, the Company acquired from MicroProbe all
of the issued and outstanding shares of common stock of Source Scientific
Systems, Inc. for total consideration of $2,450,000 plus acquisition expenses of
approximately $104,000. A total of $1,500,000 was paid in cash and the balance
was to be paid under the terms of a $950,000 Notes payable on March 27, 1995.
The Company also assumed $360,000 of a formerly joint MicroProbe and Source
revolving loan obligation to Silicon Valley Bank.
Business Disposition: In November 1992, the Company sold all the common
stock of Wespercorp International which consisted of assets and liabilities of
the Company's Peripheral Group business with an approximate net book value of
$40,000. For additional information refer to the Company's Registration
Statement on Form SB2, effective October 21, 1994.
Lease Obligation: At June 30, 1994, the remaining cost, net of sublease
income, of $517,000 of the lease on the Company's prior premises in Irvine,
resulted from moving the corporate offices to the Source Scientific Systems,
Inc. facility in Garden Grove.
</FN>
</TABLE>
<PAGE>
Source Scientific, Inc. Consolidated Financial Statements for the Years Ended
June 30, 1996 and 1995 with Independent Auditors' Report thereon
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SOURCE SCIENTIFIC, INC. PAGE
Report of Independent Accountants, Corbin & Wertz F-1
Report of Independent Accountants, Coopers & Lybrand, L.L.P. F-2
Consolidated Balance Sheets - June 30, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
Ended June 30, 1996 and 1995 F-6
INDEPENDENT AUDITORS' REPORT
Board of Directors
Source Scientific, Inc.
We have audited the accompanying consolidated balance sheet of Source
Scientific, Inc. and its subsidiaries (the "Company") as of June 30, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Source Scientific,
Inc. and its subsidiaries at June 30, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
CORBIN & WERTZ
Irvine, California
September 13, 1996, except for Note 17 as to which the date is October 9, 1996.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Shareholders
Source Scientific, Inc.
We have audited the consolidated financial statements of Source Scientific, Inc.
(formerly Alton Group, Inc.; the "Company") as of June 30, 1995, and for the
year then ended listed in the index on page 15 of this Form 10-KSB. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is the express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as will as evaluation the overall financial statement presentation.
We believer that our audit provides a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Source Scientific, Inc. for the year ended June 30, 1995, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
December 14, 1995
F-2
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
ASSETS 1996 1995
---------- ----------
Current assets:
Cash and cash equivalents $ 162,000 $ 35,000
Accounts receivable, net of allowance
for doubtful accounts of $13,000 and
$20,000 at June 30, 1996 and 1995,
respectively 791,000 449,000
Inventories 1,263,000 1,269,000
Other current assets 215,000 180,000
---------- ---------
2,431,000 1,933,000
Property and equipment, net 72,000 121,000
Goodwill, less accumulated amortization
of $24,000 and $12,000 at June 30,
1996 and 1995, respectively 66,000 78,000
Other assets, net 52,000 81,000
---------- ---------
$ 2,621,000 $ 2,213,000
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 691,000 $ 868,000
Accrued expenses 239,000 204,000
Convertible debentures --- 60,000
Notes payable and bank line of credit 228,000 327,000
Deferred rent 36,000 2,000
Lease obligation --- 30,000
--------- ---------
1,194,000 1,491,000
Convertible debentures 629,000 ---
Deferred rent, net of current portion 230,000 230,000
--------- ---------
Total liabilities 2,053,000 1,721,000
--------- ---------
Commitments and contingencies
Redeemable Series C convertible
preferred stock --- 23,000
Shareholders' equity:
Common stock; no par value, authorized
75,000,000 shares, issued and
outstanding 20,152,919 shares and
14,739,434 shares at June 30, 1996
and 1995, respectively 20,754,000 20,744,000
Accumulated deficit (20,024,000) (19,952,000)
Shareholder notes receivable from the
sale of common stock (162,000) (323,000)
----------- -----------
Total shareholders' equity 568,000 469,000
----------- -----------
$ 2,621,000 $ 2,213,000
========= =========
See accompanying notes to these consolidated financial statements
F-3
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1996 and 1995
1996 1995
--------- ---------
Revenues:
Product sales $ 3,630,000 $ 3,018,000
Research contracts 97,000 189,000
Service contracts 1,597,000 1,670,000
--------- ---------
5,324,000 4,877,000
--------- ---------
Cost of revenues:
Cost of product sales 2,364,000 2,268,000
Cost of research contracts 52,000 113,000
Cost of service contracts 921,000 818,000
--------- ---------
3,337,000 3,199,000
--------- ---------
Gross profit 1,987,000 1,678,000
--------- ---------
Operating expenses:
Selling, general and administrative 1,158,000 1,647,000
Research, development and engineering 821,000 839,000
--------- ---------
1,979,000 2,486,000
--------- ---------
Operating income (loss) 8,000 (808,000)
Interest expense, net 80,000 132,000
--------- ---------
Loss before extraordinary item (72,000) (940,000)
Extraordinary item - gain from
reduction of lease obligation --- 309,000
--------- --------
Net loss $ (72,000) $ (631,000)
========= =========
Per common share amounts:
Loss before extraordinary item $ (0.00) $ (0.09)
Extraordinary item --- 0.03
--------- ---------
Net loss $ (0.00) $ (0.06)
========== =========
Weighted average number of common
shares outstanding 20,110,501 10,658,540
=========== ===========
See accompanying notes to these consolidated financial statements
F-4
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
SHAREHOLDER
NOTES RECEIVABLE TOTAL
COMMON STOCK ACCUMULATED FROM THE SALE OF SHAREHOLDERS'
SHARES AMOUNT DEFICIT COMMON STOCK EQUITY
--------- ----------
<S> <C> <C> <C> <C> <C>
Balances, June 30, 1994 9,788,738 $20,000,000 $(19,320,000) $(283,000) $ 397,000
Issuance of common stock for note receivable
from shareholder 81,375 40,000 --- (40,000) ---
Exercise of common stock purchase options 575 300 --- --- 300
Exercise of common stock purchase warrants
and conversion of debentures 4,868,746 772,700 --- --- 772,700
Additional costs incurred in connection with
issuance of common stock in 1994 --- (69,000) --- --- (69,000)
Accretion of redeemable preferred stock --- --- (1,000) --- (1,000)
Net loss --- (631,000) --- (631,000)
--------- ---------- ---------- -------- -------
Balances, June 30, 1995 14,739,434 20,744,000 (19,952,000) (323,000) 469,000
Exercise of common stock purchase options
under Company Plan 78,425 11,000 --- --- 11,000
Exercise of other common stock
purchase options 134,375 1,000 --- --- 1,000
Exercise of common stock purchase warrants 658,667 118,000 --- --- 118,000
Common stock issued for cancellation of anti-
dilution provision 4,418,914 --- --- --- ---
Issuance of common stock for convertible
debentures and interest 345,504 41,000 --- --- 41,000
Issuance of common stock for capital
raising activity 100,000 --- --- --- ---
Cancellation of common stock issued for
shareholder note receivable forgiven (322,400) (161,000) --- 161,000 ---
Net loss --- --- (72,000) --- (72,000)
--------- --------- ------- -------- -------
Balances, June 30, 1996 20,152,919 $20,754,000 $(20,024,000) $(162,000) $ 568,000
========== ========== ========== ======== =======
</TABLE>
See accompanying notes to these consolidated financial statements
F-5
<PAGE>
SOURCE SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1996 and 1995
1996 1995
---------- ----------
Cash flows from operating activities:
Net loss $ (72,000) $ (631,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary item --- (309,000)
Depreciation and amortization 124,000 147,000
Gain on sale of property and
equipment (2,000) ---
Changes in operating assets and
liabilities:
Accounts receivable, net (342,000) 273,000
Inventories (28,000) 373,000
Other assets (23,000) (66,000)
Accounts payable (94,000) 132,000
Accrued expenses 7,000 189,000)
Customer deposits, deferred revenue
and lease obligation (35,000) (322,000)
Deferred rent 34,000 28,000
--------- --------
Net cash used in operating activities (431,000) (564,000)
--------- -------
Cash flows from investing activities:
Capital expenditures (12,000) (31,000)
Proceeds from sale of property and
equipment 2,000 ---
--------- --------
Net cash used in investing activities (10,000) (31,000)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
debentures 629,000 ---
Proceeds from issuance of note payable 180,000 ---
Repayment of notes payable (57,000) (84,000)
Net borrowings on bank line of credit (305,000) 26,000
Proceeds from exercise of common stock
purchase options 3,000 300
Proceeds from exercise of common stock
purchase warrants 118,000 692,700
Stock issuance costs --- (69,000)
--------- --------
Net cash provided by financing
activities 568,000 566,000
--------- ---------
Net change in cash and cash equivalents $ 127,000 $ (29,000)
Cash and cash equivalents, beginning of
year 35,000 64,000
--------- ---------
Cash and cash equivalents, end of year $ 162,000 $ 35,000
========= ========
Supplemental disclosure of cash flow
information -
Cash paid during the year for:
Interest $ 83,000 $ 141,000
========= ========
Income taxes $ 2,000 $ ---
========= ========
<PAGE>
Supplemental schedule of non-cash investing and financing activities:
1996
During 1996, the Company issued 345,504 shares of common stock for conversion of
debentures totaling $40,000 and accrued interest totaling $1,000.
During 1996, the Company issued notes payable in satisfaction of accounts
payable amounting to $83,000.
During 1996, the Company issued 66,093 shares of common stock through the
exercise of options for accrued vacation in the amount of $9,000.
During 1996, the Company canceled a note receivable from a shareholder amounting
to $161,000 for the return of 322,400 shares of common stock. In addition, the
Company concurrently canceled a $20,000 convertible debenture which was
outstanding at June 30, 1995.
See accompanying notes to these consolidated financial statements
F-7
The following are the Notes to the Consolidated Financial Statements
for the Years June 30, 1995 and 1996, as stated on the Company's Annual Report
for the fiscal year ended June 30, 1996:
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS: In January 1994, Source
Scientific, Inc. ("Source"), a Delaware corporation, then operating as Alton
Group, Inc. ("Alton"), acquired from MircoProbe Corporation ("MicroProbe") all
of the issued and outstanding shares of common stock of Source Scientific
Systems, Inc. for total consideration of $2,450,000 plus acquisition expenses of
approximately $104,000. A total of $1,500,000 was paid in cash and the balance
was to be paid under the terms of a $950,000 noninterest-bearing ($865,000 net
of imputed interest), subordinated promissory note due to MicroProbe.
As part of the acquisition, Alton assumed a $360,000 joint MicroProbe and Source
revolving line of credit due to Silicon Valley Bank. In addition, Alton issued
to MicroProbe a five-year warrant to purchase 50,000 shares of Alton's common
stock at an exercise price of $0.50 per share and a five-year warrant to
purchase an additional 50,000 shares of Alton's common stock at an exercise
price of $1.00 per share.
In November 1994, Alton and MicroProbe entered into an agreement to settle
outstanding issues between them in connection with the acquisition and a supply
agreement executed concurrent with the acquisition. As part of such settlement,
Alton's promissory note due to MicroProbe was canceled and the note balance of
$883,000 was recorded as a reduction to goodwill. Also pursuant to this
agreement, outstanding warrants to purchase 100,000 shares of Alton's common
stock were canceled.
In February 1995, Alton changed its name to Source.
Source designs, manufactures and markets devices and instrumentation used
worldwide in hospitals and laboratories for biomedical and industrial
applications. Source's instrument systems integrate various detection
technologies (photometry, fluorescence, luminescence), robotics, fluidics and
custom-designed software, into complete systems or special purpose modules. As
an original equipment manufacturer (OEM), Source offers for sale its expertise
in developing and manufacturing instruments to other companies for resale to
end-user customers. Revenues are generated from products sold and services
rendered through diagnostic systems suppliers (other instrument companies and
reagent companies), distribution networks, tradeshows and in-house
representatives.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The accompanying consolidated financial state-
ments include the accounts of Source and its wholly-owned subsidiaries
(collectively the "Company"). All material intercompany transactions have been
eliminated in consolidation.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those
estimates.
Fair Value of Financial Instruments The consolidated financial statements con-
tain financial instruments whereby the fair market value of the financial
instruments could be different than those recorded on a historical basis in the
accompanying consolidated financial statements. The Company's financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, convertible debentures and notes payable. The carrying amounts of the
Company's financial instruments approximate their fair values at June 30, 1996.
Concentrations of Credit Risk The Company, at times, maintains cash balances
at certain financial institutions in excess of amounts insured by Federal
agencies.
The Company sells its products throughout the United States and worldwide. The
Company extends credit to its customers and performs ongoing credit evaluations
of such customers. The Company does not obtain collateral to secure its accounts
receivable. The Company maintains allowances for potential credit losses and,
historically, such losses have been within management's estimates.
Two customers each accounted for approximately 22% of net sales for the year
ended June 30, 1996. Such customers accounted for 16% and 14%, respectively, of
accounts receivable at June 30, 1996. The Company had one customer which
accounted for approximately 37% of revenues for the year ended June 30, 1995.
Such customer accounted for approximately 22% of accounts receivable at June 30,
1995.
<PAGE>
The Company predominately sells its products in the biomedical and analytical
instruments industry. The Company's international sales were approximately 10%
and 12% of total revenues for the years ended June 30, 1996 and 1995,
respectively.
Cash and Cash Equivalents The Company considers all highly liquid short-term
investments with a remaining maturity, when purchased, of three months or less,
to be cash equivalents.
Inventories Inventories are stated at the lower of cost (first-in, first-out)
or estimated net realizable value.
The carrying value of Source's inventory represents management's estimate of its
net realizable value. Such value is based on forecasts for sales in the ensuing
years. The industry in which Source operates is characterized by rapid
technological advancement and change. Should demand for Source's products prove
to be significantly less than anticipated, the ultimate realizable value of such
products would be substantially less than the amount shown in the accompanying
consolidated balance sheet.
Property and Equipment Property and equipment are stated at cost, less accum-
ulated depreciation and amortization, and are being depreciated on a
straight-line basis over their estimated useful lives, which range from three to
ten years. Leasehold improvements are being amortized using the straight-line
method over the life of the asset or the term of the lease, whichever is
shorter. Major betterments and renewals are capitalized, while routine repairs
and maintenance are charged to expense when incurred.
Software Development Costs Software development costs incurred subsequent
to establishing technological feasibility are capitalized and amortized based on
the anticipated units to be shipped for the related products, with minimum
annual amortization equal to the straight-line amortization over the remaining
economic life of the related product not exceeding three years. The Company
evaluates capitalized software amounts by comparing such amounts to their
estimated net realizable value, i.e., future revenues reduced by the cost, if
any, of completing and disposing of the product. Amounts in excess of net
realizable value are charged to operations.
Goodwill Goodwill, which represents the excess of cost over fair value
of net assets acquired, is being amortized on the straight-line method over ten
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through projected undiscounted cash flows. The amount of
goodwill impairment, if any, is measured based on projected undiscounted cash
flows and is charged to operations in the period in which goodwill impairment is
determined by management. Management believes no impairment has occurred as of
June 30, 1996.
Warranty Costs The Company provides a warranty against defects in materials
and workmanship for one year following the date of sale. Estimated costs of
product warranties are charged to operations during the year the products are
sold.
Patents The Company capitalizes the cost of its patents and amortizes such
costs over the useful life of the patents not to exceed 17 years. At June 30,
1996, no carrying value remains in the accompanying balance sheet for unexpired
patents.
Income Taxes The Company accounts for income taxes in accordance with State-
ment of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). Under the asset and liability method of Statement No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement No. 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is provided for a portion or all of deferred tax assets if it is more
likely than not that such deferred tax assets will not be realized through
future operations.
Revenue Recognition Revenues from the sale of the Company's products are
recognized at the time of shipment to its customers, while revenue on service
contracts and research and development contracts are recognized as the service
and research and development activities are performed under the terms of the
related agreements.
Research and Development Costs Research and development costs are expensed as
incurred.
Per Common Share Information Per common share amounts are computed based on
weighted average number of common shares outstanding during each period. Common
stock equivalents and other potentially dilutive securities were excluded from
the per common share calculations as their effect would have been antidilutive
or in the case of the extraordinary item per share, such amount would not be
significant.
Reclassifications Certain amounts in the 1995 financial statements have
been reclassified to conform to the 1996 presentation.
NOTE 3 - ACCOUNTS RECEIVABLE FACTORING In February 1995, the Company entered
into an accounts receivable factoring agreement with a bank for a one-year term.
The initial advance to the Company by the bank was 80% of the accounts
receivable factored. The remaining 20%, less administrative and finance charges
as defined in the agreement, was remitted to the Company by the bank upon the
bank's collection of the factored accounts receivable balance above and beyond
the initial advance. During 1995, under the terms of the agreement, the Company
sold with recourse accounts receivable totaling approximately $1,242,000, of
which approximately $194,600 remained uncollected by the bank at June 30, 1995
and represented the Company's maximum exposure under the recourse provisions of
the agreement. A finance fee of 2.5% was charged monthly on the average
outstanding accounts receivable balance as defined by the agreement. An
administrative fee of 1% was charged on the face amount of each factored
receivable. Interest expense for the year ended June 30, 1995 was approximately
$48,000. The Company ceased factoring accounts receivable under this agreement
in October 1995.
Subsequent to the termination of the previous agreement, in December 1995, the
Company entered into two accounts receivable factoring agreements with a bank,
both for one-year terms. The initial advance under each agreement was 80% of the
accounts receivable factored. Under each agreement, in no event shall the
aggregate amount of all purchased receivables outstanding at anytime exceed
$150,000 and $250,000, respectively. The remaining 20%, less administrative and
finance charges, as defined by the agreement, is remitted to the Company by the
bank upon the bank's collection of the factored accounts receivable balance.
During 1996, under the terms of each agreement, the Company sold, with recourse,
accounts receivable totaling approximately $1,085,000. At June 30, 1996, all
amounts have been collected by the bank. A finance fee under each agreement of
1.5% and 2.25%, respectively, is charged monthly on the average outstanding
accounts receivable balance as defined by the agreement. An administration fee
<PAGE>
of 1.0% is charged on the face amount of each factored receivable under each
agreement. The Company ceased factoring accounts receivable under these
agreements in February 1996. Interest expense for the year ended June 30, 1996
amounted to approximately $67,000.
