<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1996
REGISTRATION NO. 33-1522
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
XXSYS TECHNOLOGIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN CHARTER)
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<S> <C> <C>
CALIFORNIA 3829 33-0161808
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
4619 VIEWRIDGE AVENUE
SAN DIEGO, CALIFORNIA 92123
(619) 974-8200
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
4619 VIEWRIDGE AVENUE
SAN DIEGO, CALIFORNIA 92123
(619) 974-8200
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PLACE OF BUSINESS)
DR. GLORIA C. L. MA
4619 VIEWRIDGE AVENUE
SAN DIEGO, CALIFORNIA 92123
(619) 974-8200
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
DANIEL K. DONAHUE, ESQ.
BRUCK & PERRY, A PROFESSIONAL CORPORATION
ONE NEWPORT PLACE, TENTH FLOOR
NEWPORT BEACH, CALIFORNIA 92660
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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Registration Statement Cover Page continues on following page
<PAGE> 2
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value(1)(9)......... 2,400,000 $4.00(6) $9,600,000 $3,310.34
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Common Stock, no par value(2)............ 681,815 $3.78(7) $2,577,261 $ 888.71
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Common Stock, no par value(3)............ 112,500 $3.78(8) $ 425,250 $ 146.38
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Units consisting of two shares of Common
Stock, no par value, and two Common
Stock Purchase Warrants(4)............. 80,000 $9.00 $ 720,000 $ 248.28
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Common Stock, no par value(5)(9)......... 240,000 $5.60(6) $1,344,000 $ 463.49
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Total.................................................................................. $5,057.20
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</TABLE>
(1) Represents shares underlying Common Stock Purchase Warrants ("Warrants")
made part of the Units issued in the Registrant's July 1992 initial public
offering.
(2) Represents shares owned by certain selling shareholders to be registered
hereunder.
(3) Represents shares underlying Common Stock Purchase Warrants issued by the
Company to certain private placement investors in 1992.
(4) Issuable upon exercise of a Unit Purchase Warrant issued to the
Representative of the several underwriters of the Company's July 1992
initial public offering.
(5) Represents shares of Common Stock issuable upon exercise of the Common Stock
Purchase Warrants made part of the Units issuable under the Representative's
Unit Purchase Warrant, after giving effect to certain antidilution
adjustments.
(6) Represents exercise price of Common Stock underlying Common Stock Purchase
Warrants.
(7) Estimated for purposes of calculating the registration fee pursuant to Rule
457(g)(3) based on the last sale price of the Common Stock on the NASDAQ
Small Cap Market on February 14, 1996.
(8) Estimated for purposes of calculating the registration fee pursuant to Rule
457(c) based on the last sale price of the Common Stock on the NASDAQ Small
Cap Stock Market on February 14, 1996.
(9) Pursuant to Rule 416, there are also being registered such additional shares
as may become issuable pursuant to anti-dilution provisions of the various
warrants.
<PAGE> 3
SUBJECT TO COMPLETION DATED JUNE 6, 1996
XXSYS TECHNOLOGIES, INC.
COMMON STOCK
This Prospectus relates to 3,594,315 shares of Common Stock, no par value
("Common Stock"), of XXsys Technologies, Inc. (the "Company") consisting of (i)
2,400,000 shares of Common Stock ("Warrant Stock") underlying the Company's
publicly-traded common stock purchase warrants ("Warrants"); (ii) an aggregate
of 400,000 shares of Common Stock ("Representative Stock") underlying warrants
("Representative Warrants") issued to the Representative of the underwriters in
connection with the Company's initial public offering; and (iii) an aggregate of
794,315 shares of Common Stock ("Selling Shareholder Stock") to be sold directly
by certain shareholders of the Company. Each Warrant entitles the holder to
purchase 1.5 shares of Common Stock. The Warrants are immediately exercisable at
a price of $4.00 per share. The Company has called the Warrants for redemption
on , 1996 (the "Redemption Date") at a call price of $0.05 per
Warrant. The Warrants expire on the Redemption Date to the extent unexercised.
The Representative Stock and Selling Shareholder Stock are being offered
and sold by the holders thereof and the Company will receive no proceeds from
their sale. The Warrant Stock is being offered and sold by the Company, however
there are no commitments or understandings on the part of any third parties for
the purchase of the Warrant Stock and there can be no assurance of the amount of
proceeds, if any, that the Company may receive by way of the offering made
hereby.
The Warrants initially were offered and sold as part of a "unit" offering
conducted by the Company pursuant to the Company's Prospectus dated July 31,
1992. The Warrants initially entitled the holder to purchase one share of Common
Stock at an exercise price of $5.00 per share during the first 30 months and
then at $6.00 per share during the next 30 months. As the result of adjustments
pursuant to certain anti-dilution provisions of the Warrants, each Warrant now
entitles the holder to purchase 1.5 shares of Common Stock at an exercise price
of $4.00 per share. The Company will not issue fractional shares of Common Stock
upon any exercise of the Warrants. In such an event, the holder of the Warrants
shall have the right to purchase one full share of Common Stock at the Exercise
Price.
The shares of Common Stock of the Company and the Warrants are traded in
the NASDAQ Small Cap Market under the symbols XSYS and XSYSW, respectively. On
May 30, 1996, the last sale price for the shares of Common Stock was $4.13 per
share.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. A PROSPECTIVE PURCHASER
MUST BE ABLE TO BEAR THE RISKS INHERENT IN SUCH AN
INVESTMENT. SEE "RISK FACTORS" AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C> <C>
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UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
SELLING PRICE COMMISSIONS (2) COMPANY (3) SHAREHOLDERS (4)
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Per Share of Warrant Stock(1)...... $4.00 $-0- $4.00 $-0-
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Per Share of Representative
Stock(1)......................... $4.13 $-0- $-0- $4.13
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Per Share of Selling Shareholder
Stock(1)......................... $4.13 $-0- $-0- $4.13
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</TABLE>
Footnotes appear on next page.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 4
(1) The selling price of the Warrant Stock represents the Warrant exercise price
of $4.00 per share. There is no minimum number of Warrants which must be
exercised in this offering. In addition, there are no provisions for the
escrow of proceeds which are derived from the exercise of Warrants. The
selling price of the Representative Stock and the Selling Shareholder Stock
is estimated for purposes of calculating price per share and gross proceeds
based on the last sale price of the Common Stock on the NASDAQ Small Cap
Stock Market on May 30, 1996. The Representative Stock and the Selling
Shareholder Stock will be sold by the holders at prevailing market prices as
of the date of sale. The Company will receive no portion of the proceeds
from the sale of the Representative Stock or Selling Shareholder Stock.
(2) The Company does not intend to engage any solicitation agents or pay any
commissions on the exercise of the Warrants. However, the securities or blue
sky laws of certain states may require that the Company employ a
broker-dealer registered in those states to solicit the exercise of Warrants
which are held by individuals who reside in such states. If it becomes
necessary to employ a broker-dealer with respect to solicitations in any
state, the Company will use its best efforts to engage a broker-dealer
registered in that state. Additionally, the Company will attempt to limit
the commissions paid to any such broker-dealer to 10% of any proceeds raised
by the Company through the efforts of such broker-dealer. In addition,
pursuant to the Underwriting Agreement entered into between the Company and
the Representative in connection with the Company's 1992 initial public
offering, the Company is required to pay the Representative 7% of any
proceeds of Warrant exercises solicited by a NASD-member firm. To the extent
that commissions are paid to broker-dealers, the proceeds to the Company
will be reduced. In the event the Company is unable to employ such
broker-dealers on terms acceptable to the Company, the holders of Warrants
in states which require the participation of a registered broker-dealer may
be unable to exercise their Warrants.
(3) Before deducting expenses payable by the Company estimated at $250,000.
(4) The Company anticipates that usual and customary or specifically negotiated
brokerage fees will be paid by the Selling Shareholders on the sale of the
Selling Shareholder Stock registered hereby. The Company will pay the other
expenses of this offering. The Company will receive no portion of the
proceeds from the sale of the Selling Shareholder Stock.
<PAGE> 5
INSUFFICIENT HORIZONTAL REINFORCEMENT
[Included here in paper document are
graphic images of corporate logo and
photographs of highway bridge columns
that have failed due to seismic
activity.]
[LOGO]
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<S> <C>
[LOGO] [LOGO]
Figure 1 Figure 2
[LOGO] [LOGO]
Figure 3 Figure 4
</TABLE>
Bridges built before 1971 were constructed with insufficient amounts of
horizontal reinforcement (hoop steel). In an earthquake, the strong,
side-to-side motion causes the concrete to break away, the steel to
buckle, and the bridge collapses as a consequence. There is a great need
for bridge column retrofit, especially in California where there is a
legislative mandate to upgrade the thousands of structurally deficient bridges
by 1998.
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus does not give
effect to the exercise of any outstanding warrants or options, or options
available for grant under the Company's 1991 Stock Option Plan, or conversion or
redemption of the outstanding Class A Preferred Stock of the Company. See
"Management -- Executive Compensation" and "Description of Securities."
THE COMPANY
The Company has developed a proprietary seismic retrofit technology which,
in the opinion of management, possesses certain advantages over existing
retrofit technologies. The Company's proprietary technology produces
carbon-based composite jackets designed to protect structurally deficient
highway bridge columns from collapse during seismic activity. The carbon jacket
is installed by the Company's proprietary Robo-WrapperTM machine and application
process which automatically wraps prepreg tow (a carbon fiber pre-impregnated
with resin) around the bridge column. A heat source is used to induce a chemical
reaction in which the resin molecules contained in the prepreg tow crosslink,
thereby transforming the material from a soft, pliable state to a strong, hard
shell.
Since its inception in 1985, the Company has been engaged principally in
research and development activities and revenue from operations to date have
been insignificant. As of the date of this Prospectus, the Company's
Robo-WrapperTM technology has been fully developed and validated through
independent testing using simulated seismic loads. In April 1996, the Company
was notified by the California Department of Transportation ("Caltrans") that
Caltrans had issued a procurement specification ("Composite Specification")
approving the use of the Company's Robo-WrapperTM technology as an alternate
method of retrofitting publicly-owned highway bridge columns in the State of
California that meet certain criteria. In June 1996, the Company began bidding
on retrofit contracts to be awarded by Caltrans, however, as of the date of this
Prospectus the Company has not been awarded any such contracts. There are
approximately 20,000 publicly-owned bridge columns in the State of California to
be retrofitted over the next five years, of which approximately 10,000 (50%) are
believed by the Company to be presently eligible for retrofitting pursuant to
the Composite Specification. Notwithstanding the issuance of the Composite
Specification, there can be no assurance that the Company will achieve
significant revenues from the retrofitting of publicly-owned bridges in the
State of California or any other state.
The Company's strategy and plan of operations over the next five years is
to market its Robo-WrapperTM technology primarily to those construction firms
engaged in the retrofitting of publicly-owned highway bridges in the State of
California and other seismic states. The Company estimates that the State of
California will spend approximately $2 billion on seismic retrofit of its
highway structures, including $200 to $400 million over the next five years on
the retrofitting of bridge columns alone. Prior to the issuance of the Composite
Specification, the only Caltrans-approved method of retrofitting publicly-owned
bridge columns in the State of California required the use of steel jackets.
Management of the Company believes, and independent testing at the University of
California at San Diego using simulated seismic loads confirms, that the
Company's Robo-WrapperTM technology is as effective as steel jackets and, in
addition, can be applied in less time and with less cost.
While the Company intends to focus its initial marketing efforts on the
planned retrofitting of publicly-owned bridge columns in the State of
California, the Company intends to also pursue at this time other potential
markets for its Robo-WrapperTM technology. The Company believes that the
Robo-WrapperTM can also be an effective means of remediating seismic safety
problems experienced by buildings and parking structures, particularly schools
and hospitals, in California and elsewhere. While seismic risk is typically
associated with California, there are other areas of the United States,
including the Midwest (New Madrid Fault) and the Northeast, that are potential
subjects of high seismic activity. In addition to seismic remediation, the
Company believes that structural deficiencies caused by corrosion decay
represent an additional market for its Robo-WrapperTM technology. The Company
believes that the issuance of the Composite Specification will have a
significant positive affect on its ability to market its Robo-WrapperTM
technology to engineers, contractors and governmental agencies involved in the
remediation of seismic and corrosion safety problems within the U.S. and abroad.
2
<PAGE> 7
RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk,
including, but not limited to, the Company's lack of significant operating
history; losses and accumulated deficit to date; uncertain market acceptance;
and possible need for additional capital. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by:
The Company........................................... 2,400,000 shares(1)
The Selling Shareholders.............................. 794,315 shares(2)
The Representative.................................... 400,000 shares(3)
Common Stock Outstanding................................ 6,149,057 shares
Common Stock Outstanding Upon Completion of Offering.... 9,061,557 shares(4)
Use of Proceeds NASDAQ Symbols:......................... Manufacture of Robo-Wrappers(TM) and
curing ovens; research and
development; marketing and sales;
and working capital. See "Use of
Proceeds."
NASDAQ Symbols:
Common Stock.......................................... XSYS
Warrants.............................................. XSYSW
</TABLE>
- ---------------
(1) Represents shares of Common Stock issuable upon exercise of the Company's
publicly-traded Warrants.
(2) Includes 112,500 shares of Common Stock issuable upon exercise of common
stock purchase warrants ("Bridge Warrants") at an exercise price of $.80 per
share sold by the Company in 1992. See "The Company" and "Selling
Shareholders."
(3) Represents shares of Common Stock issuable upon exercise of a Unit Purchase
Warrant issued to the Representative of the several underwriters of the
Company's 1992 initial public offering. See "The Company."
(4) Assumes the Warrants, the Bridge Warrants and the Representative's Warrants
are exercised in full.
SET FORTH BELOW IS A SUMMARY DESCRIPTION OF THE MATERIAL TERMS OF THE
WARRANT EXERCISE PROCEDURE. FOR A MORE COMPLETE DESCRIPTION, SEE "WARRANT
EXERCISE PROCEDURE" AND THE WARRANT AGREEMENT DATED JULY 31, 1992 BETWEEN THE
COMPANY AND THE WARRANT AGENT, COPIES OF WHICH WILL BE MADE AVAILABLE BY THE
COMPANY UPON REQUEST.
Warrant Terms. The Warrants were initially offered and sold as part of the
Company's initial public offering of "Units" pursuant to the Company's
Prospectus dated July 31, 1992. The Warrants initially entitled the holder to
purchase one share of Common Stock at an exercise price of $5.00 per share
during the first 30 months and then at $6.00 per share during the next 30
months. As the result of adjustments pursuant to certain anti-dilution
provisions of the Warrants, each Warrant now entitles the holder to purchase 1.5
shares of Common Stock at an exercise price of $4.00 per share. The Company will
not issue fractional shares of Common Stock upon any exercise of the Warrants.
In such an event, the holder of the Warrants shall have the right to purchase
one full share of Common Stock at the Exercise Price.
Warrant Redemption; Expiration Date. The Company has called the Warrants
for redemption at $.05 per Warrant on , 1996 (the "Redemption Date").
The Warrants will expire at 5:00 p.m. New York time on the Redemption Date (the
"Expiration Time"). There are currently 1,600,000 Warrants outstanding.
3
<PAGE> 8
Each Warrant entitles the holder thereof to purchase from the Company 1.5 shares
of Common Stock for a price of $4.00 per share (the "Exercise Price"). An
aggregate of up to 2,400,000 share(s) of Common Stock may be sold upon the
exercise of the Warrants.
Procedure for Exercising Warrants. The Warrants may be exercised by
properly completing the Election to Purchase Form set forth on the Warrant
Certificate and forwarding the Warrant with signatures guaranteed (or following
the Guaranteed Delivery Procedures), with payment of the Exercise Price for each
underlying share being purchased upon exercise of the Warrant, to the Warrant
Agent for receipt on or prior to the Expiration Time. If the mail is used to
forward Warrants, it is recommended that insured, registered mail, return
receipt requested, be used. If paying by uncertified personal check, please note
that the funds paid thereby may take at least five business days to clear.
Accordingly, Warrantholders who wish to pay the Exercise Price by means of
uncertified personal check are urged to make payment sufficiently in advance of
the Expiration Time to ensure that such payment is received and clears by such
date and are urged to consider payment by means of certified or cashier's check,
money order or wire transfer of funds.
If the aggregate Exercise Price paid by an exercising holder is
insufficient to purchase the number of underlying shares that the holder
indicates are being purchased, or if no number of underlying shares to be
purchased is specified, then the holder will be deemed to have exercised the
Warrant to purchase underlying shares to the full extent of the payment
tendered.
ONCE A HOLDER HAS EXERCISED THE WARRANT SUCH EXERCISE MAY NOT BE REVOKED.
WARRANTS NOT EXERCISED PRIOR TO THE EXPIRATION TIME WILL EXPIRE AND BECOME
WORTHLESS.
Persons Wishing to Exercise Warrants Through Others. Persons holding
Warrants through a broker, dealer, commercial bank, trust company or other
nominee, as well as persons holding Warrants personally who would prefer to have
such institutions effect transactions relating to the Warrants on their behalf,
should contact the appropriate institution or nominee and request it to effect
the transaction for them.
Warrant Agent. American Stock Transfer & Trust Company, located at 40 Wall
Street, 46th Floor, New York, New York 10005, is acting as the Warrant Agent
(the "Warrant Agent"). The Warrant Agent's telephone number is (718) 921-8200.
Information Agent. D.F. King & Co., Inc., located at 77 Water Street, New
York, New York 10005, is acting as the Information Agent (the "Information
Agent"). The Information Agent's toll-free telephone number is (800) 290-6427.
Issuance of Common Stock. Certificates representing shares of Common Stock
purchased pursuant to the exercise of the Warrants will be delivered to
purchasers as soon as practicable after the related Warrants have been validly
exercised.
4
<PAGE> 9
SUMMARY OF SELECTED FINANCIAL INFORMATION
The summary financial information set forth below has been derived from the
Consolidated Financial Statements of the Company. This information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
set forth elsewhere in this Prospectus.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED
------------------------------- MARCH 31,
1995 1994 1993 -------------------------
------- ------- ------- 1996 1995
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 409 $ 267 $ 49 $ 337 $ 282
Loss................................. (1,753) (1,413) (1,981) (589) (706)
Loss Per Share....................... (.34) (.36) (.52) (.10) (.16)
Weighted Average Shares
Outstanding........................ 5,083 3,939 3,800 6,113 4,545
</TABLE>
CONSOLIDATED BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
MARCH 31,
1996
SEPTEMBER 30, ----------
1995
-------------- (UNAUDITED)
<S> <C> <C>
Current Assets...................................................... $ 629 $ 538
Total Assets........................................................ 2,677 1,997
Current Liabilities................................................. 1,508 1,220
Total Liabilities................................................... 1,508 1,220
Working Capital..................................................... (879) (682)
Stockholders' Equity................................................ 1,168 777
</TABLE>
5
<PAGE> 10
RISK FACTORS
INVESTMENT IN THE COMPANY IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. PRIOR TO THE PURCHASE OF ANY SHARES, A PROSPECTIVE INVESTOR SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS:
Lack of Significant Operating History. Since its inception in 1985, the
Company has been engaged principally in research and development activities and
revenue from operations to date have been insignificant. The Company was
organized in 1985 for the purpose of developing and commercializing
non-destructive testing and measuring techniques for products incorporating
advanced materials. However, due to the defense cutbacks of the early 1990's and
their adverse impact on the developing markets for advanced materials, the
Company decided to suspend its efforts to commercialize its non-destructive
testing and measuring technologies without having generated significant revenues
from those operations. Since 1993, the Company has been principally engaged in
the research and development of its proprietary Robo-Wrapper(TM) retrofit
technology. See "Business -- Marketing."
The Company has not commenced revenue producing operations based on its
Robo-Wrapper(TM) technology. Consequently, the Company is subject to the various
risks typically associated with research and development stage ventures,
including unanticipated delays and complications involved with the
commercialization of the new technology, unanticipated delays and complications
involved with compliance with government regulations, market acceptance of the
commercial applications of the Robo-Wrapper(TM) technology, the development and
marketing of follow-on applications, competition from existing and future
technologies, etc. There can be no assurance that the Company will ever achieve
significant revenues or profitable operations.
Losses; Accumulated Deficit. Through March 31, 1996, the Company generated
only limited revenues from operations and incurred significant expenses in its
research and development activities. As a result, the Company sustained net
losses of $1,753,121, $1,412,749 and $1,980,534 for the years ended September
30, 1995, 1994 and 1993, respectively, and $589,258 for the six months ended
March 31, 1996. At March 31, 1996, the Company had an accumulated deficit of
$11,499,657. Following March 31, 1996, the Company has incurred additional
operating losses, and expects that it will continue to incur operating losses
until such time, if ever, as the Company achieves significant revenues from the
commercialization of its Robo-Wrapper(TM) technology. See "Management's
Discussion and Analysis and Plan of Operations" and "Financial Statements."
Uncertain Market and Validation Acceptance. Since 1993, the Company has
focused its product development efforts on the development and validation of the
Robo-Wrapper(TM) technology for retrofitting seismically deficient bridge
columns and other structures. To date, the Company has not commercially
retrofitted any bridge columns, other than limited field demonstrations, and in
April 1996 the Company commenced marketing the Robo-Wrapper(TM)technology to the
contractors, engineers and government authorities directly involved in highway
retrofitting. There is a substantial risk that these parties may not appreciate
the benefits or recognize the potential applications of the Company's
technology. Market acceptance of the Company's Robo-Wrapper(TM) technology will
depend largely upon the ability of the Company to demonstrate to the industry
the durability and cost effectiveness of the technology when compared to the
current steel retrofit method, of which there can be no assurance. See "Business
- -- Marketing."
Dependence Upon Third-Party Arrangements. The Company does not have and
does not expect to have in the foreseeable future the licenses, capital or
expertise necessary to conduct directly bridge column retrofitting. The
successful commercialization of the Robo-Wrapper(TM) technology will require
that the Company enter into collaborative arrangements with construction and
engineering firms that will conduct column retrofit jobs directly as either
prime or subcontractors. There can be no assurance that the Company will be able
to enter into such collaborative arrangements on terms acceptable to the
Company. See "Business -- Marketing."
Impact of Potential NASDAQ Delisting on Marketability of Securities. The
Company's Common Stock is listed on the NASDAQ Small Cap Stock Market. The
National Association of Securities Dealers, Inc.
