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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------------------------
For the quarterly period ended March 31, 1998
Commission File Number: 0-20376
XXSYS TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0161808
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4619 Viewridge Avenue
San Diego, California 92123
(Address of principal executive offices)
(619) 974-8200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, no par value
- - 11,294,755 shares outstanding on May 15, 1998.
Transitional Small Business Disclosure Format (check one): Yes X No
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XXSYS TECHNOLOGIES, INC.
INDEX
PART I -- FINANCIAL INFORMATION
PAGE
----
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-9
Exhibits 10-15
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 12,111 $ 33,846
Restricted certificates of deposit 551,000 551,000
Trade accounts receivable 172,174 504,644
Other accounts receivable (Note 5) 90,681 --
Stock subscription receivable (Note 2) 385,300 366,000
Inventory and work in process 373,452 80,496
Prepaid expenses and other 80,719 130,289
------------ ------------
Total current assets 1,665,437 1,666,275
Machinery, equipment and furniture, net of
accumulated depreciation of $933,200 and $787,878 1,520,388 1,587,246
Deferred costs 4,218 12,661
Patents, net of amortization of $144,466 and $128,956 182,696 142,340
------------ ------------
Total assets $ 3,372,739 $ 3,408,522
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 934,243 $ 613,811
Accrued compensation 80,278 68,382
Accrued liabilities 161,176 283,687
Related party accrued expenses 78,347 49,247
Current portion, long-term debt 48,411 94,763
------------ ------------
Total current liabilities 1,302,455 1,109,890
Long-term debt, less current portion 59,097 70,668
Commitments and contingencies (Note 3)
Shareholders' equity (Note 4):
Preferred stock, par value $100
Shares authorized -- 2,000,000;
Issued and outstanding - 500/4,500
(liquidation preference -- $50,000/$450,000 50,000 450,000
Common stock, no par value
Shares authorized -- 20,000,000;
Issued and outstanding -- 11,294,755/9,362,371 20,499,352 19,262,052
Accumulated deficit (18,278,270) (17,148,248)
Note receivable for stock (Note 5) (259,895) (335,840)
Deferred compensation -- --
------------ ------------
Total shareholders' equity 2,011,187 2,227,964
------------ ------------
Total liabilities and shareholders' equity $ 3,372,739 $ 3,408,522
============ ============
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Commercial sales and services $ 107,885 $ 31,041 $ 416,255 $ 75,622
Government research contracts 9,267 128,353 9,267 187,690
------------ ------------ ------------ ------------
Total revenues 117,152 159,394 425,522 263,312
Operating expenses:
Cost of services 115,736 159,132 377,052 310,489
Selling, general and administrative 743,231 903,861 1,428,517 1,831,604
Research and development 92,866 84,828 150,997 110,031
------------ ------------ ------------ ------------
Total operating expenses 951,833 1,147,821 1,956,566 2,252,124
------------ ------------ ------------ ------------
Operating loss (834,681) (988,427) (1,531,044) (1,988,812)
Interest income 14,178 12,042 30,776 25,613
Other income (Note 6) 0 62,077 374,990 231,575
Interest expense (1,994) (3,370) (4,749) (6,419)
------------ ------------ ------------ ------------
Net loss $ (822,497) $ (917,678) $ (1,130,022) $ (1,738,043)
============ ============ ============ ============
Net loss per share $ (.08) $ (.12) $ (.12) $ (.24)
============ ============ ============ ============
Weighted average number of shares
outstanding 9,804,268 7,376,516 9,513,428 7,337,168
============ ============ ============ ============
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,130,022) $ (1,738,043)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 169,275 124,157
Non-cash compensation -- --
Accrued interest income (14,736) (23,511)
Changes in assets and liabilities:
Investments -- --
Accounts receivable 332,470 (100,298)
Cash in escrow -- 175,000
Inventories (292,956) (77,279)
Prepaid expenses and other 49,570 28,873
Accounts payable 320,432 (37,833)
Accrued liabilities (110,615) 79,418
Related party accrued expenses 29,100 7,172
------------ ------------
Net cash used in operating activities (647,482) (1,562,344)