NOTE 4 - INVENTORIES
Inventories consist of the following at June 30:
1996 1995
---------- ----------
Raw materials $ 860,000 $ 18,000
Work in process 332,000 180,000
Finished goods 71,000 171,000
--------- ---------
$ 1,263,000 $ 1,269,000
========= =========
NOTE 5 - OTHER CURRENT ASSETS
Other current assets consist of the following at June 30:
1996 1995
---------- ----------
Reimbursable development
costs $ 126,000 $ 139,000
Supplies and inventory 68,000 23,000
Insurance 8,000 6,000
Other 13,000 12,000
--------- ---------
$ 215,000 $ 180,000
========= =========
Reimbursable development costs are capitalized as incurred to the extent such
amounts are believed to be recoverable. The Company is reimbursed upon the
billing of units shipped. During the year ended June 30, 1996, collections of
approximately $13,000 were recorded as a reduction to such amounts to be
reimbursed. No amounts were collected in fiscal 1995.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
1996 1995
---------- ----------
Machinery, equipment and tooling $ 285,000 $ 330,000
Computer equipment and software 36,000 36,000
Furniture and fixtures 17,000 17,000
--------- ---------
338,000 383,000
Less accumulated deprecIation
and amortization (266,000 (262,000)
--------- ---------
$ 72,000 $ 121,000
========= =========
Depreciation and amortization expense for the years ended June 30, 1996 and
1995, amounted to $95,000 and $147,000, respectively, of which $39,000 and
$36,000, respectively, is included in cost of product sales in the accompanying
statements of operations.
NOTE 7 - OTHER ASSETS
Other assets consist of the following at June 30:
1996 1995
---------- ----------
Software development costs $ 106,000 $ 106,000
Less accumulated amortization (97,000) (80,000)
---------- ----------
9,000 26,000
Deposits 38,000 48,000
Other 5,000 7,000
---------- ----------
$ 52,000 $ 81,000
========== ==========
Amortization of software development costs was $17,000 and $21,000 for the years
ended June 30, 1996 and 1995, respectively.
NOTE 8 - ACCRUED EXPENSES
Accrued expenses consist of the following at June 30:
1996 1995
---------- ----------
Professional fees $ 30,000 $ 30,000
Accrued payroll, vacation
and commissions 93,000 109,000
Interest 8,000 8,000
Warranties 18,000 18,000
Customer deposits 25,000 ---
Accrued redemption of redeemable
Series C convertible preferred
stock 23,000 ---
Other 42,000 39,000
---------- ----------
$ 239,000 $ 204,000
========== ==========
<PAGE>
NOTE 9 - NOTES PAYABLE AND BANK LINE OF CREDIT
Notes payable consist of the following at June 30:
1996 1995
---------- -------
Notepayable to Biopool International
bearing interest at 7% per annum
until March 1996, at which time
the rate increased to 8% per annum,
unsecured, principal payments of
$20,000 on each 15th day of the
months July through November 1996;
with a final principal payment of
$30,000 together with interest of
$6,034, due on December 15, 1996. $ 130,000 ---
Bankline of credit with a maximum
amount of $600,000, or 65% of the
Company's qualifying receivables,
collateralized by all assets of
the Company, interest at 4% over
the bank's reference rate (an
effective rate of 9% at June 30,
1995), paid in December 1995.
Additionally, the Company issued
to the bank warrants to purchase
50,000 shares of its common stock. --- 304,000
1996 1995
---------- ----------
Notes payable, unsecured, noninterest
bearing and interest bearing at
rates up to 10% per annum, with
due dates ranging from July
1996 to April 1997, certain of
which are past due and are in
technical default. 98,000 23,000
--------- --------
$ 228,000 $ 327,000
========= =========
NOTE 10 - CONVERTIBLE DEBENTURES
Convertible debentures consist of the following at June 30:
1996 1995
---------- ----------
Convertible debentures payable to
a former officer and two
unaffiliated individuals in the
face amount of $20,000 each,
convertible at any time into
shares of the Company's common
stock at the conversion price
of $0.75 per share or as adjusted
in accordance with the agreement,
with warrants attached to purchase
one share of the Company's common
stock for each $10 of debentures
at the amended price of $0.75
per share, exercisable any time
through May 3, 1998, principal
and interest at 9.75% per annum,
satisfied $40,000 by issuance
of 345,504 shares of common
stock and $20,000 satisfied
through an offset of amounts
due the Company in 1996 from
a former officer (see Note 15). --- 60,000
1996 1995
---------- ----------
Convertible debentures payable to
three unaffiliated individuals,
convertible at any time into
shares of the Company's common
stock at the conversion price
of $0.053 per share at the
option of the Company, subject
to a downward adjustment in
the event the underlying common
stock is not registered with
the Securities and Exchange
Commission within ten (10)
months from the date of issuance
to a floor of $0.05 per share,
with warrants attached to
purchase one share of the
Company's common stock at
$0.25 per share (see Note 13),
interest at 12% per annum payable
annually, principal due on
January 31, 1998 (see Note 15). 310,000 ---
Convertible debentures payable to six
unaffiliated individuals and
one individual owning more than
10% of the Company's common stock,
who is not an officer or director,
convertible at any time into
shares of the Company's common
stock at the conversion price
of $0.08 per share at the option
of the Company, subject to a down-
ward adjustment in the event the
underlying common stock is not
registered with the Securities
and Exchange Commission within
ten (10) months from the date of
issuance to a floor of$0.05 per
share, with warrants attached
to purchase one share of the
Company's common stock at $0.25
per share (see Note 13), interest
at 12% per annum payable annually,
principal due on January 31, 1998
(see Note 15). 319,000 ---
--------- --------
629,000 60,000
1996 1995
---------- ----------
Less current portion --- (60,000)
---------- ----------
$ 629,000 $ ---
========== =========
The convertible debentures issued in 1996 were issued at their estimated fair
value. Such estimate is based on the stated interest rate and the related
conversion price into the Company's common stock. The Board of Directors
estimated the fair value of the Company's common stock at the date of issuance
to be approximately $0.06 per share.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Obligation and Extraordinary Item Lease obligation, amounting to
approximately $30,000 at June 30, 1995, represents the remaining cost, net of
sublease income, of the lease on the Company's prior premises. Subsequent to the
acquisition of Source, the Company vacated such premises and moved all
operations to the Source facility. During 1995, the Company negotiated a
termination of the lease, in consideration of the termination and all
obligations thereunder, the Company paid its former landlord approximately
$150,000 and surrendered a claim to approximately $20,000 of deposit and
offsets. A remaining balance of $30,000 was owed to the Company's former
landlord at June 30, 1995 and was included in current liabilities. The
settlement reduced the Company's previously accrued lease obligation by
$309,000, and accordingly, an extraordinary gain of this amount is reflected in
the accompanying 1995 statement of operations.
<PAGE>
Lease Commitments The Company leases its office and warehouse facilities
under an operating lease which expires in January 2002. The following is a
schedule of future annual minimum lease payments under all noncancellable
operating lease agreements as of June 30, 1996:
Years Ending
June 30,
1997 $ 339,000
1998 349,000
1999 350,000
2000 366,000
2001 390,000
Thereafter 227,000
----------
$ 2,021,000
==========
Rent expense was $316,000 and $324,000 for the years ended June 30, 1996 and
1995, respectively.
Employment Contracts The Company entered into two and three-year employment
contracts with certain officers, directors of the Company and key management of
the Company, commencing July 1, 1995. Prior to this date, the Company had
certain employment agreements which were in effect. The contracts effective July
1, 1995 provide for annual compensation ranging from $52,000 to $124,000. Total
compensation charged to operations for the years ended June 30, 1996 and 1995,
under agreements in effect during such years amounted to $481,201 and $407,869,
respectively. Future annual compensation under all management agreements for
fiscal years ending June 30, 1997 and 1998 are $521,619 and $103,021,
respectively.
NOTE 12 - INCOME TAXES The Company has not incurred significant income
taxes during the years ended June 30, 1996 and 1995.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows:
June 30,
-------------------------
1996 1995
---------- ----------
Deferred tax assets:
Inventory reserve $ 86,000 $ 89,000
Warranty reserve 6,000 8,000
Vacation accrual 21,000 46,000
Allowance for bad debts 5,000 9,000
Credits 642,000 642,000
Other --- 2,000
Net operating loss carryforwards 8,393,000 8,345,000
---------- ----------
9,153,000 9,141,000
Valuation allowance (9,120,000) (9,103,000)
---------- ----------
Net deferred tax assets 33,000 38,000
Deferred tax liability -
Property and equipment (33,000) (38,000)
---------- ----------
Net deferred income taxes $ --- $ ---
========= =========
A reconciliation of the actual income tax expense to expected income tax benefit
computed by applying the Federal statutory income tax rate of 34% to net loss
for the year ended June 30, 1996 is as follows:
Amount %
Income tax benefit computed at
Federal statutory tax rate $ (24,000) (34)%
State income taxes 5,000 7
Other 2,000 3
Increase in the valuation allowance
for deferred tax assets 17,000 24
--------- ----
Income taxes $ --- -- %
========= ====
The difference between the federal statutory rate of 34% and the Company's
effective tax rate of 0% in 1995 is the result of incurring net operating losses
without current tax benefit.
As of June 30, 1996, the Company had net operating loss carryforwards for
federal and state purposes of approximately $24,000,000 and $2,600,000,
respectively. In addition, the Company had general business and research and
development tax credit carryforwards of approximately $642,000. These
carryforwards generally expire through 2011. As a result of common stock
transactions of the Company, certain of its tax loss carryforwards are subject
to restrictions which place a maximum annual limitation on the utilization of
loss carryforwards arising prior to a change in ownership, as defined in the
Internal Revenue Code.
NOTE 13 - COMMON STOCK PURCHASE OPTIONS AND WARRANTS
Stock Option Plan The Company amended its stock option plan (the "Plan")
during 1995 whereby the Board of Directors may grant options to employees,
officers, outside directors and consultants to purchase up to an aggregate of
3,500,000 shares of the Company's common stock. Options to be granted under the
Plan may be incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code and/or options other than incentive stock options
(nonstatutory options). The exercise price of incentive stock options may not be
less than 100% of the fair value market value of the common stock on the date of
grant, and the exercise price for nonstatutory options must be at least 99% of
<PAGE>
such fair market value. The incentive stock options vest ratably over five
years. No incentive stock options shall be exercisable after the earlier of the
expiration date of the Plan or three months after termination of employment.
Nonstatutory options must be exercised prior to the expiration date of the Plan
or within a specified term ranging from one to five years.
A summary of common stock purchase option activity is as follows during the
years ended at June 30:
1996 1995
---------- ----------
Outstanding at beginning of year 628,250 749,116
Granted 2,036,000 150,000
Canceled (38,250) (456,416)
Exercised (78,425) (81,950)
Reissued --- 267,500
---------- ----------
Outstanding at end of year 2,547,575 628,250
---------- ----------
In March 1996, the Board of Directors approved that all outstanding grants of
common stock purchase options, vested and non-vested, for current employees,
officers and directors, be re-priced to reflect the exercise price of $0.14.
During 1996, the Board of Directors granted options to purchase 2,036,000 shares
of common stock. Options to purchase 38,250 shares of common stock were
canceled.
At June 30, 1996, options to purchase 1,405,313 shares of common stock were
exercisable under the plan described above. Such options expire at various dates
through December 1999.
Other Options and Warrants In addition to options issued under the Plan,
the Company issued common stock purchase options to nonaffiliated entities.
These options are exercisable at $0.008 to $0.75 per share over the terms
ranging from one to five years and vested at the date of grant. From time to
time, the Company issued warrants in connection with its financings (see Notes 9
and 10), expiring at various dates through February 2000. During 1996, the
activity of other common stock purchase options and warrants was as follows:
Shares Price Range
Available Per Share
Balances, June 30, 1995 6,382,332 $0.008-$0.75
Warrants issued in connection
with convertible debentures 3,920,000 $0.25
Warrants canceled or expired (186,050) $0.75
Warrants exercised (658,667) $0.45
Other options exercised (134,375) $0.008
Canceled through issuance
of common stock (Note 15) (4,747,140) $0.45
----------
Balances, June 30, 1996 4,576,100 $0.25-$0.75
==========
At June 30, 1995, options to purchase 394,375 had been granted, of which 134,375
were exercised during 1996, and the remaining balance of options to purchase
260,000 shares of common stock were outstanding as of June 30, 1996, all of
which are exercisable at $0.75 per share.
In connection with the Company's private placement of convertible debentures
totaling $629,000 in January and February 1996 (see Note 10), warrants to
purchase 3,920,000 shares of common stock were granted with an exercise price of
$0.25 per share and expire in January and February 1999. No value was ascribed
to such warrants since management believes the exercise price was substantially
in excess of fair value at the time of issuance.
During fiscal 1996, warrants to purchase 4,747,140 common shares, subject to
certain anti-dilution provisions, exercisable at $0.45 per share (subject to a
reduction of the exercise price to $0.30 per share), were canceled through the
issuance of 4,418,914 shares of common stock (see Note 15). During the current
year, warrants to purchase 646,667 shares of common stock, previously
exercisable at $0.45 per share, were exercised at $0.18 per share and 12,000
shares, previously exercisable at $0.45 per share, were exercised at $0.14 per
share. All remaining common stock purchase warrants outstanding at June 30, 1996
were exercisable.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25. The disclosure
requirements for the Company required by Statement No. 123 will be effective for
the Company's fiscal 1997 financial statements.
NOTE 14 - PREFERRED STOCK The Company was required to redeem the shares
of Series C Preferred Stock on September 1, 1995 at $15.4666 per share. The
holders of Series C Preferred Stock were notified by the Company on November 3,
1995, (the "Notice"), that under the terms of the redemption rights of Series C
Preferred Stock, the delay in redeeming the preferred shares caused an increase
in the price per share by $4.00 per annum, based on a quarterly proration, to
$18.93. The Notice also indicated the Company's intent to establish a redemption
date of January 3, 1996. Dividends accrue on the Series C Preferred Stock at
$0.53 per share per annum.
On January 26, 1996, the Company notified holders of its Series C Preferred
Stock that the Redemption Date was changed to June 28, 1996 at a Redemption
Price of $17.93 in accordance with the terms of these stock certificates. As of
June 30, 1996, the holders of the stock certificates had not completed a
required acceptance and release agreement, nor had the certificates been
tendered to the Company. As a result, no payment was made for the redemption of
the Series C Preferred Stock as of June 30, 1996. Since the notice of redemption
on June 28, 1996 was tendered, such preferred shares are no longer validly
issued and outstanding. Such investors must claim their redemption monies within
<PAGE>
two years from the date of redemption. Accordingly, $23,000, plus accrued
interest of $4,000, is included in accrued liabilities in the accompanying 1996
consolidated balance sheet.
NOTE 15 - COMMON STOCK During 1995, certain debentures in the aggregate
amount of $228,706, plus accrued interest of $10,218 were converted into
1,195,013 shares of common stock. With the issuance of certain debentures sold
in 1995 in the aggregate amount of $414,712, and to the purchasers of such
debentures, the Company issued an aggregate of 172,050 warrants, each to
purchase one share of common stock at an exercise price of not less than $0.75
per shares. The Company temporarily reduced the warrant exercise price of such
warrants from $0.60 to $0.15 and $0.18, in February and June of 1995,
respectively, raising aggregate funds of $318,425 from the exercise of 2,122,833
warrants into an equal number of shares of common stock. Certain of the warrant
holders, who were also debenture holders in the aggregate amount of $200,354,
plus accrued interest of $14,997, used their debenture holdings for the exercise
of their warrants into aggregate amount of 1,423,500 shares of common stock
during the reduced exercise price periods.
In addition, in fiscal 1995, a retiring employee, who remains a director of the
Company, exercised options at $0.75 per share for 81,375 shares of common stock,
collateralized by a note.
In July 1995, the Company issued 646,667 shares of common stock in connection
with the exercise of warrants at an exercise price of $0.18 per share. In
addition, in June 1996, the Company issued 12,000 shares of common stock in
connection with the exercise of warrants at an exercise price of $0.14 per
share. Aggregate proceeds received in connection with these transactions, as
reflected in the accompanying consolidated statement of shareholders' equity,
totaled $118,000 (also see Note 13).
As discussed in Note 13, in February 1996, the Company issued 4,418,914 shares
of its common stock for the cancellation of certain warrants (see Note 13)
exercisable at $0.45 per share (subject to a reduction of the exercise price of
$0.30 per share). These warrants contained an anti-dilution provision which
enabled the holders the right to purchase additional shares at the then exercise
price per share in the event the Company issued any additional shares of its
common stock in any unrelated transactions. The common stock issued in the
transactions discussed above were effected to cancel the anti-dilution provision
contained in the underlying warrants. No value was ascribed to common stock
issued to cancel these warrants at the time of issuance in February 1996.
During fiscal 1996, the Company issued 345,504 shares of the Company's common
stock valued at prices ranging from $0.10 to $0.14 upon conversion of debentures
issued in 1993. The aggregate reduction of convertible debentures in 1996
totaled $40,000, plus accrued interest of $1,000 (see Note 10).
In April 1996, the Company reached an agreement with a former officer of the
Company regarding the disposition of mutual interests and obligations between
the parties which resulted in the cancellation of a note receivable from the
sale of common stock totaling $161,000, as well as 332,400 shares of common
stock which collateralized the note receivable. In addition, the Company
canceled $20,000 of convertible debentures, plus accrued interest due to this
former officer (also see Note 10) offset by approximately $24,000 of accrued
interest on the note receivable referred to above.
In June 1996, the Company issued 100,000 shares of common stock to an
unaffiliated entity in connection with certain capital raising activities. The
holder of the shares were granted "piggy-back" registration rights with respect
thereto.
NOTE 16 - RETIREMENT SAVINGS PLAN During 1991, Source established a profit-
sharing plan (the "401(k) Plan"), which is intended to qualify under Section
401(k) of the Internal Revenue Code of 1986. The 401(k) Plan allows eligible
employees to contribute up to 15% of their salary. Effective February 1, 1995,
the Company adopted the 401(k) Plan. At its discretion, the Company may make
matching contributions to the 401(k) Plan. No employer contributions have been
made since adoption of the 401(k) Plan.