6
<PAGE> 11
("NASD") has adopted rules which establish stringent criteria for the continued
listing of securities on the NASDAQ system. For continued listing, an issuer
must maintain not less than $2,000,000 in total assets and $1,000,000 in net
worth, and a minimum bid price of $1 per share. As of March 31, 1996, the
Company had total assets of $1,997,525 and a net worth of $777,429, and expects
to continue to incur operating losses for, at least, the next two fiscal
quarters as it commences commercial retrofit operations. Unless the Company is
able to obtain additional equity through the Warrant redemption or otherwise,
the Company's common stock will be delisted from NASDAQ. Even if the Company is
able to obtain enough additional equity to resume compliance with the total
assets and net worth standards, the Company may be unable to maintain the total
asset or net worth standards for continued listing if the Company continues to
incur operating losses and could thereafter be subject to delisting from NASDAQ.
In the event the Company's common stock is delisted from NASDAQ, trading, if
any, in the securities would thereafter be conducted in the over-the-counter
market on the NASD's "Electronic Bulletin Board." If this were to occur, an
investor would find it substantially more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's Common Stock. In addition,
if the Company's Common Stock is delisted, transactions in the Common Stock
would be subject to a rule that imposes additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (accredited investors are generally those
with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or
$300,000 together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, delisting, if it occurred, would substantially affect the
ability of broker-dealers to sell the Company's Common Stock and the ability of
shareholders to sell their securities in the secondary market.
No Minimum Proceeds; Possible Need for Additional Capital. There are no
commitments or understandings on the part of any third parties for the purchase
of any of the securities being offered for sale by the Company pursuant to this
Prospectus. Consequently, there can be no assurance of the amount of proceeds,
if any, that the Company may receive by way of the offering made hereby. The
Company estimates that it will require an additional $2,000,000 of capital for
the purchase of machines and equipment and for the working capital necessary to
commence the commercialization of the Robo-Wrapper(TM) technology. In addition,
the Company estimates that it will need an additional $800,000 of capital to
sustain operations over the next 12 months in the absence of significant revenue
from its Robo-Wrapper(TM) operations. There are no understandings or
arrangements for the Company's receipt of additional capital from alternative
sources. Therefore, there can be no assurance that the Company will be able to
obtain capital from sources other than this offering should the need arise. See
"Management's Discussion and Analysis and Plan of Operations" and "Use of
Proceeds." The Company's inability to raise the $2,000,000 needed to fund the
aforementioned machines, equipment and working capital would delay its
commercialization of the Robo-Wrapper(TM) technology. If any such delay is
significant, the Company may miss the opportunity to participate in some or all
of the California highway retrofit projects described elsewhere in this
Prospectus. See "Business -- Background."
Management Discretion Over Application of Offering Proceeds. In the event
all Warrants are exercised, the Company will receive $9,600,000 of proceeds, of
which $2,200,000 (22.9%) will be allocated to working capital. While the funds
allocated to working capital are intended to fund near term losses as the
Company commences commercial operations, management of the Company has reserved
the right to apply these funds in their discretion and towards any purpose they
consider to be in the best interest of the Company. See "Use of Proceeds."
Uncertainty of Protection Offered by Patents and Trade Secrets. The Company
has filed three patent applications relating to the Robo-Wrapper(TM) technology.
In addition, the Company relies upon trade secrets protection for much of its
confidential and proprietary software and know-how. However, there can be no
assurance that the pending applications will be approved or that any issued
patent will offer the Company meaningful protection or competitive advantage.
There can also be no assurance that others will not independently develop
similar technologies, duplicate the Company's technologies, or design around the
patented aspects of the Company's technologies. In addition, litigation may be
necessary to enforce the Company's patents, protect its trade secrets and defend
against claims of infringements. Such litigation could
7
<PAGE> 12
result in substantial costs and diversion of management and other resources,
potentially to the point of having a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Intellectual Property."
Product Liability; Absence of Insurance Coverage. The testing, marketing
and sale of products for civil engineering applications entails a risk of
negligence and other claims by owners and general contractors of projects, and
product liability claims by those persons who ultimately use or occupy such
projects. The Company currently maintains product liability insurance providing
coverage in the approximate amount of $2,000,000 per year, however there can be
no assurance that the Company will be able to maintain insurance coverage or
that any such insurance will be sufficient to cover all possible liabilities. In
the event of a successful suit against the Company, lack or insufficiency of
insurance coverage could have a material adverse effect on the Company. Further,
owners and general contractors may require minimum product liability insurance
coverage as a condition precedent to entering into collaborative arrangements
with the Company. Failure to satisfy such insurance requirements could impede
the ability of the Company to achieve broad use and acceptance of its
Robo-Wrapper(TM) technology, which would have a material adverse effect upon the
business and financial condition of the Company.
Uncertain Government Regulation. Because the use of advanced composite
materials in civil engineering projects, such as the Robo-Wrapper(TM)
technology, is new and has not been extensively tested in actual applications,
the regulatory requirements governing such applications are uncertain and may be
subject to substantial review by various governmental and regulatory authorities
in the U.S. and foreign countries. This regulatory review may result in delays
in regulatory approval. Moreover, as the Company proceeds to market its
technologies for the application of advanced composite materials in civil
engineering projects other than government-owned bridges, state regulatory
bodies, such as the California Building Standards Commission, private regulatory
bodies, such as the International Conference of Building Officials, and other
entities which propose or administer building codes may also undertake
substantial regulatory review of the Company's technologies. Such governmental
or private regulatory review may result in the establishment of requirements
which could adversely affect the Company's ability to test, manufacture or
market products.
Possible Volatility of Stock Price. The market price and trading volume of
the Company's Common Stock have fluctuated widely in the past, and the market
price and trading volume of the Common Stock may be volatile following this
offering. The Company believes that factors such as announcements of results of
operations and technological innovations by the Company or its competitors,
developments in patents or other proprietary rights of the Company and changes
in governmental regulations may cause the market price of the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and shares of high technology companies in particular, have
experienced significant price and volume fluctuations not necessarily related to
the operating performance of the issuer of the securities. See "Market For
Common Equity And Related Shareholder Matters."
Dependence Upon Key Personnel. The Company is dependent upon the services
of its Chairman and Chief Executive Officer, Dr. Gloria C.L. Ma. The loss of the
services of Dr. Ma could have a material adverse effect on the Company's
business and future prospects. See "Management."
Significant Competition. The Company will face competition from the current
and future retrofit procedures. As of the date of this Prospectus, the principal
competition to the Robo-Wrapper(TM) technology is the use of steel jackets.
Additionally, other companies, some of which have substantially greater
resources than the Company, have already been using composites to retrofit
private and publicly-owned structures located in California and other states,
including Hexcel Fyfe Company, Hardcore Dupont and Mitsubishi. As of the date of
this Prospectus, only one of the Company's competitors using composites, Hexcel
Fyfe Company, has received approval from Caltrans to wrap structures. If
Caltrans allows other companies to rely upon the Company's testing so as to
reduce substantially the testing needed, the Company could face additional
composite-based competition sooner than expected. Additionally, should the
Company's pending patents be rejected, it could lose any competitive advantage
that patent protection affords. See "Business -- Competition."
8
<PAGE> 13
Possible Shortages of Raw Materials at Competitive Prices. The cost of the
carbon fiber and resin will represent a significant portion of the cost of using
the Company's wrapping system. The carbon fiber industry has a history of
periodic shortages and price increases. Any significant increases in the cost of
either material could have a material adverse effect on the cost competitiveness
of the Robo-Wrapper(TM) technology relative to steel jackets and other
non-carbon based composite retrofit technologies. See "Business -- Manufacturing
and Raw Materials."
Dilution. Purchasers of the shares of Common Stock issuable upon exercise
of the Warrants will experience immediate and substantial dilution in the net
tangible book value of their shares of $2.84 per share (or 71% of the Warrant
exercise price), assuming the Warrants are exercised in full and without giving
effect to the sale of any other shares of Common Stock being offered by the
Company. In the event less than all of the Warrants are exercised, the amount of
dilution experienced by persons exercising warrants will be greater. See
"Dilution."
Absence of Dividends. The Company has not declared or paid any cash
dividends and does not expect to declare or pay any cash dividends for the
foreseeable future. Earnings, if any, will be retained to fund development and
expansion. There is no assurance that the Company will, at any time, pay cash
dividends. See "Description of Securities -- Dividends."
Potential Adverse Consequences of Issuance of Preferred Stock. The Board of
Directors has the authority to issue up to 2,000,000 shares of Preferred Stock,
in one or more series, and to fix the number of shares and the rights,
preferences and privileges of any such series. To date, 4,500 shares of Series A
Preferred Stock have been issued by the Company. Any additional Preferred Stock
issued by the Board of Directors may contain rights and preferences adverse to
the voting power and other rights of the holders of Common Stock. The issuance
of additional shares of Preferred Stock having rights superior to those of the
Common Stock may result in a decrease in the value or market price of the Common
Stock and, further, could be used by the Board of Directors as a means to
prevent a change in control of the Company. See "Description of Securities
- -- Preferred Stock."
Non-Registration in Certain Jurisdictions of Shares Underlying the
Securities; Need for Current Prospectus. The Warrants are not exercisable
unless, at the time of exercise, the Company has on file with the Securities and
Exchange Commission an effective registration statement relating to the shares
of Common Stock issuable upon exercise of the Warrants and such shares have been
registered or qualified, or are exempt from registration or qualification, under
the securities laws of the state of residence of the holder who wishes to
exercise the Warrants. During the period that the Warrants are exercisable,
persons may purchase Warrants while residing in, or holders may move to,
jurisdictions in which the underlying shares of Common Stock are not registered
or qualified for sale. If the Company is unable or chooses not to register or
qualify the shares of Common Stock underlying the Warrants for sale in all of
the states that the Warrantholders reside, the Company may not be able to allow
such Warrants to be exercised and Warrantholders in those states may have no
choice but to either sell their Warrants or allow them to be redeemed at the
Redemption Price of $.05 per Warrant. The Company has not effected state
security law compliance for the exercise of Warrants by beneficial holders of
Common Stock residing in the States of , and residents
of such states will not be entitled to exercise any Warrants currently owned or
acquired in the open-market. See "Warrant Exercise Procedure."
9
<PAGE> 14
THE COMPANY
The Company was organized under the laws of the State of California on
November 19, 1985 for the purpose of developing and commercializing
non-destructive testing and measurement techniques of products incorporating
advanced materials. In response to the defense cutbacks of the early 1990's and
their impact on the developing markets for advanced materials, in 1993 the
Company initiated efforts to develop commercial applications of its technologies
and know-how. The initial results of those efforts is the Company's Robo-
WrapperTM machine and application process, a proprietary technology that
produces carbon-based composite jackets designed to protect structurally
deficient highway bridge columns from collapse during seismic activity. See
"Business -- General."
Since its inception in 1985, the Company has been engaged principally in
research and development activities and revenue from retrofit operations to date
have been insignificant. As of the date of this Prospectus, the Company's
Robo-WrapperTM technology has been fully developed and validated through
independent testing using simulated seismic loads. In April 1996, the Company
was notified by the California Department of Transportation ("Caltrans") that
Caltrans had issued a procurement specification ("Composite Specification")
approving the use of the Company's Robo-WrapperTM technology as an alternate
method of retrofitting publicly-owned highway bridge columns in the State of
California that meet certain criteria included in the Composite Specification.
In June 1996, the Company began bidding on retrofit contracts to be awarded by
Caltrans, however as of the date of this Prospectus the Company has not been
awarded any such contracts. There are approximately 20,000 publicly-owned bridge
columns in the State of California to be retrofitted over the next five years,
of which approximately 10,000 (50%) are believed by the Company to be presently
eligible for retrofitting pursuant to the Composite Specification.
Notwithstanding the issuance of the Composite Specification, there can otherwise
be no assurance that the Company will achieve significant revenues from the
retrofitting of publicly-owned bridges in the State of California or any other
state.
In July 1992, the Company conducted an initial public offering of 800,000
Units at $7.50 per Unit. Each Unit consisted of two shares of Common Stock and
two Redeemable Common Stock Purchase Warrants ("Warrants"). The Warrants
initially entitled the holder to purchase one share of Common Stock at an
exercise price of $5.00 per share during the first 30 months and then at $6.00
per share during the next 30 months. As the result of adjustments pursuant to
certain anti-dilution provisions of the Warrants, each Warrant now entitles the
holder to purchase 1.5 shares of Common Stock at an exercise price of $4.00 per
share. On June , 1996, the Company called the Warrants for redemption and this
Prospectus relates, in part, to the shares of Common Stock issuable upon
exercise of the Warrants. See "Warrant Exercise Procedure."
In connection with its initial public offering, the Company sold to the
Representative of the several underwriters, for nominal consideration, a warrant
("Representative's Warrant") to purchase 80,000 Units, each Unit consisting of
two shares of Common Stock and two Redeemable Common Stock Purchase Warrants
("Unit Warrants"). The initial exercise price of the Representative's Warrant
was $9.00 per Unit and the initial exercise price of the Unit Warrants was $8.40
per share. Due to adjustments pursuant to certain anti-dilution provisions made
part of the Unit Warrants, each Unit Warrant entitles its holder to purchase 1.5
shares of Common Stock at an exercise price of $5.60 per share. Pursuant to
those registration rights the Company has registered the shares of Common Stock
issuable upon exercise of the Representative's Warrant, including the Unit
Warrants, pursuant to the registration statement of which this Prospectus is
made a part.
Between February and July 1992, the Company conducted a private placement
of unsecured promissory notes in the aggregate principal amount of $450,000 for
purposes of providing the Company with bridge financing pending completion of
the initial public offering. The notes bore interest at 10% per annum for three
months and at 3% over the prime rate per annum thereafter, and were due and
payable upon the closing of the initial public offering. In connection with the
private placement, the noteholders received five-year warrants ("Bridge
Warrants") to purchase an aggregate of 112,500 shares of Common Stock at a price
of $.80 per share. Pursuant to certain registration rights included in the
Bridge Warrants, the Company has registered the shares of Common Stock issuable
upon exercise of the Bridge Warrants pursuant to the registration statement of
which this Prospectus is made a part.
All references to the Company include its wholly-owned subsidiary,
Composite Retrofit Corporation. The Company's executive offices and research and
development facilities are located at 4619 Viewridge Avenue, San Diego, CA
92123, telephone 619-974-8200.
10
<PAGE> 15
USE OF PROCEEDS
The Company is offering pursuant to this Prospectus 2,400,000 shares of
Common Stock issuable upon exercise of the Warrants at an exercise price of
$4.00 per share. In the event the Warrants are exercised in full, the gross
proceeds to the Company will be $9,600,000; however, there are no commitments or
understandings on the part of any parties for the purchase of any of the shares
and there can be no assurance of the amount of proceeds, if any, the Company
will receive pursuant to the offering. Set forth below is a summary of the
Company's intended application of the proceeds of this offering, assuming the
Warrants are exercised in full. In the event of the exercise of the
Representative's Warrant or the Bridge Warrants, the net proceeds from such
exercise will be applied to working capital.
<TABLE>
<CAPTION>
AMOUNT PERCENT
---------- -------
<S> <C> <C>
Offering Costs(1)..................................... $ 250,000 2.6%
Equipment(2).......................................... 3,675,000 38.3%
Research and Development(3)........................... 2,200,000 22.9%
Sales & Marketing..................................... 975,000 10.2%
General and Administrative............................ 300,000 3.1%
Working Capital....................................... 2,200,000 22.9%
---------- ----
Total....................................... $9,600,000 100%
========== ====
</TABLE>
- ---------------
(1) Consists of filing fees and legal, accounting, printing and mailing
expenses.
(2) Represents proceeds to be allocated towards purchase of Robo-Wrapper(TM)
machines and curing ovens. The Company intends to purchase the equipment in
operating units consisting of one Robo-Wrapper(TM) machine and two curing
ovens. Each operating unit will cost approximately $425,000 per unit.
(3) Represents proceeds to be applied towards, among other matters, the
development and validation of wrapping machines intended for use in
retrofitting of parking and underwater structures and the further
development and validation of sensors and non-destructive testing and
measurement technologies for quality control and performance monitoring of
the carbon composite jackets.
The Company estimates that it will require a minimum of $2,000,000 of
capital for the purchase of machines and for the working capital necessary to
further advance the commercialization of the Robo-Wrapper(TM) technology.
Additionally, the Company estimates that it will also need $800,000 of capital
to sustain operations over the next 12 months in the absence of significant
revenue from its Robo-Wrapper(TM) operations. The Company intends generally to
apply the net proceeds of this offering in increments of $1,000,000 towards the
above-described applications, as follows: equipment ($425,000), sales and
marketing ($175,000), research and development ($100,000) and working capital
($300,000).
Pending application of funds, the net proceeds will be invested in deposits
with banks, investment grade securities and short-term income producing
investments, including U.S. Treasury securities and other money market
instruments.
11
<PAGE> 16
DILUTION
As of March 31, 1996, there were 6,149,057 shares of the Company's Common
Stock outstanding. The net tangible book value per share was $.08 based upon the
unaudited balance sheet of the Company as of March 31, 1996. "Net tangible book
value" per share represents the amount of the Company's total assets, less the
amount of its liabilities and intangible assets, divided by the number of shares
of Common Stock outstanding. Based upon the sale of all of the shares of Warrant
Stock offered hereby by the Company and without giving any effect to the sale of
any shares of Common Stock issuable upon exercise of the Bridge Warrants or the
Representative's Warrants, and after deducting estimated offering expenses
payable by the Company, the pro forma net tangible book value per share at March
31, 1996 will be approximately $1.16. The current shareholders will thus benefit
from an immediate increase in net tangible book value per share of approximately
$1.08. There will be an immediate dilution to new investors from the warrant
exercise price of approximately $2.84 (or 71% of the Warrant exercise price).
"Dilution" per share represents the price per share paid by the holders
exercising the Warrants in this offering less the pro forma net tangible book
value per share at March 31, 1996 after giving effect to the same adjustments.
The following table illustrates the dilution to Warrant holders who
exercise their Warrants on a per share basis as of March 31, 1996(1):
<TABLE>
<S> <C>
Exercise price per share........................................... $4.00
Net tangible book value per share before offering.................. $0.08
Increase per share attributable to payments made by
Warrantholders................................................... $1.08
Pro forma net tangible book value per share after offering......... $1.16
-----
Dilution in net tangible book value per share to Warrantholders.... $2.84
=====
</TABLE>
- ---------------
(1) The tabular presentation gives no effect to the exercise of any Bridge
Warrants or any part of the Representative's Warrant.
12
<PAGE> 17
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq Small Cap Market under
the symbol XSYS following the Company's initial public offering on July 31,
1992. The table below sets forth the quarterly high and low last sale prices as
reported on NASDAQ for the indicated periods.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1996
First Quarter................................................. 6 1/4 4 3/8
Second Quarter................................................ 5 7/16 3 3/8
Third Quarter (through May 30, 1996).......................... 6 4 1/64
FISCAL 1995
First Quarter................................................. 2 1/8 7/8
Second Quarter................................................ 2 7/8
Third Quarter................................................. 1 7/8 1 15/16
Fourth Quarter................................................ 7 1/8 1 9/16
FISCAL 1994
First Quarter................................................. 2 7/8 1 1/2
Second Quarter................................................ 2 1/2 1 3/8
Third Quarter................................................. 1 3/4 3/4
Fourth Quarter................................................ 1 7/8 1/2
</TABLE>
On May 30, 1996, the closing price for the Company's Common Stock was $4.13
per share. As of that date, the Company had 199 shareholders of record and
approximately 2,100 beneficial owners of the Common Stock.
DIVIDEND INFORMATION
The Company has not paid any dividends on its Common Stock and currently
intends to retain any earnings for use in its business; therefore, the Company
does not anticipate paying cash dividends in the foreseeable future.
13
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATIONS
The Company is engaged in developing and commercializing the use of
composite materials in infrastructure renewal markets and developing
technologies for non-destructive testing and measurement techniques for
composite materials. Through March 31, 1996, the Company has generated limited
revenues and has incurred significant losses, due primarily to extensive
expenditures in research and development of various technologies leading to new
applications of composite materials.
RESULTS OF OPERATIONS
First Six Months of Fiscal 1996 Compared to First Six Months of Fiscal
1995. Revenues of $336,685 were recorded in the six months ended March 31,
1996, representing an increase of $54,634, or 19%, over the comparable period in
fiscal 1995. Total operating expenses of $1,306,175 in the first six months of
fiscal 1996 increased by $327,295, or 33%, over the comparable period of fiscal
1995. The cost of services of $223,114 represented 66% of contract revenues in
the first six months of fiscal 1996. Research and development efforts for the
first six months of fiscal 1996 were funded primarily through billable
government contracts and therefore were reported as cost of services. Selling,
general and administrative expenses increased by $211,641, or 25%, to $1,054,410
over the prior year period as the result of higher staffing levels and travel
activity as the Company prepares for the commercialization of the Robo-WrapperTM
technology.
Interest income during the first six months of fiscal 1996 increased to
$44,984, compared to $25,445 in the prior year period, as a result of a higher
level of cash available for investment in fiscal 1996 and accrued interest on
the long term note receivable. Other income was primarily the result of a
settlement of a lawsuit. See Note 7 to Unaudited Consolidated Financial
Statements.
The net loss for the first six months of fiscal 1996 was $589,258, which
represents a decrease of $116,828, or 17%, compared with the net loss of
$706,086 in the first six months of fiscal 1995. On a per share basis, the net
loss was $0.10 in the first six months of 1996, compared to $0.16 in the first
six months of 1995. The reduction in loss per share of $0.06 is primarily the
result of other income and additional average number of shares outstanding
compared with the comparable period in fiscal 1995.
Fiscal Year 1995 Compared to Fiscal Year 1994. Revenues for the fiscal
year ended September 30, 1995 were $408,867 compared to $266,890 in the prior
fiscal year, an increase of $141,977 or 53%. The increase is primarily
attributable to funding received from grants awarded by the Advanced Research
Projects Agency ("ARPA") and the National Institute for Standards and Technology
("NIST"). The Company continued to depend on federal and state grant programs
for its primary revenue sources in 1995. Revenues in fiscal 1995 were derived
primarily from work performed under a grant from ARPA, totaling $208,286 or 51%
of revenues, and an additional $117,030 or 29% from NIST. Other federal programs
provided for the balance of revenues. At September 30, 1995, the Company had
approximately $800,000 of funding available from outstanding federal and state
contracts.