Cash flows from investing activities:
Purchase of machinery and equipment (78,464) (409,363)
Deferred costs 0 (49,172)
Other assets (55,866) (5,277)
------------ ------------
Net cash used in investing activities (134,330) (463,812)
Cash flows from financing activities:
Sale of common stock 818,000 1,938,933
Warrant redemption costs -- --
Exercise of warrants -- 25,000
Issuance of warrants -- --
Issuance of convertible notes -- --
Issuance of other notes payable -- --
Repayment of notes payable (57,923) (46,330)
Payments of related party debt -- --
------------ ------------
Net cash from financing activities 760,077 1,917,603
Net increase (decrease) in cash (21,735) (108,553)
Cash and cash equivalents -- beginning of period 33,846 184,489
------------ ------------
Cash and cash equivalents at end of period $ 12,111 $ 75,936
============ ============
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
NOTES TO 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 necessary for a fair
presentation of the information contained therein. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes for the year ended September 30, 1997, contained
in the Company's Form 10-K. The results of operations for the six-month period
ended March 31, 1998, are not necessarily indicative of results for the entire
year.
2. STOCK SUBSCRIPTIONS RECEIVABLE
The stock subscriptions receivable at March 31, 1998, of $ 385,300
represent cash received by the Company in April and May 1998 as partial payment
for stock purchased under stock purchase agreements that the Company signed on
December 30, 1997, and June 16, 1997. The stock subscriptions receivable at
September 30, 1997, of $366,000 represents $190,000 in cash received by the
Company from October 1, 1997, to December 31, 1997, as part of a restricted
stock purchase agreement that the Company signed on June 16, 1997, and payment
of $176,000 in October 1997, for the principal balance due the Company under a
note payable and stock purchase agreement signed on September 1, 1995. The stock
subscriptions receivable are shown as current assets because the amounts were
received prior to the issuance of the financial statements for each of the
periods ended September 30, 1997, and March 31, 1998.
3. COMMITMENTS
At March 31, 1998, the Company had a commitment to complete construction of
a column wrapping machine designated for wrapping columns up to six feet in
diameter. The balance to be paid prior to taking delivery of the machine, Robo
2.2(TM), is $140,500. Machine testing and delivery is expected to be in the
third fiscal quarter 1998.
4. SHAREHOLDERS' EQUITY
Common Stock:
During the period from October 1, 1997, to March 31, 1998, the Company
received cash in the amount of $550,000 from one individual for 1,022,254 shares
of restricted Common Stock under Regulation S. Of the total received, $190,000
was reported as a subscription receivable at September 30, 1997. Additionally,
$92,000 was received from another individual for 202,832 shares of restricted
common stock under Regulation D. The average price per share of the Common Stock
issued was $0.52.
In October 1997, the Company received $212,170 from an uncle of the
Company's chairman in final payment of a two-year note given as part of a
$1,056,000 private placement made with the Company in October 1995 in exchange
for 211,200 shares of Common Stock. The Common Stock was issued in October 1995
in exchange for $880,000 in cash and a two-year note for $176,000. The payment
in October 1997 for the note included $36,170 in accrued and unpaid interest.
On March 19, 1998 the holder of Company's $100 Par Series "A" Preferred
Stock exercised his right to convert 4,000 shares into 320,000 shares of Common
Stock, for an average conversion price per share of Common Stock of $1.25.
In April and May 1998 the Company received $49,067 for 68,876 shares of
restricted Common Stock as part of a $1,000,000 private placement under
Regulation S, signed on June 16, 1997, and $336,233 for 544,567 shares of
restricted Common Stock as part of a $1,500,000 private placement agreement
under Regulation D signed on December 30, 1997. The amounts received are shown
as a subscriptions receivable at March 31, 1998. The average price per share of
the Common Stock issued was $0.63. Sales of Common Stock under all private
placements under Regulation S have now been completed.