NOTE 17 - SUBSEQUENT EVENTS
On October 9, 1996, the Company entered into a financing arrangement with a
commercial lender to borrow up to $1,000,000. This line will allow the Company
to borrow up to 80% of its eligible receivables, as defined, at an interest rate
of prime plus 2.75% (subject to a 12% add-on in the event of default). The line
contains certain financial covenants and is secured by substantially all of the
Company's assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPER-
ATIONS FOR THE COMPANY
The Company's Results of Operations, for the 3-month and 6-month periods ended
December 31, 1996, and for the year ended June 30, 1996 are presented below:
Results of Operations
Comparison of 1996 to 1995, 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, 1995 and December 31, 1996. During the second
quarter ended December 31, 1996, sales declined by approximately 32.5% compared
to the second quarter ended December 31, 1995. Sales also declined for the
6-month period ended December 31, 1996, by approximately 15.5% compared to the
6-month period ended December 31, 1995. For both the 3-month and 6-month
periods, revenues declined due to delayed renewals of several manufacturing
contracts and extended commencement dates for product service contracts with two
major customers. The total back log of services and products were $2.7 million
at December 31, 1995. During the period from 10/10/96 through 2/28/97, the
Company generated sales orders of approximately $2.4 million, and the backlog
was approximately $2.4 million as of February 28, 1997.
<PAGE>
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED CHANGE FROM
DECEMBER 31, 1995 DECEMBER 31, 1996 DEC. 1995 TO DEC. 1996
----------------------- --------------------- ----------------------
(000's) % of (000's) % of (000's) %
Amount Sales Amount Sales Amount Change
----------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,121 100.0 $ 757 100.0 ($364) -32.5
Cost of goods sold 701 62.5 565 74.6 (136) -19.4
----- ----- ---- ----- ---- -----
Gross profit 420 37.5 192 25.4 (228) -54.3
----- ----- ---- ----- ---- -----
Selling, general and administration 332 29.6 334 44.1 2 0.6
Research and development 208 18.6 185 24.4 (23) -11.1
----- ----- ---- ----- ---- -----
Total operating expenses 540 48.2 519 68.6 (21) -3.9
----- ----- ---- ----- ---- -----
Operating income (loss) (120) -10.7 (327) -43.2 (207) -172.5
Interest, net 10 0.9 26 3.4 16 160.0
----- ----- ---- ----- ---- -----
Net income (loss) ($130) -11.6 ($353) -46.6 ($223) 171.5
===== ===== ==== ===== ==== =====
6 MONTHS ENDED 6 MONTHS ENDED CHANGE FROM
DECEMBER 31, 1995 DECEMBER 31, 1996 DEC. 1995 TO DEC. 1996
----------------------- --------------------- ----------------------
(000's) % of (000's) % of (000's) %
Amount Sales Amount Sales Amount Change
----------------------- --------------------- ---------------------
Net sales $2,224 100.0 1,880 100.0 ($344) -15.5
Cost of goods sold 1,388 62.4 1,402 74.6 14 1.0
----- ----- ---- ----- ---- -----
Gross profit 836 37.6 478 25.4 (358) -42.8
----- ----- ---- ----- ---- -----
Selling, general and administration 630 28.3 645 34.3 15 2.4
Research and development 406 18.3 375 19.9 (31) -7.6
----- ----- ---- ----- ---- -----
Total operating expenses 1,036 46.6 1,020 54.3 (16) -1.5
----- ----- ---- ----- ---- -----
Operating income (loss) (200) -9.0 (542) -28.8 (342) 171.0
Interest, net 11 0.5 37 2.0 26 236.4
----- ----- ---- ----- ---- -----
Net income (loss) $211) -9.5 ($579) -30.8 ($368) -174.4
===== ===== ==== ===== ==== ======
</TABLE>
Net Revenues. Net revenues decreased by 32.5% during the quarter ended December
31, 1996 compared to the quarter ended December 31, 1995. Revenues also declined
by 15.5% for the six-month period ended December 31, 1996 compared to the
six-month period ended December 31, 1995. At the date of this Report, the
recently obtained sales orders and resulting increase in the current backlog
will commence generating revenues for the Company in the third and fourth fiscal
quarters, although there can be no assurance that overall revenues will result
in profitability for any specific quarter. 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
for the three-month period ending December 31, 1996, to 74.6%, compared to 62.5%
for the three-month period ending December 31, 1995, was due to delayed
commencement dates of new and renewal service and manufacturing contracts. The
increase of cost of revenues as a percentage of revenues for the six-month
period ending December 31, 1996, to 74.6%, compared to 62.4% for the six-month
period ending December 31, 1995, was due to a large portion of raw materials and
finished goods of the Alton Subsidiary's Lamda product line sold at standard
cost as part of a settlement agreement with a previous customer; and due to the
lower sales volume and a less profitable mix of products shipped and services
provided by the Source Subsidiary, resulting in under-absorption of
manufacturing overhead. Because average profit margins are greater on service
contract revenues than on sales of manufactured products, the overall cost of
goods sold for the quarter ended December 31, 1996, reflects an overall higher
cost associated with the types of manufactured products sold during the period.
Operating Expenses. Total operating expenses increased as a percentage of
revenues from 48.2% for the three month period ended December 31, 1995, to 68.6%
for the three month period ended December 31, 1996, and from 46.6% for the six
month period ended December 31, 1995, to 54.3% for the six month period ended
December 31, 1996. Research and development costs for the six month period ended
December 31, 1996, reflect costs to develop the Company's new product,
PlateMate(TM). Of the three major clinical chemistry trade shows and exhibits
attended by the Company in the calendar year 1996, expenses for the two largest
exhibits were incurred early in the six month period ended December 31, 1996. In
addition, international travel related to major new business contributed to the
higher costs.
Interest Expense. Interest costs increased in the three- and six-month periods
ended December 31, 1996, compared to the same period last year due to the
utilization of the new credit facility provided by Concord effective in October
1996.
Comparison of 1996 to 1995 fiscal years ended June 30
For the second consecutive year, the Company improved its overall financial
condition, and the last two consecutive quarters of fiscal year 1996 were
profitable, although such improvements or profitability were not repeated in the
two subsequent periods. During the fiscal year ended June 30, 1996, the Company
completed several transactions that improved the financial operating condition
and operations of the Company. In the 1996 fiscal year, the Company sold
convertible debentures totaling $629,000 and received an additional $130,014.50
from the exercise of Warrants and Options. The Company retired all remaining A
Warrants, Dealer Warrants and underlying warrants through the issuance of Common
Stock of the Company. Two of the remaining convertible debentures previously
<PAGE>
sold in 1993, in the aggregate principal amount of $40,000, were converted into
Common Stock of the Company. The remaining debenture was included in a
settlement of mutual obligations between the Company and a former executive of
the Company.
The following table shows the results of operations between the 1996 and
1995 fiscal years. Amounts shown in the table below are in 000's.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED CHANGE FROM
JUNE 30, 1996 JUNE 30, 1995 JUNE 1995 TO JUNE 1996
------------------------ ---------------------- --------------------------
Amount % of Sales Amount % of Sales Amount % Change
----------- --------- ---------------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 5,324 100.0 4,877 100.0 447 9.2
Cost of goods sold 3,337 62.7 3,199 65.6 138 4.3
----- ---- ----- ---- --- ---
Gross profit 1,987 37.3 1,678 34.4 309 18.4
----- ---- ----- ---- --- ----
Selling, General & Admin 1,158 21.8 1,647 33.8 (489) -29.7
Research and development 821 15.4 839 17.2 (18) -2.1
Total operating expenses 1,979 37.2 2,486 51.0 (507) -20.4
----- ---- ----- ---- ----- -----
Operating income (loss) 8 0.2 (808) -16.6 816 -101.0
Interest, net 80 1.5 132 2.7 (52) -39.4
-- --- --- --- ---- -----
Loss before extraordinary items (72) -1.4 (940) -19.3 868 -92.3
Extraordinary item - gain from 0 - (309) -6.3 (309) -
reduction of lease obligation ---- -- ----- ---- ----- --
Net loss ($72) -1.4 ($631) -12.9 $559 -88.6
===== ====== ====
</TABLE>
Net Revenues. The increase in revenues of approximately 9% from the 1995 fiscal
year to the 1996 fiscal year was due to the increase in customer orders,
introduction of a new product line and the Company's ability to acquire
materials needed to manufacture and fulfill customer purchase orders through
infusion of cash from convertible debentures. On an ongoing basis, the Company
has an average of 20 quotes submitted to potential customers to provide research
and development, manufacturing and product service contracts, although there is
no assurance any such contracts will be achieved by the Company, or that in the
event any of such contracts are awarded, sufficient economic value will be
realized to make a significant difference in the Company's profitability.
Cost of Goods Sold. The decrease in cost of goods sold as a percentage of sales
of 63% in 1996 compared to 66% in 1995, was due to a decrease in manufacturing
labor and overhead, increase in manufacturing absorption, and a more favorable
product mix. The gross profit in 1996 compared to 1995, improved by approxi-
mately 3% for the 12-month period.
Operating Expenses. Selling, general and administrative expenses declined as a
percentage of revenues from 34% for the fiscal year ended June 30, 1995, to 22%
for the fiscal year ended June 30, 1996. The decline was due to the management's
implementation of a cost reduction plan which included reduced salary rates for
all employees, a workforce reduction, renegotiation of lease and service related
contracts, and operating cost controls. For the fiscal year ended June 30, 1996,
the Company recognized approximately 30% reduction in selling, general and
administrative expenses, and a 2% decrease in research and development expenses
compared to the fiscal year ended June 30, 1995. Research and development costs
for the fiscal year 1996 reflect costs to develop the Company's new product,
PlateMate(TM), costs of the Company's successful effort in obtaining the ISO9001
certification, as well as its qualification of the Company's major products for
the CE quality mark (required for products sold in the countries belonging to
European Free Trade Association). Management believes the achievement of such
certification will enhance the Company's ability to manufacture and sell its
products worldwide, although there can be no assurance that such certification
will result in profitable contracts for the Company.
Liquidity and Capital Resources and Plan of Operation
The Company significantly improved its liquidity during the fiscal year
ended June 30, 1996, due to convertible debentures issued by the Company in the
aggregate amount of $629,000. Consistent with the repayment terms of the
debentures, such amounts were considered long-term in the three- and six-month
periods ended December 31, 1996. Effective February 1, 1997, the debentures were
converted to shares of Common Stock of the Company. Management continues to seek
improvement of the Company's liquidity by: (i) restructuring old trade payables;
(ii) offering discounts in exchange for progress payments; and (iii) negotiating
facility cost reductions with a suitable tenant, or sub-leasing a portion of its
space. 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.
The Company's working capital decreased from $1,237,000 at June 30,
1996, to approximately $679,000 at December 31, 1996. The Company requires add-
itional operating capital for its current operations.
On October 10, 1996, the Company secured a line of credit with Concord
at an initial variable interest rate of prime plus 2.75% for borrowings up to
$1,000,000 based on 80% of the eligible accounts receivable. As of December 31,
1996, the Company had borrowed an aggregate of $259,000 against the line of
credit and the Accommodation Note. Such funds were used to pay the balance of
the principal and accrued interest of $75,589 on a promissory note due on March
28, 1996 (the "Biopool Note"), and provide operating capital.
<PAGE>
Pursuant to the terms and conditions of the 1996 A Debentures and 1996
B Debentures, their conversion price was adjusted downward from $0.053 and
$0.08, respectively, to $0.05 per share of common stock issuable upon such
conversion. The adjustment was due to the Company's inability to sustain
profitability for the two consecutive quarters ended June 30 and September 30,
1996. On January 31, 1997, the debentures plus accrued interest to January 31,
1997, were converted to shares of common stock of the Company.
The Company has continued its cost containment plan which included a
further reduction in its workforce and a combination of certain job functions in
the six month period ended December 31, 1996 and up to the date of this Proxy
Statement. 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 December 31, 1996, or as of the date of this Proxy Statement.
The Company has no long term commitments other than an annual lease obligation
of between $247,104 and $389,520 for its facility through January 31, 2002.
OTHER MATTERS
The Board of Directors is not aware of any business which may be
properly presented for action at the Special Meeting and which is required to be
disclosed in this Proxy Statement except the matters set forth in the Notice and
described in this Proxy Statement. Unless otherwise directed, all shares
represented by the persons named in the accompanying Proxy will be voted in
favor of the proposals described in this Proxy Statement. Any broker non-votes
will be treated as abstentions by the beneficial owners thereof. If any other
matters come before the Special Meeting, including matters incident to the
conduct of the meeting and any Shareholder proposal omitted from the Proxy
Statement and Proxy pursuant to the proxy rules of the SEC, the persons named in
the accompanying Proxy will vote on those matters according to their best
judgment.
EXPENSES
The entire cost of preparing, assembling, printing and mailing this
Proxy Statement and the enclosed form of Proxy and the cost of soliciting
Proxies with respect to the Special Meeting will be borne by the Company. The
Company will request banks and brokers to solicit their customers who
beneficially own shares listed of record in names of nominees, and will
reimburse those banks and brokers for their reasonable out-of-pocket expenses of
such solicitations. The original solicitation of Proxies by mail may be
supplemented by telephone, facsimile and personal solicitation by officers and
other regular employees of the Company, but no additional compensation will be
paid to such individuals.
ANNUAL REPORT TO SHAREHOLDERS
The Company's Annual Report to Shareholders which includes financial
statements for the fiscal years ended June 30, 1995 and 1996, was sent to the
Shareholders concurrently with mailing of the Proxy Statement for the Annual
Meeting of Shareholders held November 26, 1996.
BY ORDER OF THE BOARD OF DIRECTORS
Garden Grove, California Catherine Curtis
March 31, 1997 Secretary
Copies of the Company's Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission, including financial statements, can be obtained without
charge by holders (including beneficial owners) of the Company's Common Stock,
from Catherine Curtis, Corporate Secretary, 7390 Lincoln Way, Garden Grove,
California 92841.
<PAGE>
APPENDIX A
THE ASSET PURCHASE AGREEMENT
Following is the Asset Purchase Agreement, between Buyer and the
Company, dated March 26, 1997. The Company has determined that the exclusion of
the schedules from the Proxy Statement does not incur a material omission, nor
inhibit the ability of the shareholders to make an informed decision.
Note: The Table of Contents of the Asset Purchase Agreement indicates the actual
page number within the document, and not the page number of this Proxy
Statement.
================================================================================
ASSET PURCHASE AGREEMENT
ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF
SOURCE SCIENTIFIC, INC.
BY
BBI - SOURCE SCIENTIFIC, INC.
a wholly owned subsidiary
OF
BOSTON BIOMEDICA, INC.
DATED: MARCH 26, 1997
================================================================================
ASSET PURCHASE AGREEMENT
TABLE OF CONTENTS
Page
ARTICLE 1. PURCHASE AND SALE OF ASSETS. 1
1.1 Sale of Assets. 1
1.2 Assumption of Liabilities. 1
1.3 Purchase Price and Payment. 2
1.4 Adjustment to Purchase Price. 3
1.5 Time and Place of Closing. 4
1.6 Delivery of Assumption of Liabilities. 4
1.7 Transfer of Subject Assets. 4
1.8 Delivery of Records and Contracts. 4
1.9 Change of Name. 4
1.10 Further Assurances. 5
1.11 Tax Returns. 5
1.12 Allocation of Purchase Price. 5
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF SELLER. 5
2.1 Organization and Qualification of Seller. 5
2.2 Capitalization of Seller. 6
2.3 Subsidiaries. 6
2.4 Authorization of Transaction. 6
2.5 Present Compliance with Obligations and Laws. 7
2.6 No Conflict of Transaction With Obligations and Laws. 7
2.7 Financial Statements. 7
2.8 Absence of Undisclosed Liabilities. 7
2.9 Absence of Certain Changes. 8
2.10 Payment of Taxes. 9
2.11 Title to Properties; Liens; Condition of Properties. 9
2.12 Collectibility of Accounts Receivable. 10
2.13 Inventories. 10
2.14 Intellectual Property Rights. 11
2.15 Contracts and Commitments. 13
2.16 Labor and Employee Relations. 13
2.17 Employee Benefits and ERISA. 14
2.18 Environmental Matters. 16
2.19 Permits. 18
2.20 Warranty or Other Claims. 18
2.21 Litigation. 18
2.22 Borrowings and Guarantees. 18
2.23 Financial Service Relations and Powers of Attorney. 18
2.24 Insurance. 19
2.25 Minute Books. 19
2.26 Finder's Fee. 19
2.27 Transactions with Interested Persons. 19
2.28 Absence of Sensitive Payments. 19
2.29 Disclosure of Material Information. 20
2.30 SEC Filings. 20
Page 1 of Appendix A
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BBI AND BUYER. 20
3.1 Organization of BBI and Buyer. 21
3.2 Authorization of Transaction. 21
3.3 No Conflict of Transaction With Obligations and Laws. 21
3.4 SEC Filings. 21
3.5 Litigation. 22
3.6 Finder's Fee. 22
ARTICLE 4. COVENANTS OF SELLER. 22
4.1 Conduct of Business. 23
4.2 Authorization from Others 23
4.3 Breach of Representations and Warranties. 23
4.4 Consummation of Agreement. 23
4.5 Compliance with Securities Laws 24
ARTICLE 5. COVENANTS OF BBI AND BUYER. 24
5.1 Authorization from Others. 24
5.2 Consummation of Agreement. 24
5.3 Disclosure of Adverse Change. 24
ARTICLE 6. CONDITIONS TO OBLIGATIONS OF BBI AND BUYER. 24
6.1 Shareholder Authorization. 24
6.2 Dissenting Stockholders. 25
6.3 Representations; Warranties; Covenants. 25
6.4 No Material Adverse Change. 25
6.5 Opinion of Seller's Counsel. 25
6.6 Employment Contracts. 25
6.7 Non-Competition Contracts. 25
6.8 Approval of Board of Directors. 25
6.9 Approval of Buyer's Counsel. 25
6.10 Absence of Certain Litigation. 26
6.11 FIRPTA Certificate. 26
6.12 Consents and Waivers. 26
6.13 Escrow Agreement. 26
6.14 Convertible Debentures. 26
6.15 Opinion of Auditors. 27
6.16 Opinion of Investment Banking Firm. 27
6.17 Due Diligence. 27
6.18 Facility Lease. 27
6.19 Reduction of Interest Payments. 27
6.20 Consents to Transactions. 27
6.21 Authorization. 27
6.22 Bulk Sales Law. 27
ARTICLE 7. CONDITIONS TO OBLIGATIONS OF SELLER 28
7.1 Shareholder Authorization. 28
7.2 Representations; Warranties; Covenants. 28
ARTICLE 8. TERMINATION OF AGREEMENT. 28
8.1 Termination. 28
8.2 Right to Proceed. 28
ARTICLE 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING. 28
9.1 Survival of Warranties. 28
9.2 Collection of Assets. 28
9.3 Payment of Debts. 29
ARTICLE 10. INDEMNIFICATION. 29
10.1 Definitions. 29
10.2 Indemnification by Seller. 30
10.3 Indemnification by Buyer. 30
10.4 Defense of Third Party Actions. 31
10.5 Miscellaneous. 32
10.6 Payment of Indemnification. 32
ARTICLE 11. MISCELLANEOUS. 32
11.1 Fees and Expenses. 32
11.2 Notices. 33
11.4 Publicity and Disclosures. 33
11.5 Non-Solicitation. 34
11.6 Confidentiality. 34
11.7 Entire Agreement. 34
11.8 Severability. 34
11.9 Assignability. 34
11.10 Amendment. 34
11.11 Attorney-in-Fact. 35
11.12 Governing Law; Venue. 35
11.13 Counterparts. 35
11.14 Effect of Table of Contents and Headings. 35
iii
Page 2 of Appendix A
<PAGE>
ASSET PURCHASE AGREEMENT
AGREEMENT entered into as of the 26 day of March, 1997, among Boston
Biomedica, Inc., a Massachusetts corporation with its principal place of
business in West Bridgewater, Massachusetts ("BBI"), BBI - Source Scientific,
Inc.Acquisition Corp. I, a Massachusetts corporation and wholly owned subsid-
iary of BBI ("Buyer") and Source Scientific, Inc., a California corporation
with its principal place of business in Garden Grove, California ("Seller").