Total operating expenses increased by $411,085 (24%) in fiscal 1995 to
$2,103,926. The cost of services was $225,202, or 55% of contract revenues. In
comparison, the cost of services in fiscal 1994 was $58,521, or 22% of contract
revenues. This higher percentage in fiscal 1995 was the result of different
contractual terms and is more indicative of expected cost levels. Selling,
general and administrative expenses were $1,763,420 in fiscal 1995, an increase
of $406,889 or 30% over fiscal 1994. The increase reflects additional staffing
costs in support of expanded contract work, as well as increased expenses for
investor relations and fund raising activities. Research and development costs
decreased substantially in fiscal 1995, to $115,304 from $277,289 in the prior
year, a decrease of 58%, as a greater portion of the Company's research and
development efforts was funded by research contracts.
Interest income of $48,098 in fiscal 1995 was 60% higher than in the prior
year, the result of accrued interest on a long-term note receivable that was
held for a full year in fiscal 1995. Interest expense of $106,160 in fiscal 1995
represents an increase of $89,325 or a five-fold increase over the prior fiscal
year as the Company
14
<PAGE> 19
had a significant increase in its average borrowings and also issued a
substantial number of warrants in connection with loans and loan extensions.
The net loss in the year ended September 30, 1995 was $1,753,121 compared
to $1,412,749 in the prior year, an increase of $340,372 or 24%. The loss per
share decreased, however, because of a higher average number of shares
outstanding. The loss per share in fiscal 1995 was $0.34, an improvement of 6%
compared to the loss per share of $0.36 in fiscal 1994.
The Company had current assets of $628,785 as of September 30, 1995,
representing an increase of $547,946 over the balance sheet as of September 30,
1994. The increase is primarily the result of raising $1,056,000 through a
private placement of Common Stock at $5.00 per share on September 1, 1995. Of
the total private placement, $500,000 in cash was received prior to September
30, 1995. A portion of the private placement, totaling $380,000, was received in
early October and is shown as a subscription receivable on the balance sheet as
of September 30, 1995. The balance of the private placement, totaling $176,000,
is in the form of a two-year note receivable from the holder of the stock. (See
Note 6 to the year end consolidated financial statements.) These funds were used
to reduce accounts payable and make a deposit on construction of a
second-generation Robo-WrapperTM machine.
Also in fiscal 1995, the Company took a write-down of its remaining
inventory of pre-preg carbon fiber which was left over from prior research
programs. Pre-preg carbon fiber ages slowly despite being in refrigeration. The
batch in inventory had reached its productive life and had no other use or
value.
A large portion of the funds raised by the Company during fiscal 1995 were
applied towards the commercialization of Robo-WrapperTM technology and
construction of equipment. The Company modestly increased its cash position as
of September 30, 1995 to $148,562, an increase of $139,840 over the prior year
date. Net cash used in operating activities of $1,273,074 and investing
activities of $305,886 during fiscal 1995 was funded by $1,718,800 in financing
activities. Financing activities included the issuance of convertible notes of
$800,000, which were converted to 1,231,030 shares of Common Stock during the
year, the issuance of notes payable of $564,500, and the private placement of
$1,056,000, of which $500,000 in cash had been received by September 30, 1995. A
portion of the financing activities were used for the repayment of $190,700 in
notes payable which came due during the period.
Fiscal Year 1994 Compared to Fiscal Year 1993. Revenues for the fiscal
year ended September 30, 1994 were $266,890 compared to $49,018 in 1993.
Contract revenues represented all of the 1994 total and $35,000 for 1993. In
1994 the Company's contracts were with the Federal Highway Administration, U.S.
Environmental Protection Agency ("EPA"), and ARPA. An ARPA contract of $433,000,
awarded in June 1994, provides partial funding for the validation of the
Company's column wrapping technology at the UCSD's Powell Laboratory. Revenues
in 1994 were primarily from work performed under grants from ARPA, totaling
$127,966 or 48%, and the EPA, totaling $116,875 or 44% of total revenues. The
1993 revenues related to a $50,000 contract funded by a grant from the EPA that
was completed during the second quarter. Equipment sales of $14,018 were
recorded in 1993 pursuant to a sales and remarketing agreement.
Total operating expenses for 1994 were $1,692,841, a decrease of $423,332
or 20% over operating expenses in 1993 of $2,116,173. This decrease reflects the
redirection of the Company toward its seismic retrofit technology. The cost of
equipment sales in 1993 was 90% of the related revenues. The cost of services
was 46% of revenues in 1993, compared to 22% in 1994, because of different
contractual terms. Selling, general and administrative expenses decreased to
$1,356,531 from $1,857,195, a decrease of $500,664 (27%), the result of reduced
staffing and marketing activities as the Company developed the column wrapping
technology. The 1993 amount also includes approximately $124,000 of legal,
accounting and related fees related to a proposed acquisition that was not
completed. Research and development costs increased to $277,789 from $230,261 in
the respective periods, an increase of $47,528 or 21%, reflecting further
research into advanced materials.
Interest income on invested cash, securities, and a long-term note
receivable was $30,037 in the 1994 period compared to $87,224 in the prior year.
The decline represents the lower amount of cash available for
15
<PAGE> 20
investment. Interest expense in 1994 was $16,835 and was $603 in 1993,
reflecting the use of borrowed funds for the first time since 1992.
The net loss for the year ended September 30, 1994 was $1,412,749 compared
to $1,980,534 in the 1993 fiscal year, a decrease of 29%. The loss per share
decreased by 31% to $0.36 in 1994 from $0.52 in 1993, based on a 4% increase in
the average number of shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
During its 1994 and 1995 fiscal years the Company operated with modest cash
resources. Funding of approximately $675,000 was received pursuant to grants
from several government agencies in support of research and development
activities. A balance of approximately $800,000 remains available under these
grants. However, in order to meet all of its operating expenses, the Company has
relied on the sale of common stock and the issuance of convertible notes to
raise additional funds. Net proceeds from sales of securities in fiscal 1995
were approximately $2,100,000. In October 1995, a litigation settlement resulted
in the receipt of cash of $1,300,000 by the Company.
As of March 31, 1996, the Company had cash and cash equivalents of
$198,517, cash in escrow of $175,000 and accounts receivable of $100,061.
However, the Company's current liabilities as of March 31, 1996 were $1,220,096
and the Company had a working capital deficit of $682,424 as of the same date.
Following March 31, 1996, the Company has incurred additional losses, which have
increased its working capital deficit. In May 1996, the Company's Chairman and
Chief Executive Officer, Dr. Gloria Ma, paid to the Company $309,916 as a
partial reduction of amounts owed to the Company under a promissory note made by
her. Dr. Ma also offset against the amounts owed by her under the note certain
deferred salaries, accrued vacation and unreimbursed travel and entertainment
expenses, the net of which reduced the amounts owing under the note by an
additional $137,012. See "Management -- Certain Transactions."
The Company estimates that it will require approximately $2,000,000 of
additional capital for the purchase of machines and for the working capital
necessary to further advance the commercialization of the Robo-WrapperTM
technology. The Company also estimates that it will need an additional $800,000
of capital to sustain operations over the next 12 months in the absence of
significant revenues from its Robo-WrapperTM operations. In order to finance
these costs, the Company intends to call the Warrants for redemption. However,
there are no commitments or understandings on the part of any third parties to
exercise the Warrants and there can be no assurance of the amount of proceeds,
if any, that the Company may receive by way of the offering made hereby.
Further, there are no understandings or arrangements for the Company's receipt
of additional capital from alternative sources. Therefore, there can be no
assurance that the Company will be able to obtain capital from sources other
than this offering should the need arise.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operating
costs.
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<PAGE> 21
BUSINESS
GENERAL
The Company has developed a proprietary seismic retrofit technology which,
in the opinion of management, possesses certain advantages over existing applied
retrofit technologies. The Company's proprietary technology produces
carbon-based composite jackets designed to protect structurally deficient
highway bridge columns from collapse during seismic activity. The carbon jacket
is installed by the Company's proprietary Robo-WrapperTM machine and application
process which automatically wraps prepreg tow (a carbon fiber pre-impregnated
with resin) around the bridge column. A heat source is used to induce a chemical
reaction in which the resin molecules contained in the prepreg tow crosslink,
thereby transforming the material from a soft, pliable state to a strong, hard
shell.
The Company was organized in 1985 for the purpose of developing and
commercializing non-destructive testing and measurement techniques of products
incorporating advanced materials. Advanced materials consist of advanced metals
and alloys, ceramic and polymer based materials, and composites of these
constituents, many of which were originally developed for aerospace and defense
applications. Advanced materials are used to produce devices and structures with
performance and functional attributes superior to those made of conventional
metals. Between 1988 and 1992, the Company obtained seven U.S. patents
pertaining to its non-destructive testing and measurement technologies. However,
the development and marketing of these technologies were significantly adversely
affected by the defense cutbacks in the early 1990's. In response to the defense
cutbacks and their impact on the developing markets for advanced materials, the
Company initiated efforts to develop commercial applications of its technologies
and know-how. The Company's Robo-WrapperTM technology is the result of those
efforts.
As of the date of this Prospectus, the Company's Robo-WrapperTM technology
has been fully developed and validated through independent testing using
simulated seismic loads. In April 1996, the Company was notified by the
California Department of Transportation ("Caltrans") that Caltrans had issued a
procurement specification ("Composite Specification") approving the use of the
Company's Robo-WrapperTM technology as an alternate method of retrofitting
publicly-owned highway bridge columns in the State of California that meet
certain criteria set forth in the Composite Specification. In June 1996, the
Company began bidding on retrofit contracts to be awarded by Caltrans, however
as of the date of the Prospectus the Company has not been awarded any such
contracts. There are approximately 20,000 publicly-owned bridge columns in the
State of California to be retrofitted over the next five years, of which
approximately 10,000 (50%) are believed by the Company to be presently eligible
for retrofitting pursuant to the Composite Specification. Management intends to
seek further modifications to the Composite Specification to expand its
application to all publicly-owned bridge columns in the State of California,
however there can be no assurance that the Company will be successful in this
regard.
The Company's primary strategy and plan of operations over the next five
years is to market its Robo-WrapperTM technology to those construction firms
engaged in the retrofitting of publicly-owned highway bridges in the State of
California and other seismic states. The Company estimates that the State of
California will spend approximately $2 billion on seismic retrofit of its
highway structures, including $200 to $400 million over the next five years on
the retrofitting of bridge columns alone. Prior to the issuance of the Composite
Specification, the only Caltrans-approved method of retrofitting publicly-owned
bridge columns in the State of California required the use of steel jackets.
Management of the Company believes, and independent testing confirms, that the
Company's Robo-WrapperTM technology is, at least, as effective as steel jackets
and, in addition, can be applied in less time and with less cost. In addition to
the market for seismic retrofitting of highway bridge columns, the Company
intends to pursue other potential markets for its retrofit technology, including
the retrofitting of buildings and parking structures for seismic risk and
corrosion decay.
BACKGROUND
Currently, approximately $28 billion a year is spent in the United States
to maintain the highway infrastructure. Conservative estimates indicate that
twice that amount is necessary to maintain the highway infrastructure in its
current condition. An estimated 226,000 (39%) of the nation's 577,000 bridges
are
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classified as structurally deficient or functionally obsolete, with a total
estimated cost of $212 billion to eliminate these deficiencies. The primary
concerns are seismic safety and corrosion decay.
While seismic risk is typically associated with California and the West
Coast, there are other areas in the United States, including the Midwest (New
Madrid Fault) and the Northeast, that are also potential subjects of high
seismic activity. While the seismic risk to bridge structures differs from
region to region, the unpredictable nature of seismic events and the
vulnerability of the majority of existing bridges necessitates the development
and implementation of fast, effective and economical retrofitting technologies
to ensure the safe and continued use of the nation's bridge infrastructure.
Seismically deficient bridge columns have inadequate strength and
ductility, caused by insufficient horizontal reinforcement (hoop steel). These
deficiencies can result in premature and often explosive column failures during
earthquakes. Column failure is generally of a flexural or shear nature. Long and
slender columns are susceptible to flexural failure at either column end which,
without proper horizontal reinforcement, leads to the buckling of the continuous
column reinforcement (see figure 4, inside front cover page), or the debonding
of the lapped column reinforcement (see figure 3, inside front cover page) once
the concrete spalls off. Short or stocky columns typically fail by becoming
brittle in diagonal tension resulting in shear failure of the column during
seismic activity (see figure 1, inside front cover page). In all cases,
confinement of the concrete by external jackets can prevent these failures,
thereby increasing the column's ductile response and energy absorption capacity
in the event of an earthquake. Existing retrofit technologies, including the
Company's Robo-Wrapper(TM) technology, are not designed to prevent column
damage. Instead, they are designed to prevent the column from collapsing in the
event of damage and, thereby, protect the safety of the travelling public at the
time of seismic activity and increase the chances for the bridge's repair and
subsequent use.
Prior to the issuance of the Composite Specification, steel jacketing had
been the only method of retrofitting bridge columns approved by Caltrans (see
figure 6, inside back cover page). Prior to installation, accurate measurement
of the column must be taken to pre-manufacture the steel half-shells. Once
manufactured, the steel shells are delivered to the site, lifted in place by
heavy off-road cranes and seam-welded along the vertical and horizontal joints.
Gaps between the steel and column are filled with cement grout, followed by
drying and painting to prevent corrosion. While steel jackets themselves are
relatively inexpensive, the installation process is labor intensive.
Installation of steel jackets on a typical 4-foot diameter, 22-foot high
circular column requires a two to three man crew working two to three days. As
described further below, the Company estimates that each Robo-Wrapper(TM)
machine and a three man crew will be able to wrap approximately three to four
22-foot columns per day, including setup, wrap, and tear down of equipment.
The Company intends to focus initially on the California market which
includes approximately 24,000 bridge structures. Caltrans has concluded that
approximately 5,000 bridges need some form of replacement or retrofitting in
order to meet safety criteria, with a total program cost estimated at $3
billion, of which approximately $1 billion has already been spent. Approximately
one-third of the bridges identified for seismic retrofit in California have
already been retrofitted using steel jacketing. The Company estimates that the
remaining publicly-owned bridges columns represent a $200 to $400 million market
and that the remaining bridge columns eligible for retrofitting under the
Composite Specification represent a $100 to $200 million market. The remaining
publicly-owned bridge columns are to be serviced between the year 1996 and the
year 2000, with the majority of the remaining Caltrans-owned bridges to be bid
by mid-1996 and completed by the end of 1997.
The Company's long-term strategy is to market its Robo-Wrapper(TM)
technology as a cost effective means of remediating corrosion decay. The
national bridge inventory consists of approximately 577,000 bridges of which
approximately 39% require some form of repair or retrofit. The total retrofit
cost to eliminate current deficiencies is estimated to be $212 billion. This
includes remediation of both corrosion decay and seismic safety problems.
Hercules, Inc., the largest supplier of carbon fiber in the United States, has
estimated that there are approximately 15,800 bridges in seismically active
areas outside of California which require seismic retrofitting.
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The Company believes that underwater structures, such as pilings and piers,
and support columns in buildings/parking structures and other areas, will
represent additional markets for the Company's Robo-Wrapper(TM) technology. The
California Seismic Safety Commission ("CSSC") is in the process of examining
these issues with respect to upgrading the safety of buildings, particularly
schools and hospitals. The California Earthquake Hazard Reduction Act of 1986
mandates that government and private entities implement plans to reduce
earthquake risk significantly by the year 2000. Retrofitting of parking
structures with composite materials has already been promoted by the Company's
competitors on a limited basis.
THE XXSYS ROBO-WRAPPER(TM) TECHNOLOGY
The Company's product is applied by a three-man crew using a proprietary
Robo-Wrapper(TM) machine (patent pending) and application process (patent
pending) to wrap prepreg tow (carbon fiber which has been pre-impregnated with
resin) around the bridge column (see figures 5 and 8, inside back cover page).
Columns are first inspected from a manlift and any defects such as holes or
sharp projections are repaired. The columns are then cleaned in preparation for
wrapping. The Company estimates that the preparation will take one person
approximately one to two hours.
Prepreg tow in spool form is placed on the Robo-Wrapper(TM) machine. A
controlled tension is applied to each spool. The machine rotates around the
column in a precise, programmed motion applying the tow in a continuous pattern
around the column to form a jacket that conforms to the shape of the column. The
thickness of the jacket varies based on the type of retrofit (flexural or shear)
and is dictated by the design specified by the structural engineer. The Company
estimates that each Robo-Wrapper(TM) machine and a three man crew will be able
to wrap approximately three to four 22-foot columns per day, including setup,
wrap, and tear down of equipment.
Upon completion of the wrapping process, a heat source is used to cure the
resin in a controlled environment. During the heating process, the liquid resin
undergoes a chemical reaction in which the molecules crosslink, forming a solid
which gives the product its ultimate mechanical properties. Heat can be applied
using several methods including electric heat blankets, forced hot air, or
radiant energy. All of these methods have been successfully demonstrated. The
radiant energy curing system is the method the Company intends to use
commercially since it is the most versatile system for the wide range of column
sizes expected to be encountered in the field. Curing a 22-foot column with the
planned curing system is projected to take two to three consecutive cures
estimated at about 8 hours per column, including setup and tear down, with
minimal monitoring during that period. Once the curing is complete, the column
will be painted with a chemical and UV resistant coating to complete the
process.
The Company's Robo-Wrapper(TM) technology has been independently validated
under simulated seismic loads by the Powell Structural Research Laboratory at
the University of California, San Diego (see figure 7, inside back cover page).
The Powell Laboratory conducted tests of seven 4/10ths scale concrete columns
with different reinforcement and retrofit strategies for shear and flexural
failure modes over a period of 13 months. These tests were conducted at the
request of, and observed by, Caltrans and were funded by grants from the U.S.
Department of Defense and Department of Transportation. See "Research and
Development" below. The data gathered from the testing was analyzed by the
Powell Laboratory and in August 1995 a formal report was submitted to Caltrans
evidencing that the carbon jackets installed by the Robo-Wrapper(TM) performed
as well as and, in some cases, even better than steel jackets, and can be
installed in less time and with less cost.
The testing, marketing and sale of products for civil engineering
applications entails a risk of negligence and other claims by owners and general
contractors of projects, and product liability claims by those persons who
ultimately use or occupy such projects. The Company currently maintains product
liability insurance providing coverage in the approximate amount of $2,000,000
per year, however there can be no assurance that the Company will be able to
maintain insurance coverage at a reasonable cost or that any such insurance will
be sufficient to cover all possible liabilities. In the event of a successful
suit against the Company, lack or insufficiency of insurance coverage could have
a material adverse affect on the Company. Further, owners and general
contractors may require minimum product liability insurance coverage as a
condition precedent to entering into collaborative arrangements with the
Company. Failure to satisfy such insurance requirements
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could impede the ability of the Company to achieve broad use and acceptance of
its Robo-Wrapper(TM) technology, which would have a material adverse affect upon
the business and financial condition of the Company.
SENSOR AND NDE TECHNOLOGIES
The Company will utilize its prior expertise in sensor and non-destructive
testing ("NDE") technologies to develop quality assurance and performance
monitoring technologies to enhance user confidence in the carbon jacketing
process, thereby accelerating its commercial acceptance. Quality assurance
technologies include the monitoring of the resin impregnation process on the
carbon fiber line to control resin content of the prepreg tow and ensure
consistency of the product made, and in situ cure monitoring technologies to
ensure the carbon composite jacket reaches the desired cure state during field
installation. Performance monitoring technologies include the measurement of
strain in the composite jacket over its service life, and particularly after
events like an earthquake, such that informed decision can be made regarding
maintenance and repair of the jacket. These research and development efforts are
partially funded by the Advanced Technology Program (ATP) from the National
Institute of Standards and Technology (NIST) to accelerate the commercialization
of the Robo-Wrapper(TM) technology. See "Research and Development." If
successful, these sensor and NDE technologies can be utilized for other
composite applications, and the Company intends to pursue these opportunities
as a separate business unit.
MANUFACTURING AND RAW MATERIALS
The Company designed the existing Robo-Wrapper(TM) and its curing system
and intends to contract with original equipment manufacturers for the
manufacture of Robo-Wrappers(TM) and curing systems. To ensure confidentiality
of trade secrets, the Company may machine critical parts and perform final
assembly, system integration, and quality assurance at the Company's facilities.
Eight companies currently supply approximately 15 million pounds of carbon
fiber annually to the industrial, aerospace and automotive markets. Announced
plant expansions are expected to soon add approximately 5 million pounds of
annual capacity. The carbon fiber utilized in the Company's test work was
supplied by Hercules Inc., the largest supplier of carbon fiber in the United
States. Amoco, the second largest U.S. supplier, is in the process of qualifying
its materials for use in connection with the Robo-Wrapper(TM) machine. The
Company intends to purchase materials from both of these suppliers.
The resin material used in the Company's testing program was supplied by
Ciba Composites, which has recently acquired Hexcel, Inc. to become the world's
largest prepreg material company. Five other U.S. companies presently
manufacture resin materials suitable for use in the Robo-Wrapper(TM)
applications and all five are in various states of prequalification or
qualification of their materials for use in connection with the
Robo-Wrapper(TM) machine.
The Company believes that all of the raw materials used in the installation
of the Robo-Wrapper(TM) jackets are generally available in adequate amounts and
at competitive prices from multiple sources. However, since the majority of the
cost involved in installing the Robo-Wrapper(TM) jacket is the cost of the
carbon fiber and resin, any significant increases in the cost of either
material could have a material adverse affect on the cost competitiveness of
the Robo-Wrapper(TM) technology relative to steel jackets and other non-carbon
based composite retrofit technologies. To protect against supply shortages and
price increases, the Company intends to negotiate with carbon fiber and resin
suppliers for long term supply agreements.
MARKETING
The Company intends to market its Robo-Wrapper(TM) technology primarily to
the engineers and contractors involved in the retrofitting of bridge columns and
other structures and government agencies responsible for public structures and
the administration of safety standards for privately-owned structures. As of the
date of this Prospectus, the Company is not and does not intend to become
directly engaged in construction activities, therefore the Company intends to
enter into license or joint venture arrangements with construction firms
involved in seismic retrofitting. The contractor will be responsible for bidding
on public or
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private retrofit projects, and conducting the actual retrofitting. The Company
proposes to provide the Robo-Wrapper(TM) machine, prepreg materials, curing
ovens and one or more technical assistants to the contractor directly conducting
the column retrofit, in return for which the Company will receive a percentage
of the job revenue.