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5. NOTES RECEIVABLE FOR COMMON AND PREFERRED STOCK
On May 12, 1998, Dr. Ma reduced the balance of a promissory note and
accrued interest due the Company by $90,681, by relinquishing her rights to
certain deferred salaries and accrued vacation. The effect of this transaction
is to reclass $90,681 previously reported as "Notes Receivable - Preferred and
Common Stock" to "Other Receivables." The remaining balance due under the
promissory note of $259,895 on March 31, 1998, and $335,840 at September 30,
1997, continues to be reported as a contra-equity account, "Notes Receivable
Preferred and Common Stock." Of the amount being paid on the note by Dr. Ma,
$55,056 was first applied to reduction of accrued interest and the remaining
amount of $35,625 was applied to reduction in principal on the promissory note.
6. OTHER INCOME
Other income of $374,995 in the first six months of fiscal 1998 represents
the net effect of the Company's receipt of payment of a final consulting fee
from a composite materials company in the First Fiscal Quarter 1998. Other
income of $62,077 for the three months ended March 31, 1997, and $231,575 for
the six months ended March 31, 1997, represents consulting fees from a composite
materials company and final settlement with the former president of the Company
over rights to a consulting fee from the same company.
7. CONSULTING AGREEMENT
On April 15, 1998, the Company entered into a two-year consulting agreement
with Continental Capital & Equity Corporation (CCEC), a public relations and
direct marketing advertising firm located in Longwood, Florida, specializing in
the dissemination of information about publicly traded companies. As part of the
agreement, CCEC will publicize the Company to brokers, prospective investors and
shareholders, including preparation and mailing of corporate information about
the Company and field calls from firms, investors and brokers inquiring about
the Company. In consideration of the services to be performed by CCEC, CCEC will
be entitled to receive 300,000 shares of freely trading Common Stock and options
to purchase an additional 50,000 shares at $2.00 per share and 50,000 shares at
$3.00 per share. All Common Stock issued is to be held in escrow for a specific
period of time and is subject to repurchase by the Company at designated prices
for a limited period after issuance.
RESULTS OF OPERATIONS
Second Quarter of Fiscal 1998 Compared to Second Quarter of 1997
Revenues of $117,152 were recorded in the fiscal quarter ended March 31,
1998, the second quarter of the Company's 1998 fiscal year, representing a
decrease of $42,242, or 27%, compared with the second quarter of fiscal 1997.
The decline in revenues was accounted for by a $119,086 decline in government
research revenues partially offset by a $76,844 increase in revenues from
commercial contracts. Commercial contracts represented 92% of revenues in the
second quarter 1998 compared to 19% of revenues in the second quarter 1997.
Commercial contract revenues in the second fiscal quarter 1998 were over three
times the commercial revenues in the comparable period in 1997. Government
contracts represented 8% of revenues in fiscal 1998, compared to 81% government
contract work in 1997.
Total operating expenses of $951,833 in the second quarter 1998 decreased
by $195,988, or 17%, compared with the second quarter of fiscal 1997. Contract
costs represented 99% and 100% of contract revenues in 1998 and 1997 second
fiscal quarters respectively. The low gross margins in the second quarter 1998
are the result of high cost of smaller projects and costs of training and
education of field personnel in the application and use of carbon composite
materials and technology. Low margins in the comparable period of 1997 are the
result of research grants that only partially funded the program costs. Research
and development costs in excess of reimbursements by government agencies are
reported as research and development expense. Selling, general and
administrative expenses decreased by $160,630, or 18%, to $743,231, in 1998 as a
result of a smaller staff size in the administrative area.
Interest income during the second quarter 1998 increased to $14,178,
compared to $12,042 in the second quarter of the prior year. Other income in the
second fiscal quarter 1997 is primarily the result of consulting fees received
from a composite materials company (see Note 6, Other Income).