RECITALS:
WHEREAS, Buyer wishes to acquire substantially all of the assets of Seller
and assume certain liabilities and obligations of Seller, and Seller wishes to
convey such assets to Buyer, subject to such liabilities and subject to the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Assets.
(a) Subject to the provisions of this Agreement and except as
expressly excluded in paragraph 1.1(b), Seller agrees to sell and Buyer agrees
to purchase, at the Closing (as defined in Section 1.5 hereof), all of the
properties, assets and business of Seller of every kind and description,
tangible and intangible, real, personal or mixed, and wherever located,
including without limitation all assets set forth on Schedule 1.1 hereto, all
assets shown or reflected on the Base Balance Sheet (as defined in Section 2.7
hereof) of Seller and all assets acquired or created by Seller in the ordinary
course of business and consistent with the terms hereof since the date of the
Base Balance Sheet through the Closing, and all of Seller's good will and the
exclusive right to use the name of Seller as all or part of a trade or corporate
name. The assets, property and business of Seller to be sold to and purchased by
Buyer under this Agreement are hereinafter sometimes referred to as the "Subject
Assets."
(b) Seller's corporate franchise, stock record books, corporate
record books containing minutes of meetings of directors and stockholders and
such other records as have to do exclusively with Seller's organization or stock
capitalization shall be excluded from the Subject Assets.
-1-
1.2 Assumption of Liabilities.Assumption of Liabilities.
(a) Upon the sale and purchase of the Subject Assets, except as
excluded in paragraph 1.2(b), Buyer shall assume and agree to pay or discharge
when due the following:
(i) those liabilities of Seller listed on Schedule 1.2(a)
hereto, as derived from the Base Balance Sheet;
(ii) liabilities for accrued vacation and unreimbursed
expenses for the employees and to the extent set forth in Schedule 1.2(a); and
(iii) all liabilities and obligations incurred by Seller in
the ordinary course of business and consistent with the terms hereof since the
date of the Base Balance Sheet which are outstanding at the time of the Closing.
The liabilities to be assumed by Buyer under this Agreement are hereinafter
sometimes referred to as the "Assumed Liabilities."
(b) Except to the extent expressly assumed pursuant to Section
1.2(a) above, Buyer does not assume and shall not be liable for any debt,
obligation, responsibility or liability of the Seller, or any Affiliate (as
defined below), or any claim against any of the foregoing, whether known or
unknown, contingent or absolute, or otherwise. Without limiting the foregoing
sentence, Buyer shall have no responsibility with respect to the following,
whether or not disclosed in the Base Balance Sheet or a Schedule hereto:
(i) liabilities and obligations related to or arising from
any transactions with any officer, director or stockholder of Seller or any
person or organization controlled by, controlling, or under common control with
any of them (an "Affiliate");
(ii) liabilities and obligations for taxes of any kind re-
sulting from the operation of Seller through the Closing and any liabilities and
obligations for taxes of any kind related to or arising from the transfers
contemplated hereby;
(iii) liabilities and obligations for damage or injury to
person or property based upon events occurring prior to the date of Closing;
(iv) liabilities and obligations to employees of Seller,
whether for accident, disability, or workers compensation insurance or benefits,
benefits under employee benefit plans, back pay, accrued vacation, or
obligations related to or resulting from severance of employment by Seller;
(v) workmen's liens on any of the Subject Assets;
(vi) liabilities incurred by Seller in connection with
this Agreement and the transactions provided for herein, including counsel and
accountant's fees, filing fees and
-2-
expenses related to Seller's proxy material, transfer and other taxes, and
expenses pertaining to its liquidation or the performance by Seller of its
obligations hereunder;
(vii) liabilities of Seller to its dissenting stock-
holders, if any to the extent holders of in excess of one-half percent (0.5%) of
the outstanding shares of capital stock of Seller exercise dissenting
stockholder rights under the California General Corporation Law; and
(viii) liabilities of Seller with respect to any op-
tions, warrants, agreements or convertible or other rights to acquire any shares
of its capital stock of any class.
(c) The assumption of Assumed Liabilities by Buyer hereunder
shall be treated as independent of Buyer's existing business and shall not
enlarge any rights of third parties under contracts or arrangements with Buyer
or Seller or any of their respective subsidiaries. Nothing herein shall prevent
Buyer from contesting in good faith any of the Assumed Liabilities.
1.3 Purchase Price and Payment. In consideration of the sale by
Seller to Buyer of the Subject Assets, in addition to the assumption by Buyer of
the Assumed Liabilities, Buyer agrees to pay to Seller and to the Escrow Agent,
as provided hereafter, the aggregate amount of Two Million One Hundred
Forty-Four Thousand Dollars ($2,144,000) (the "Purchase Price"), subject to
adjustment as provided for in Section 1.4 of this Agreement, which shall be
payable as follows:
(a) the sum of One Million Eight Hundred Ninety-Four Dollars
($1,894,000) shall be paid at the Closing to Seller in cash, by certified check
or by federal funds wire transfer; and
(b) the sum of Two Hundred Fifty Thousand Dollars ($250,000.00)
in cash, shall be deposited at the Closing into an interest bearing escrow
account, and held pursuant to an Escrow Agreement, in substantially the form
attached hereto as Exhibit 1.3 (the "Escrow Agreement").
1.4 Adjustment to Purchase Price. The Purchase Price shall be re-
duced by One Dollar ($1.00) for each One Dollar ($1.00) that Seller's tangible
book value as of the Closing Date, in accordance with generally accepted
Page 3 of Appendix A
<PAGE>
accounting principles, is less than Five Hundred Thousand Dollars ($500,000).
Tangible book value shall be determined by Seller to be Seller's stockholders'
equity minus all intangible assets and is subject to verification by Buyer, or,
at the option of Buyer, by Buyer's independent accountants, Coopers and Lybrand
L.L.P. ("Coopers & Lybrand") through an audit of certain procedures as deter-
mined by Coopera & Lybrand. Buyer shall furnish to Seller, for Seller's review
and comment, the results of any audit or procedures performed by Coopers &
Lybrand. Any results from Coopers & Lybrand shall be final and binding on the
parties hereto. In the event the Purchase Price is reduced as provided herein,
the amounts of the reduction in the Purchase Price shall be paid to Buyerout of
the funds held in escrow pursuant to the Escrow Agreement to the extent of the
balance thereof, and shall then be paid by the Seller. Any amount payable to
Buyer or a result of a Purchase Price adjustment shall be paid to Buyer within
five business days of notice to Seller either of Buyer's verification of
Seller's tangible book value or of Coopers & Lybrand's results of audit or cer-
-3-
tain procedures performed in assessing the accuracy of Seller's calculation of
the Seller's tangible book value as of the Closing Date.
1.5 Time and Place of Closing. The closing of the purchase and sale
provided for in this Agreement (herein called the "Closing") will be held at the
offices of Brown, Rudnick, Freed & Gesmer, counsel to the Buyer, at its offices
at One Financial Center, Boston, Massachusetts on or before May 5, 1997 (the
"Closing Date") or at such other place, date or time as may be fixed by mutual
agreement of the parties.
1.6 Delivery of Assumption of Liabilities. At the Closing, Buyer
shall deliver or cause to be delivered to Seller, among other things, an
agreement to assume the Assumed Liabilities having substantially the provisions
of Section 1.2 hereof and in substantially the form set forth as Exhibit 1.6
hereto.
1.7 Transfer of Subject Assets. At the Closing, Seller shall deliver
or cause to be delivered to Buyer good and sufficient instruments of transfer
transferring to Buyer title to all the Subject Assets including a Bill of Sale
in substantially the form set forth as Exhibit 1.7 hereto, and such other
instruments of transfer as Buyer may require. Such instruments of transfer (a)
shall be in the form and will contain the warranties, covenants and other
provisions (not inconsistent with the provisions hereof) which are usual and
customary for transferring the type of property involved under the laws of the
jurisdictions applicable to such transfers, (b) shall be in form and substance
satisfactory to counsel for Buyer, and (c) shall effectively vest in Buyer good
and marketable title to all the Subject Assets, free and clear of all liens,
restrictions and encumbrances except those specifically disclosed in the
Schedule hereto or in the Base Balance Sheet and which Buyer has agreed herein
may remain in place at and after Closing.
1.8 Delivery of Records and Contracts. At the Closing, Seller shall
deliver or cause to be delivered to Buyer all of Seller's leases, contracts,
commitments and rights, with such assignments thereof and consents to
assignments as are necessary to assure Buyer of the full benefit of the same.
Seller shall also deliver to Buyer at the Closing all of Seller's business
records, tax returns, books and other data relating to its assets, business and
operations (except corporate records and other property of Seller excluded under
Subsection 1.1(b) and Seller shall take all requisite steps to put Buyer in
actual possession and operating control of the Subject Assets and business of
Seller. After the Closing, Buyer shall afford to Seller and its accountants and
attorneys reasonable access to the books and records of Seller delivered to
Buyer under this Section 1.8 and shall permit Seller to make extracts and copies
therefrom for the purpose of preparing such tax returns of Seller as may be
required after the Closing and for other proper purposes approved by Buyer.
1.9 Change of Name. Immediately following the Closing, Seller shall
file with the California Secretary of State an amendment to its Charter (as
hereafter defined) changing its name to a name which does not include the words
"Source Scientific." At the Closing, Seller shall deliver to Buyera consent in
form satisfactory to the Secretary of State of Massachusetts consenting to the
use of the name "Source Scientific" by Buyer or any affiliate thereof.
-4-
1.10 Further Assurances. Seller from time to time after the Clos-
ing at the request of Buyer and without further consideration shall execute and
deliver further instruments of transfer and assignment (in addition to those
delivered under Section 1.7) and take such other action as Buyer may reasonably
require to more effectively transfer and assign to, and vest in, Buyer all of
its right, title and interest in and to the Subject Assets free and clear of all
liens and encumbrances, except those expressly permitted hereby. To the extent
that the assignment of any lease, contract, commitment or right shall require
the consent of other parties thereto, this Agreement shall not constitute an
assignment thereof; however, Seller shall obtain before the Closing any
necessary consents or waivers to assure Buyer of the benefits of such leases,
contracts, commitments or rights. Seller shall cooperate with Buyer to permit
Buyer to enjoy Seller's rating and benefits under the workman's compensation
laws and unemployment compensation laws of applicable jurisdictions, to the
extent permitted by such laws. Nothing herein shall be deemed a waiver by Buyer
of its right to receive at the Closing an effective assignment of each of the
leases, contracts, commitments or rights of Seller.
1.11 Tax Returns. Seller, with the assistance and approval of Buyer,
shall promptly prepare and file on or before the due date or any extension
thereof (together with Buyer's payment for the amount of taxes, if any, shown to
be due thereon which constitute Assumed Liabilities) all required federal, state
and local tax returns with respect to Seller's operations prior to the Closing.
Unless Buyer otherwise requests, Seller shall also take all necessary steps to
terminate its fiscal year for federal income tax purposes on the Closing date.
1.12 Allocation of Purchase Price. The purchase price payable by
Buyer for the Subject Assets pursuant to Section 1.3 and the face amount of the
Assumed Liabilities assumed pursuant to Section 1.2 shall represent payment for
the Subject Assets at the prices shown on a memorandum to be prepared and
initialed by the parties and delivered at the Closing or as soon thereafter as
required information is made available. The prices reflected in said memorandum
shall represent the fair market values of the Subject Assets at the Closing, to
the best of the knowledge and belief of the parties hereto, and the parties
hereto agree that they will not take a position inconsistent with such
allocation for Federal income tax purposes.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants to Buyer as follows:
2.1 Organization and Qualification of Seller. Seller is a corpor-
ation duly organized, validly existing and in good standing under the laws of
the State of California, with full power and authority to own or lease its
properties and to conduct its business in the manner and in the places where
such properties are owned or leased or such business is conducted by it. The
copies of Seller's Certificate of Incorporation or equivalent document as
amended to date ("Charter"), certified by the California Secretary of State, and
of Seller's by-laws as amended to date, certified by Seller's Secretary (or the
equivalent), and previously delivered to Buyer's counsel, are complete and
correct. Seller is duly qualified to do business as a foreign corporation in
-5-
every jurisdiction in which such qualification is required. The states in which
Seller is so qualified are listed on Schedule 2.1.
2.2 Capitalization of Seller. The authorized capital stock of
the Seller consists of 75,000,000 shares of common stock, no par value (the
"Common Stock"), of which 34,540,004 shares are validly issued and outstanding,
fully paid and non-assessable as of the date of this Agreement. Except as set
forth on Schedule 2.2 hereto, there are no (a) outstanding warrants, options or
other rights granted by Seller or, to Seller's knowledge, by any principal
stockholders of Seller (the "Principal Stockholders"), to purchase or acquire,
or pre-emptive rights with respect to the issuance or sale of, the capital stock
of Seller, (b) other securities of Seller directly or indirectly convertible
into or exchangeable for shares of capital stock of the Seller, or (c)
restrictions on the transfer of Seller's capital stock. For purposes of this
Agreement, Principal Stockholders shall include all stockholders of Seller who
hold, of record or beneficially, five percent (5%) or more of the outstanding
shares of Seller's Common Stock.
Page 4 of Appendix A
<PAGE>
2.3 Subsidiaries.
(a) Seller directly or indirectly owns the indicated amounts of
the issued and outstanding capital stock of the corporations listed on Schedule
2.3 to this Agreement (hereinafter referred to as the "Subsidiaries" or
individually as a "Subsidiary"). The Seller has good and marketable title to the
shares of stock of each of the Subsidiaries which it owns, free of any adverse
claim, lien or restriction, and there are no outstanding options, warrants or
other rights of any kind to acquire any additional shares of stock of any of the
Subsidiaries.
(b) Except as set forth on Schedule 2.3, each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation, with full power and authority to own or lease its
properties and to conduct its business in the manner and in the places where
such properties are owned or leased or such business is conducted. The copies of
the Charter and by-laws of each Subsidiary as amended to date, certified by the
Secretary of State of the state of incorporation of such Subsidiary or its
Secretary (or the equivalent) and previously delivered to Buyer's counsel are
complete and correct. Each of the Subsidiaries is duly qualified to do business
as a foreign corporation in every jurisdiction in which such qualification is
required.
(c) Except as set forth on Schedule 2.3, neither Seller nor any
of its Subsidiaries owns any securities issued by any other business
organization or governmental authority, except U.S. Government securities.
Neither Seller nor any of the Subsidiaries is a partner or participant in any
joint venture or partnership of any kind.
2.4 Authorization of Transaction. All necessary action, corporate or
otherwise, has been taken by Seller and the Stockholders, if any such action is
necessary, to authorize the execution, delivery and performance of this
Agreement and the transactions contemplated hereby, and the Agreement is the
valid and binding obligation of Seller, enforceable in accordance with its
terms.
-6-
2.5 Present Compliance with Obligations and Laws. Neither Seller
nor any Subsidiary is: (a) in violation of its Charter or by-laws; (b) in
default in the performance of any material obligation, agreement or condition of
any material debt instrument which (with or without the passage of time or the
giving of notice) affords to any person the right to accelerate any material
indebtedness or terminate any material right; (c) in default or breach of (with
or without the passage of time or the giving of notice) any other material
contract to which it is a party or by which it or any of the Subject Assets are
bound except as disclosed in Schedule 2.21; or (d) in violation of any law,
regulation, administrative order or judicial order applicable to it or its
business or the Subject Assets.
2.6 No Conflict of Transaction With Obligations and Laws.
(a) Neither the execution, delivery or performance of this
Agreement, nor the performance of the transactions contemplated hereby, will:
(i) constitute a breach or violation of the Charter or by-laws of Seller or any
Subsidiary; (ii) conflict with or constitute (with or without the passage of
time or the giving of notice) a breach of, or default under, any debt instrument
to which Seller or any Subsidiary is a party, or give any person the right to
accelerate any material indebtedness or terminate any material right; (iii)
constitute (with or without the passage of time or giving of notice) a default
under or breach of any other material agreement, instrument or obligation to
which Seller or any Subsidiary is a party or by which it or any of the Subject
Assets are bound; or (iv) result in a violation of any law, regulation,
administrative order or judicial order applicable to Seller or any Subsidiary,
or their businesses or the Subject Assets.
(b) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby by the Seller do not require the
consent, waiver, approval, authorization, exemption of or giving of notice to
any governmental authority.