The Company's marketing mission will be to educate those engineers,
contractors and government agencies involved in the retrofit industry on the
strategic benefits of the Company's Robo-Wrapper(TM) technology and to obtain a
high degree of acceptance of its technology among them. Since state and local
government agencies strictly regulate building and construction standards, it
will be necessary for the Robo-Wrapper(TM) to obtain government approval as a
retrofit method before it can be considered for use in the agency's
jurisdiction. Retrofit contractors will also have to accept the technology and
incorporate it into their bid proposals. The Company believes that the issuance
of the Caltrans Composite Specification will have a significant positive affect
on its ability to successfully market its Robo-Wrapper(TM) technology to the
engineers, contractors and governmental agencies involved in the remediation of
structural deficiencies. However, the failure of the Company to successfully
market its technology to either the relevant government agencies or the retrofit
contractors will significantly impede the Company's efforts to commercially
exploit its Robo-Wrapper(TM) technology.
Important aspects of the Company's marketing strategy will include the
development and dissemination of educational materials for the various target
groups through seminars and short-courses, and the development and
implementation of a comprehensive training program to ensure rapid and
successful technology transfer. It will be important to convince the hundreds of
individual contractors and engineers involved with preparing bid retrofit
packages to either request the Company's product or at least give the bidding
contractors a choice of steel or carbon composite when they bid. The Company has
no retrofit contracts to date and it does not expect to generate revenues from
retrofit work until mid-1996. The Company anticipates it will be primarily
dependent on the Caltrans market for most of its revenue in 1996 and 1997.
COMPETITION
The Company will face competition from the current and future retrofit
procedures. As of the date of this Prospectus, the principal competition to the
Robo-Wrapper(TM) technology is the use of steel jackets. Additionally, other
companies, some of which have substantially greater resources than the Company,
have already been using composites to retrofit private and publicly-owned
structures located in California and other states, including Hexcel Fyfe
Company, Hardcore Dupont and Mitsubishi. As of the date of this Prospectus, only
one of the Company's competitors using composites, Hexcel Fyfe Company, has
received approval from Caltrans to wrap structures. If Caltrans allows other
companies to rely upon the Company's testing so as to reduce substantially the
testing needed, the Company could face additional composite-based competition
sooner than expected. Additionally, should the Company's pending patents be
rejected, it could lose any competitive advantage that patent protection
affords.
RESEARCH AND DEVELOPMENT
Research and development expenses for the years ended September 30, 1995,
1994 and 1993 were $115,304, $277,789 and $230,261, respectively. These amounts
represent direct expenditures by the Company and do not include approximately $4
million of federal and state grant monies paid directly to third parties, such
as UCSD and Hercules, Inc., for purposes of developing and validating the
Robo-Wrapper(TM) technology.
The Company participates in several federally-funded joint research and
development projects. The Company is currently a participant in a bridge
infrastructure renewal program funded by the U.S. Department of Defense,
Advanced Research Projects Agency ("ARPA"). The Company has received a matching
funds grant of $514,000, of which $285,877 had been earned as of September 30,
1995. The purpose of the ARPA program is to validate and demonstrate carbon
composite jacketing, and the Company has applied its grant money under the ARPA
program towards the costs of wrapping seven bridge columns for the independent
testing of those columns by Powell Laboratories of UCSD.
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The Company is also the lead participant of a $2.7 million program funded
by the U.S. Department of Commerce, National Institute of Standards and
Technology ("NIST"). The purpose of the NIST program is to accelerate the
commercialization of carbon composite jacketing technology. The NIST program
participants include: the Company, which is responsible for developing the
method for installing and testing carbon-based jackets and sensor and
non-destructive testing technologies for quality assurance and performance
monitoring; Hercules, Inc., which is responsible for developing a low cost
prepreg tow; and Trans Science Corporation, which is responsible for developing
computer software which will design the length and thickness of the jacket based
on the particular characteristics of the structure to be retrofitted. The
Company's share of the grant funds is $538,000, of which $110,710 had been
earned as of September 30, 1995. The Company was also awarded $250,000 in
matching funds from the State of California's Trade and Commerce Agency for the
NIST program.
The Company is a founding member of the Advanced Composite Technology
Transfer ("ACTT") Consortium, a group organized to construct an all-composite
cable-stayed bridge in San Diego, the first such bridge in the country for
vehicular traffic. The Company is responsible for assessing non-destructive
testing technology related to various quality assurance programs during
manufacture and for developing procedures to monitor structural integrity over
the life span of the bridge.
The Company intends to conduct continued research and development in the
area of non-destructive testing and measurement. The Company intends to pursue
research grants and invest a portion of the Company's own research and
development budget in the area of ultrasonic measurement and applications.
INTELLECTUAL PROPERTY
In August 1994, the Company filed for a patent on the mobile robotic
wrapping machine (Robo-Wrapper(TM)) and the application process to be used in
the carbon composite retrofit program. In June 1995, the U.S. Patent and
Trademark Office, in an initial office action, asked the Company to split the
patent application into two applications -- one for the machine and the other
for the process. In December 1995, the Company filed a patent application for
the method of curing filament-wound columns using a radiant heater. All three of
the patent applications are pending. The Company holds seven U.S. patents on its
non-destructive testing and measurement technologies.
The Company endeavors to maintain the confidentiality of its proprietary
technologies and know-how through confidentiality agreements, in-house controls
over the manufacture of certain parts of the Robo-Wrapper(TM) machine and
restricted access to certain information on a "need to know" basis.
EMPLOYEES
As of May 31, 1996, the Company had 19 employees of whom eight were in
executive or administrative positions, five were engaged in engineering, one was
engaged in marketing and five were in manufacturing positions. None of the
Company's employees are covered by a collective bargaining agreement. The
Company believes that its relations with its employees are good.
PROPERTY
The Company leases approximately 7,000 square feet of office and production
facilities in San Diego, California. This space is utilized for the Company's
executive offices, research and development, sales and marketing, and
engineering activities, at a monthly rent of $5,000, pursuant to a lease that
extends to October 1998. Should additional facilities be required, the Company
believes that adequate space is currently, and in the near future will continue
to be, available in the San Diego area.
LITIGATION
There are no pending legal proceedings to which the Company or any of its
officers and directors is a party or to which the property of the Company is
subject, other than routine litigation involving claims of immaterial amounts
arising during the normal course of business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- --- -------------------------------------------------
<S> <C> <C>
Gloria C.L. Ma, Ph.D........... 48 Chairman of the Board and Chief Executive Officer
Lawrence D. Cercone, Ph.D...... 51 Vice President of Engineering
Gregory P. Hanson, CMA......... 49 Chief Financial Officer
Andrew J. Lampe................ 63 Director of Marketing and Sales
William J. Dale, Esq........... 62 Director and Secretary
Walter Geer.................... 46 Director
</TABLE>
Dr. Ma is co-founder of the Company and served as President from its
inception in 1985 to September 1991, Executive Vice President from September
1991 to July 1994, and thereafter as Chairman. She resumed the position of Chief
Executive Officer in April 1995. Before founding the Company, Dr. Ma was
President of Zealot & Company, Ltd., a privately held investment company in Hong
Kong. She received undergraduate and masters degrees in genetics from McGill
University and a Ph.D. degree in molecular biology from the University of
California, San Diego.
Dr. Cercone was appointed Vice President of Engineering in August 1994. For
the prior five years he served as an adjunct professor at the University of
Wyoming. Prior to 1989, Dr. Cercone owned an engineering firm specializing in
the design and manufacture of composite machinery and was employed by Ciba
Composite, Celanese Corp. and Stauffer Chemical. Dr. Cercone has a Ph.D. in
chemical engineering from Massachusetts Institute of Technology.
Mr. Hanson was appointed Vice President and Chief Financial Officer of the
Company in October 1995. From May 1993 to September 1995, Mr. Hanson held a
number of financial positions with Titan Information Systems Corporation, a
diversified telecommunications company, including acting Chief Financial
Officer. From January 1992 to May 1993, Mr. Hanson served as Chief Financial
Officer of Onsite Energy, an energy service and finance company. From February
1990 to December 1991, Mr. Hanson was Chief Financial Officer for Catrel USA, a
waste resource recovery company. Mr. Hanson has a B.S. degree in Mechanical
Engineering from Kansas State University and an M.B.A. degree from the
University of Michigan. He is a Certified Management Accountant and has passed
the examination for Certified Public Accountants.
Mr. Lampe has served as Director of Marketing and Sales since February 1,
1996. From October 1994 to January 1996, Mr. Lampe served as an independent
transportation and marketing consultant. From February 1992 to October 1994, Mr.
Lampe was Director of Government Relations for Amtech Systems Corporation. From
November 1972 to January 1992, Mr. Lampe served as Manager of Government
Relations of the Traffic Control Materials Division of 3M Company. In his
positions with Amtech Systems and 3M Company, Mr. Lampe was responsible for
representing his employer's new products and technologies in the highway safety
industry before government agencies and other regulatory bodies, and working
with those agencies in developing policies, regulations and standards for the
implementation of the new products and applications.
Mr. Dale has been Secretary and a director of the Company since 1994. Since
1982, Mr. Dale has served as President of Silverado Capital, Inc., a San
Diego-based company engaged in arranging the exchange of international
currencies and in the international marketing of biorational plant growth
enhancers. From 1980 to 1989, Mr. Dale was a partner in a San Diego law firm
handling corporate and securities law matters. Mr. Dale received a B.A. degree
in Economics from Allegheny College and an LL.B. degree from the University of
Pennsylvania.
Mr. Geer has been a director of the Company since August 1995. Since June
1992, Mr. Geer has served as President of Greymar Development, LLC, a
full-service residential real estate development company, and President of North
County Homes, a developer of a master planned community of automated housing.
From January 1991 to May 1993, Mr. Geer has also served as an independent
consultant to the home building
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industry. Mr. Geer received a Bachelor of Architecture degree from California
Polytechnic at San Luis Obispo, California.
All directors serve for a term of one year and until their successors are
duly elected and qualified. All officers serve at the discretion of the Board of
Directors.
CERTAIN TRANSACTIONS
In May 1994, the Company sold to the brother of Dr. Gloria Ma, Chairman and
Chief Executive Officer of the Company, in a private transaction 4,500 shares of
Series A Preferred Stock in exchange for the assignment of a nonrecourse
promissory note made by Dr. Ma in the principal amount of $450,000, plus
$198,750 of accrued interest, secured by a second deed of trust on real
property. The nonrecourse promissory note has an interest rate of 10% per annum
and is due in January 1999, including accrued interest. Each preferred share has
a liquidation preference of $100, is redeemable at the Company's option at a
price of $120 per share, and is convertible at the option of the holder into 80
shares of the Company's Common Stock. In May 1996, Dr. Ma reduced the amounts
owing to the Company under the note by $446,928, of which $264,272 was applied
to reduction of accrued interest and $182,656 was applied to the outstanding
principal amount. Dr. Ma effected the reduction through a cash payment of
$309,916 and the relinquishment of her rights to deferred salaries, accrued
vacation and unreimbursed travel and entertainment expenses, partially offset by
other amounts she owed the Company, the net of which reduced the amounts owing
under the note by an additional $137,012.
In July 1994, the Board of Directors granted to the then president of the
Company, the right to dispose of the asset "deferred acquisition expenses"
(consisting of a due diligence package, including contracts, appraisals and
environmental studies on a targeted company representing in excess of $1,000,000
expended by the Company). Upon any such disposal, the individual was to receive
a commission of one-third of the price obtained, up to a maximum amount of
$100,000. In September 1995, the owner of the target company announced a pending
sale to another party. The Company and its former president filed suit claiming
breach of contract and breach of fiduciary relationship by the purchaser.
Pursuant to a settlement agreement reached in October 1995, the Company received
a cash payment of $1,300,000 (net of legal fees). In addition, the Company will
receive annual payments of up to $250,000 for six years pursuant to a consulting
contract between the target and the Company. The target company also agreed to
offer a five-year material supply contract and to provide product and/or
technical services (for research and development, materials testing, etc.). As
part of the litigation settlement the former executive received $100,000.
On September 1, 1995, the Company agreed to sell 352,000 shares of
restricted Common Stock to an uncle of Dr. Ma in consideration of $1,056,000
($3.00 per share). The last sale price of the Common Stock quoted on the NASDAQ
Small Cap Market on that day was $3.75. In December 1995, the purchase agreement
was renegotiated to provide for the Company's sale of a total of 211,200 shares
of restricted Common Stock at $5.00 per share, plus a five year Warrant to
purchase 352,000 shares of restricted Common Stock at $6.00 a share. Of the
total purchase commitment, $176,000 consisted of a two-year note (shown as a
reduction of stockholders' equity) and the balance was paid in cash.
The Company has in the past conducted, and intends in the future to
conduct, all related party transactions involving the Company on terms no less
favorable than could be obtained from unaffiliated parties and approved by the
majority of the independent and disinterested members of the Company's board of
directors. In addition, any loans by the Company to officers, directors,
shareholders or affiliates will be approved by a majority of the independent and
disinterested directors.
24
<PAGE> 29
EXECUTIVE COMPENSATION
Compensation of Executive Officers. The following table shows for the
fiscal years ended September 30, 1995, 1994 and 1993, certain compensation paid
by the Company to its executive officers.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
COMMON
SHARES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
---------------------------------------- STOCK OPTIONS
NAME AND PRINCIPAL COMPENSATION AWARDS GRANTED ALL OTHER
POSITION YEAR SALARY(1) BONUS OTHER(2) ($) (# SHARES) COMPENSATION
- ----------------------- ----- -------- ------------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gloria C.L. Ma, 1995 $110,250 $ 2,667 $52,780(3) 349,249 --
Chairman & CEO 1994 94,500 -- -- -- -- --
1993 94,500 5,000 -- -- 18,000 --
Paul W. Pendorf 1995 $ 77,564(4)(5) -- $ 2,667 -- -- --
Past President 1994 119,400(6) -- -- -- -- --
1993 126,000 -- -- -- 24,000 --
Gregory P. Hanson, CMA 1995 (7) -- -- -- -- --
Chief Financial
Officer 1994 -- -- -- -- -- --
1993 -- -- -- -- -- --
Larry D. Cercone, Ph.D. 1995 61,875 4,030 -- -- 100,000 --
VP of Engineering 1994 7,500(8) -- -- -- -- --
1993 -- -- -- -- -- --
Andrew J. Lampe 1995 (9) -- -- -- -- --
Director of Marketing 1994 -- -- -- -- -- --
and Sales 1993 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Salary includes deferred compensation in the year earned for each of the
named executive officers.
(2) Dr. Ma and Mr. Pendorf each received $2,667 from the Company in fiscal year
1995 for certain personal guarantees made on behalf of the Company.
(3) Represents the dollar value of 55,000 shares of restricted Common Stock
issued to Dr. Ma during fiscal year 1995 based on a last sale price for the
Common Stock on the date of grant. The dollar value of the restricted stock
as of December 29, 1995 was $281,875 based on a last sale price for the
Common Stock of $5.13 per share as of that date.
(4) Mr. Pendorf resigned as the Company's President and Chief Executive Officer
on March 25, 1995.
(5) Mr. Pendorf's compensation in fiscal year 1995 includes $63,000 in severance
pay from the Company.
(6) In July 1994, the Company's Board of Directors granted to Mr. Pendorf the
right to dispose of a due diligence package, including contracts, appraisals
and environmental studies, on a proposed acquisition target. Upon such
disposal, Mr. Pendorf was to receive a commission of one third of the price
obtained, up to a maximum of $100,000. Mr. Pendorf received $100,000 in
fiscal year 1996 as part of a settlement agreement related to this matter.
(7) Mr. Hanson was hired as Chief Financial Officer on October 1, 1995 at an
annual salary of $90,000.
(8) Dr. Cercone has served as Vice President of Engineering since August 1994.
(9) Mr. Lampe was hired as Director of Marketing effective as of February 1,
1996 at an annual base salary of $80,000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING % OF TOTAL OPTIONS/SARS
OPTIONS/SARS GRANTED GRANTED TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME (#) FISCAL YEAR PRICE ($/SH) DATE
- -------------------------- --------------------- ------------------------ ----------------- ------------
<S> <C> <C> <C> <C>
Gloria C.L. Ma, Ph.D...... 99,249 28% $1.79 07/03/2000
Lawrence Cercone, Ph.D.... 100,000 29% $1.88 07/15/2000
Gregory P. Hanson, CMA.... 100,000 29% $3.50 08/30/2000
</TABLE>
25
<PAGE> 30
Compensation of Directors. Directors do not receive cash compensation or
attendance fees for serving on the Board of Directors. However, all directors
receive reimbursement for out of pocket expenses in attending Board of Director
meetings. All non-officer directors are granted annually options under the
Company's 1991 Stock Option Plan to purchase 4,000 shares of Common Stock. The
options are granted on the anniversary date of their appointment to the Board at
an exercise price equal to the last sale price for the Company's Common Stock.
See "Stock Option Plan."
Stock Option Plan. The Company has adopted a 1991 Stock Option Plan (the
"1991 Plan") covering 550,000 shares and a 1996 Stock Option Plan ("1996 Plan")
covering 1,000,000 shares of the Company's Common Stock (subject to adjustment
to cover stock splits, stock dividends, recapitalizations and other capital
adjustments) for employees, including officers, and directors of the Company.
Both Plans provide that options granted under the Plans will be designated as
incentive stock options or non-incentive stock options by the Board of
Directors, which also will have discretion as to the persons to be granted
options, the number of shares subject to the options and the terms of the option
agreements. The options to be granted under the Plans and designated as
incentive stock options are intended to receive incentive stock option tax
treatment pursuant to Section 422 of the Internal Revenue Code of 1986, as
amended.
Both Plans provide that (i) all options granted thereunder shall be
exercisable during a period of no more than ten years from the date of grant
(five years for options granted to holders of 10% or more of the outstanding
shares of Common Stock), and (ii) the option exercise price for incentive stock
options shall be at least equal to 100% of the fair market value of the
Company's Common Stock on the date of grant (110% for options granted to holders
of 10% or more of the outstanding shares of Common Stock). The aggregate fair
market value, as determined on the date of grant, of shares of Common Stock for
which incentive stock options are first exercisable under the terms of both
Plans by an option holder during any calendar year cannot exceed $100,000.
Both Plans provide for automatic annual grants of non-qualified options to
the Company's outside directors. Each outside director is annually granted a
five-year option for 4,000 shares at the then current fair market value. These
options become exercisable one year after the date of grant, subject to
continuing service as a director. Directors may also be granted additional
options to acquire shares of the Company's Common Stock at the discretion of the
Board of Directors.
If the employment of an optionee is terminated other than by reason of
death, disability or retirement at age 65, any unexercised options granted to
the optionee will immediately terminate. Within one year from the date of a
termination by reason of disability, or three months from the date of a
termination by reason of retirement at age 65, the optionee may exercise the
option (but not after ten years from the date of grant). If employment is
terminated by death, the person or persons to whom the optionee's rights under
the option are transferred by will or the laws of descent and distribution have
similar rights of exercise within three months after such death. Options are not
transferable other than by will or the laws of descent and distribution and,
during the optionee's lifetime, are exercisable only by the optionee. Shares
underlying options which expire or terminate may be the subject of future
options. The 1991 Plan terminates on December 14, 2001 and the 1996 Plan
terminates on January 13, 2006. As of May 30, 1996, options to purchase an
aggregate of 472,000 shares of Common Stock had been granted under the 1991 Plan
and no options had been granted under the 1996 Plan.
26
<PAGE> 31
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of the date of this Prospectus by (i)
each person who is known by the Company to be the beneficial owner of more than
five percent (5%) of the Common Stock, (ii) each of the Company's directors and
executive officers and (iii) by all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OWNED
---------------------------------------------- ----------------- -----------------
<S> <C> <C>
Gloria C. L. Ma, Ph.D. ....................... 933,651(1) 14.5%
4619 Viewridge Avenue
San Diego, CA 92123
Lawrence D. Cercone, Ph.D. ................... 5,000 (3)
4619 Viewridge Avenue
San Diego, CA 92123
Gregory P. Hanson............................. 7,970 (3)
4619 Viewridge Avenue
San Diego, CA 92123
Andrew J. Lampe............................... -- --
4619 Viewridge Avenue
San Diego, CA 92123
William J. Dale............................... 60,558(2) (3)
1150 Joshua Way
Vista, CA 92083
Walter Geer................................... -- --
5070 North 40th Street
Suite 120
Phoenix, AZ 85018
Law Biu Biu................................... 1,289,161 21%
171 Prince Edward Road
Suite 204
Kowloon, Hong Kong
Tung Bik Lin.................................. 443,182(4) 6.7%
Apartment 2D
29 Conduit Road
Hong Kong
All directors and officers, as a group,
including the named persons (six (6)
persons).................................... 1,007,179(5) 15.5%
</TABLE>
- ---------------
(1) Includes 291,751 shares which Dr. Ma has the right to acquire within 60 days
of February 26, 1996, through the exercise of options. Dr. Ma is the niece
of Law Biu Biu.
(2) Includes 54,000 shares which Mr. Dale has the right to acquire within 60
days of February 26, 1995, through the exercise of options.
(3) Represents less than one percent.
(4) Represents an aggregate of 443,182 shares which Tung Bik Lin has the right
to acquire within 60 days of February 26, 1996, through the exercise of
options.
(5) Includes an aggregate of 343,751 shares which the directors and executive
officers have the rights to acquire within 60 days of February 26, 1996,
through the exercise of options.
27
<PAGE> 32
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, no
par value, of which, as of the date of this Prospectus, 6,149,057 shares were
issued and outstanding and held of record by 199 persons. As of the date of this
Prospectus, there are outstanding options, warrants or other securities,
exclusive of the Warrants, Bridge Warrants and Representative's Warrants and
Common Stock underlying options granted under the Plan, which upon exercise or
conversion entitle their holder to acquire 1,691,967 shares of Common Stock at
an average exercise price of $4.12 per share.
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders generally. The approval of
proposals submitted to shareholders at a meeting other than for the election of
directors requires the favorable vote of a majority of the shares voting, except
in the case of certain fundamental matters (such as certain amendments to the
Articles of Incorporation, and certain mergers and reorganizations), in which
cases California law and the Company's Bylaws require the favorable vote of at
least a majority of all outstanding shares. Cumulative voting in the election of
directors is permitted under the Company's Bylaws. Shareholders are entitled to
receive such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefor, and in the event of
liquidation, dissolution or winding up of the Company to share ratably in all
assets remaining after payment of liabilities and liquidation preferences to the
holders of senior securities. The holders of shares of Common Stock have no
preemptive, conversion or subscription rights.