The net loss for the second quarter of fiscal 1998 of $822,497 represents a
decrease of $95,181 compared with the net loss of $917,678 in the second quarter
of 1997. On a per share basis, the net loss was $0.08 in the second quarter
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1998, compared to $0.12 in the second quarter of 1997. The lower administrative
cost was the primary reason for the smaller loss.
Six Months of 1998 Compared to Six Months of 1997
Revenues of $425,522 were recorded for the six months ended March 31, 1998,
representing an increase of $162,210, or 62%, compared with the first six months
of fiscal 1997. Revenues from commercial contracts in the first half 1998 were
over five-fold the commercial revenues for the comparable period in 1997.
Commercial revenues represented 98% of revenues during the first six months 1998
compared to 29% in the comparable period in 1997. Government contracts
represented 2% of total revenues, compared to 71% in 1997. The reduction in
revenues from government grants through the first six months was more than
offset by an increase in commercial revenues from commercial sales contracts.
Total operating expenses of $1,956,566 in the first six months of 1998
decreased by $295,558, or 13%, compared with fiscal 1997. The cost of services
of $377,052 in the first half 1998 represented 89% of contract revenues,
compared with $310,489 or 118% of contract revenues in the comparable period in
1997. Selling, general and administrative expenses decreased by $403,087, or
22%, to $1,428,517, as a result of a reduction in personnel and expenses in the
administrative area.
Interest income during the first six months increased to $30,776, compared
to $25,613 in the first half of the prior year. Other income is primarily the
result of consulting fees received from a composite materials company (see Note
6, Other Income).
The net loss for the first half of fiscal 1998 of $1,130,022 represents a
decrease of $608,021 compared with the net loss of $1,738,043 in the first half
of 1997. On a per share basis, the net loss was $0.12 in the first half of 1998,
compared to $0.24 in the first half of 1997. Higher revenues and margins
combined with lower administrative expense in 1998 were the primary reasons for
the lower losses.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of fiscal 1998, the Company continued to incur losses
in pursuing the commercialization of its composite retrofit business primarily
because of continued high business development expense and cost of conducting
small demonstration projects in new states and countries. The Company has
incurred costs of conducting small demonstration projects now in primarily three
states - California, Washington, and Utah - and two countries outside the United
States, Canada and England. The Company believes that the commercialization of
the retrofit business throughout the United States will come from such
demonstration projects, which are expected to continue throughout 1998. The
Company plans to take delivery of its fourth Robo-Wrapper(TM) machine in the
third fiscal quarter 1998.
Working capital at March 31, 1998, was $362,982, compared with $556,385 at
September 30, 1997, for a decline of $193,403 during the six months. Working
capital for both periods includes $551,000 in restricted certificates of
deposit, which are necessary for material payment and performance bonds totaling
$551,000 put in place for the Company's surety to provide a bond for work being
conducted on the Arroyo Seco bridge retrofit project. The Company will not have
access to these funds until work has been satisfactorily completed and accepted
by both the prime contractor and the California Department of Transportation
(Caltrans). The restrictions of the bond combined with continued cost being
incurred on the project without receiving any reimbursement for work completed
to date have contributed to the increase in accounts payable of $320,432 between
September 30, 1997, and March 31, 1998, and decline in working capital. The
Company can give no assurances as to when it will be paid by the prime
contractor for the work performed on the project or when the bond will be
released, which could continue to have a negative impact on the Company's
working capital.
The sale of Common Stock continues to be the Company's supplemental source
of funds while the Company continues to commercialize its retrofit business. The
Company reported at the beginning of its fiscal year that approximately $5.0
million in capital will be necessary to sustain operations and capital equipment
purchases throughout the 1998 fiscal year. During the first half ended March 31,
1998, the Company received $642,000 from the sale of 1,225,086 shares of
restricted Common Stock through three private placements and $176,000 from the
receipt of a final payment on a two-year note receivable from the Chairman's
uncle to purchase Common Stock. An additional $385,300
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was received in April and May 1998 as part of the sale of 613,443 shares of
restricted Common Stock under the private placements. The amount of capital
remaining to be received under existing private placements under Regulation D
signed in December 1997 is $2,571,767.