2.7 Financial Statements. Attached as Schedule 2.7 hereto are the
following audited consolidated financial statements of Seller and its
Subsidiaries and unconsolidated statements of such companies for the fiscal
years ended June 30, 1996 and 1995 and unaudited consolidated financial
statements for the six and three month periods ended December 31, 1996 all of
which statements are complete and correct and fairly present the financial
position of Seller and its Subsidiaries on a consolidated or unconsolidated
basis, as the case may be, on the date of such statements and the results of
their operations on the applicable basis for the periods covered thereby, and
such financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved and prior periods.
The Seller's unaudited balance sheet as of December 31, 1996 included
in the above financial statements is sometimes referred to hereinafter as the
"Base Balance Sheet."
2.8 Absence of Undisclosed Liabilities. As of the date of the
Base Balance Sheet, Seller and its Subsidiaries had no material liabilities of
any nature, whether accrued, absolute, contingent or otherwise (including
without limitation liabilities as guarantor or otherwise with respect to
obligations of others, or liabilities for taxes due or then accrued or to become
due), except: (a) the Assumed Liabilities; (b) liabilities stated or adequately
reserved against on
-7-
the Base Balance Sheet; and (c) liabilities disclosed in Schedule 2.8 hereto.
Since the date of the Base Balance Sheet, Seller and its Subsidiaries had no
material liabilities of any nature, whether accrued, absolute, contingent or
otherwise (including without limitation liabilities as guarantor or otherwise
with respect to obligations of others, or liabilities for taxes due or then
accrued or to become due) except (a) the Assumed Liabilities; (b) liabilities
stated or adequately reserved against on the Base Balance Sheet; (c) liabilities
in the aggregate not in excess of $5,000 arising in the ordinary course of
business; and (d) liabilities disclosed in Schedule 2.8 hereto. There is no fact
which materially adversely affects, or may in the future (so far as can now be
reasonably foreseen) materially adversely affect, the business, properties,
operations or condition of Seller and its Subsidiaries on a consolidated basis
which has not been specifically disclosed herein or in a schedule furnished
herewith.
2.9 Absence of Certain Changes. Except as disclosed in Sched-
ule 2.9 hereto, since the date of the Base Balance Sheet there has not been:
(a) any change in the financial condition, properties, assets,
liabilities, business or operations of the Seller or any Subsidiary which change
by itself or in conjunction with all other such changes, whether or not arising
in the ordinary course of business, has been materially adverse with respect to
Seller or any Subsidiary;
(b) any contingent liability incurred by Seller or any Subsi-
diary as guarantor or otherwise with respect to the obligations of others;
(c) any mortgage, encumbrance or lien placed on any of the
properties of Seller or any Subsidiary which remains in existence on the date
hereof or at the time of Closing;
(d) any obligation or liability incurred by Seller or any Sub-
sidiary other than obligations and liabilities incurred in the ordinary course
of business;
(e) any purchase, sale or other disposition, or any agreement
or other arrangement for the purchase, sale or other disposition, of any of the
properties or assets of Seller or any Subsidiary other than in the ordinary
course of business;
(f) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, assets or business
of Seller and its Subsidiaries on a consolidated basis;
(g) any declaration, setting aside or payment of any dividend
on, or the making of any other distribution in respect of, the capital stock of
Seller, or any Subsidiary other than a wholly-owned Subsidiary, or any direct or
indirect redemption, purchase or other acquisition by Seller of its own capital
stock or the stock of any such Subsidiary;
Page 5 of Appendix A
<PAGE>
(h) any labor trouble or claim of unfair labor practices
involving Seller or any Subsidiary; any change in the compensation payable or to
become payable by Seller or any Subsidiary to any of their officers, employees
or agents other than normal merit increases in
-8-
accordance with compensation programs existing on the date of the Base Balance
Sheet, or any bonus payment or arrangement made to or with any of such officers,
employees or agents;
(i) any change with respect to the management or supervisory
personnel of Seller or any Subsidiary;
(j) any payment or discharge of a material lien or liability of
Seller or any Subsidiary which was not shown on the Base Balance Sheet or
incurred in the ordinary course of business thereafter; or
(k) any obligation or liability incurred by Seller or any
Subsidiary to any of their employees, officers, directors or shareholders or any
loans or advances made by Seller or any Subsidiary to any of their employees,
officers, directors or shareholders, except transactions between Seller and a
Subsidiary and normal compensation and expense allowances payable to officers.
2.10 Payment of Taxes. Except as disclosed on Schedule 2.10 hereto,
the Seller and each of its Subsidiaries have filed all federal, state, local,
and foreign government income, excise and franchise tax returns, real estate and
personal property tax returns, sales and use tax returns and all other tax
returns required to be filed by them, and they have paid all taxes owing by them
except taxes which have not yet accrued or otherwise become due for which
adequate provision has been made in the pertinent financial statements referred
to in Section 2.7 above. All transfer, excise and other taxes payable to any
jurisdiction by reason of the sale and transfer of the Subject Assets pursuant
to this Agreement shall be paid or provided for by Seller after the Closing out
of the consideration payable by Buyer hereunder. Except as disclosed on Schedule
2.10 hereto, the federal income tax returns of Seller and the Subsidiaries have
never been examined by the Internal Revenue Service and no extension of time for
the assessment of deficiencies for any year is in effect. The provisions for
taxes reflected in the above-mentioned financial statements are adequate to
cover any tax liabilities of Seller and any Subsidiary in respect of their
respective businesses, properties and operations during the periods covered by
said financial statements and all prior periods. Neither the Internal Revenue
Service nor any other taxing authority is now asserting or threatening to assert
against the Seller or any Subsidiary any deficiency or claim for additional
taxes or interest thereon or penalties in connection therewith.
2.11 Title to Properties; Liens; Condition of Properties.
(a) Set forth on Schedule 2.11 hereto is a listing of (i) all
the real property owned by Seller or any Subsidiary at the date hereof, (ii) all
leases under which Seller or any Subsidiary leases real property at the date
hereof, (iii) a complete description of the machinery, equipment and other
personal property used or owned by Seller or any Subsidiary as of the date
hereof, and (iv) all leases under which Seller or any Subsidiary leases any
personal property at the date hereof. Except as specifically disclosed in
Schedule 2.11 or in the Base Balance Sheet, Seller and its Subsidiaries have
good and marketable title in fee simple to all of their real and personal
property, including property described in said schedule as owned, and all of
their leases
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are valid and subsisting and fully assignable by Seller or its Subsidiaries (as
the case may be) and no default exists under any thereof.
(b) None of the real or personal property owned or used by
Seller or any Subsidiary is subject to any mortgage, pledge, lien (other than
for taxes not yet due and payable), conditional sale agreement, security title,
encumbrance or other charge, except as specifically disclosed in Schedule 2.11
or in the Base Balance Sheet.
(c) Except as otherwise specified in Schedule 2.11 hereto:
(i) all buildings, machinery and equipment of Seller
and each Subsidiary are in good repair, have been well maintained, substantially
conform with all applicable ordinances, regulations and zoning or other laws,
and do not encroach on property of others, and such machinery and equipment is
in good working order; and
(ii) as of the date hereof, there is no pending or
threatened change of any such ordinance, regulation or zoning or other law and
there is no pending or threatened condemnation of any such property.
2.12 Collectibility of Accounts Receivable. All of the accounts
receivable of Seller and its Subsidiaries shown or reflected on the Base Balance
Sheet, less a reserve for bad debts in the amount shown on the Base Balance
Sheet, are, and those existing at the time of Closing, less the reserve shown on
the Base Balance Sheet, will be, (a) valid and enforceable claims which arose
out of transactions with unaffiliated parties, (b) fully collectible within 90
days from invoice date through the Seller's normal means of collection, and (c)
subject to no set-off or counterclaim.
2.13 Inventories. Except as set forth in Schedule 2.13, all finished
goods, work in process and raw materials contained in the inventories of Seller
and its Subsidiaries reflected on the Base Balance Sheet are, and those existing
at the Closing will be, of a quality and quantity saleable in the ordinary
course of the business of Seller and its Subsidiaries at prevailing market
prices without discounts. Except as set forth in Schedule 2.13, all inventory
items shown on the Base Balance Sheet are, and those existing at the Closing
will be, priced at lower of cost (FIFO) or market, and reflect write-downs to
realizable values in the case of items which have become obsolete or unsaleable
(except at prices less than cost) through regular distribution channels in the
ordinary course of the business of Seller and its Subsidiaries. Subject to
write-downs complying with the preceding sentence, the values of the inventories
stated in the Base Balance Sheet reflect the normal inventory valuation policies
of Seller and its Subsidiaries and were determined in accordance with generally
accepted accounting principles, practices and methods, consistently applied.
Purchase commitments for raw materials and parts are not in excess of normal
requirements, and none are at prices materially in excess of current market
prices. Sales commitments for finished goods are all at prices in excess of
prices used in valuing inventory, after allowing for selling expenses and a
normal profit margin. Since the date of the Base Balance Sheet, no inventory
items have been sold or disposed of except through sales in the ordinary course
of business at prices no less than prevailing market prices, and in no event
less than cost.
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2.14 Intellectual Property Rights. Rights.
(a) For purposes of this Section 2.14, "Intellectual Property"
means a patent, patent application, trademark or service mark, trademark or
service mark application, trade name or copyright, and "Computer Software" means
all information, however embodied, with respect to information processing
processes and programs, including software, firmware, databases and manuals and
documentation with respect thereto.
(b) All rights of ownership of, or material licenses to use,
Intellectual Property or Computer Software held by the Seller or any Subsidiary
are listed on Schedule 2.14. There are no Intellectual Property or Computer
Software rights, other than those set forth on such schedule, reasonably
necessary to the conduct of the business of Seller and its Subsidiaries as
presently conducted.
(c) Except as set forth on Schedule 2.14, all rights to
Intellectual Property required to be listed in Schedule 2.14 and in which Seller
or any Subsidiary claims ownership rights:
(i) have been duly registered in, filed in, or iss-
ued by the United States Patent Office, United States Register of Copyrights, or
the corresponding offices of other countries identified on said schedule;
(ii) have been properly maintained and renewed in acc-
ordance with all applicable laws and regulations in the United States and such
foreign countries;
Page 6 of Appendix A
<PAGE>
(iii) in the case of copyrightable works of authorship,
were developed and authored as original works of authorship either by full time
employees of Seller or a Subsidiary within the normal scope of their duties as
works for hire, or by third persons as works for hire under an express written
obligation of assignment to Seller or a Subsidiary;
(iv) are owned exclusively by Seller or a Subsidiary,
free and clear of any attachments, liens, or encumbrances; no other person has
any right or interest in or license to use or right to license others to use any
of the Intellectual Property;
(v) are freely transferable (except as otherwise re-
quired by law); and
(vi) are not subject to any outstanding order, decree,
judgment or stipulation.
(d) Except as set forth in Schedule 2.14, with respect to any
Computer Software used in or necessary to the business of the Seller and the
Subsidiaries and in which Seller or any Subsidiary claims ownership rights,
Seller and each Subsidiary have: (i) affixed in a timely manner appropriate
copyright notices complying with the Copyright Act of 1976, as amended, and the
rules and regulations of the United States Copyright Office to all copies of
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such Computer Software, in object code form or any other form distributed to the
public; (ii) distributed such Computer Software only pursuant to written
agreements limiting the use, reproduction, distribution and disclosure thereof,
and requiring the licensees to preserve the confidentiality thereof to an extent
adequate to protect Seller's rights therein; and (iii) disclosed or made
available the source code or systems documentation thereof only to employees or
consultants of the Seller who required such disclosure or access for the
business purposes of the Seller.
(e) With respect to any Intellectual Property or Computer
Software set forth on Schedule 2.14 which Seller or any Subsidiary holds a
license to use, such license is adequate to the conduct of the business of
Seller and its Subsidiaries as presently conducted.
(f) No proceedings to which Seller or any Subsidiary is a party
have been commenced which (i) challenge the rights of Seller or any Subsidiary
in respect of the Intellectual Property or any Computer Software listed on
Schedule 2.14, or (ii) charge Seller or any Subsidiary with infringement of any
other person's rights in Intellectual Property or Computer Software; and no such
proceeding to which Seller or a Subsidiary is not a party has been filed, nor
are any such proceedings threatened to be filed.
(g) To Seller's knowledge, none of the rights in Intellectual
Property or Computer Software listed on Schedule 2.14 is being infringed by any
other person, and neither Seller nor any Subsidiary is infringing upon any
Intellectual Property or Computer Software rights of any other person.
(h) No director, officer or employee of Seller or any of its
Subsidiaries owns, directly or indirectly, in whole or in part, any Intellectual
Property right which Seller or any of its Subsidiaries has used, is presently
using, or the use of which is reasonably necessary to their respective
businesses as now conducted.
(i) In addition to the Intellectual Property described above,
Seller and each of its Subsidiaries have the right to use, free and clear of any
claims or rights of others except claims or rights described in Schedule 2.14,
all trade secrets, customer lists, manufacturing secret processes (collectively
"Trade Secrets") required for or used in the manufacture or marketing of all
products formerly or presently produced by Seller or such Subsidiary, including
products licensed from others. The Seller and its Subsidiaries have adopted
measures adequate to protect their Trade Secrets. Copies of all forms of
confidentiality or non-disclosure agreements utilized by Seller or any
Subsidiary to protect its Trade Secrets have been provided to Buyer. The Seller
and each of its Subsidiaries are not using or in any way making use of any Trade
Secrets of any third party, including without limitation a former employer of
any present or past employee of Seller or any Subsidiary.
(j) To Seller's knowledge, none of the Trade Secrets is being
infringed by any other person, and none of the Trade Secrets infringe upon the
trade secret rights of any other person.
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2.15 Contracts and Commitments.
(a) Except for contracts, commitments, plans, agreements and
licenses described in Schedule 2.15 hereto, neither Seller nor any Subsidiary is
a party to or subject to:
(i) any contract or agreement for the purchase of any
commodity, material, equipment or asset, except purchase orders in the ordinary
course for less than $1,000 each, such orders not exceeding in the aggregate
$5,000;
(ii) any other contracts or agreements creating any oblig-
ations of Seller or any Subsidiary after the date of the Base Balance Sheet;
(iii) any contract or agreement providing for the purchase
of all or substantially all of its requirements of a particular product from a
supplier;
(iv) any contract or agreement which by its terms does not
terminate or is not terminable without penalty by Seller or such Subsidiary (or
its successor or assign) within one year after the date hereof;
(v) any contract or agreement for the sale or lease of
its products not made in the ordinary course of business;
(vi) any contract with any sales agent or distributor of
products of Seller or any Subsidiary;
(vii) any contract containing covenants limiting the freedom
of Seller or any Subsidiary to compete in any line of business or with any
person or entity; or
(viii) any license or franchise agreement (as licensor or
licensee or franchisor or franchisee).
(b) Except as described in Schedule 2.15, neither Seller nor
any Subsidiary is in default under any contracts, commitments, plans, agreements
or licenses to which they are party or by which they are bound or has knowledge
of any termination, cancellation, limitation or modification or change in any
business relationship with any material supplier or customer. For the purposes
hereof, a supplier or customer is material if it accounts for more than two
percent (2%) of the orders or sales, as the case may be, of Seller and its
Subsidiaries on a consolidated basis.
2.16 Labor and Employee Relations.
(a) Except as shown on Schedule 2.16 hereto, there are no
currently effective consulting or employment agreements or other material
agreements with individual consultants or employees to which Seller or any
Subsidiary is a party or by which they are bound. Complete and accurate copies
of all such written agreements have been delivered to Buyer. Also shown on
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Schedule 2.16 are the name and rate of compensation (including all bonus
compensation) of each officer, employee or agent of Seller or any Subsidiary.
(b) Except as shown on Schedule 2.16, none of the employees of
Seller or any Subsidiary is covered by any collective bargaining agreement with
any trade or labor union, employees' association or similar association. Each of
Seller and the Subsidiaries has complied with applicable laws, rules and
regulations relating to the employment of labor, including without limitation
those relating to wages, hours, unfair labor practices, discrimination, and
payment of social security and similar taxes.
Page 6 of Appendix A
<PAGE>
There are no representation elections, arbitration proceedings, labor strikes,
slowdowns or stoppages, material grievances or other labor troubles pending or
overtly threatened, with respect to the employees of Seller or any Subsidiary.
(c) There are no complaints against Seller or any Subsidiary
pending or overtly threatened before the National Labor Relations Board or any
similar state or local labor agencies, or before the Equal Employment
Opportunity Commission or any similar state or local agency, by or on behalf of
any employee of Seller or any Subsidiary.
(d) There is no contingent liability for sick leave, vacation
time, severance pay or similar items not set forth on the Base Balance Sheet or
on Schedule 2.16. The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will not trigger any
severance pay obligation under any contract or at law.
(e) The Seller has provided to Buyer a complete description of
all employment policies under which the Seller or any Subsidiary has operated or
which has been communicated to their employees.
2.17 Employee Benefits and ERISA.
(a) Schedule 2.17 (a) hereto describes all of the employee
compensation and benefit plans, agreements, commitments, practices or
arrangements of any type (including, but not limited to, plans described in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) offered, maintained or contributed to by Seller or any Subsidiary for
the benefit of current or former employees or directors of Seller or any
Subsidiary, or with respect to which Seller or any Subsidiary has or may have
any liability, whether direct or indirect, actual or contingent (including, but
not limited to, liabilities arising from affiliation under Section 414(b), (c),
(m) or (o) of the Code or Section 4001 of ERISA) (collectively, the "Benefit
Plans"). Neither Seller nor any Subsidiary has incurred any obligation for any
withdrawal liability or liability to make any other contributions with respect
to any employee benefit plan that is a "multiemployer plan" within the meaning
of Section 3(37) of ERISA. Neither Seller nor any Subsidiary has any liability,
whether direct or indirect, actual or contingent, with respect to any employee
pension plan as defined in Section 3(2) of ERISA, and which is intended to meet
the qualification requirements of the Code that is a defined benefit plan (as
defined in Section 3(35) of ERISA) and is subject to Title IV of ERISA, whether
or not terminated (including, but not limited to, liabilities arising from
affiliation under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of
ERISA).