PREFERRED STOCK
The Company's Restated Articles of Incorporation authorizes the issuance of
2,000,000 shares of Preferred Stock. The Company has issued 4,500 shares
("Preferred Shares") of Preferred Stock. Each Preferred Share has a liquidation
preference of $100, is redeemable at the Company's option at a price of $120 per
share and is convertible into 80 shares of the Company's Common Stock at the
option of the holder. The holder of the Preferred Shares are entitled to appoint
one person to the Company's Board of Directors. As of the date of this
Prospectus, the Preferred Shareholders do not have a representative sitting on
the Board of Directors. Any additional Preferred Stock issued by the Board of
Directors may contain rights and preferences adverse to the voting power and
other rights of the holders of Common Stock. See "Risk Factors."
WARRANTS
The following is a brief summary of the material provisions of the
Warrants, but this summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
the Company and American Stock Transfer and Trust Company (the "Warrant Agent").
A copy of the Warrant Agreement has been filed as an exhibit to the registration
statement of which this Prospectus is a part.
Exercise Price and Terms. Each Warrant initially entitled the holder
thereof to purchase one share of Common Stock at a price of $5.00 per share if
exercised within thirty months from July 31, 1992, the effective date of the
Company's initial public offering, and then at $6.00 per share if exercised
within the succeeding thirty months. As the result of adjustments pursuant to
certain anti-dilution provisions of the Warrants, each Warrant now entitles the
holder to purchase 1.5 shares of Common Stock at an exercise price of $4.00 per
share. The Company will not issue fractional shares of Common Stock upon any
exercise of the Warrants. In such an event, the holder of the Warrants shall
have the right to purchase one full share of Common Stock at the Exercise Price.
The Warrants are subject to redemption at $.05 per Warrant on 30 days'
written notice and have been called for redemption on , 1996
("Redemption Date"). The Warrants will be exercisable until the close of
business on the Redemption Date. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
28
<PAGE> 33
The exercise price of the Warrants bears no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, specifically stock dividends, stock splits,
combinations or reclassifications of the Common Stock or sale by the Company of
shares of Common Stock at a price below the then current exercise price of the
Warrants. Additionally, an adjustment would be made in the case of a
reclassification or exchange of the Common Stock, consolidation or merger of the
Company with or into another corporation (in which the Company is not the
successor) or sale of all or substantially all of the assets of the Company, in
order to enable Warrant holders to acquire the kind and number of shares of
stock or other securities or property receivable in such event by a holder of
the number of shares of Common Stock that might otherwise have been purchased
upon the exercise of the Warrant. No adjustments will be made upon the
occurrence of events which would have an insignificant effect on the exercise
price until the cumulative adjustments in the exercise price per share amount to
$.05 or more. No adjustment to the exercise price of the shares subject to the
Warrants will be made for dividends (other than dividends in the form of stock),
if any, paid on the Common Stock or for securities issued pursuant to the
Company's 1991 Stock Option Plan or other employee benefit plans.
Warrant Holder Not a Shareholder. The Warrants do not confer upon holders
thereof any voting or any other rights of a shareholder of the Company.
TRANSFER AND WARRANT AGENT
The Transfer Agent for the Company's Common Stock and the Warrant Agent is
American Stock Transfer and Trust Company, 40 Wall Street, 46th Floor, New York,
New York 10005.
DIVIDENDS
The Company does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The California General Corporation Law provides that corporations may
include a provision in their Articles of Incorporation relieving directors of
monetary liability for breach of their fiduciary duty as directors, provided
that such provision shall not eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful payment
of a dividend or unlawful stock purchase or redemption, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Company's Articles of Incorporation provides that the Company's directors are
not liable to the Company or its shareholders for monetary damages for breach of
their fiduciary duty as directors to the fullest extent permitted by California
law. In addition to the foregoing, the Company's Bylaws provide that the Company
may indemnify directors, officers, employees or agents to the fullest extent
permitted by law and the Company has agreed to provide such indemnification to
its directors and executive officers pursuant to written agreements.
The above provisions in the Articles of Incorporation and Bylaws and the
written indemnity agreements may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter shareholders
or management from bringing a lawsuit against directors for breach of their
fiduciary duty, even though such an action, if successful, might otherwise have
benefitted the Company and its shareholders. However, the Company believes the
foregoing provisions are necessary to attract and retain qualified persons as
directors.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions,
29
<PAGE> 34
or otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable.
ESCROW SHARES
In connection with the Company's initial public offering, eleven (11) of
the Company's shareholders agreed to place an aggregate of 700,000 shares of
Common Stock held by them in escrow for a seven-year term, beginning on the
effective date of the offering (July 31, 1992) and extending through September
30, 1999, pursuant to an Escrow Agreement with the Company and American Stock
Transfer and Trust Company, as escrow agent. The Escrow Agreement provides,
among other things, that (i) if the Company earns at least $.25 per share for
the year ended September 30, 1994, 350,000 shares of Common Stock will be
released from escrow and returned to the shareholders placing shares in escrow;
(ii) if the Company earns at least $.50 per share for the year ended September
30, 1995, 350,000 shares of Common Stock will be released from escrow and
returned to the shareholders placing shares in escrow; and (iii) if the Company
earns at least $.75 per share for any year during the term of the Escrow
Agreement, then any remaining shares will be released from escrow and returned
to the shareholders placing shares in escrow. For purposes of the Escrow
Agreement, net income per share is defined, generally, to be the per share
earnings of the Company after provision for income taxes, excluding
extraordinary items and including income or loss from acquired companies engaged
in a business similar to that of the Company.
In addition, if at any time during the term of the Escrow Agreement (i) the
average of the closing bid prices of the Company's Common Stock for 30
consecutive trading days, as reported on NASDAQ, exceeds $11.25 per share or
(ii) all of the Common Stock then outstanding is sold at a price exceeding
$11.25 per share or (iii) the Company sells all or substantially all of its
assets as a result of which its shareholders receive in excess of $11.25 per
share in cash and/or securities, then any remaining shares (or such lesser
number of shares which, if released, would not cause the price per share to be
received by the shareholders to be less than $11.25 per share) will be released
from escrow.
If the foregoing earnings or stock price levels are not achieved during the
term of the Escrow Agreement, any shares remaining in escrow will be returned
after the full term to the shareholders placing shares in escrow. These
shareholders retain the right to vote the escrowed shares during the term of the
Escrow Agreement. As of the date of this Prospectus, none of the shares have
been released from escrow.
WARRANT EXERCISE PROCEDURE
EXPIRATION DATE
The Warrants have been called by the Company for redemption
on , 1996 (the "Redemption Date") at which time any Warrants
which have not been exercised will expire (the "Expiration Time"). After the
Redemption Date, unexercised Warrants will be no longer exercisable. The Company
will not be obligated to honor any purported exercise of Warrants received by
the Warrant Agent after the Expiration Time, regardless of when the documents
relating to such exercise were sent, except pursuant to the Guaranteed Delivery
Procedures described below.
EXERCISE PRICE
The exercise price is $4.00 per share, payable in cash. The exercise price
and the number of shares of Common Stock issuable upon exercise are subject to
further adjustment upon the occurrence of certain events, pursuant to certain
anti-dilution provisions of the Warrants. (See "Description of Securities --
Warrants".) The Company will supplement this Prospectus promptly upon the
occurrence of any event requiring an adjustment of the exercise price or the
number of shares issuable upon exercise, and will thereby inform each holder of
an outstanding Warrant of such adjustment.
30
<PAGE> 35
EXERCISE OF WARRANTS
This Prospectus is being delivered directly by the Company to
Warrantholders. The outstanding Warrants of the Company are to be exercised,
without the selling efforts of any broker or dealer, except as may be necessary
under certain state securities or blue sky laws, and without the involvement of
an underwriter.
Warrants may be exercised by delivering to American Stock Transfer and
Trust Company, the Warrant Agent, at the address specified below, prior to the
Expiration Time, the properly completed and executed Warrant Certificate(s)
evidencing such Warrants with any signatures guaranteed as required, together
with payment in full of the exercise price for each share of Common Stock
subscribed for pursuant to the Warrant. Such payment in full must be by (i)
check or bank draft drawn upon a U.S. bank, or postal, telegraphic or express
money order, payable to American Stock Transfer and Trust Company, as Warrant
Agent, or (ii) wire transfer of funds to the account maintained by the Warrant
Agent for such purpose at Chemical Bank, ABA No. 021000128, Account No.
610093045 for XXSYS Technologies, Inc. The exercise price will be deemed to have
been received by the Warrant Agent only upon (i) clearance of any uncertified
check, (ii) receipt by the Warrant Agent of any certified check or bank draft
drawn upon a U.S. bank or of any postal, telegraphic or express money order or
(iii) receipt of collected funds in the Warrant Agent's account designated
above. Funds paid by uncertified personal check may take at least five business
days to clear. ACCORDINGLY, HOLDERS OF WARRANTS WHO WISH TO PAY THE EXERCISE
PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE PAYMENT
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION TIME TO ENSURE THAT SUCH PAYMENT IS
RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT BY MEANS OF
CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS. Pending
payment to the Company, all funds received in payment of the Exercise Price
shall be held by the Warrant Agent and invested at the direction of the Company
in short-term certificates of deposit, short-term obligations of the United
States, any state or any agency thereof, or money market mutual funds investing
in the foregoing instruments. The account in which such funds will be held is
not insured by the FDIC. Any interest earned on such funds will be retained by
the Company.
The Warrant Agent's address, which is the address to which the Warrant
Certificates and payment of the exercise price should be delivered, as well as
the address to which a Notice of Guaranteed Delivery must be delivered, is:
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
The Warrant Agent's telephone number is (718) 921-8200.
The Company will pay the fees and expenses of the Warrant Agent and also
has agreed to indemnify the Warrant Agent from certain liabilities which it may
incur in connection with this offering.
If a Warrant holder wishes to exercise Warrants, but time will not permit
such holder to cause the Warrant Certificate evidencing such Warrants to reach
the Warrant Agent on or prior to the Expiration Time, such Warrants may
nevertheless be exercised if all of the following conditions (the "Guaranteed
Delivery Procedures") are met:
(i) such holder has caused payment in full of the exercise price for
each share of Common Stock being subscribed for pursuant to the Warrant to
be received (in the manner set forth above) by the Warrant Agent on or
prior to the Expiration Time;
(ii) the Warrant Agent receives, on or prior to the Expiration Time, a
guarantee notice (a "Notice of Guaranteed Delivery"), substantially in the
form provided by the Company (the "Instructions"), guaranteed by a member
firm of an approved Signature Guarantee Medallion Program, stating the name
of the exercising Warrantholder, the number of Warrants represented by the
Warrant Certificate(s) held by such exercising Warrantholder, the number of
shares of Common Stock being subscribed for pursuant to the Warrant and
guaranteeing the delivery to the Warrant Agent of any Warrant
Certificate(s) evidencing such Warrants within five days following the date
of the Notice of Guaranteed Delivery; and
31
<PAGE> 36
(iii) the properly completed Warrant Certificate(s) evidencing the
Warrants being exercised, with any signatures guaranteed as required, is
received by the Warrant Agent within five days following the date of the
Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed
Delivery may be delivered to the Warrant Agent in the same manner as
Warrant Certificates at the addresses set forth above, or may be
transmitted to the Warrant Agent by telegram or facsimile transmission
(telecopy no. (718) 236-2976). Copies of the form of Notice of Guaranteed
Delivery are available upon request from the Warrant Agent and the
Information Agent.
If an exercising Warrantholder does not indicate the number of Warrants
being exercised, or does not forward full payment of the aggregate exercise
price for the number of Warrants that the Warrant holder indicates are being
exercised, then the Warrantholder will be deemed to have exercised the Warrant
with respect to the maximum number of Warrants that may be exercised for the
aggregate exercise price payment delivered by the Warrantholder. Any amount
remaining shall be returned to the Warrantholder promptly by mail without
interest or deduction.
Certificates representing shares of Common Stock subscribed for and issued
pursuant to the Warrants will be mailed as soon as practicable after the valid
exercise of the related Warrants. Certificates for shares of Common Stock issued
pursuant to the exercise of Warrants will be registered in the name of the
Warrantholder exercising such Warrants.
A Warrantholder who subscribes for fewer than all of the shares represented
by his or its Warrant Certificates may, under certain circumstances, receive
from the Warrant Agent a new Warrant Certificate representing the unexercised
Warrants only if the Warrant Agent receives a properly endorsed Warrant
Certificate no later than close of business on the fifth day prior to the
Expiration Time. After such time and date, no new Warrant Certificates will be
issued.
Unless a Warrant Certificate (i) provides that the shares of Common Stock
to be issued pursuant to the exercise of Warrants represented thereby are to be
delivered to the holder of such Warrants or (ii) is submitted for the account of
a member of an approved Signature Guarantee Medallion Program, signatures on
such Warrant Certificate must be guaranteed by a member of an approved Signature
Guarantee Medallion Program.
Holders who hold Warrants for the account of others, such as brokers,
trustees or depositaries for securities, should contact the respective
beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to their
Warrants. If such a beneficial owner so instructs, the broker, trustee or
depositary should complete appropriate Warrant Certificates and submit them to
the Warrant Agent with the proper payment. In addition, beneficial owners of
Warrants held through such a holder should contact the nominee holder and
request the nominee holder to effect transactions in accordance with the
beneficial owners' instructions.
WARRANT CERTIFICATES SHOULD BE SENT WITH PAYMENT TO THE WARRANT AGENT. DO
NOT SEND WARRANT CERTIFICATES TO THE COMPANY OR THE INFORMATION AGENT.
THE METHOD OF DELIVERY OF WARRANT CERTIFICATES AND PAYMENT OF THE EXERCISE
PRICE TO THE WARRANT AGENT WILL BE AT THE ELECTION AND RISK OF THE
WARRANTHOLDERS. IF WARRANT CERTIFICATES AND PAYMENTS ARE SENT BY MAIL,
WARRANTHOLDERS ARE URGED TO SEND SUCH MATERIALS BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED AND ARE URGED TO ALLOW A SUFFICIENT
NUMBER OF DAYS TO ENSURE DELIVERY TO THE WARRANT AGENT AND CLEARANCE OF PAYMENT
PRIOR TO THE EXPIRATION TIME. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR, WARRANTHOLDERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR
WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Warrants will be determined by the Company, whose determinations
will be final and binding. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Warrant. Warrant Certificates will not be deemed to have been received or
accepted until all irregularities have been waived or cured within such time as
the Company determines in its sole discretion. Neither the Company nor the
Warrant Agent will be under
32
<PAGE> 37
any duty to give notification of any defect or irregularity in connection with
the submission of Warrant Certificates or incur any liability for failure to
give such notification. The Company reserves the right to reject any exercise if
such exercise is not in accordance with the terms of the Warrant Agreement or
not in proper form or if the acceptance thereof or the issuance of shares of
Common Stock pursuant thereto could be deemed unlawful.
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
exercising Warrants or requests for additional copies of this Prospectus should
be directed to the Information Agent at the telephone number and address set
forth below.
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
1-800-290-6427
REGULATORY LIMITATION
The Company has endeavored, to the extent practicable, to comply with state
securities laws pertaining to this offering, including the sale of the shares of
Common Stock issuable upon exercise of the Warrants. However, the Company has
not effected state security law compliance for the exercise of Warrants by
beneficial holders of Common Stock residing in the States
of , and residents of such states will not be entitled to
exercise any Warrants currently owned or acquired in the open-market.
NO REVOCATION OF EXERCISE
Once a holder of Warrants has exercised the Warrants, such exercise may not
be revoked.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax consequences
applicable to Warrantholders upon the exercise or disposition of the Warrants is
based upon the opinion of Bruck & Perry, A Professional Corporation, counsel to
the Company. This summary is qualified in its entirety by reference to, and is
based upon, laws, regulations, rulings and decisions in effect on the date of
this Prospectus and as those laws, regulations, rulings, and decisions were
interpreted on such date. This summary does not discuss all aspects of federal
income taxation that may be relevant to a particular investor or to certain
types of investors subject to special treatment under the federal income tax
laws (for example, banks, dealers in securities, life insurance companies,
tax-exempt organizations and foreign taxpayers), or any aspect of state, local
or foreign tax laws. Warrantholders should consult their own tax advisors to
determine the proper tax treatment of their interests in Warrants and the
underlying shares of Common Stock in view of their own individual circumstances
and with respect to state and local taxes.
Sale of the Warrants. A Warrantholder who sells Warrants will recognize
gain or loss equal to the difference between the sale proceeds and the basis (if
any) of the Warrants sold. Such gain or loss will be capital gain or loss if the
Common Stock would be a capital asset in the hands of the Warrantholder and will
be long-term capital gain or loss if the Warrants are deemed to have been held
for more than one year at the time of the sale.
Expiration of the Warrants. Warrantholders who allow the Warrants to expire
unexercised will not recognize any gain or loss, and no adjustment will be made
to the basis of their Common Stock. A Warrantholder who allows Warrants to
expire unexercised will recognize a loss equal to the basis of those Warrants.
Any loss recognized by a Warrantholder on the expiration of the Warrants will be
a capital loss if the Common Stock would be a capital asset in the hands of the
Warrantholder and will be a long-term capital loss if the Warrants are deemed to
have been held for more than one year at the time they expire.
33
<PAGE> 38
Exercise of the Warrants; Basis and Holding Period of Underlying
Shares. Warrantholders will not recognize any gain or loss upon the exercise of
their Warrants for Common Stock. The basis of the Common Stock acquired through
exercise of the Warrants will be equal to the sum of the exercise price therefor
and the basis of the Warrants. The holding period for the Common Stock acquired
through exercise of the Warrants will begin with and include the date the
Warrants are exercised.
The foregoing is only a summary of material federal income tax consequences
associated with the Warrants. These consequences may vary depending on a
holder's individual circumstances, and there may be state or local tax
consequences associated with the Warrants. Accordingly, holders of Warrants are
advised to consult their tax advisors with respect to these and other federal,
state and local tax consequences of the distribution and exercise of Warrants.
SELLING SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of shares of Common Stock by the Selling Shareholders as of the date
of this Prospectus and the number of such shares included for sale in this
Prospectus. To the best of the Company's knowledge, none of the Selling
Shareholders has held any office or maintained any material relationship with
the Company or any of its predecessors or affiliates over the past three years.
The Selling Shareholders reserve the right to reduce the number of shares of
Common Stock offered for sale or to otherwise decline to sell any or all of the
shares of Common Stock offered hereby.
<TABLE>
<CAPTION>
SHARES
OWNED SHARES TO
PRIOR TO BE SOLD IN
SELLING SHAREHOLDER OFFERING OFFERING
------------------------------------------------------ -------- ----------
<S> <C> <C>
ERM-West, Incorporated................................ 266,488 266,488
The Equity Group...................................... 21,289 21,289
R.M. Kassoff & Associates, Inc........................ 6,000 6,000
Gerald Posakony....................................... 32,620 32,620
Jonathan Turk......................................... 50,000 50,000
GHL Incorporated...................................... 1,890 1,890
RB Partners........................................... 119,501 119,501
Janneke de Ruyter..................................... 1,228 1,228
John and Cecilia Haviland............................. 45,671 45,671
James A. Hathaway..................................... 6,250(1) 6,250
Fredo P. Killing...................................... 2,500(1) 2,500
Julian Leeds.......................................... 2,500(1) 2,500
Gerald Blum........................................... 5,000(1) 5,000
Ben Pollack........................................... 3,750(1) 3,750
Marsha Rubin.......................................... 17,500(1) 17,500
Angela Reina.......................................... 2,500(1) 2,500
Stephan C. Cohen...................................... 30,000(1) 30,000
Eric Marc Cohen....................................... 1,250(1) 1,250
Chris Crawford........................................ 3,750(1) 3,750
RG Asset Management................................... 8,750(1) 8,750
Paul Wolfson.......................................... 6,250(1) 6,250
Sagax Investment Fund................................. 6,250(1) 6,250
Lynda Rubin........................................... 3,750(1) 3,750
Robert E. McCarthy.................................... 6,250(1) 6,250
Lee Ann Ryan.......................................... 6,250(1) 6,250
Edward Giles.......................................... 47,295 47,295
Patrick Paul.......................................... 47,295 47,295
C. Frederick Stone.................................... 27,025 27,025
John Hogan............................................ 13,513 13,513
-------- ----------
Total............................................ 792,315 792,315
======= =======
</TABLE>
- ------------------
(1) Represents 112,500 shares of Common Stock issuable upon exercise of the
Bridge Warrants. See "The Company."
34
<PAGE> 39
The Common Stock offered by the Selling Shareholders may be offered and
sold from time to time as market conditions permit in the NASDAQ Small Cap Stock
Market, or otherwise, at prices and terms then prevailing or at prices related
to the then current market price, or in privately negotiated transactions. As of
the date of this Prospectus, no underwriting arrangements have been entered into
by the Selling Shareholders. The shares offered hereby may be sold by one or
more of the following methods, without limitation: (a) block trades in which a
broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers
and (d) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Shareholders in amounts to be negotiated. Such brokers and dealers, any other
participating brokers or dealers, and the Selling Shareholders, may be deemed to
be "underwriters" within the meaning of the 1933 Act in connection with such
sales and any profits realized or commissions received may be deemed
underwriting compensation.