This Form 10-QSB contains forms of forward-looking statements that are
based on the Company's beliefs as well as assumptions made by and information
currently available to the Company. Such statements are subject to certain
risks, uncertainties and assumptions, which are identified and described in the
Company's registration statements and periodic reports on file with the SEC,
including the Company's 1997 Annual Report on Form 10-KSB and subsequent
Quarterly Reports on Form 10-QSB. In particular, there is a risk that the
parties to the stock purchase agreements signed in December 1997 may not be able
to fulfill their remaining funding obligations. If the remaining funding
obligations should not be timely received or not received at all, then it will
be necessary for the Company to obtain substantial additional capital from other
sources which may be at unfavorable prices or not obtained at all, in which case
the Company may have to reduce, curtail or sell operating activities and assets.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results will vary materially from
those anticipated, estimated, or projected and the variation may be material.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operating
costs.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently subject to certain claims and legal actions
arising in the ordinary course of its business. In the opinion of management,
all such matters are adequately covered by insurance or will not have a material
adverse effect on the Company's financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.39 Consulting Services Agreement between the Company and Continental
Capital & Equity Corporation, dated April 15, 1998.
10.40 Notice of Exercise of "Series A" Preferred Stock dated March 19,
1998.
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
XXSYS TECHNOLOGIES, INC.
May 15, 1998
By: /s/ Gregory P. Hanson
--------------------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT 10.39
CLIENT SERVICE AGREEMENT
THIS AGREEMENT is made and entered into this 15th day of April, 1998 between
CONTINENTAL CAPITAL & EQUITY CORPORATION, located at 195 Wekiva Springs Road,
Suite 200, Longwood, FL 32779, hereinafter sometimes referred to as (CCEC) and
XXSYS TECHNOLOGIES, INC., located at 4619 Viewridge Avenue, San Diego, CA
92123-1639, hereinafter sometimes referred to as (the "Company").
WITNESSETH:
WHEREAS, CCEC is a public relations and direct marketing advertising firm
specializing in the dissemination of information about publicly traded
companies, and WHEREAS, the Company is publicly held with its common stock
trading on NASDAQ, and WHEREAS, the Company desires to publicize itself with the
intention of making its name and business better known to its shareholders,
investors, and brokerage houses, and WHEREAS, CCEC is willing to accept the
Company as a client.
NOW THEREFORE, in consideration of the mutual covenants herein contained, it is
agreed:
1. ENGAGEMENT: The Company hereby engages CCEC to publicize the Company to
brokers, prospective investors and shareholders described in Section 2 of this
Agreement, and subject to the further provisions of this Agreement. CCEC hereby
accepts the Company as a client and agrees to publicize it as described in
Section 2 of this Agreement, but subject to the further provisions of this
Agreement.
2. MARKETING PROGRAM: Consists of the following components:
(A) CCEC will review and analyze all aspects of the Company's goals and
make recommendations on feasibility and achievement of desired goals.
(B) CCEC will review all of the general information and recent filings
from the Company and produce and mail up to 100,000 piece direct mail package to
include an 11" X 17" self mailer and an ample number of corporate profiles and
presidential letters so as to allow for one profile and one letter for each
respondent to the original mailing. Profiles will be prepared in brokerage style
format, all items to be approved in writing by the Company prior to circulation.
(C) CCEC will provide through its extensive network, firms and brokers
interested in participating in the retail distribution of the common stock of
XXSYS and schedule and conduct the necessary due diligence and obtain the
required approvals necessary for those firms to participate. CCEC will also
interview and make determinations on any firms or brokers referred by the
Company with regard to their participation.