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(b) With respect to each Benefit Plan described in Section
2.17(a) hereto, Seller has delivered to Buyer true and complete copies of: (i)
any and all plan documents (including, but not limited to, all amendments
thereto) and agreements (including, but not limited to, trust agreements,
insurance contracts, and custodial and investment management agreements); (ii)
any and all material employee communications (including, but not limited to, all
summary plan descriptions and material modifications thereto, claims, review
policies, distribution forms, and loan documents, as applicable); (iii) all
returns or reports required at any time within the last five (5) years by ERISA
or the Code (including, but not limited to, the five (5) most recent actuarial
reports, if applicable); (iv) the most recent annual and periodic accounting of
plan assets, if applicable; (v) the most recent determination letter received
from the Internal Revenue Service (the "Service"), if applicable; and (vi) in
the case of any unfunded or self-insured plan or arrangement, a current estimate
of accrued and anticipated liabilities thereunder.
(c) With respect to each Benefit Plan described on Schedule
2.17(a) hereto and except as set forth on Schedule 2.17(c) hereto, (i) if
intended to qualify under Section 401(a) of the Code, such plan so qualifies,
and its trust is exempt from taxation under Section 501(a) of the Code; (ii)
such plan has been administered and enforced in accordance with its terms and
all applicable laws, regulations and rulings in all material respects; (iii) no
breach of fiduciary duty has occurred with respect to which Seller or any
Subsidiary or any Benefit Plan may be liable or otherwise damaged in any
material respect; (iv) no material disputes nor any audits or investigations by
any governmental authority are pending or threatened; (v) no "prohibited
transaction" (within the meaning of either Section 4975(c) of the Code or
Section 406 of ERISA) has occurred with respect to which Seller or any
Subsidiary or any Benefit Plan may be liable or otherwise damaged in any
material respect; (vi) all contributions (including, without limitation,
normally anticipated matching or discretionary contributions under defined
contribution plans), premiums, and other payment obligations have been accrued
on the consolidated financial statements of Seller (including without limitation
the Base Balance Sheet) in accordance with generally accepted accounting
principles, and, to the extent due, have been made on a timely basis, in all
material respects; (vii) all contributions or benefit payments made or required
to be made under such plan meet the requirements for deductibility under the
Code; (viii) Seller has expressly reserved the right to amend, modify or
terminate such plan, or any portion of it, at any time without liability to
itself; and (ix) no such plan requires Seller or any Subsidiary to continue to
employ any employee or director.
(d) With respect to each Benefit Plan described on Schedule
2.17(a) hereto and except as set forth on Schedule 2.17(d) hereto, (i) no such
plan is, or has ever been, subject to Title IV of ERISA; (ii) there is no excess
of actuarial accrued liabilities or "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA), over the fair market value of Plan assets as of the
Closing Date; (iii) there has been no "accumulated funding deficiency," whether
or not waived, and no missed "quarterly contributions," (as these terms are
defined in ERISA); (iv) the funding methods used are acceptable under ERISA; (v)
the actuarial assumptions used are and have been reasonable, both individually
and collectively and calculated as if the participants receive lump sum payments
upon plan termination; (vi) there has been no "reportable event" (as defined in
Section 4043 of ERISA); (vii) there has been no termination or partial
termination; (viii) there
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has been no filing with the Pension Benefit Guaranty Corporation ("PBGC") of an
intent to terminate such plan, nor has the PBGC instituted any proceedings to
terminate such plan; (ix) no lien has been created under Section 412(n) of the
Code or Section 302(f) of ERISA; (x) neither Seller nor any Subsidiary has
received a notice of deficiency or liability or a demand for payment from,
incurred any liability to, been assessed a penalty by, or had a lien perfected
or enforced by the PBGC; and (xi) if such plan is a multiemployer pension plan
under which the Seller is obligated to make contributions, there would be no
withdrawal liability under Title IV of ERISA upon the cessation of contributions
to such plan as of the day of the Closing.
(e) With respect to each Benefit Plan described on Sched-
ule 2.17(a) hereto which provides welfare benefits of the type described in
Section 3(1) of ERISA: except as set forth on Schedule 2.17(e) hereto, (i) no
such plan provides medical or death benefits with respect to current or former
employees or directors of Seller or any Subsidiary, or their dependents, beyond
their termination of employment, other than coverage mandated by Sections
601-608 of ERISA and 4980B of the Code; (ii) each such plan has been
administered in compliance with Sections 601-609 of ERISA and 4980B of the Code;
(iii) no such plan is or is provided through a "multiple employer welfare
arrangement" within the meaning of Section 3(40) of ERISA; and (iv) no such plan
has reserves, assets, surpluses or prepaid premiums.
(f) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any individual to severance pay pursuant to a
prior agreement with Seller; (ii) accelerate the time of payment or vesting
under any Benefit Plan; or (iii) increase the amount of compensation or benefits
due to any individual. No payment made or contemplated under any Benefit Plan
constitutes an "excess parachute payment" within the meaning of Section 280G of
the Code.
2.18 Environmental Matters.
(a) Except as disclosed in Schedule 2.18 hereto, any and all
waste oil, hazardous waste, hazardous substances, toxic substances or hazardous
materials used or generated by Seller or any Subsidiary have always been and are
being generated, used, stored or treated on or at any of the properties or
facilities owned or leased by Seller or any Subsidiary (for the purposes of this
Section, a "Site") in accordance with federal, state and local laws, regulations
and ordinances. Copies of any and all filings made or documents prepared under
the California Safe Drinking Water & Toxic Enforcement Act of 1986 and under
Title III of the Superfund Amendments and Reauthorization Act of 1986, including
without limitation material safety data sheets and chemical lists, have been
provided to Buyer.
Page 7 of Appendix A
<PAGE>
(b) Except as disclosed in Schedule 2.18 hereto, no petroleum,
oil, hazardous waste, hazardous substances, toxic substances or hazardous
materials used or generated by Seller or any Subsidiary have ever been, are
being, are intended to be or are threatened with being spilled, released,
discharged, disposed, placed, leaked, or otherwise caused to become located in
the air, soil or water in, under or upon a Site. Seller has provided Buyer with
copies of all notices filed pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act or comparable state law, including
without limitation any reports, whether oral
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or written, made to the National Response Center, or other agencies.
(c) Except as disclosed in Schedule 2.18 hereto, no petroleum,
oil, hazardous substances or hazardous waste have ever been shipped by or for
Seller or any Subsidiary to other sites or facilities for treatment, storage or
disposal, and neither Seller nor any Subsidiary has received any notice that any
sites or facilities to which any such wastes have been shipped or sent are
subject to or threatened to become subject to any governmental response action
or clean up order. Seller has provided Buyer with copies of all manifests
documenting disposal of hazardous substances relating to operations of Seller
and its Subsidiaries.
(d) Except as disclosed in Schedule 2.18 hereto, all hazardous
materials and toxic substances have been shipped by Seller and its Subsidiaries
in accordance with all applicable federal, state and local laws, regulations and
ordinances, including The Hazardous Materials Transportation Act, the
regulations of the Department of Transportation, and any corresponding state and
local statute and regulations adopted pursuant to said acts.
(e) All underground tanks and other underground storage
facilities located at any Site are disclosed in Schedule 2.18 hereto and copies
of all notifications made to federal, state or local authorities pursuant to the
Resource Conservation and Recovery Act relating to underground storage tanks
have been provided to Buyer. As of the date hereof, none of such underground
tanks and other underground storage facilities are in violation of any federal,
state or local environmental law, regulation or ordinance.
(f) Except as disclosed in Schedule 2.18 hereto, all wells,
water discharges and other water diversions on any Site are properly registered
and/or permitted under, and copies of such permits have been provided to Buyer,
and do not violate, any applicable federal, state or local law, regulation or
ordinance.
(g) Except as disclosed in Schedule 2.18 hereto, each of Seller
and its Subsidiaries has all necessary and applicable air permits and licenses,
and has properly registered (for air pollution control purposes) all air
emitting devices used in activities conducted by it, as required by applicable
federal, state or local law, regulation or ordinance. Copies of all such permits
have been provided to Buyer.
(h) Except as disclosed on Schedule 2.18 hereto, all asbestos
insulated equipment or areas on any Site are in compliance with all applicable
federal, state and local laws, current regulations, and ordinances.
(i) For purposes of this section, "hazardous waste", "hazardous
substances", "hazardous material", "oil", "petroleum", "toxic substances",
"manifest", "material safety data sheets", and "response action" shall have the
meaning set forth in the Resource Conservation and Recovery Act, The
Comprehensive Environmental Response, Compensation and Liability Act, The
Hazardous Materials Transportation Act, The Federal Water Pollution Control Act,
The Toxic Substances Control Act, and corresponding state and local statutes,
and ordinances and any
-17-
amendments, or successor legislation to such Acts, or as currently defined in
any federal, state or local regulations adopted pursuant to such Acts.
2.19 Permits. Each of Seller and its Subsidiaries holds all licenses,
permits and franchises which are required to permit it to conduct their
respective businesses as presently conducted, and all such licenses, permits and
franchises are listed on Schedule 2.19 hereto and are now, and will be after the
Closing, valid and in full force and effect, and Buyer shall have full benefit
of the same.
2.20 Warranty or Other Claims. Except as disclosed on Schedule 2.20,
there are no existing or threatened claim, nor are there any facts upon which a
claim could be based, against Seller or any Subsidiary for services or
merchandise which are defective or fail to meet any service or product
warranties. No claim has been asserted against Seller or any Subsidiary for
renegotiation or price redetermination of any business transaction, and there
are no facts upon which any such claim could be based.
2.21 Litigation. Except for matters described in Schedule 2.21 hereto,
there is no litigation pending or threatened against Seller or any Subsidiary
and there are no outstanding court orders, court decrees, or court stipulations
to which Seller or any of its Subsidiaries is a party or by which any of their
assets are bound, any of which (a) question this Agreement or affect the
transactions contemplated hereby, or (b) materially restrict the present
business, operations, prospects, assets or condition, financial or otherwise, of
Seller or any Subsidiary, or (c) will result in any material adverse change in
the business, properties, operations, prospects, assets or the condition,
financial or otherwise, of Seller or any of its Subsidiaries. Neither Seller nor
any Subsidiary, has any reason to believe that any further action, suit,
proceeding or investigation which (a) questions this Agreement or affects the
transactions contemplated hereby, or (b) materially restricts the present
business, properties, operations, prospects, assets or conditions, financial or
otherwise, of Seller or any Subsidiary, or (c) will result in any material
adverse change in the business, properties, operations, prospects, assets or
condition, financial or otherwise, of Seller or any of its Subsidiaries, which
has not been identified in Schedule 2.21 may be brought against the Seller or
any of its Subsidiaries.
2.22 Borrowings and Guarantees. Except for the loan in the amount
of Five Hundred Thousand Dollars ($500,000) made pursuant to that certain
Business Loan and Security/Subordination Agreement by and among BBI, Seller and
Concord Growth Corporation (the "Loan Agreement") and as otherwise set forth on
Schedule 2.22 hereto, there are no agreements and undertakings pursuant to which
Seller (a) is borrowing or is entitled to borrow any money, (b) is lending or
has committed itself to lend any money, or (c) is a guarantor or surety with
respect to the obligations of any person. Complete and accurate copies of all
such written agreements have been delivered to Buyer.
2.23 Financial Service Relations and Powers of Attorney. All of the
arrangements which Seller or any Subsidiary has with any bank depository
institution or other financial services entity, whether or not in Seller's or
the Subsidiary's name, are completely and accurately described on Schedule 2.23
hereto, indicating with respect to each of such arrangements the type of
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arrangement maintained (such as checking account, borrowing arrangements, safe
deposit box, etc.) and the person or persons authorized in respect thereof.
Except as set forth in Schedule 2.23 or pursuant to the Loan Agreement, neither
the Seller nor any Subsidiary has any outstanding power of attorney.
2.24 Insurance. Schedule 2.24 contains a complete and correct list
of all policies of insurance maintained by Seller or any Subsidiary (including
insurance providing benefits for employees) in effect on the date hereof,
together with complete and correct information with respect to the premiums,
coverages, insurers, expiration dates, and deductibles in respect of such
policies. Except for amounts deductible under policies of insurance described on
such Schedule or with respect to risks assumed as a self-insurer and described
on such Schedule, neither Seller nor any Subsidiary is, or has been at any time,
subject to any liability as a self-insurer of the businesses or assets of Seller
or any Subsidiary that is reasonably likely to have a material adverse effect
upon the businesses, assets, revenues, condition (financial or otherwise) or
prospects of Seller or any Subsidiary. Except as set forth on Schedule 2.24,
there are no claims pending or overtly threatened, under any of said policies,
or disputes with insurers, and all premiums due and payable thereunder have been
paid, and all such policies are in full force and effect in accordance with
their respective terms.
2.25 Minute Books. The minute books of Seller and the minute books
of each Subsidiary accurately record all action taken by their respective
shareholders, boards of directors and committees thereof.
Page 8 of Appendix A
<PAGE>
2.26 Finder's Fee. Except as set forth on Schedule 2.26 hereto,
neither the Seller, nor any Subsidiary nor, to Seller's knowledge any Principal
Stockholder, has incurred or become liable for any broker's commission or
finder's fee relating to or in connection with the transactions contemplated by
this Agreement.
2.27 Transactions with Interested Persons. No officer, supervisory
employee, director or stockholder of Seller or any Subsidiary, or their
respective spouses or children, (a) owns, directly or indirectly, on an
individual or joint basis, any material interest in, or serves as an officer or
director of, any customer, competitor or supplier of Seller or any Subsidiary,
or any organization which has a material contract or arrangement with Seller or
any Subsidiary, or (b) has any contract or agreement with the Seller or any
Subsidiary other than as disclosed on Schedule 2.27 hereto, and all such
agreements are, except as noted on such schedule, on arms-length terms.
2.28 Absence of Sensitive Payments. Neither Seller, any of its Sub-
sidiaries, nor any of their respective directors, officers, agents, stockholders
or employees, either on behalf of Seller or its Subsidiaries:
(a) has made or has agreed to make any contributions, payments
or gifts of funds or property to any governmental official, employee or agent
where either the payment or the purpose of such contribution, payment or gift
was or is illegal under the laws of the United States, any state thereof, or any
other jurisdiction (foreign or domestic);
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(b) has established or maintained any unrecorded fund or
asset for any purpose, or has made any false or artificial entries on any of
its books or records for any reason; or
(c) has made or has agreed to make any contribution or
expenditure, or has reimbursed any political gift or contribution or expenditure
made by any other person, to candidates for public office, whether federal,
state or local (foreign or domestic) where such contributions were or would be a
violation of applicable law.
2.29 Disclosure of Material Information. Neither this Agreement nor
any schedule or exhibit hereto or certificate issued pursuant hereto contains
any untrue statement of a material fact, or omits to state a material fact
necessary to make the statements herein or therein not misleading, relating to
the business or affairs of Seller and its Subsidiaries. There is no fact which
materially adversely affects the business, condition (financial or otherwise) or
prospects of Seller and its Subsidiaries which has not been set forth herein or
in a Schedule hereto.
2.30 SEC Filings.
(a) Seller has filed or caused to be filed all registration
statements, reports or statements, and any amendments thereto, required to be
filed by it pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, and has heretofore furnished (or shall prior to the Closing Date
furnish) to Buyer copies, as applicable, of:
(i) Seller's Annual Report on Form 10-K for its three
most recent fiscal years;
(ii) Seller's Annual Report to Stockholders for its
three most recent fiscal years;
(iii) Seller's definitive Proxy Statements for all
meetings of stockholders since the beginning of its third preceding fiscal year;
and
(iv) Seller's Quarterly Report(s) on Form 10-Q for each
quarter since the end of its most recent fiscal year.
(b) The documents furnished to Buyer pursuant to paragraph (a)
were prepared in accordance with the requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder in all material respects and do
not contain any misstatement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein, in light of the
circumstances, not misleading.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BBI AND BUYER.
BBI and Buyer hereby represent and warrant to Seller as follows:
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3.1 Organization of BBI and Buyer. Each of BBI and Buyer is a
corporation duly organized, validly existing and in good standing under the laws
of Massachusetts with full corporate power to own or lease its properties and to
conduct its business in the manner and in the places where such properties are
owned or leased or such business is conducted by each of them.
3.2 Authorization of Transaction. All necessary action, corporate
or otherwise, has been taken by BBI and Buyer to authorize the execution,
delivery and performance of this Agreement, and the same is the valid and
binding obligation of BBI and Buyer enforceable in accordance with its terms,
subject to laws of general application affecting creditor's rights generally.
3.3 No Conflict of Transaction With Obligations and Laws.
(a) Neither the execution, delivery or performance of this
Agreement, nor the performance of the transactions contemplated hereby, will:
(i) constitute a breach or violation of BBI or Buyer's Charter or by-laws; (ii)
conflict with or constitute (with or without the passage of time or the giving
of notice) a breach of, or default under any material agreement, instrument or
obligation to which BBI or Buyer is a party or by which either of them or their
respective assets are bound which would materially affect the performance by
Buyer of its obligations under this Agreement; or (iii) result in a violation of
any law, regulation, administrative order or judicial order applicable to BBI or
Buyer.
(b) The execution, delivery and performance of this Agreement
and the transactions contemplated hereby by Buyer do not require the consent,
waiver, approval, authorization, exemption of or giving of notice to any
governmental authority.
3.4 SEC Filings.
(a) Buyer has filed or caused to be filed all registration
statements, reports or statements, and any amendments thereto, required to be
filed by it pursuant to Sections 13, 14, or 15(d) of the Securities Exchange Act
of 1934, and has heretofore furnished (or shall prior to the Closing Date
furnish) to Seller copies, as applicable, of:
(i) Buyer's Annual Report on Form 10-K for its most
recent fiscal year;
(ii) Buyer's Annual Report to Stockholders for its
most recent fiscal year;
(iii) Buyer's definitive Proxy Statements for all
meetings of Stockholders since the beginning of its preceding fiscal year; and
(iv) Buyer's Quarterly Report(s) on Form 10-Q for
each quarter since the end of its most recent fiscal year.
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3.5 Litigation. There is no litigation pending or, to the knowledge
of Buyer, threatened against Buyer which will have a material adverse effect on
its properties, assets or business or which would prevent or hinder the
consummation of the transactions contemplated by this Agreement.
3.6 Finder's Fee. Except as set forth on Schedule 3.6 hereto,
Buyer has not incurred or become liable for any broker's commission or finder's
fee relating to or in connection with the transactions contemplated by this
Agreement.
ARTICLE 4. COVENANTS OF SELLER.