The Company will pay certain expenses incident to the offering and sale of
the Common Stock to the public by the Selling Shareholders. The Company will not
pay for, among other expenses, commissions and discounts of underwriters,
dealers or agents or the fees and expenses of counsel for the Selling
Shareholders, if any.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Articles of Incorporation eliminates the personal
liability of its directors for monetary damages resulting from the breach of
their fiduciary duty to the fullest extent permitted under California law. The
Restated Articles of Incorporation and the Company's Bylaws authorize the
Company to indemnify its agents, officers and directors to the fullest extent
permitted by the California Corporations Code. Pursuant to the California
Corporations Code, a corporation generally has the power to indemnify any person
who was or is a party or is threatened to be made a part of any proceeding by
reason of the fact that person is currently or was in the past an officer,
director or other agent of the corporation, if that person acted in good faith
and in a manner the person reasonably believed to be in the best interests of
the corporation and had no reasonable cause to believe the conduct of the person
was unlawful. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers. These provisions
do not eliminate liability for breach of the director's duty of loyalty to the
Company or its shareholders or for acts or omission not in good faith or
involving intentional misconduct or knowing violations of law or any transaction
for which the director derived an improper personal benefit. Further, no
indemnification shall be provided if (i) it would be inconsistent with a
provision of the Restated Articles of Incorporation, Bylaws or a resolution of
the Company's shareholders, or an agreement in effect at the time of the accrual
of the alleged cause of action asserted in the proceeding in which the expenses
were incurred or other amounts were paid, which prohibits or otherwise limits
indemnification or (ii) it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
The Company has entered into separate indemnification agreements with each
of its directors and executive officers. These agreements may require the
Company, among other things, to indemnify the directors and executive officers
against certain liabilities that may arise by reason of their status or service
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceedings against them
as to which they will be indemnified and to obtain directors' insurance if
available on reasonable terms.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
35
<PAGE> 40
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
LEGAL MATTERS
The law firm of Bruck & Perry, A Professional Corporation, Newport Beach,
California, has acted as counsel for the Company in connection with this
offering and has rendered its opinion to the Company on the legality of the
securities covered by this Prospectus.
EXPERTS
The financial statements of the Company as of September 30, 1995 and 1994
and for the three years ended September 30, 1995 included herein and elsewhere
in the registration statement, have been included herein and in the registration
statement in reliance upon the report of Feldman Radin & Co., P.C., independent
certified public accountants, appearing elsewhere herein, given upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission
("Commission") a registration statement on Form SB-2 under the 1933 Act with
respect to the Warrant Stock, Representative Stock and the Selling Shareholder
Stock. This Prospectus does not contain all of the information set forth in such
registration statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Warrant Stock, Representative
Stock and Selling Shareholder Stock being offered hereby, reference is hereby
made to such registration statement and the exhibits and schedules thereto.
Statements contained in this Prospectus regarding the provisions of documents
filed with such registration statement as exhibits are necessarily summaries of
such documents, and each such statement is qualified in all respects by
reference to the copy of the applicable document filed with the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and in accordance therewith
files reports and other information with the Commission. Such reports, proxy
statements and other information filed by the Company with the Commission,
including the registration statement and exhibits thereto, of which this
Prospectus is a part, can be inspected at the Commission's offices without
charge. Copies of such material can also be obtained from the Commission's
offices at prescribed rates.
36
<PAGE> 41
XXSYS TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditor's..................................................... F-2
Audited Financial Statements
Consolidated Balance Sheets as of September 30, 1995 and 1994..................... F-3
Consolidated Statements of Operations for the three years ended September 30,
1995........................................................................... F-4
Consolidated Statements of Stockholder's Equity for the three years ended
September 30, 1995............................................................. F-5
Consolidated Statements of Cash Flows for the three years ended September 30,
1995, 1994 and 1993............................................................ F-6
Notes to Consolidated Financial Statements........................................ F-7
Unaudited Financial Statements
Consolidated Balance Sheet as of March 31, 1996................................... F-13
Consolidated Statements of Operations for the six month periods ended March 31,
1996 and 1995.................................................................. F-14
Consolidated Statement of Stockholders' Equity year to date March 31, 1996........ F-15
Consolidated Statements of Cash Flows for the six month periods ended March 31,
1996 and 1995.................................................................. F-16
Notes to Unaudited Consolidated Financial Statements.............................. F-17
</TABLE>
F-1
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
XXSYS TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheets of XXsys
Technologies, Inc. as of September 30, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years ended September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of XXsys
Technologies, Inc. as of September 30, 1995 and 1994, and the consolidated
results of its operations and cash flows for each of the three years ended
September 30, 1995, in conformity with generally accepted accounting principles.
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, New York
December 22, 1995, except as to
Note 6. Stockholders' Equity
Preferred Stock, as to which
the date is May 31, 1996
F-2
<PAGE> 43
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 148,562 $ 8,722
Accounts receivable.......................................... 46,623 40,400
Stock subscription receivable................................ 380,000 --
Inventory.................................................... -- 26,045
Prepaid expenses and other................................... 53,600 5,672
---------- ----------
Total current assets...................................... 628,785 80,839
Machinery, equipment and furniture, net of accumulated
depreciation of $340,220 and $184,098........................ 439,047 328,753
Long-term note receivable...................................... 446,928 446,928
Deferred acquisition costs..................................... 1,102,181 1,117,188
Patents, net of amortization of $86,298 and $66,524............ 59,796 49,474
---------- ----------
$ 2,676,737 $ 2,023,182
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable................................................ $ 695,552 $ 290,700
Accounts payable............................................. 521,699 621,880
Accrued liabilities.......................................... 98,622 77,988
Related party accrued expenses............................... 192,426 156,659
---------- ----------
Total current liabilities............................ 1,508,299 1,147,227
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $100, shares
authorized -- 2,000,000; issued and outstanding -- 4,500
(liquidation preference -- $450,000)...................... 450,000 450,000
Common stock, no par value, 20,000,000 shares authorized;
6,067,082 shares issued and outstanding (4,257,989 in
1994)..................................................... 12,068,535 9,836,305
Accumulated deficit.......................................... (10,910,399) (9,157,278)
Note receivable for preferred stock.......................... (263,698) (218,697)
Note receivable for common stock............................. (176,000) --
Deferred compensation........................................ -- (34,375)
---------- ----------
Total stockholders' equity........................... 1,168,438 875,955
---------- ----------
$ 2,676,737 $ 2,023,182
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 44
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Sales............................................. $ -- $ -- $ 14,018
Contract revenues................................. 408,867 266,890 35,000
----------- ----------- -----------
Total revenues............................ 408,867 266,890 49,018
Operating expenses:
Cost of equipment sales........................... -- -- 12,617
Cost of services.................................. 225,202 58,521 16,100
Selling, general and administrative............... 1,763,420 1,356,531 1,857,195
Research and development.......................... 115,304 277,789 230,261
----------- ----------- -----------
Total operating expenses.................. 2,103,926 1,692,841 2,116,173
----------- ----------- -----------
Operating loss...................................... (1,695,059) (1,425,951) (2,067,155)
Interest income..................................... 48,098 30,037 87,224
Interest expense.................................... (106,160) (16,835) (603)
----------- ----------- -----------
Net loss............................................ $(1,753,121) $(1,412,749) $(1,980,534)
=========== =========== ===========
Net loss per share.................................. $ (.34) $ (.36) $ (.52)
=========== =========== ===========
Weighted average number of shares outstanding....... 5,083,000 3,938,826 3,800,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 45
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK NOTES DEFERRED STOCK-
PREFERRED ----------------------- RECEIVABLE ACCUMULATED COMPEN- HOLDERS'
STOCK SHARES AMOUNT FOR STOCK DEFICIT SATION EQUITY
--------- --------- ----------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992....... $ -- 3,800,000 $ 9,032,366 $ -- $ (5,763,995) $(109,375) $ 3,158,906
Warrants issued for services........ 17,200 17,200
Amortization of deferred
compensation...................... 37,500 37,500
Net loss............................ (1,980,534) (1,980,534)
--------- --------- ----------- ---------- ------------ --------- -----------
Balances at September 30, 1993...... -- 3,800,000 9,049,566 -- (7,744,529) (71,875) 1,233,162
Sale of 4,500 shares of preferred
stock............................. 450,000 198,750 (201,822 ) 446,928
Increase in interest receivable on
note.............................. (16,875 ) (16,875)
Stock issued in settlement of
debt.............................. 387,989 387,989 387,989
Sale of common stock................ 70,000 50,000 50,000
Warrants issued for services........ 150,000 150,000
Amortization of deferred
compensation...................... 37,500 37,500
Net loss............................ (1,412,749) (1,412,749)
--------- --------- ----------- ---------- ------------ --------- -----------
Balances at September 30, 1994...... 450,000 4,257,989 9,836,305 (218,697 ) (9,157,278) (34,375) 875,955
Stock issued in settlement of
debt.............................. 84,789 84,789 84,789
Increase in interest receivable on
note.............................. (45,001 ) (45,001)
Conversion of notes issued in
Regulation S offering............. 1,231,030 800,000 800,000
Exercise of warrants................ 200,000 45,000 45,000
Sale of common stock................ 211,200 1,056,000 (176,000 ) 880,000
Stock issued for services........... 82,074 90,173 90,173
Warrants issued for services........ 100,000 100,000
Warrants issued in connection with
debt.............................. 56,268 56,268
Amortization of deferred
compensation...................... 34,375 34,375
Net loss............................ (1,753,121) (1,753,121)
--------- --------- ----------- ---------- ------------ --------- -----------
Balances at September 30, 1995...... $450,000 6,067,082 $12,068,535 $(439,698 ) $(10,910,399) $ -- $ 1,168,438
======== ======== ========== ========= =========== ========= ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 46
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(1,596,853) $(1,412,749) $(1,980,534)
Adjustments to reconcile net loss to cash used in
operating activities
Depreciation and amortization.................. 185,270 131,927 72,913
Non-cash compensation.......................... 124,548 37,500 37,500
Accrued interest income........................ (45,001) (16,875) --
Changes in assets and liabilities:
Investments.................................. -- 1,163,500 (182,521)
Accounts receivable.......................... (6,223) (30,842) 3,354
Inventories.................................. 26,045 61,125 74,637
Prepaid expenses and other................... (47,928) 46,864 68,977
Accounts payable............................. (385) 550,706 46,939
Accrued liabilities.......................... 51,686 (79,409) 48,486
Related party accrued expenses............... 35,767 156,659 --
----------- ----------- -----------
Net cash used in operating activities..... (1,273,074) 608,406 (1,810,249)
Cash flows from investing activities:
Purchase of machinery and equipment............... (275,790) (277,719) (170,620)
Deferred acquisition costs........................ -- (579,199) --
Other assets...................................... (30,096) 79,998 (89,298)
----------- ----------- -----------
Net cash used in investing activities..... (305,886) (776,920) (259,918)
Cash flows from financing activities:
Sale of common stock.............................. 500,000 50,000 --
Exercise of warrants.............................. 45,000 -- --
Issuance of convertible notes..................... 800,000 -- --
Issuance of other notes payable................... 564,500 38,800 200,000
Repayment of notes payable........................ (190,700) -- (70,200)
Payments of related party debt.................... -- (284,305) --
----------- ----------- -----------
Net cash from financing activities........ 1,718,800 (195,505) 129,800
Net increase (decrease) in cash..................... 139,840 (364,019) (1,940,367)
Cash and cash equivalents -- beginning of year ..... 8,722 372,741 2,313,108
----------- ----------- -----------
Cash and cash equivalents -- end of year............ $ 148,562 $ 8,722 $ 372,741
=========== =========== ===========
Supplemental information:
Cash interest paid................................ $ 15,208 $ 16,835 $ 603
Issuance of warrants.............................. $ 156,268 $ 150,000 $ 17,200
Stock issued for accounts payable................. $ 84,789 $ 387,989 $ --
Stock issued for services......................... $ 90,173 $ -- $ --
Issuance of preferred stock for note.............. $ -- $ 446,928 $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 47
XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Composite Retrofit Corporation.
All intercompany accounts have been eliminated in consolidation.
Cash and Cash Equivalents. Cash and cash equivalents consist of investments
with an original maturity of three months or less.
Inventory. Inventory is stated at the lower of cost or market using the
first-in, first-out method of inventory valuation.
Machinery, Equipment and Furniture. Machinery, equipment and furniture are
stated at cost and are being depreciated on a straight-line basis over estimated
useful lives of three to five years.
Patents. Costs incurred in obtaining patents are being amortized over
periods averaging seven years.
Revenue Recognition. A majority of the Company's revenue to date has been
derived from services performed under cost reimbursement and fixed-price
research contracts. Under fixed-price research contracts, revenues are generally
recognized upon shipment of deliverable items under the contract. For cost-
reimbursement contracts, revenues are recorded as earned when the work is
performed under the terms of the contract.
Research and Development. Research and development costs are expensed as
incurred.
Income Taxes. The Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," effective October
1, 1991. Net operating losses may be carried forward to offset future taxable
income of the Company. At September 30, 1995, these carryforwards were
approximately $10,000,000 and $5,000,000 for federal and state tax purposes,
respectively, and expire in 2001 through 2010. As a result of a change in
ownership in 1991, certain restrictions imposed by Section 382 of the Internal
Revenue Code will limit the utilization of the loss carryforwards to
approximately $1,000,000 per year.
Major Customers. Two customers accounted for 51% and 29% of 1995 revenues.
In 1994 two customers represented 48% and 44% of revenues and in 1993
represented 71% and 18% of revenues.
Net Loss Per Share. Net loss per share is based on the weighted average
number of shares of common stock outstanding. Conversion of preferred stock and
exercise of stock options have been excluded, as the effect of their inclusion
would be anti-dilutive.
Reclassifications. Certain items in the prior year financial statements
have been reclassified to conform to the 1995 presentation.
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 amount 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 reporting period. Actual results could differ from those estimates.
2. DEFERRED ACQUISITION COSTS
In October 1993, the Company began negotiations for the acquisition of a
composite materials company with revenues in excess of $100 million. The Company
was unable to complete the transaction as originally contemplated. However,
negotiations were continued with third parties regarding a joint bid or a
transaction in
F-7
<PAGE> 48
XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which the Company would not be a direct purchaser but would have a significant
minority interest in a new company that would make the acquisition.
The Company incurred costs in excess of $1,100,000 for legal fees,
appraisals, environmental studies and other due diligence. These costs were
deferred pending completion of a purchase transaction or, alternatively, the
termination of all negotiations.
In September 1995 the owner of the target company announced a pending sale
to another party. The Company and its former president filed suit claiming
breach of contract and breach of fiduciary relationship by the purchaser.
Pursuant to a settlement agreement reached in October 1995 ("Settlement
Agreement"), the Company received a cash payment of $1,300,000 (net of legal
fees). In addition, the Company will receive annual payments of up to $250,000
for six years pursuant to a consulting contract between the target and the
Company. The target company also agreed to offer a five-year material supply
contract and to provide product and/or technical services (for research and
development, materials testing, etc.).
In November 1995 a claim for fees in connection with the Settlement
Agreement was placed against the Company by its previous investment banker,
H. J. Meyers & Co., Inc. ("HJM") (formerly Thomas James Associates, Inc.). HJM
claims that the Company's aforementioned Settlement Agreement qualifies as a
"Transaction" under the terms of the Company's earlier investment banking
agreement with HJM, and that HJM is entitled to an investment banking fee. HJM
is seeking $400,000 as its share of the Company's settlement and is willing to
waive its right of first refusal to act as warrant solicitation agent in
connection with the Company's proposed warrant redemption in return. The Company
denies that the Settlement Agreement with the purchaser of the target company
represents a Transaction and is disputing HJM's claim. Further, the Company has
decided not to engage a broker-dealer to act as warrant solicitation agent in
connection with its proposed warrant redemption.
3. NOTES PAYABLE
Notes payable at September 30, 1995 include $100,000 borrowed from four
individuals in May 1994. The notes have an interest rate of 10% per annum. The
original maturity date of these notes has been extended several times, most
recently until September 30, 1995, in consideration for five-year warrants to
purchase a total of 170,000 shares of common stock at $1.00 per share. The notes
were repaid in October 1995. Also included in notes payable is $93,000 borrowed
from an individual in August and September 1995, due on October 28, 1995 plus
interest at 10% per annum. This note was repaid in December 1995.
In March and May 1995 the Company borrowed $410,000 from two parties. The
notes were due in July 1995 plus interest at 10% per annum. In July 1995 the
noteholders elected to convert the notes into 465,909 shares of restricted
common stock ($0.88 per share) and exercise warrants to purchase 246,000 shares
of common stock for $61,500 ($0.25 per share). In August 1995 the noteholders
notified the Company of their desire to rescind the note conversion and warrant
exercise due to delays in the registration of these securities. Subsequent to
September 30, 1995, the Company finalized the terms of a rescission of the
conversion agreements and the warrant exercise and signed new notes payable at
10% annual interest beginning September 12, 1995, totaling $502,552, which
includes $410,000 in original loans, $61,500 tendered originally for the
warrants and accrued interest to that date. The rescission has been recorded as
of September 30, 1995. The new notes payable are due on October 11, 1996, or
upon the Company receiving no less than $2 million from any equity offering,
whichever occurs sooner. Based on management's current plans for repayment,
these new notes are recorded as short term liabilities. As a separate inducement
for these transactions, a total of 605,682 five-year warrants to purchase common
stock at $6.00 a share were granted.
In March 1994 the Company borrowed $190,000 pursuant to a note agreement.
Interest at the rate of 14% per annum was payable monthly. The note was repaid
upon the scheduled maturity date of March 31, 1995.
F-8
<PAGE> 49
XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS
Related party accrued expenses consist of salaries, severance and vacation
pay due to current and former officers of the Company.
In July 1994 the Board of Directors granted, to the then president of the
Company, the right to dispose of the asset "deferred acquisition expenses"
(consisting of a due diligence package, including contracts, appraisals and
environmental studies on a targeted company). Upon any such disposal, the
individual was to receive a commission of one third of the price obtained, up to
a maximum amount of $100,000. As part of the litigation settlement described in
Note 2, the former executive received $100,000.
In March 1995, in connection with the resignation of two officers, the
Company assigned to those individuals and a then director of the Company the
corporate opportunity to pursue two other acquisitions. In the event an
acquisition is completed, the Company is to receive a payment of $100,000. As
part of this agreement, in April 1995 the Company's chairman received six-month
options to purchase 100,000 shares of the Company's stock owned by the director
and 175,000 shares held by his related corporation for a total purchase price of
$187,500. These options were exercised in October 1995.
5. COMMITMENTS
The Company leases its office facilities pursuant to a lease that extends
to October 31, 1998. The remaining rent commitment at September 30, 1995 is
$206,600. Rent expense was $63,790 in 1995, $60,000 in 1994, and $59,242 in
1993. On September 15, 1995, the Company signed a five-month construction
contract for $312,000 to design and build the second-generation
Robo-Wrapper(TM), which is to be completed by mid-March 1996. The Company paid
$166,574 to turn on the contract on September 15, 1996. The balance of payments
to be made were structured around milestones, none of which had been completed
by September 30, 1995
6. STOCKHOLDERS' EQUITY
Preferred Stock:
In May 1994 the Company sold to the brother of Gloria C. L. Ma, an officer
and director of the Company, in a private transaction 4,500 shares of Series A
Preferred Stock in exchange for the assignment of a non-recourse promissory note
made by Dr. Ma in the principal amount of $450,000, plus $198,750 of accrued
interest, secured by a second deed of trust on real property. The non-recourse
promissory note has an interest rate of 10% per annum and is due in January
1999, including accrued interest. Each preferred share has a liquidation
preference of $100, is redeemable at the Company's option at a price of $120 per
share, and is convertible at any time into 80 shares of the Company's common
stock.
In May 1996 Dr. Ma reduced the note and accrued interest due the Company by
making a cash payment of $309,916 and relinquishing her rights to deferred
salaries, accrued vacation, and unreimbursed travel and entertainment expense,
partially offset by other amounts she owed the Company, the net of which reduced
the note a further $137,012. The total amount of $446,928 was known prior to
publishing this financial statement and has been reported as an asset in
"Long-Term Notes Receivable." The remaining balance due under the note together
with accrued interest, which total $263,698 on September 30, 1995, and $218,697
on September 30, 1994, have been included in a contra-equity account, "Notes
Receivable for Preferred Stock."
Of the amount paid by Dr. Ma on the note in May 1996, $264,272 was first
applied to reduction of accrued interest and the remaining amount of $182,656
was applied to reduction in principal on the note. The remaining principal
balance on the note on May 21, 1996, was $267,344.
F-9
<PAGE> 50
XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warrants:
At September 30, 1992 the Company had warrants outstanding which entitle
the holders to purchase 2,755,120 shares of Common Stock at prices from $0.68 to
$5.60 a share. Of these warrants, 112,500 had been issued from February 1992 to
July 1992 in conjunction with bridge loans to the Company, and were valued at
$193,500. An additional warrant to purchase 2,620 shares had been issued on
February 1, 1992 in conjunction with consulting services and were valued at
$4,820. Warrants to purchase 2,400,000 shares of common stock at $4.00 a share
(after giving effect to anti-dilution adjustments) were issued as part of the
Company's July 1992 initial public offering ("IPO"). Additionally, the
underwriter received a warrant to purchase 240,000 shares at $5.40 a share
(after giving effect to anti-dilution adjustments).
On July 31, 1992, the Company sold 800,000 units of its securities at $7.50
per unit in an IPO, each unit consisting of two shares of common stock and two
five-year warrants to purchase shares of common stock. As a result of
anti-dilution provisions in the warrant agreement, the $6.00 per share exercise
price was adjusted downward to $4.19 per share on March 10, 1995. Subsequent
changes in capitalization which are subject to anti-dilution provisions now
entitle the holder of each warrant to purchase 1-1/2 shares of common stock at
$4.00 per common share. A total of 2,400,000 shares of common stock are now
purchasable at $4.00 per common share based on 1,600,000 publicly traded
warrants outstanding. The warrants are redeemable at the Company's option at
$0.05 per warrant on 30 days written notice prior to July 30, 1997.
The Company also issued to the underwriter, for nominal consideration, a
warrant to purchase 80,000 units consisting of two shares of common stock and
two redeemable common stock purchase warrants, exercisable to July 30, 1997. The
purchase price of the units is $9.00 per unit. The exercise price of the
warrants included in these units is $8.40. The prices of the underwriter's units
and warrants are also subject to antidilution adjustments, and now entitle the
underwriter to purchase 240,000 common shares at $5.60 per share.
In February 1993, the Company issued 50,000 warrants to purchase common
stock at prices ranging from $0.80 to $3.00 per share in connection with
services and were valued at $17,200.
During October through December 1993, the Company issued warrants to
purchase 114,285 shares of Common Stock (at prices ranging from $0.25 to $1.75
per share) to consultants in connection with services and were valued at
$150,000. One of the consultants was a director. Also during 1994 fiscal year,
100,000 warrants to purchase Common Stock at $.20 per share were issued to a
director in connection with a stock sale. Additionally, in May 1994, 50,000
warrants were issued to purchase Common Stock at $1.00 per share in connection
with debt. The effect of any valuation was immaterial.