(D) CCEC will be available to the Company to field any calls from firms,
investors and brokers inquiring about the Company.
(E) For the duration of this Agreement, CCEC will feature the Company on
its Internet site, www.insidewallstreet.com and will purchase advertising space
on other high traffic web sites so as to create a minimum of 500,000 hits for
the benefit of the Company.
3. TIME OF PERFORMANCE: Services to be performed under this Agreement shall
commence upon execution of this Agreement and shall continue for two years.
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4. COMPENSATION AND EXPENSES: In consideration of the services to be performed
by CCEC, the Company agrees to a unique compensation package which is payable as
follows:
1. STOCK: Upon meeting certain milestones as described below, CCEC shall
be entitled to receive from the Company and/or its designee, Three Hundred
Thousand (300,000) shares of freely trading common stock and an option to
purchase 50,000 shares at $2.00 per share and an option to purchase 50,000
shares at $3.00 per share. These shares shall be escrowed at Prudential
Securities, La Jolla Branch, California, and subject to repurchase by XXsys
and/or its designee. CCEC agrees to give the Company irrevocable proxies to vote
these shares until they are repurchased or sold.
2. ESCROW: CCEC agrees to escrow shares as follows:
(a) Two Hundred Thousand (200,000) shares shall be placed in escrow
for a period of thirty (30) days and shall be released upon XXsys(1)s approval
of work performed. Upon release from escrow, these shares shall be subject to a
30-day repurchase by the Company and/or its designee. If the common stock has
traded at an average bid price of $1.00 or higher for a consecutive 15 trading
days, the repurchase price will be $1.00 per share. If the stock has traded at
an average bid price of less than $1.00 for a consecutive of 15 trading days,
the repurchase price will be $0.50 or market, whichever is less.
(b) One Hundred Thousand (100,000) shares shall be placed in escrow
for a period of ninety (90) days and shall be released upon XXsys(1)s approval
of work performed. Upon release from escrow, these shares shall be subject to a
30-day repurchase by the Company and/or its designee. If the common stock has
traded at an average bid price of $3.00 or higher for a consecutive of 30
trading days, the repurchase price will be $3.00 per share. If the stock has
traded at an average bid price of less than $3.00 for a consecutive of 30
trading days, the repurchase price shall be $0.50 or market, whichever is less.
3. OPTION: CCEC shall be issued a one-year option by the Company and/or
its designee to purchase a total of 100,000 shares of freely trading common
stock. The exercise price and vesting schedule of said options are as follows:
(a) When the Company(1)s common stock trades at $10.00 per share
for 30 consecutive days, an option for 50,000 shares shall vest and CCEC shall
be entitled to purchase 50,000 shares of freely trading common stock at $2.00
per share. These shares shall be subject to a repurchase agreement by the
Company and/or its designee at a 20% discount to the average bid price for the
30 days preceding the day of repurchase.
(b) When the Company(1)s common stock trades at $15.00 per share
for 30 consecutive days with a trading volume of 300,000 shares per day, the
option for the remaining 50,000 shares shall vest and CCEC shall be entitled to
purchase 50,000 shares of freely trading common stock at $3.00 per share. These
shares shall be subject to a repurchase agreement by the Company and/or its
designee at a 20% discount to the average bid price for the 30 days preceding
the day of repurchase.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND CCEC: The Company and CCEC
represent and warrant to each other, each such representation and warranty being
deemed to be material that:
(A) The Company will cooperate fully and timely with CCEC to enable CCEC
to perform its obligations under this Agreement.
(B) The execution and performance of this Agreement by the Company and
CCEC have been duly authorized by the Board of Directors of both parties in
accordance with applicable law, and, to the extent required, by the requisite
number of shareholders of the Company and CCEC.
(C) The performance by the Company and CCEC of this Agreement will not
violate any applicable court decree, law or regulation, nor will it violate any
provisions of the organizational documents of both parties or any contractual
obligation by which the parties may be bound.