Seller hereby covenants and agrees with Buyer as follows:
Page 9 of Appendix A
<PAGE>
4.1 Conduct of Business. Between the date of this Agreement and the
Closing, Seller will do, and it will cause each of its Subsidiaries to do, the
following unless Buyer shall otherwise consent in writing:
(a) conduct its business only in the ordinary course and
refrain from changing or introducing any method of management or operations
except in the ordinary course of business and consistent with prior practices;
(b) refrain from making any purchase, sale or disposition of
any asset or property other than in the ordinary course of business, from
purchasing any capital asset costing more than $300 and from mortgaging,
pledging, subjecting to a lien or otherwise encumbering any of its properties or
assets;
(c) refrain from incurring any contingent liability as a
guarantor or otherwise with respect to the obligations of others, and from
incurring any other contingent or fixed obligations or liabilities except those
that are usual and normal in the ordinary course of business;
(d) refrain from making any change or incurring any obligation
to make a change in its Charter or by-laws or authorized or issued capital
stock, except as contemplated by this Agreement;
(e) refrain from declaring, setting aside or paying any
dividend or making any other distribution in respect of capital stock, or making
any direct or indirect redemption, purchase or other acquisition of capital
stock, of Seller or any Subsidiary other than a wholly-owned Subsidiary;
(f) refrain from entering into any employment contract or
making any change in the compensation payable or to become payable to any of its
officers, employees or agents;
(g) refrain from prepaying any loans from its stockhol-
ders, officers or directors (if any) or making any change in its borrowing
arrangements;
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(h) use its best efforts to prevent any change with respec
to its banking arrangements;
(i) use its best efforts to keep intact its business
organization, to keep available its present officers, agents and employees and
to preserve the goodwill of all suppliers, customers and others having business
relations with it;
(j) have in effect and maintain at all times all insurance of
the kind, in the amount and with the insurers set forth in Schedule 2.24 hereto
or equivalent insurance with any substitute insurers approved by Buyer; and
(k) permit Buyer and its authorized representatives to have
full access to all its properties, assets, records, tax returns, contracts and
documents and furnish to Buyer or its authorized representatives such financial
and other information with respect to its business or properties as Buyer may
from time to time reasonably request.
(l) promptly advise Buyer of additions, deletions or other
changes required to be made to the Schedules hereto to make such Schedules
accurate and complete as of the Closing solely as a result of the operation of
the business of Seller in a manner consistent with the covenants of this
Agreement, and to furnish Buyer with such revised Schedules at or prior to the
Closing.
4.2 Authorization from Others. Prior to the Closing, Seller will
have obtained, and will cause its Subsidiaries to have obtained, all
authorizations, consents and permits of others required to permit the
consummation by Seller and its Subsidiaries of the transactions contemplated by
this Agreement.
4.3 Breach of Representations and Warranties. Promptly upon the
occurrence of, or promptly upon Seller's becoming aware of the impending or
threatened occurrence of, any event which would cause or constitute a breach, or
would have caused or constituted a breach had such event occurred or been known
to Seller prior to the date hereof, of any of the representations and warranties
of Seller contained in or referred to in this Agreement, Seller shall give
detailed written notice thereof to Buyer and shall use its best efforts to
prevent or promptly remedy the same.
4.4 Consummation of Agreement. The Seller shall use its best efforts
to perform and fulfill all conditions and obligations on its part to be
performed and fulfilled under this Agreement, to the end that the transactions
contemplated by this Agreement shall be fully carried out. To this end, Seller
will obtain all necessary authorizations or approvals of its stockholders and
Board of Directors, to the sale of assets contemplated by this Agreement and the
dissolution of Seller in accordance with the laws of the state of incorporation
of Seller, which shall include as integral parts thereof:
(a) the transfer to Buyer of the Subject Assets upon the terms
and conditions set forth in this Agreement;
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(b) cessation of all business by Seller as Source Scientific,
Inc. from and after the Closing, except in connection with its liquidation; and
(c) authorization to the officers and directors of Seller to
discharge all debts and obligations of Seller (other than those assumed by Buyer
hereunder), and to distribute in liquidation the purchase price received by
Seller as provided herein.
4.5 Compliance with Securities Laws. As soon as practicable after
execution of this Agreement, Seller shall cause its counsel to initiate
preparation of preliminary proxy materials in accordance with the Securities
Exchange Act of 1934, and the rules and regulations thereunder, for a special
meeting of the Company's stockholders at which the stockholders will be asked to
approve the transactions contemplated hereby. Such proxy materials shall be in
form and substance satisfactory to Buyerand its counsel.
ARTICLE 5. COVENANTS OF BBI AND BUYER.
BBI and Buyer hereby covenant and agree with Seller as follows:
5.1 Authorization from Others. Prior to the Closing Buyer will have
obtained all authorizations, consents and permits of others required to permit
the consummation by BBI and Buyer of the transactions contemplated by this
Agreement.
5.2 Consummation of Agreement. Buyer shall use its best efforts to
perform and fulfill all conditions and obligations on its part to be performed
or fulfilled under this Agreement, to the end that the transactions contemplated
by this Agreement shall be fully carried out. To this end, BBI will obtain any
approvals of its stockholders or Board of Directors and Buyer will obtain any
approvals of its stockholders or Board of Directors which may be required in
order to consummate the transactions contemplated hereby.
5.3 Disclosure of Adverse Change. Prior to the Closing, Buyer
shall advise Seller of any fact which materially adversely affects the business,
condition (financial or otherwise) or prospects of Buyer and BBI not otherwise
previously publicly disclosed. To this end, Buyer shall have the right, prior to
disclosing such fact to Seller, to require Seller to enter into a
confidentiality agreement relating to non-disclosure of such fact consistent
with compliance under the Securities Exchange Act of 1934.
ARTICLE 6. CONDITIONS TO OBLIGATIONS OF BBI AND BUYER.
The obligations of BBI and Buyer to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing Date the actions required by this Article 6 will have been
accomplished.
6.1 Shareholder Authorization. This Agreement and the transactions
contemplated hereby shall have been duly approved by the affirmative vote of
Seller's stockholders, as required by the laws of the state of incorporation of
Seller.
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Page 10 of Appendix A
<PAGE>
6.2 Dissenting Stockholders. Holders of not more than one-half per-
cent (.5%) of the shares of the Common Stock of Seller shall have taken steps to
preserve the rights of dissenting stockholders afforded by the laws of the state
of incorporation of Seller, and Seller shall have delivered to Buyer a true and
correct list of the names, addresses and numbers of shares held by each holder
of dissenting shares of Seller and the steps taken by each such holder as
required by the laws of Seller's jurisdiction of incorporation governing
appraisal rights.
6.3 Representations; Warranties; Covenants. Each of the represen-
tations and warranties of Seller contained in Article 2 shall be true and
correct as though made on and as of the Closing Date. Seller shall, on or before
the Closing Date, have performed all of its obligations hereunder which by the
terms hereof are to be performed on or before the Closing Date. Seller shall
have delivered to Buyer a certificate of Seller's President and Chief Financial
Officer dated as of the Closing Date, in form and substance satisfactory to BBI
and Buyer, to the effect that the statements contained in Sections 6.3 and 6.4
are true and that all other conditions to BBI's and Buyer's obligations
hereunder have been satisfied. Seller shall have delivered to Buyer a
certificate of Seller's President and Chief Financial Officer, dated as of the
Closing Date, in form and substance satisfactory to BBI and Buyer, confirming
that the conditions set forth in Sections 6.1 and 6.2 have been fulfilled.
6.4 No Material Adverse Change. There shall have been no material ad-
verse change in the financial condition, prospects, properties, assets,
liabilities, business or operations of Seller since the date hereof, whether or
not in the ordinary course of business.
6.5 Opinion of Seller's Counsel.
(a) At the Closing, BBI and Buyer shall have received from
Susan L. Preston, Esquire, counsel for Seller, an opinion dated as of the
Closing, in form and substance satisfactory to BBI and Buyer.
(b) At the Closing, BBI and Buyer shall have received from
Messrs. Arter & Hadden, counsel for Seller, an opinion dated as of the Closing,
in form and substance satisfactory to BBI and Buyer.
6.6 Employment Contracts. Each of the individuals listed on Schedule
6.6 hereto shall have accepted employment with Buyer and executed and delivered
to Buyer an employment agreement having substantially the terms and conditions
contained in Exhibit 6.6 attached hereto, and all employment contracts to which
Seller is a party shall have been terminated.
6.7 Non-Competition Contracts. Seller and each of the individuals
listed on Schedule 6.7 hereto shall have executed and delivered to Buyer
non-competition agreements having substantially the terms and conditions of
Exhibit 6.7 attached hereto.
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6.8 Approval of Board of Directors. The transactions contempla-
ted by this Agreement shall have been reviewed and approved by the Board of
Directors of Buyer and BBI and their respective stockholders to the extent nec-
essary.
6.9 Approval of Buyer's Counsel. All actions, proceedings instru-
ments and documents required to carry out this Agreement and all related
legal matters contemplated by this Agreement shall have been approved by coun-
sel for Buyer, provided that the approval of such counsel shall not be unreason-
ably withheld.
6.10 Absence of Certain Litigation. There shall not be any (a)
injunction, restraining order or order of any nature issued by any court of
competent jurisdiction which directs that this Agreement or any material
transaction contemplated hereby shall not be consummated as herein provided, (b)
suit, action or other proceeding by any federal, state, local or foreign
government (or any agency thereof) pending before any court or governmental
agency, or threatened to be filed or initiated, wherein such complainant seeks
the restraint or prohibition of the consummation of any material transaction
contemplated by this Agreement or asserts the illegality thereof, or (c) suit,
action or other proceeding by a private party pending before any court or
governmental agency, or threatened to be filed or initiated, which in the
opinion of counsel for Buyer is likely to result in the restraint or prohibition
of the consummation of any material transaction contemplated hereby or the
obtaining of an amount in payment (or indemnification) of material damages from
or other material relief against any of the parties or against any directors or
officers of BBI or Buyer, in connection with the consummation of any material
transaction contemplated hereby.
6.11 FIRPTA Certificate. At the Closing, the Seller will deliver to
Buyer certificates which satisfy the requirements of the regulations under
Section 1445 of the Internal Revenue Code of 1986, as amended.
6.12 Consents and Waivers. Seller shall have obtained any necessary
consents or waivers to assure Buyer of the benefits of all leases, contracts,
commitments and rights, to the extent that the assignment of any lease,
contract, commitment or right requires the consent of parties other than Seller.
6.13 Escrow Agreement. There shall have been executed and delivered to
BBI and Buyer an Escrow Agreement in substantially the form attached hereto as
Exhibit 1.3, pursuant to which $250,000 of the purchase price shall be deposited
in escrow at the Closing to secure payment of any purchase price adjustment or
indemnification payable to BBI and Buyer hereunder by reason of the breach of
any of the representations and warranties of Seller or failure of Seller to
perform any of its obligations hereunder, and said amounts shall have been
deposited with the Escrow Agent pursuant to said Escrow Agreement.
6.14 Convertible Debentures. Holders of the convertible debentures of
Seller in the principal amount of $629,000 shall have converted the principal
amount of such debentures and all accrued interest thereon ($70,898 as of
January 31, 1997) into 13,997,960 shares of Seller's Common Stock and terminated
in writing their stock purchase warrants, in full satisfaction of Seller's
obligations to such debenture holders.
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6.15 Opinion of Independent Accountants. Buyer shall have received in
form and substance reasonably satisfactory to it, reports and opinions on such
business, financial and legal matters in connection with the transactions
contemplated by this Agreement as it deems pertinent, including, without
limitation, a satisfactory report from Buyer's independent accountants,
Coopers & Lybrand, regarding Seller's business and financial condition.
6.16 Opinion of Investment Banking Firm. Buyer shall have received in
form and substance reasonably satisfactory to it, an opinion from a recognized
investment banking firm to the effect that the purchase price is fair to Buyer's
stockholders from a financial point of view.
6.17 Due Diligence. The results of Buyer's due diligence investigation
of Seller shall be satisfactory to Buyer, in Buyer's sole discretion. Any
additions, deletions or other changes to be made to the Schedules hereto
pursuant to Section 4.1(1) shall be satisfactory to Buyer, in Buyer's sole
discretion.
6.18 Facility Lease. The lease with respect to Seller's Garden Grove
facility located at 7390 Lincoln Way, Garden Grove, California (the "Garden
Grove Lease") shall have been amended, in form and substance satisfactory to
Buyer, to reduce to approximately 25,000 square feet (one floor) the space
leased by Seller, and to reduce the payment due under the Garden Grove Lease in
proportion to the decrease in the amount of space leased.
6.19 Reduction of Interest Payments. Concord Growth Corporation
("Concord") shall have agreed in writing to a reduction in the minimum interest
payment to $2,500 per month in return for an increase in interest to the prime
rate plus five percent (5%) and a reduction in advancement to seventy percent
(70%), along with payment of the line of credit loan by April 30, 1997, and
Concord shall have further agreed in writing that upon repayment of the
principal amount of Seller's line of credit loan with Concord and all accrued
but unpaid interest thereon, Concord shall waive its right to prepayment
penalties of any kind.
6.20 Consents to Transactions. BBI's lending bank, The First National
Bank of Boston, shall have consented to the transactions contemplated hereby.
Page 11 of Appendix A
<PAGE>
6.21 Authorization. Seller shall have obtained and will cause its
Subsidiaries to have obtained all authorities, consents and permits of others
required to permit the consummation by Seller and its Subsidiaries of the
transactions contemplated by this Agreement.
6.22 Bulk Sales Law. Seller shall have complied with the obligations
imposed on vendors under the Bulk Sales Act, or the equivalent, as a result of
the transactions contemplated by this Agreement.
ARTICLE 7. CONDITIONS TO OBLIGATIONS OF SELLER
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The obligations of Seller to consummate this Agreement and the
transactions contemplated hereby are subject to the condition that on or before
the Closing the actions required by this Article 7 will have been accomplished.
7.1 Shareholder Authorization. This Agreement and the transactions
contemplated hereby shall have been duly approved by the affirmative vote of the
stockholders of Seller as required by Seller's state of incorporation.
7.2 Representations; Warranties; Covenants. Each of the
representations and warranties of Buyer contained in Article 3 shall be true and
correct as though made on and as of the Closing; Buyer shall, on or before the
Closing, have performed all of its obligations hereunder which by the terms
hereof are to be performed on or before the Closing; and Buyer shall have
delivered to Seller a certificate of the President and any Vice President of
Buyer dated as of the Closing to such effect.
ARTICLE 8. TERMINATION OF AGREEMENT.
8.1 Termination. At any time prior to the Closing, this Agreement may
be terminated (a) by mutual consent of the parties with the approval of their
respective Board of Directors, notwithstanding prior approval of this Agreement
by the stockholders of any party, (b) by either party if there has been a
material misrepresentation, breach of warranty or breach of covenant by the
other party in its representations, warranties and covenants set forth herein,
(c) by Buyer if the conditions stated in Article 6 have not been satisfied at or
prior to the Closing, or (d) by Seller if the conditions stated in Article 7
have not been satisfied at or prior to the Closing.
8.2 Right to Proceed. Anything in this Agreement to the contrary
notwithstanding, if any of the conditions specified in Article 6 hereof have not
been satisfied, Buyer shall have the right (but not the obligation) to proceed
with the transactions contemplated hereby without waiving its rights hereunder,
and if any of the conditions specified in Article 7 hereof have not been
satisfied, Seller shall have the right (but not the obligation) to proceed with
the transactions contemplated hereby without waiving its rights hereunder.
ARTICLE 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING.
9.1 Survival of Warranties. All representations, warranties,
agreements, covenants and obligations herein or in any schedule, certificate or
financial statement delivered by either party to the other party incident to the
transactions contemplated hereby are material, shall be deemed to have been
relied upon by the other party and shall survive through and until March 31,
1998, regardless of any investigation and shall not merge in the performance of
any obligation by either party hereto.
9.2 Collection of Assets. Subsequent to the Closing, Buyer shall have
the right and authority to collect all receivables and other items transferred
and assigned to it by Seller hereunder and to endorse with the name of Seller
any checks received on account of such receivables or other items, and Seller
agrees that it will promptly transfer or deliver to Buyer from time to time
after Closing, any cash or other property that Seller may receive with respect
to any claims, contracts, licenses, leases, commitments, sales orders, purchase
orders, receivables of any character or any other items required to be
transferred by it to Buyer pursuant to the provisions hereof.
9.3 Payment of Debts. Seller shall as promptly as possible after the
Closing pay all debts and obligations not to be assumed by Buyer hereunder.
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ARTICLE 10. INDEMNIFICATION.
10.1 Definitions. For purposes of this Article 10:
"Losses" means all losses, damages (including, without
limitation, punitive and consequential damages), liabilities, payments and
obligations, and all expenses related thereto. Losses shall include any
reasonable legal fees and costs incurred by any of the Indemnified Persons
subsequent to the Closing in defense of or in connection with any alleged or
asserted liability, payment or obligation, whether or not any liability or
payment, obligation or judgment is ultimately imposed against the Indemnified
Persons and whether or not the Indemnified Persons are made or become parties to
any such action.
"Buyer's Indemnified Persons" means BBI and the Buyer, and
their respective directors, officers, employees, stockholders and agents.
"Indemnified Person" means any person entitled to be
indemnified under this Article 10.
"Indemnifying Person" means any person obligated to indemnify
another person under this Article 10.
"Seller's Indemnified Persons" means the Seller.
"Third Party Action" means any written assertion of a claim, or
the commencement of any action, suit, or proceeding, by a third party as to
which any person believes it may be an Indemnified Person hereunder.
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10.2 Indemnification by Seller.