In March 1995 a director was granted a warrant to purchase 100,000 shares
at $0.25 per share and were valued at $100,000. In June 1995 a second director
was granted a warrant to purchase 50,000 shares at $1.63 per share, and the
Chairman of the Company was granted a warrant to purchase 250,000 shares at a
price of $1.79 per share. These warrants were issued above the market price on
the date of grant and have a term of five years. The Chairman's warrants had
immediate vesting and the two directors' warrants vest over a two-year period of
service.
A total of 120,000 warrants to purchase Common Stock at $1.00 per share
were issued in connection with loan extensions in November 1994 (60,000) and
March 1995 (60,000), and were valued at $25,234 and $31,034, respectively.
Additionally, effective September 12, 1995, a total of 605,682 five-year
warrants to purchase common stock at $6.00 a share were granted in connection
with the rescissions of stock conversion agreements and warrant exercises and
the issuances of 10% notes payable due October 11, 1996. The closing price of
common stock on that date was 5 3/32. No value was assigned to the warrants.
In fiscal 1995, 427,740 warrants to purchase Common Stock at $6.00 a share
were issued in connection with stock sales. Included were 75,740 underwriters
warrants issued in December 1994 in connection with a
F-10
<PAGE> 51
XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock sale, and were not valued. Additionally, effective August 30, 1995,
352,000 five-year warrants to purchase common stock at $6.00 a share were
granted in connection with a private placement of 211,200 shares common stock at
$5.00 a share. The closing price of common stock on that date was 3 3/8,
accordingly, no value was assigned to the warrants.
Total warrants issued in connection with services, stock sales and debt
extensions, as well as warrants exercised, are shown in the following table.
<TABLE>
<CAPTION>
NUMBER OF VALUATION
SHARES(1) PRICE PER SHARE RECORDED
--------- ----------------- --------
<S> <C> <C> <C>
Balance -- September 30, 1992............... 2,755,120 $0.68 - $5.60 $198,320
Warrants issued for services.............. 50,000 $0.80 - $3.00 17,200
--------- ---------
Balance -- September 30, 1993............... 2,805,120 215,520
Warrants issued for services.............. 114,285 $0.25 - $1.75 150,000
Warrants issued with stock sale........... 100,000 $0.20 --
Warrants issued with debt................. 50,000 $1.00 --
--------- ---------- ---------
Balance -- September 30, 1994............... 3,069,405 365,520
Warrants issued for services.............. 400,000 $0.25 - $1.79 100,000
Warrants issued with stock sale........... 427,740 $1.95 - $6.00 --
Warrants issued with debt extension....... 725,682 $1.00 - $6.00 56,268
Warrants exercised........................ (200,000) $0.20 - $0.25 --
--------- ---------- ---------
Balance -- September 30, 1995............... 4,422,827 $521,788
</TABLE>
Warrant balances as of September 30, 1994 are shown in the following table
categorized by exercise price for warrants granted, grant dates, shares
exercisable, and expiration dates.
<TABLE>
<CAPTION>
PRICE OF
WARRANT DATE OF COMMON
NUMBER OF EXERCISE WARRANT STOCK ON DATE OF
DATE OF GRANT WARRANTS PRICE EXPIRATION DATE OF GRANT EXERCISE
------------- --------- --------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
2/92-7/92 112,500 $ 0.80000 5 Years $ 2.50000
2/1/92 2,620 $ 0.68700 1/21/97 $ 2.50000
7/31/92 2,400,000 $ 4.00000 7/30/97 $ 3.00000
7/31/92 240,000 $ 5.40000 7/30/97 $ 3.00000
2/12/93 10,000 $ 0.80000 2/11/98 $ 2.50000
2/12/93 40,000 $ 3.00000 1/31/97 $ 2.50000
10/21/93 14,285 $ 1.75000 10/20/00 $ 1.75000
12/30/93 100,000 $ 0.25000 3/15/99 $ 1.62500 1/28/95
3/15/94 100,000 $ 0.20000 3/15/99 $ 1.50000 2/9/95
5/10/94 50,000 $ 1.00000 5/10/99 $ 1.25000
-------- --------- ----------
Balance at
September 30,
1994................ 3,069,405 $ 0.11071 $ 0.26481
======== ========= ==========
</TABLE>
- ---------------
(1) Represents the number of Common Shares purchasable and the exercise price
after giving effect to anti-dilution provisions in the Warrant Agreement and
Representative's Warrant.
F-11
<PAGE> 52
XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warrant balances as of September 30, 1995 are shown in the following table
categorized by exercise price for warrants granted, grant dates, shares
exercisable, and expiration dates.
<TABLE>
<CAPTION>
PRICE OF
WARRANT DATE OF COMMON
NUMBER OF EXERCISE WARRANT STOCK ON DATE OF
DATE OF GRANT WARRANTS PRICE EXPIRATION DATE OF GRANT EXERCISE
------------- --------- --------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
2/92-7/92 112,500 $ 0.80000 5 Years $ 2.50000
2/1/92 2,620 $ 0.68700 1/21/97 $ 2.50000
7/31/92 2,400,000 $ 4.00000 7/30/97 $ 3.00000
7/31/92 240,000 $ 5.40000 7/30/97 $ 3.00000
2/12/93 10,000 $ 0.80000 2/11/98 $ 2.50000
2/12/93 40,000 $ 3.00000 1/31/97 $ 2.50000
10/21/93 14,285 $ 1.75000 10/20/00 $ 1.75000
5/10/94 50,000 $ 1.00000 5/10/99 $ 1.25000
11/30/94 60,000 $ 1.00000 11/30/99 $ 1.56250
12/16/94 75,740 $ 1.95000 12/15/99 $ 1.75000 12/27/95
3/1/95 60,000 $ 1.00000 2/28/00 $ 1.75000
3/23/95 50,000 $ 0.25000 3/23/01 $ 1.25000
3/23/95 50,000 $ 0.25000 3/23/02 $ 1.25000
6/23/95 25,000 $ 1.63000 6/23/01 $ 1.62500
6/23/95 25,000 $ 1.63000 6/23/02 $ 1.62500
6/24/95 250,000 $ 1.79000 6/23/00 $ 1.62500
9/12/95 295,455 $ 6.00000 9/11/00 $ 5.03125
9/12/95 147,727 $ 6.00000 9/11/00 $ 5.03125
9/12/95 162,500 $ 6.00000 9/11/00 $ 5.03125
9/15/95 352,000 $ 6.00000 9/11/00 $ 5.43750
-------- --------- ----------
Balance at
September 30,
1995................ 4,422,827 $ 1.55163 $ 1.44827
======== ========= ==========
</TABLE>
Common Stock:
The Company sold 1,600,000 shares of its common stock in an initial public
offering on July 31, 1992. The shares were part of 800,000 units priced at $7.50
per unit, the units also including five-year warrants to purchase shares of
common stock.
In March 1994 the Company sold 70,000 shares of common stock for $50,000
and issued a five-year warrant to purchase 100,000 shares at a price of $0.20
per share. This warrant was exercised in February 1995.
In June 1994 the Company issued 387,989 shares of common stock to three
creditors in settlement of liabilities of $387,989. Of these shares, 119,501 may
be redeemed by the Company at $1.25 per share through June 1998. The remaining
268,488 shares are subject to redemption at a price to be negotiated.
On December 12, 1994 the Company issued 5% Convertible Notes due December
31, 1997 in the aggregate principal amount of $800,000. The notes were
convertible into common stock at a discount to market, with $400,000 convertible
beginning on January 26, 1995 and $400,000 beginning on February 26, 1995. The
entire principal amount was converted to 1,231,030 shares of common stock during
January and February 1995. Warrants to purchase 75,740 shares of common stock at
a price of $1.95 were issued in connection with this financing.
F-12
<PAGE> 53
XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During fiscal year 1995 the Company converted $57,500 owed to two
consultants and other debt of $27,289 into 84,789 shares of common stock. Also
during 1995, The Company issued 82,074 shares of common stock to employees and a
consultant as additional compensation (valued at $90,173).
In February 1995 the Company received $20,000 upon the exercise of a
warrant to purchase 100,000 shares of Common Stock at $0.20 a share. In March
1995 the Company received $25,000 upon the exercise of a warrant to purchase
100,000 shares of common stock at $0.25 per share.
In March and May 1995 the Company borrowed $410,000 from two individuals.
These notes were subject to a conversion agreement into 465,909 shares of common
stock in July 1995, which was later rescinded together with a rescission of
warrants to purchase 246,000 shares of common stock at a price of $0.25 per
share, in exchange for extending the notes.
On September 1, 1995, the Company agreed to a private placement of
$1,056,000 in exchange for restricted common stock to be sold to an uncle of the
Company's chairman at a price of $3.00 per share. The closing price of the
common stock was 3 3/4 on that day. In December 1995 the purchase agreement was
renegotiated to $5.00 a share for a total of 211,200 restricted common shares to
be issued. In connection with this transaction, the Company issued 352,000
five-year warrants to purchase restricted common stock at $6.00 a share. Of the
total purchase commitment, $176,000 consisted of a two-year note (shown as a
reduction of stockholders' equity) and the balance was paid in cash. A portion
of the cash ($360,000) was not received until October 3, 1995 and is shown in
the consolidated balance sheet as a subscription receivable at September 30,
1995.
F-13
<PAGE> 54
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 198,517
Cash in escrow............................................................. 175,000
Accounts receivable........................................................ 100,061
Prepaid expenses and other................................................. 64,094
-----------
Total current assets............................................... 537,672
Machinery, equipment and furniture, net of accumulated depreciation of
$401,388................................................................... 756,989
Long-term note receivable.................................................... 446,928
Deferred costs (Note 3)...................................................... 192,500
Patents, net of amortization of $102,154..................................... 63,436
-----------
$ 1,997,525
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable.............................................................. $ 502,552
Accounts payable........................................................... 442,943
Accrued liabilities........................................................ 188,196
Related party accrued expenses............................................. 86,405
-----------
Total current liabilities.......................................... 1,220,096
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $100
Shares authorized -- 2,000,000;
Issued and outstanding -- 4,500
(liquidation preference -- $450,000).................................... 450,000
Common stock, no par value
Shares authorized -- 20,000,000;
Issued and outstanding -- 6,149,057..................................... 12,360,285
Note receivable for common stock........................................... (176,000)
Note receivable for preferred stock........................................ (286,259)
Warrants for services to be performed...................................... (70,940)
Accumulated deficit.......................................................... (11,499,657)
-----------
Total stockholders' equity......................................... 777,429
-----------
$ 1,997,525
===========
</TABLE>
See accompanying notes.
F-14
<PAGE> 55
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH
31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Sales........................................................... $ -- $ --
Contract revenues............................................... 336,685 282,051
---------- ----------
Total revenues.......................................... 336,685 282,051
Operating expenses:
Cost of services................................................ 223,114 45,608
Selling, general and administrative............................. 1,054,410 842,769
Research and development........................................ 28,651 90,503
---------- ----------
Total operating expenses................................ 1,306,175 978,880
---------- ----------
Operating loss.................................................... 969,490 (696,829)
Interest income................................................... 44,984 25,455
Other income (Note 7)............................................. 372,819 --
Interest expense.................................................. (37,571) (34,712)
---------- ----------
Net loss.......................................................... $ (589,258) $ (706,086)
========== ==========
Net loss per share................................................ $ (.10) $ (.16)
========== ==========
Weighted average number of shares outstanding..................... 6,112,516 4,545,366
========== ==========
</TABLE>
See accompanying notes.
F-15
<PAGE> 56
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
WARRANTS
FOR
COMMON STOCK NOTE SERVICES DEFERRED TOTAL
PREFERRED ----------------------- RECEIVABLE TO BE ACCUMULATED COMPEN- STOCKHOLDERS'
STOCK SHARES AMOUNT FOR STOCK PERFORMED DEFICIT SATION EQUITY
--------- --------- ----------- ---------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at September
30, 1995............ $450,000 6,067,082 $12,068,535 (439,698 ) $(10,910,399) -- 1,168,438
Increase in interest
receivable on
Note................ $ (22,561 ) $ -- $ -- $ (22,561)
Exercise of
Warrants............ 75,740 147,693 147,693
Warrants issued for
services............ -- -- 120,000 -- (120,000 ) -- --
Warrants issued for
services............ -- -- -- -- 49,060 -- 49,060
Stock issued for
services............ 6,235 24,057 24,057
Net loss.............. (589,258) (589,258)
-------- --------- ----------- --------- ------------ --------- -------
Balances at March 31,
1996................ 450,000 6,149,057 12,360,285 (462,259 ) (70,940 ) (11,499,657) 0 777,429
</TABLE>
See accompanying notes.
F-16
<PAGE> 57
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH
31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................... $(589,258) $(706,086)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization............................................ 77,024 79,851
Non-cash compensation.................................................... 143
Accrued interest income.................................................. (25,561)
Changes in assets and liabilities:
Investments............................................................ --
Accounts receivable.................................................... (55,438)
Inventories............................................................ --
Prepaid expenses and other............................................. (10,494)
Accounts payable....................................................... (78,756)
Accrued liabilities.................................................... 8,039
Related party accrued expenses......................................... (106,021)
---------- ---------
Net cash used in operating activities............................... (775,322) (626,235)
Cash flows from investing activities:
Purchase of machinery and equipment......................................... (379,110) (66,610)
Deferred acquisition costs.................................................. 1,102,181 (1,991)
Other assets................................................................ (19,496) (74,101)
---------- ---------
Net cash used in investing activities............................... 703,575 (145,614)
Cash flows from financing activities:
Sale of common stock........................................................ 380,000 --
Warrant redemption costs.................................................... (87,051) --
Exercise of warrants........................................................ 147,693 --
Issuance of warrants........................................................ 49,060 --
Issuance of convertible notes............................................... -- 800,000
Issuance of other notes payable............................................. -- --
Repayment of notes payable.................................................. (193,000) --
Payments of related party debt.............................................. -- --
---------- ---------
Net cash from financing activities.................................. 296,702 845,000
Net increase (decrease) in cash............................................... 224,955 73,151
Cash and cash equivalents -- beginning of period.............................. 148,562 8,722
---------- ---------
Cash and cash equivalents -- end of period.................................... $ 373,517 $ 81,873
========== =========
</TABLE>
See accompanying notes.
F-17
<PAGE> 58
XXSYS TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the
information contained therein. The condensed unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes for the year ended September 30, 1995. The results of
operations for the six-month period ended March 31, 1996, are not necessarily
indicative of results for the entire year.
2. ESCROW
Cash in escrow represent the Company's contractual share of a payment of a
consulting fee made part of a settlement of a lawsuit in 1995, net of legal
fees. (See also Note 7). The funds are held in escrow pending settlement of a
dispute between the Company and its former president.
3. DEFERRED COSTS
Costs incurred in the first six months ended March 31, 1996 are in
connection with a planned redemption of warrants and have been deferred. If the
warrant redemption is completed, these costs will be accounted for as part of
the cost of the redemption. Otherwise, they will be charged to expense in the
period the warrant redemption activity is terminated.
4. NOTES PAYABLE
Notes payable borrowed from four individuals in May 1994 totaling $100,000
and having an interest rate of 10% per year were paid off on October 4, 1995,
including $13,940 in interest. Another note payable of $93,000 borrowed from an
individual over the August-September 1995 time-frame having an interest rate of
10% per year was repaid on December 4, 1995, including $4,904 in interest.
Notes payable at March 31, 1996 totaling $502,552 represent extensions and
additions to loans that were in existence from two parties prior to October 1,
1995. The interest rate on loans outstanding at March 31, 1996, is at 10% per
year. These notes payable are due on October 11, 1996, or upon the Company
receiving no less than $2 million from any equity offering, whichever occurs
sooner. Based on management's current plans for repayment, these new notes are
recorded as short term liabilities.
5. COMMITMENTS
At March 31, 1996, the Company had a commitment to make a final payment of
$40,000 on the purchase of a column wrapping machine subject to successful field
demonstration performance, consisting of wrapping 50 columns per the contract's
acceptance criteria. As of May 13, 1996, the machine has successfully wrapped
one column in a field demonstration conducted for Caltrans at the intersection
of Interstates 5 and 8.
6. STOCKHOLDERS' EQUITY
Common Stock:
On December 27, 1995, the Company received $147,693 upon the exercise of a
warrant to purchase 75,740 restricted shares of common stock at $1.95 per share.
On October 3, 1995, the Company received cash in the amount of $380,000 as
part of a subscription receivable related to a private placement of $1,056,000,
in exchange for 211,200 shares of common stock sold to an uncle of the Company's
chairman at a price of $5.00 per share under a purchase agreement dated
F-18
<PAGE> 59
XXSYS TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 1, 1995. Cash in the amount of $500,000 had already been received by
September 30, 1995. Of the total purchase commitment, $176,000 remains as a
two-year note payable to the Company at an interest rate of 10% per year, due
September 29, 1997.
On January 12, 1996, the Company granted 50 shares of common stock, valued
at $143, to a part-time employee. On January 19, 1996, the Company issued 6,185
shares of common stock as payment for services to four consultants, valued at
$23,914, for an average of $3.87 a share.
Warrants:
On January 17, 1996, the Company issued warrants to a consultant to
purchase 100,000 shares of common stock, including 50,000 shares at $4.00 a
share and 50,000 shares at $3.50 a share, in connection with services to be
performed over a six-month period. The warrants were valued at $120,000, of
which $49,060 was accrued for the second quarter ended March 31, 1996.
7. OTHER INCOME
Other income of $372,819 for the six months ended March 31, 1996 represents
further payments made in connection with the Company's settlement of a lawsuit
in which it claimed breach of contract and breach of fiduciary relationship
against third parties who interfered with Company's efforts to acquire a
composite materials company (the "target company") in fiscal 1995. In October
1995, the Company received a cash payment of $1,300,000, which was offset
against the Company's cost of acquisition, including legal fees, appraisal,
environmental studies and other due diligence costs and estimated charges for
future costs totaling $1,177,180. Actual cost of acquisition and legal expenses
of the settlement were lower than previously estimated for the second quarter of
1996 by approximately $75,000. The other income for the six months ended March
31, 1996 also includes a separate payment of a consulting fee in the amount of
$175,000 made part of the settlement, net of legal fees.
F-19
<PAGE> 60
CARBON COMPOSITE RETROFITTING
[Included here in paper document are
graphic images of corporate logo and
photographs of carbon composite and
steel jacket applications.]
[LOGO]
<TABLE>
<S> <C>
[LOGO] [LOGO]
Figure 1 Figure 2
[LOGO] [LOGO]
Figure 3 Figure 4
</TABLE>
Caltrans recently approved the use of the company's carbon composite
jacket as an alternate method of retrofitting publicly-owned highway
bridge columns in the state of California. Previously, steel jacketing
was the only retrofit process that had been approved by Caltrans. Recent
research at University of California, San Diego (UCSD) showed that
wrapping columns with carbon composite jackets will reinforce them to prevent
collapse during seismic activity. The results show that the carbon jackets are
structurally as effective as steel jackets, and can be applied in less time, and
with less cost. All seismic tests are being conducted at UCSD's Powell Lab where
XXsys is a member of a consortium, funded by the Advanced Research Project
Agency (Dept. of Defense), the Federal Highway Administration (Dept. of
Transportation), and the National Institute of Standards and Technology (Dept.
of Commerce) for developing civil sector uses for composites once used only in
defense.
<PAGE> 61
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY
ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN
OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 6
The Company........................... 10
Use of Proceeds....................... 11
Dilution.............................. 12
Market for Common Equity and Related
Shareholder Matters................. 13
Management's Discussion and Analysis
and Plan of Operations.............. 14
Business.............................. 17
Management............................ 23
Executive Compensation................ 25
Principal Shareholders................ 27
Description of Securities............. 28
Warrant Exercise Procedure............ 30
Selling Shareholders.................. 34
Indemnification of Directors and
Officers............................ 35
Legal Matters......................... 36
Experts............................... 36
Additional Information................ 36
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[LOGO]
XXSYS TECHNOLOGIES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Previously provided.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Previously provided.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Previously provided.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation. Incorporated by reference to Form S-l dated
July 16, 1992, File No. 33-47018.
3.1.1 Certificate of Amendment to Articles of Incorporation. Incorporated by reference
to Form 10-K for the year ended September 30, 1993.
3.2 Restated Bylaws. Incorporated by reference to Form S-l dated July 16, 1992, File
No. 33-47018.
4.0 Certificate of Determination for Registrant's Series A Preferred Stock.
Incorporated by reference to Form 8-K dated May 12, 1994.
5.1 Opinion of Bruck & Perry re: legality of shares.
10.1 Employment Agreement dated September 7, 1991 between Registrant and Gloria
C. L. Ma. Incorporated by reference to Form S-l dated July 16, 1992, File No.
33-47018.
10.2 Lease Agreement dated October 26, 1995 between Registrant and Viewridge Business
Park. Incorporated by reference to Form 10-KSB for the year ended September 30,
1995.
10.3 Form of Indemnification Agreement between Registrant and its officers and
directors. Incorporated by reference to Form S-l dated July 16, 1992, File No.
33-47018.
10.4 1991 Stock Option Plan dated December 14, 1991, as amended. Incorporated by
reference to Form 10-KSB for the year ended September 30, 1995.
10.5 Unit Purchase Warrant dated August 12, 1992 issued to H.J. Meyers & Co., Inc.
Incorporated by reference to Form 10-K for the year ended September 30, 1992.
10.6 Stock Escrow Agreement among Registrant, American Stock Transfer and Trust
Company and certain shareholders of Registrant. Incorporated by reference to
Form 10-K for the year ended September 30, 1992.
10.7 Agreement between certain of Registrant's shareholders and H.J. Meyers & Co.,
Inc. with respect to transferability of shares. Incorporated by reference to
Form 10-K for the year ended September 30, 1992.
10.8 Letter agreement between Registrant and H.J. Meyers & Co., Inc. pertaining to
mergers and acquisitions. Incorporated by reference to Form 10-K for the year
ended September 30, 1992.
10.9 Form of Bridge Warrant. Incorporated by reference to Form S-l dated July 16,
1992, File No. 33-47018.
10.10 Memorandum of Understanding dated February 12, 1993 among the members of the
Advanced Composite Technology Transfer (ACTT) Consortium. Incorporated by
reference to Form 10-K for the year ended September 30, 1993.
10.11 Cooperation Agreement dated July 21, 1993 among Composite Retrofit Corporation,
Hercules Incorporated, FCI Constructors, and Ciba Composites Division,
Ciba-Geigy Corporation. Incorporated by reference to Form 10-K for the year
ended September 30, 1993.