(D) The Company will promptly deliver to CCEC a complete due diligence
package to include latest 10K, latest 10Q, last 6 months of press releases and
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all other relevant materials, including but not limited to corporate reports,
brochures, etc.
(E) Because CCEC will rely on such information to be supplied it by the
Company, all such information shall be true, accurate, complete and not
misleading, in all respects.
(F) The Company will act diligently and promptly in reviewing materials
submitted to it by CCEC to enhance timely distribution of the materials and will
inform CCEC of any inaccuracies contained therein prior to the projected
publication date.
6. DISCLAIMER BY CCEC: CCEC WILL BE THE PREPARER OF CERTAIN PROMOTIONAL
MATERIALS. CCEC MAKES NO REPRESENTATION THAT (A) ITS SERVICE WILL RESULT IN ANY
ENHANCEMENT TO THE COMPANY (B) THE PRICE OF THE COMPANY'S PUBLICLY TRADED
SECURITIES WILL INCREASE, (C) ANY PERSON WILL PURCHASE SECURITIES IN THE
COMPANY, OR (D) ANY INVESTOR WILL LEND MONEY TO OR INVEST IN OR WITH THE
COMPANY.
7. TERMINATION: If the Company fails to cooperate with CCEC, or fails to make
timely payment of the compensation set forth in section 4 of this agreement CCEC
shall have the right to terminate any further performance under this Agreement.
If the Company desires to make a tender offer for its publicly traded shares and
take it private, the Company shall have the right to terminate any further
performance of this Agreement. In such events all earned compensation shall
become immediately due and payable and/or deliverable, and CCEC shall be
entitled to receive and retain the same as liquidated damages, and not as a
penalty, in lieu of all other remedies, the parties acknowledging and agreeing
that it would be too difficult currently to determine the exact extent of CCEC's
damage, but that the receipt and retention of such compensation is reasonable
present estimate of such damage.
8. LIMITATION OF CCEC LIABILITY: If CCEC fails to perform its services
hereunder, its entire liability to the Company shall not exceed the lessor of
(a) the amount of cash compensation CCEC has received from the Company under
Section 4 of this agreement or (b) the actual damage to the Company as a result
of such non-performance. IN NO EVENT WILL CCEC BE LIABLE FOR ANY INDIRECT,
SPECIAL OR CONSEQUENTIAL DAMAGES NOR FOR ANY CLAIM AGAINST THE COMPANY BY ANY
PERSON OR ENTITY ARISING FROM OR IN ANY WAY RELATED TO THIS AGREEMENT.
9. OWNERSHIP OF MATERIALS: All right, title and interest in and to materials to
be produced by CCEC in connection with the contract and other services to be
rendered under this Agreement shall be deemed the sole and exclusive property of
the Company. The Company agrees not to reproduce or otherwise distribute any
material containing Inside Wall Street logos or CCEC references, after the
termination of this Agreement without CCEC(1)s written consent.
10. CONFIDENTIALITY: Until such time as the same may become publicly known, CCEC
agrees that any confidential nature will not be revealed or disclosed to any
person or entity, except in the performance of this Agreement, and upon
completion of its services and upon written request of the Company all
materials, original documentation provided by the Company will be returned to
it. CCEC will, however, require Confidentiality Agreements from its own
employees and from contractors CCEC reasonably believes will come in contact
with confidential material.
11. NOTICES: All notices hereunder shall be in writing and addressed to the
party at the address herein set forth, or at such other address as to which
notice pursuant to this section may be given, and shall be given by personal
delivery, by certified mail, express mail or by national overnight courier
services. Notices will be deemed given upon the earlier of actual receipt or
three (3) business days after being mailed or delivered to such courier service.
12
<PAGE> 4
Notices shall be addressed to CCEC at:
Suite 200
195 Wekiva Springs Road
Longwood, FL 32779
and to the Company at:
4619 Viewridge Avenue
San Diego, CA 92123
Any notices to be given hereunder will be effective if executed by and sent by
the attorneys for the parties giving such notice.