(a) Subject to the limitations in paragraph (b) below, Seller
agrees to defend, indemnify and hold harmless Buyer's Indemnified Persons from
and against all Losses directly or indirectly incurred by or sought to be
imposed upon any of them:
(i) resulting from, relating to or arising out of any
breach of any of the representations or warranties made by Seller in or pursu-
ant to this Agreement or any schedule hereto or in any agreement, document or
instrument executed and delivered pursuant hereto or in connection with the
Closing;
(ii) resulting from or arising out of any breach of any
covenant or agreement made by Seller in or pursuant to this Agreement;
(iii) in respect of any liability or obligation of
Seller or any Subsidiary not included in the Assumed Liabilities;
(iv) resulting from or arising out of any liability,
payment or obligation arising out of any litigation or similar matter required
to be described on Schedule 2.21, except to the extent of reserves with respect
thereto on the Base Balance Sheet;
(v) resulting from or arising out of any liability,
payment or obligation in respect of any taxes for all periods, or portions
thereof, ending on or before the Closing Date, owing by Seller or any Subsid-
iary of any kind or description (including interest and penalties with respect
thereto);
(vi) resulting from or arising out of any governmental
or third party claims for damages or clean-up costs under any environmental law
arising out of the operations of the Seller or any Subsidiary on or before the
Closing Date, except to the extent of reserves with respect thereto on the Base
Balance Sheet.
(b) The right to indemnification under paragraph 10.2(a) is
subject to the following limitations: Seller shall have no liability under
paragraph 10.2(a) unless one or more of the Buyer's Indemnified Persons gives
written notice to Seller asserting a claim for Losses, including reasonably
detailed facts and circumstances pertaining thereto, before the earlier of the
running of any applicable statute of limitations or March 31, 1998.
Page 12 of Appendix A
<PAGE>
10.3 Indemnification by Buyer.
(a) From and after the Closing Date, Buyer shall indemnify and
hold harmless Seller's Indemnified Persons from any and all Losses directly or
indirectly incurred by or sought to be imposed upon them:
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(i) resulting from or arising out of any breach of
any of the representations or warranties made by Buyer, in or pursuant to this
Agreement or in any agreement, document or instrument executed and delivered
pursuant hereto or in connection with the Closing; and
(ii) resulting from or arising out of any breach of any
covenant or agreement made by Buyer in or pursuant to this Agreement.
10.4 Defense of Third Party Actions.
(a) Promptly after receipt of notice of any Third Party Action,
any person who believes he, she or it may be an Indemnified Person will give
notice to the potential Indemnifying Person of such action. The omission to give
such notice to the Indemnifying Person will not relieve the Indemnifying Person
of any liability hereunder, except to the extent, but only to the extent, it was
prejudiced thereby, nor will it relieve it of any liability which it may have
other than under this Article 10.
(b) Upon receipt of a notice of a Third Party Action, the
Indemnifying Person shall have the right, at its option and at its own expense,
to participate in and be present at the defense of such Third Party Action, but
not to control the defense, negotiation or settlement thereof, which control
shall remain with the Indemnified Person, unless the Indemnifying Person makes
the election provided in paragraph (c) below.
(c) By written notice within 45 days after receipt of a notice
of a Third Party Action, an Indemnifying Person may elect to assume control of
the defense, negotiation and settlement thereof, with counsel reasonably
satisfactory to the Indemnified Person; provided, however, that the Indemnifying
Person agrees (i) to promptly indemnify the Indemnified Person for its expenses
to date, and (ii) to hold the Indemnified Person harmless from and against any
and all Losses caused by or arising out of any settlement of the Third Party
Action approved by the Indemnifying Person or any judgment in connection with
that Third Party Action. The Indemnifying Persons shall not in the defense of
the Third Party Action enter into any settlement which does not include as a
term thereof the giving by the third party claimant of an unconditional release
of the Indemnified Person, or consent to entry of any judgment except with the
consent of the Indemnified Person.
(d) Upon assumption of control of the defense of a Third Party
Action under paragraph (c) above, the Indemnifying Person will not be liable to
the Indemnified Person hereunder for any legal or other expenses subsequently
incurred in connection with the defense of the Third Party Action, other than
reasonable expenses of investigation.
(e) If the Indemnifying Person does not elect to control the
defense of a Third Party Action under paragraph (c), the Indemnifying Person
shall promptly reimburse the Indemnified Person for expenses incurred by the
Indemnified Person in connection with defense of such Third Party Action, as and
when the same shall be incurred by the Indemnified Person.
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(f) Any person who has not assumed control of the defense of
any Third Party Action shall have the duty to cooperate with the party which
assumed such defense.
10.5 Miscellaneous. Buyer's Indemnified Persons shall be entitled to
indemnification under Section 10.2(a) and Seller's Indemnified Persons shall be
entitled to indemnification under Section 10.3(a), regardless of whether the
matter giving rise to the applicable liability, payment, obligation or expense
may have been previously disclosed to any such person and limited only in
accordance with Section 10.4(a) notice requirements.
10.6 Payment of Indemnification. Claims for indemnification under this Article
10 other than pursuant to Section 10.3 shall be paid pursuant to the terms of
the Escrow Agreement with respect to amounts held thereunder and otherwise by
the Seller, and any claims for indemnification under this Article 10 shall be
paid or otherwise satisfied by Indemnifying Persons within 30 days after notice
thereof is given by the Indemnified Person if the Indemnifying Person does not
dispute the claim, or within five (5) days of resolution of any disputed claim.
ARTICLE 11. MISCELLANEOUS
11.1CLE 1 Fees and Expenses. Except as set forth below, each of the parties will
bear its own expenses in connection with the negotiation and the consummation of
the transactions contemplated by this Agreement, and no expenses of Seller
relating in any way to the purchase and sale of the Subject Assets hereunder
shall be charged to or paid by Buyer or included in any account of Seller as of
the Closing.
Seller shall pay to Buyer upon demand a fee equal to all Expenses (as
defined below) (the "Termination Fee"), payable by certified check or by federal
funds wire transfer, if (i) the requisite approval of the transactions
contemplated hereby by Seller's stockholders is not obtained at Seller's Special
Meeting of Stockholders, (ii) the Special Meeting of Stockholders does not occur
prior to April 2, 1997 or if it does occur, Seller's stockholders do not approve
the transactions by the requisite vote, (iii) the conditions specified in
Articles 6 and 7 hereof are not satisfied (other than regulatory approvals and
breach by Buyer), (iv) Seller materially breaches the letter agreement dated
February 4, 1997 between Buyer and Seller (the "Letter Agreement"), or (v) this
Agreement is terminated by Seller for any reason other than as a result of a
willful and material breach of this Agreement by Buyer; provided, however, that
the Termination Fee shall be Buyer's Expenses plus $250,000 if Seller (or any
affiliate) enters into an acquisition with a person other than Buyer, within one
year of the date of the Letter Agreement.
For purposes of this Article 8, "Expenses" means all fees and expenses
incurred or paid by or on behalf of Buyer or any of its affiliates in connection
with the consummation of any of the transactions contemplated hereby, by the
Letter Agreement, by the Business Loan and Security/Subordination Agreement, or
the transactions contemplated hereby or thereby, including all fees and expenses
of counsel, investment banking firms, accountants, experts and consultants to
Buyer or any of its affiliates and a reasonable allocation of corporate
overhead. In the event that this Agreement is so terminated, each party will
return all papers, documents, financial
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statements and other data furnished to it by or with respect to each other party
to such other party (including any copies thereof made by the first party).
11.2 Notices. Any notice or other communication in connection with
this Agreement shall be deemed to be delivered if in writing (or in the form of
a telegram or facsimile transmission) addressed as provided below and if either
(a) actually delivered electronically or physically at said address, or (b) in
the case of a letter, three business days shall have elapsed after the same
shall have been deposited in the United States mail, postage prepaid and
registered or certified, return receipt requested:
If to the Seller, to:
Source Scientific, Inc.
7390 Lincoln Way
Garden Grove, CA 92841
Attention: Richard A. Sullivan, President
with a copy to:
Weiss, Jensen, Ellis & Howard
520 Pike Street, Suite 2600
Seattle, WA 98101
Attention: Susan L. Preston
Page 13 of Appendix A
<PAGE>
If to BBI or Buyer, to:
Boston Biomedica, Inc.
375 West Street
West Bridgewater, MA 02379
Attention: Richard T. Schumacher, President
with a copy to:
Brown, Rudnick, Freed & Gesmer
One Financial Center
Boston, MA 02111
Attention: Steven R. London, Esquire and John G. Nossiff, Jr., Esquire
and in any case at such other address as the addressee shall have specified by
written notice. All periods of notice shall be measured from the date of
delivery thereof.
11.4 Publicity and Disclosures. No press releases or any public
disclosure, either written or oral, of the transactions contemplated by this
Agreement shall be made without the prior knowledge and written consent of BBI
and Seller. Seller and BBI acknowledge, however, that, as public companies,
Seller and BBI may be legally obligated to make certain public
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announcements from time to time regarding their respective businesses, including
one or more announcements regarding the transactions contemplated by this
Agreement. Accordingly, BBI and Seller agree that, notwithstanding any other
provision of this Section 11.4, BBI and Seller shall be free to make such public
announcements regarding the transactions contemplated by this Agreement at such
time as Buyer, or BBI or Seller reasonably believes such announcements are
required in order to comply with applicable federal and state securities laws,
provided that each provides the other with a copy of such announcement at least
24 hours prior to its release.
11.5 Non-Solicitation. Seller shall not, and shall use its best
efforts to cause its affiliates, as that term is interpreted under the
Securities Act of 1933, as amended, and each of its officers, directors,
employees, representatives, and agents not to, directly or indirectly (a)
encourage, solicit, initiate, engage or participate in discussions or
negotiations with any person or entity (other than Buyer) concerning any merger,
consolidation, sale of material assets, tender offer, recapitalization,
accumulation of any equity interest in Seller, proxy solicitation or other
business combination involving Seller or any Subsidiary or (b) provide any
nonpublic information concerning the business, properties or assets of Seller or
any subsidiary to any person or entity (other than Buyer) other than in
connection with the sale of products in the ordinary course of business.
11.6 Confidentiality. The parties agree that they will keep
confidential and not disclose or divulge any confidential, proprietary or secret
information which they may obtain from the other in connection with the
transactions contemplated herein, or pursuant to inspection rights granted
hereunder unless such information is or hereafter becomes public information.
11.7 Entire Agreement. This Agreement (including all exhibits or
schedules appended to this Agreement and all documents delivered pursuant to or
referred to in this Agreement, all of which are hereby incorporated herein by
reference) constitutes the entire agreement between the parties, and all
promises, representations, understandings, warranties and agreements with
reference to the subject matter hereof and inducements to the making of this
Agreement relied upon by any party hereto, have been expressed herein or in the
documents incorporated herein by reference.
11.8 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision hereof.
11.9 Assignability. This Agreement may not be assigned otherwise than
by operation of law (a) by BBI or Buyer without the prior written consent of
Seller, or (b) by Seller without the prior written consent of Buyer. However,
any or all rights of BBI and Buyer to receive performance (but not the
obligations of Buyer to Seller hereunder) and rights to assert claims against
Seller hereunder, may be assigned by Buyer to (i) any direct or indirect
subsidiary, parent or other affiliate of Buyer, or (ii) any person or entity
extending credit to BBI or Buyer to finance the purchase price. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns.
11.10 Amendment. This Agreement may be amended only by a written
agreement executed by BBI, Buyer and Seller.
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11.11 Attorney-in-Fact. The Seller hereby irrevocably appoints and
designates Richard T. Schumacher or his successor unanimously appointed in
written notice by the Seller to the Buyer (the "Agent") as its agent and
attorney-in-fact to accept service of process immediately following the Closing.
11.12 Governing Law; Venue.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts (other than the
choice of law principles thereof), except that any representations and
warranties with respect to real and tangible property shall be governed by and
construed in accordance with the laws of the jurisdiction where such property is
situated if other than in the Commonwealth of Massachusetts.
(b) Any claim, action, suit or other proceeding initiated by
any of the Sellers' Indemnified Persons against Buyer, or by any of the Buyer's
Indemnified Persons against any Seller, under or in connection with this
Agreement may be asserted, brought, prosecuted and maintained in any Federal or
state court in the Commonwealth of Massachusetts, as the party bringing such
action, suit or proceeding shall elect, having jurisdiction over the subject
matter thereof, and Seller and Buyer hereby waive any and all rights to object
to the laying of venue in any such court, the assertion of personal jurisdiction
over such persons by any such court and to any right to claim that any such
court may be an inconvenient forum. Seller and Buyer hereby submit themselves to
the jurisdiction of each such court and agree that service of process on them in
any such action, suit or proceeding may be effected by the means by which
notices are to be given to it under this Agreement.
11.13 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed in original but all of which
together shall constitute one and the same instrument.
11.14 Effect of Table of Contents and Headings. Any table of contents,
title of an article or section heading herein contained is for convenience of
reference only and shall not affect the meaning of construction of any of the
provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in multiple counterparts as of the date set forth above
by their duly authorized representatives.
BOSTON BIOMEDICA, INC.
BY: ____________________________
Richard T. Schumacher, President
BBI-SOURCE SCIENTIFIC, IN..
BY: ____________________________
Name:
Title:
Page 14 of Appendix A
<PAGE>
SOURCE SCIENTIFIC, INC.
BY: ____________________________
Richard A. Sullivan, President
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ASSETS FOR CASH PURCHASE AGREEMENT
List of Schedules and Exhibits
Schedule 1.1 - Assets
Schedule 1.2(a) - Liabilities Assumed
Schedule 2.1 - Qualification of Seller
Schedule 2.2 - Options, Warrants and Convertible Securities
Schedule 2.3 - Subsidiaries
Schedule 2.7 - Financial Statements of the Seller
Schedule 2.8 - Undisclosed Liabilities
Schedule 2.9 - Changes Since Base Balance Sheet Date
Schedule 2.10 - Payment and Taxes
Schedule 2.11 - Property, Leases and Equipment
Schedule 2.13 - Inventories
Schedule 2.14 - Intellectual Property Rights
Schedule 2.15 - Contracts and Commitments
Schedule 2.16 - Labor and Employee Relations
Schedule 2.17(a) ERISA; Compensation and Benefit Plans
Schedule 2.17(c) ERISA; Compensation and Benefit Plans
Schedule 2.17(d) ERISA; Compensation and Benefit Plans
Schedule 2.17(e) ERISA; Compensation and Benefit Plans
-37-
Schedule 2.18 - Environmental Matters
Schedule 2.19 - Permits
Schedule 2.20 - Claims
Schedule 2.21 - Litigation
Schedule 2.22 - Borrowings and Guarantees
Schedule 2.23 - Banking and Financial Arrangements
Schedule 2.24 - Insurance
Schedule 2.26 - Finder's Fees
Schedule 2.27 - Transactions with Interested Persons
Schedule 6.6 - Parties to Employment Contracts
Schedule 6.7 - Parties to Non-Competition Contracts
Exhibit 1.3 - Escrow Agreement
Exhibit 1.6 - Assumption of Liabilities
Exhibit 1.7 - Bill of Sale
Exhibit 6.6 - Employment Contract
Exhibit 6.7 - Non-Competition Contract
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(End of Asset Purchase Agreement)
Page 15 of Appendix A
<PAGE>
APPENDIX B
Sections 1301 through 1304 of the California General Corporation Law
1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time, contents.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholders' right under such
sections. The statement of price constitutes and offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in (i) or (ii) of paragraph (1) of subdivision (b)
of Section 1300 (without regard to the provisos in that paragraph), not later
than the date of the shareholders' meeting to vote upon the reorganization, or
(2) in any other case within 30 days after the date on which the notice of the
approval by the outstanding shares pursuant to subdivision (a) or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
1302. Submission of share certificates for endorsement; uncertificated securit-
ies.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificate of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303. Payment of agreed price with interest; agreement fixing fair market value;
filing; time of payment.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
1304. Action to determine whether shares are dissenting shares or fair market
value; limitation; joinder; consolidation; determination of issues; appointment
of appraisers.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares is
in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
[Description: Box with sample "X" with instruction: Please mark your votes as
in this example.
[Description: Proxy Card, 7 1/2 inches wide and 4 1/4 inches long]
[Description: on left side of the card, the following:]
-- Source Scientific, Inc. --
The Board of Directors recommends a vote "FOR APPROVAL OF THE ASSET
PURCHASE AGREEMENT AND DISSOLUTION " in Item 1, and "FOR" Item 2.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
[Description: on right side of the Proxy Card, the following:]
1. To consider and vote upon a [Description: 3 boxes, to affix
proposal (a) to approve the Asset an X for voting, one box each
Purchase Agreement, for the encaptioned: "FOR", "AGAINST",
acquisition of substantially all of the and "ABSTAIN"]
assets of Source Scientific, Inc.(the "Company") by BBI-Source Scientific,
Inc., and the related transactions contemplated thereby, all as more fully
described in the accompanying Proxy Statement; and (b) thereafter to diss-
olve the Company and distribute its net remaining assets in cash to the
Company's shareholders of record on the date of dissolution of the
Company.
2. To transact such other matters as [Description: 3 boxes, to affix
may properly come before the Special an X for voting.]
Meeting or any adjournment thereof.
The undersigned hereby revokes any other proxy to vote at such meeting,
and hereby ratifies and confirms that said attorneys and proxies, and each
of them may lawfully do by virtue hereof. With respect to matters not
known at the time of the solicitation hereof, said proxies are authorized
to vote in accordance with their best judgment.
- ---------------------------------- ------------------------------ -----------
SIGNATURE SIGNATURE IF HELD JOINTLY DATE
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
[Description: on the back of the Proxy Card, the following:]
SOURCE SCIENTIFIC, INC.
This Proxy is Solicited on Behalf of the Board of Directors
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH
BELOW. THIS PROXY WILL BE TREATED AS A "GRANT OF AUTHORITY TO VOTE FOR" THE
ASSET PURCHASE AGREEMENT, THE TRANSACTIONS CONTEMPLATED THEREBY, AND THE
SUBSEQUENT DISSOLUTION OF THE COMPANY, AND AS SAID PROXY SHALL DEEM ADVISABLE ON
SUCH OTHER BUSINESS AS MAY COME BEFORE THE MEETING, UNLESS OTHERWISE DIRECTED.
The signator of this proxy, ("Signator"), a Shareholder of Source
Scientific, Inc., a California corporation (the "Company"), hereby appoints
Richard A. Sullivan and Catherine Curtis, Secretary, and each of them, the
proxies of the Signator, each with full power of substitution, to attend, vote
and act for the undersigned at the Special Meeting of the Shareholders to be
held on Wednesday, April 30, 1997, at 11:00 a.m. California time, which the
Signator, at the Special Meeting of Shareholders of the Company, would be
entitled to vote as specified on the reverse.
Note: Please notify below any change of address of the Signator:
NEW ADDRESS: -------------------------------------------------------------------
(To be Signed on Reverse Side)