</TABLE>
II-1
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
10.12 Warrant Agreement dated December 30, 1993 between the Company and Mr. S.
Georgiev. Incorporated by reference to Form 10-QSB for the quarter ended
December 31, 1993.
10.13 Registrant's Promissory Note dated May 10, 1994 in the amount of $35,000.
Incorporated by reference to Form 10-QSB for the quarter ended June 30, 1994.
10.14 Registrant's Promissory Note dated May 10, 1994 in the amount of $20,000.
Incorporated by reference to Form 10-QSB for the quarter ended June 30, 1994.
10.15 Registrant's Promissory Note dated May 10, 1994 in the amount of $10,000.
Incorporated by reference to Form 10-QSB for the quarter ended June 30, 1994.
10.16 Registrant's Promissory Note dated May 10, 1994 in the amount of $35,000.
Incorporated by reference to Form 10-QSB for the quarter ended June 30, 1994.
10.17 Form of Warrant Agreement issued to holders of Registrant's Promissory Note
dated May 10, 1994. Incorporated by reference to Form 10-QSB for the quarter
ended June 30, 1994.
10.18 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May
10, 1994, in the amount of $35,000. Incorporated by reference to Form 10-QSB for
the quarter ended December 31, 1994.
10.19 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May
10, 1994, in the amount of $20,000. Incorporated by reference to Form 10-QSB for
the quarter ended December 31, 1994.
10.20 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May
10, 1994, in the amount of $10,000. Incorporated by reference to Form 10-QSB for
the quarter ended December 31, 1994.
10.21 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May
10, 1994, in the amount of $35,000. Incorporated by reference to Form 10-QSB for
the quarter ended December 31, 1994.
10.22 Form of Warrant Agreement issued to holders of Registrant's Promissory Notes,
Amended November 30, 1994. Incorporated by reference to Form 10-QSB for the
quarter ended December 31, 1994.
10.23 Letter Agreement between Company and Steven Georgiev dated January 4, 1995.
Incorporated by reference to Form 10-QSB for the quarter ended December 31,
1994.
10.24 Agreement regarding separation of employment of Paul W. Pendorf and William J.
Timmerman dated March 25, 1995. Incorporated by reference to Form 8-K dated
April 10, 1995.
10.25 Registrant's Promissory Note dated March 25, 1995 in the amount of $200,000 and
related Warrant Agreement. Incorporated by reference to Form 10-QSB for the
quarter ended June 30, 1995.
10.26 Registrant's Promissory Note dated March 26, 1995 in the amount of $100,000 and
related Warrant Agreement. Incorporated by reference to Form 10-QSB for the
quarter ended June 30, 1995.
10.27 Registrant's Promissory Note dated May 10, 1995 in the amount of $110,000 and
related Warrant Agreement. Incorporated by reference to Form 10-QSB for the
quarter ended June 30, 1995.
10.28 Registrant's Promissory Note dated July 28, 1995 in the amount of $93,000 and
related Warrant Agreement. Incorporated by reference to Form 10-KSB for the year
ended September 30, 1995.
10.29 Registrant's Promissory Note in the amount of $247,202, effective September 12,
1995, together with related Warrant Agreement. Incorporated by reference to Form
10-KSB for the year ended September 30, 1995.
10.30 Registrant's Promissory Note in the amount of $123,601, effective September 12,
1995, together with related Warrant Agreement. Incorporated by reference to Form
10-KSB for the year ended September 30, 1995.
10.31 Registrant's Promissory Note in the amount of $131,749, effective September 12,
1995, together with related Warrant Agreement. Incorporated by reference to Form
10-KSB for the year ended September 30, 1995.
</TABLE>
II-2
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
10.32 Stock Subscription Agreement and related warrant agreement. Incorporated by
reference to Form 10-KSB for the year ended September 30, 1995.
11.1 Statement re: Computation of per share earnings.
23.1 Consent of Bruck & Perry, A Professional Corporation.
23.2 Consent of Feldman Radin & Co., P.C., Certified Public Accountant.
27.1 Financial Data Schedule
</TABLE>
ITEM 28. UNDERTAKINGS.
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933 ("Act"); (ii) to reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information set forth in the registration statement, notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a prospectus filed
with the Commission pursuant to Rule 424(b) under the Act) if, in the
aggregate, the changes in the volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; (iii) to include any additional or changed material information
on the plan of distribution.
(2) That, for the purpose of determining any liability under the Act,
each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission
("Commission") such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C. The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
registrant shall treat the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the small business issuer under
Rule 424(b)(1), or (4) or 497(h) under the Act as part of this registration
statement as of the time the Commission declared it effective.
(2) For determining any liability under the Act, the registrant shall
treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE> 65
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this Pre-Effective Amendment No. 2 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California on June 5, 1996.
XXSYS TECHNOLOGIES, INC.,
a California corporation
By: /s/ GLORIA C.L. MA
------------------------------------
Gloria C.L. Ma, Ph.D.
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to Registration Statement has been signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<C> <S> <C>
/s/ GLORIA C.L. MA, Ph.D. Chairman of the Board of June 5, 1996
- --------------------------------------------- Directors & Chief Executive
Gloria C.L. Ma, Ph.D. Officer
/s/ GREGORY P. HANSON Chief Financial Officer (Chief June 5, 1996
- --------------------------------------------- Accounting Officer)
Gregory P. Hanson
/s/ WALTER GEER Director June 5, 1996
- ---------------------------------------------
Walter Geer
Director
- ---------------------------------------------
William J. Dale
</TABLE>
II-4
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C>
3.1 Restated Articles of Incorporation. Incorporated by reference to Form
S-l dated July 16, 1992, File No. 33-47018..............................
3.1.1 Certificate of Amendment to Articles of Incorporation. Incorporated by
reference to Form 10-K for the year ended September 30, 1993............
3.2 Restated Bylaws. Incorporated by reference to Form S-l dated July 16,
1992, File No. 33-47018.................................................
4.0 Certificate of Determination for Registrant's Series A Preferred Stock.
Incorporated by reference to Form 8-K dated May 12, 1994................
5.1 Opinion of Bruck & Perry re: legality of shares.........................
10.1 Employment Agreement dated September 7, 1991 between Registrant and
Gloria C. L. Ma. Incorporated by reference to Form S-l dated July 16,
1992, File No. 33-47018.................................................
10.2 Lease Agreement dated October 26, 1995 between Registrant and Viewridge
Business Park. Incorporated by reference to Form 10-KSB for the year
ended September 30, 1995................................................
10.3 Form of Indemnification Agreement between Registrant and its officers
and directors. Incorporated by reference to Form S-l dated July 16,
1992, File No. 33-47018.................................................
10.4 1991 Stock Option Plan dated December 14, 1991, as amended. Incorporated
by reference to Form 10-KSB for the year ended September 30, 1995.......
10.5 Unit Purchase Warrant dated August 12, 1992 issued to H.J. Meyers & Co.,
Inc. Incorporated by reference to Form 10-K for the year ended September
30, 1992................................................................
10.6 Stock Escrow Agreement among Registrant, American Stock Transfer and
Trust Company and certain shareholders of Registrant. Incorporated by
reference to Form 10-K for the year ended September 30, 1992............
10.7 Agreement between certain of Registrant's shareholders and H.J. Meyers &
Co., Inc. with respect to transferability of shares. Incorporated by
reference to Form 10-K for the year ended September 30, 1992............
10.8 Letter agreement between Registrant and H.J. Meyers & Co., Inc.
pertaining to mergers and acquisitions. Incorporated by reference to
Form 10-K for the year ended September 30, 1992.........................
10.9 Form of Bridge Warrant. Incorporated by reference to Form S-l dated July
16, 1992, File No. 33-47018.............................................
10.10 Memorandum of Understanding dated February 12, 1993 among the members of
the Advanced Composite Technology Transfer (ACTT) Consortium.
Incorporated by reference to Form 10-K for the year ended September 30,
1993....................................................................
10.11 Cooperation Agreement dated July 21, 1993 among Composite Retrofit
Corporation, Hercules Incorporated, FCI Constructors, and Ciba
Composites Division, Ciba-Geigy Corporation. Incorporated by reference
to Form 10-K for the year ended September 30, 1993......................
10.12 Warrant Agreement dated December 30, 1993 between the Company and Mr. S.
Georgiev. Incorporated by reference to Form 10-QSB for the quarter ended
December 31, 1993.......................................................
10.13 Registrant's Promissory Note dated May 10, 1994 in the amount of
$35,000. Incorporated by reference to Form 10-QSB for the quarter ended
June 30, 1994...........................................................
10.14 Registrant's Promissory Note dated May 10, 1994 in the amount of
$20,000. Incorporated by reference to Form 10-QSB for the quarter ended
June 30, 1994...........................................................
10.15 Registrant's Promissory Note dated May 10, 1994 in the amount of
$10,000. Incorporated by reference to Form 10-QSB for the quarter ended
June 30, 1994...........................................................
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.16 Registrant's Promissory Note dated May 10, 1994 in the amount of
$35,000. Incorporated by reference to Form 10-QSB for the quarter ended
June 30, 1994...........................................................
10.17 Form of Warrant Agreement issued to holders of Registrant's Promissory
Note dated May 10, 1994. Incorporated by reference to Form 10-QSB for
the quarter ended June 30, 1994.........................................
10.18 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement
dated May 10, 1994, in the amount of $35,000. Incorporated by reference
to Form 10-QSB for the quarter ended December 31, 1994..................
10.19 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement
dated May 10, 1994, in the amount of $20,000. Incorporated by reference
to Form 10-QSB for the quarter ended December 31, 1994..................
10.20 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement
dated May 10, 1994, in the amount of $10,000. Incorporated by reference
to Form 10-QSB for the quarter ended December 31, 1994..................
10.21 Registrant's November 30, 1994 Amendment to Note and Warrant Agreement
dated May 10, 1994, in the amount of $35,000. Incorporated by reference
to Form 10-QSB for the quarter ended December 31, 1994..................
10.22 Form of Warrant Agreement issued to holders of Registrant's Promissory
Notes, Amended November 30, 1994. Incorporated by reference to Form
10-QSB for the quarter ended December 31, 1994..........................
10.23 Letter Agreement between Company and Steven Georgiev dated January 4,
1995. Incorporated by reference to Form 10-QSB for the quarter ended
December 31, 1994.......................................................
10.24 Agreement regarding separation of employment of Paul W. Pendorf and
William J. Timmerman dated March 25, 1995. Incorporated by reference to
Form 8-K dated April 10, 1995...........................................
10.25 Registrant's Promissory Note dated March 25, 1995 in the amount of
$200,000 and related Warrant Agreement. Incorporated by reference to
Form 10-QSB for the quarter ended June 30, 1995.........................
10.26 Registrant's Promissory Note dated March 26, 1995 in the amount of
$100,000 and related Warrant Agreement. Incorporated by reference to
Form 10-QSB for the quarter ended June 30, 1995.........................
10.27 Registrant's Promissory Note dated May 10, 1995 in the amount of
$110,000 and related Warrant Agreement. Incorporated by reference to
Form 10-QSB for the quarter ended June 30, 1995.........................
10.28 Registrant's Promissory Note dated July 28, 1995 in the amount of
$93,000 and related Warrant Agreement. Incorporated by reference to Form
10-KSB for the year ended September 30, 1995............................
10.29 Registrant's Promissory Note in the amount of $247,202, effective
September 12, 1995, together with related Warrant Agreement.
Incorporated by reference to Form 10-KSB for the year ended September
30, 1995................................................................
10.30 Registrant's Promissory Note in the amount of $123,601, effective
September 12, 1995, together with related Warrant Agreement.
Incorporated by reference to Form 10-KSB for the year ended September
30, 1995................................................................
10.31 Registrant's Promissory Note in the amount of $131,749, effective
September 12, 1995, together with related Warrant Agreement.
Incorporated by reference to Form 10-KSB for the year ended September
30, 1995................................................................
10.32 Stock Subscription Agreement and related warrant agreement. Incorporated
by reference to Form 10-KSB for the year ended September 30, 1995.......
11.1 Statement re: Computation of per share earnings.........................
23.1 Consent of Bruck & Perry, A Professional Corporation....................
23.2 Consent of Feldman Radin & Co., P.C., Certified Public Accountant.......
27.1 Financial Data Schedule.................................................
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[BRUCK & PERRY LETTERHEAD]
FILE NO.
85570.02
February 20, 1996
XXsys Technologies, Inc.
4619 Viewridge Avenue
San Diego, California 92123
Re: Registration Statement on Form SB-2
Gentlemen:
As counsel for XXsys Technologies, Inc., a California corporation (the
"Company"), we have examined its Restated Articles of Incorporation, Bylaws and
such other corporate records, documents and proceedings, and such questions of
law as we have deemed relevant for the purpose of this opinion. We have also, as
such counsel, examined the Registration Statement on Form SB-2 of the Company as
filed with the Securities and Exchange Commission, covering the registration
under the Securities Act of 1933, as amended, of (i) 2,400,000 shares of no par
value common stock ("Common Stock") underlying the Company's publicly-traded
Common Stock Purchase Warrants; (ii) 112,500 shares of Common Stock underlying
the Company's Bridge Warrants (as that term is defined in the Registration
Statement on Form SB-2); (iii) 80,000 Units, each Unit consisting of two (2)
shares of Common Stock and two (2) Common Stock Purchase Warrants ("Unit
Warrants"), each of which entitles the holder to purchase one (1) share of
Common Stock; and (iv) 240,000 shares of Common Stock underlying the Unit
Warrants, including the exhibits and form of prospectus (the "Prospectus") filed
therewith, and any amendments thereto (collectively the "Registration
Statement").
Upon the basis of such examination, we are of the opinion that:
1. The Company is a corporation duly authorized and validly existing
in good standing under the laws of the State of California, with all
requisite power to conduct the business described in the Registration
Statement.
2. The Common Stock registered pursuant to the Registration Statement
has been duly and validly authorized and, subject to payment therefore,
pursuant to the terms contemplated in the final Prospectus, such Common
Stock will be duly and validly issued as fully paid and nonassessable
securities of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
BRUCK & PERRY
A Professional Corporation
<PAGE> 1
EXHIBIT 11.1
XXSYS TECHNOLOGIES
WEIGHTED AVERAGE SHARES AND EPS
SIX MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Amount of Price Number No. Reference
Capital Per Share Shares Status Days Wtd. Avg. Date
----------- --------- --------- ------ ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - October 1, 1995 $12,068,535 6,067,082 6,007,082 10/01/94
Conversion of debt to
common stock:
First Bermuda 147,693 75,740 103 10,702 12/19/95
Stock in exchange for services:
5,145 $2.61168 1,970 75 1,642 01/16/96
5,500 $5.01368 1,097 75 914 01/16/96
3,269 $2.66205 1,228 75 1,023 01/16/96
10,000 $5.29101 1,890 75 1,575 01/16/96
------ ----- -----
23,914 6,185 5,154
Stock grants:
143 50 79 44 01/12/96
0 - 0
--- -- --
Subtotal stock grants 143 50 44
Warrants for services to be performed 120,000
BALANCE - March 31, 1996 $12,360,285 6,149,057 6,112,516
First half income available to
common shareholders (589,258)
Earnings per share $0.10
</TABLE>
(1)
<PAGE> 2
XXSYS TECHNOLOGIES
WEIGHTED AVERAGE SHARES AND EPS
SIX MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
Amount of Price Number No. Reference
Capital Per Share Shares Status Days Wtd. Avg. Date
--------- --------- ------ ------ ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
- OCTOBER 1, 1994 $ 9,836,305 4,257,989 182 4,257,989 10/01/94
Conversion of debt
to common stock:
27,500 $1.00000 27,500 68 10,275 01/23/95
10,000 $1.00000 10,000 92 5,055 12/30/94
6,000 $1.00000 6,000 60 1,978 01/31/95
20,000 $1.00000 20,000 32 3,516 02/28/95
3,000 $1.00000 3,000 24 396 03/08/95
18,289 $1.00000 18,289 32 3,216 02/28/95
----------- --------- ---------
Subtotal 84,789 84,789 issued 24,435
Issuance of common stock
under Regulation S: 800,000 $0.64986 12/16/94
Convertible loans were converted $0.64986 30,769 65 10,989 01/26/95
on dates indicated $0.64986 64,778 61 21,711 01/30/95
$0.64986 123,078 60 40,575 01/31/95
$0.64986 397,020 59 128,704 02/01/95
$0.64986 615,392 34 114,963 02/26/95
----------- --------- ---------
800,000 1,231,030 issued 243,668
Stock grants to employees 12,090 $0.80600 15,000 29 1,192 03/03/95
Accrued value of stock for services 11,909
----------- --------- ---------
Subtotal stock grants 23,999 15,000 issued 1,192
Warrants (issued and exercised):
Warrants issued for services 100,000
Warrants issued for loan extension 56,268
Warrants exercised 20,000 $0.20000 100,000 50 13,699 02/10/95
Warrants exercised 25,000 $0.25000 100,000 16 4,384 03/16/95
----------- --------- ---------
Subtotal warrants (exercised) 201,268 200,000 issued 18,082
----------- --------- ---------
BALANCE
- - MARCH 31, 1995 $10,946,361 5,788,808 4,545,366
=========== ========= =========
First half net income available to ($706,086)
common shareholders
Earnings per share ($0.16)
</TABLE>
(2)
<PAGE> 3
XXSYS TECHNOLOGIES
WEIGHTED AVERAGE SHARES AND EPS
FISCAL YEAR ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
Amount of Price Number No. Reference
Capital Per Share Shares Status Days Wtd. Avg. Date
---------- --------- -------- ------ ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
- October 1, 1993 $9,049,566 3,800,000 365 3,800,000 10/01/93
Debt settlements 294,202 $1.00000 294,202 95 76,573 06/28/94
93,787 $1.00000 93,787 93 23,896 06/30/94
---------- --------- ---------
387,989 387,989 100,470
Sale of stock 50,000 $0.71429 70,000 200 38,356 03/15/94
Warrants issued for
services 150,000
Sale of preferred stock 198,750
---------- --------- ---------
Subtotal warrants 348,750 0 0
---------- --------- ---------
BALANCE
- September 30, 1994 $9,836,305 4,257,989 3,938,826
========== ========= =========
Annual net income
available to common
shareholders ($1,412,749)
Earnings per share ($0.36)
</TABLE>
(3)
<PAGE> 4
XXSYS TECHNOLOGIES
WEIGHTED AVERAGE SHARES AND EPS
FISCAL YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Amount of Price Number No. Reference
Capital Per Share Shares Status Days Wtd.Avg. Date
----------- --------- --------- ------ ----- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
- OCTOBER 1, 1994 $ 9,836,305 4,257,989 365 4,257,989 10/01/94
Conversion of debt
to common stock:
27,500 $1.00000 27,500 251 18,911 01/23/95
10,000 $1.00000 10,000 275 7,534 12/30/94
6,000 $1.00000 6,000 243 3,995 01/31/95
20,000 $1.00000 20,000 215 11,781 02/28/95
3,000 $1.00000 3,000 207 1,701 03/08/95
18,289 $1.00000 18,289 215 10,773 02/28/95
----------- --------- -----------
Subtotal 84,789 84,789 issued 54,695
Issuance of common stock
under Regulation S: 800,000 $0.64986 12/16/94
Convertible loans were converted $0.64986 30,769 248 20,906 01/26/95
on dates indicated $0.64986 64,778 244 43,304 01/30/95
$0.64986 123,078 243 81,940 01/31/95
$0.64986 397,020 242 263,230 02/01/95
$0.64986 615,392 217 365,863 02/26/95
----------- --------- -----------
800,000 1,231,030 issued 629,093
Stock subscriptions
Receivable: 1,056,000 $5.00000 211,200 issued 1 579 09/30/95
Stock in exchange for services:
29,333 $1.71805 17,074 issued 1 47 09/30/95
Stock grants:
12,090 $0.80600 15,000 212 8,712 03/03/95
48,750 $0.97500 50,000 100 13,699 06/23/95
----------- --------- -----------
Subtotal stock grants 60,840 65,000 issued 22,411
Warrants (issued and exercised):
Issued for services 100,000
Issued for loan extensions 56,268
Exercised 20,000 $0.20000 100,000 233 63,836 02/10/95
Exercised 25,000 $0.25000 100,000 199 54,521 03/16/95
----------- --------- -----------
Subtotal warrants (exercised) 201,268 200,000 issued 118,356
----------- --------- -----------
BALANCE
- SEPTEMMER 30, 1995 $12,068,535 6,067,082 5,083,169
----------- --------- -----------
Annual net income available to
common shareholders ($1,753,121)
Earnings per share ($0.34)
</TABLE>
(4)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF BRUCK & PERRY
With regard to the Pre-Effective Amendment No. 2 to the Form SB-2
Registration Statement to be filed with the Securities and Exchange Commission
by XXsys Technologies, Inc., a California corporation, we hereby consent to the
use of our name under the section entitled "Legal Matters" in the Prospectus
which is a part of said Pre-Effective Amendment No. 2.
BRUCK & PERRY
A Professional Corporation
Newport Beach, California
June 3, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2
Registration Statement of our report dated December 22, 1995, except as to Note
6. Stockholders' Equity Preferred Stock, as to which the date is May 31, 1996,
relating to the financial statements of XXsys Technologies, Inc. and the
reference to our firm under the caption "EXPERTS" in the accompanying
Prospectus.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
New York, New York
June 3, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 373,517<F1>
<SECURITIES> 0
<RECEIVABLES> 100,261
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 537,672
<PP&E> 756,989<F2>
<DEPRECIATION> 421,389
<TOTAL-ASSETS> 1,997,525
<CURRENT-LIABILITIES> 1,220,096
<BONDS> 0
0
450,000
<COMMON> 12,360,285
<OTHER-SE> (533,199)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,997,525
<SALES> 0
<TOTAL-REVENUES> 336,685
<CGS> 0
<TOTAL-COSTS> 223,114
<OTHER-EXPENSES> 1,083,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,531
<INCOME-PRETAX> (589,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (589,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (589,258)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> 0
<FN>
<F1>Includes cash in escrow of $175,000.
<F2>Property Plant and Equipment is net of depreciation of $401,383.
<F3>Includes Note receivable preferred stock of $286,259. Note receivable common
stock of $176,000 and warrants for services to be performed $70,940.
</FN>
</TABLE>