12. SEPARABILITY: If one or more of the provisions of this Agreement shall be
held invalid, illegal, or unenforceable in any respect, such provision, to the
extent invalid, illegal, or unenforceable, and provided that such provision is
not essential to the transaction provided for by this Agreement, shall not
affect any other provision hereof, and the Agreement shall be construed as if
such provision had never been contained herein.
13. MISCELLANEOUS:
(A) EFFECTIVE DATE OF REPRESENTATIONS: Shall be no later than the date
CCEC is prepared to distribute letters and/or brochures pursuant to the
contract.
(B) GOVERNING LAW: This Agreement shall be governed by and interpreted
under the laws of the State of Florida where CCEC has been organized and this
Agreement has been accepted by CCEC.
(C) CURRENCY: In all instances, references to dollars shall be deemed to
be United States Dollars.
(D) MULTIPLE COUNTERPARTS: This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original.
Executed as a sealed instrument as of the last day and year shown hereunder.
CONFIRMED AND AGREED ON THE 16TH DAY OF APRIL, 1998
CONTINENTAL CAPITAL & EQUITY CORPORATION
By: /s/ JAMES B. HOLTON /s/ JOHN MANION
-------------------------------- -----------------------------------
CCEC Representative CCEC Officer
/s/ PAM O'BRIEN /s/ SHERRI B. WILSON
-------------------------------- -----------------------------------
Witness Witness
CONFIRMED AND AGREED ON THE 16TH DAY OF APRIL, 1998
XXSYS TECHNOLOGIES, INC.
By: /s/ GLORIA C.L. MA, /s/ GREGORY P. HANSON
-------------------------------- -----------------------------------
Duly Authorized Witness
13
<PAGE> 1
EXHIBIT 10.40
March 19, 1998
Ms. Gloria C. L. Ma
Chairman and Chief Executive
XXsys Technologies, Inc.
4619 Viewridge Ave.
San Diego, CA 92123
Subject: Notice of Exercise of "Series A" Preferred Stock
I hereby elect to exercise my rights to convert 4,000 shares of "Series
A" Preferred Stock into 320,000 shares of Common Stock of XXsys Technologies,
Inc. (the "Company"). Enclosed herewith is tender of the certificate for "Series
A" Preferred Stock in the amount of 4,500 shares.
A certificate representing the "Series A" Preferred Stock representing
any unexercised portion of the surrendered Preferred Stock certificate should be
delivered to the undersigned at the address set forth below.
Banton Ma
"Series A" Preferred Stock Holder
/s/ BANTON MA
-----------------------------------
Signature
-----------------------------------
Address for delivery
-----------------------------------
Tax I.D. Number or Social Security No.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE FISCAL QUARTER ENDED MARCH 31, 1998. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-30-1998
<CASH> 12,111
<SECURITIES> 0
<RECEIVABLES> 648,155<F1>
<ALLOWANCES> 0
<INVENTORY> 373,452
<CURRENT-ASSETS> 1,665,437
<PP&E> 2,453,588
<DEPRECIATION> 933,200
<TOTAL-ASSETS> 3,372,739
<CURRENT-LIABILITIES> 1,302,455
<BONDS> 0
0
50,000
<COMMON> 20,499,352
<OTHER-SE> (259,895)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 3,372,739
<SALES> 425,522
<TOTAL-REVENUES> 425,522
<CGS> 377,052
<TOTAL-COSTS> 377,052
<OTHER-EXPENSES> 1,579,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,749
<INCOME-PRETAX> (1,130,022)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,130,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,130,022)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES STOCK SUBSCRIPTION RECEIVABLE $385,300
<F2>NOTE RECEIVABLE FOR PREFERRED STOCK OF $259,895 IS SHOWN AS CONTRA-EQUITY
ACCOUNT.
</FN>
</TABLE>
