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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 (NO FEE REQUIRED)
Commission File Number: 0-20376
XXSYS TECHNOLOGIES, INC.
(Name of small business issuer 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) (Zip Code)
Registrant's telephone number, including area code: (619) 974-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its fiscal year ended September 30, 1997: $650,520
The market value of voting stock held by non-affiliates of the registrant as of
December 19, 1997, was approximately $5 million.
Shares of Common Stock outstanding at December 19, 1997: 9,362,371
DOCUMENTS INCORPORATED BY REFERENCE
Form 8-K dated August 29, 1997.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
XXsys Technologies, Inc. (the "Company") was organized under the laws of
the State of California on November 19, 1985, to develop non-destructive testing
and measurement techniques for advance materials in the defense industry. In
response to the defense cutbacks of the early 1990s and their impact on the
developing markets for advanced materials, the Company initiated efforts in 1993
to develop commercial applications of its technologies and know-how. The initial
results of those efforts is the Company's Robo-Wrapper(TM) machine and
application process, a proprietary technology that produces carbon-based
composite jackets designed to upgrade structurally deficient or corroded
structures that support highway bridges and buildings that could collapse during
seismic activity or from corrosive decay. The Company anticipates that its
primary source of revenues during the next five years will be as a specialty
subcontractor, using its machinery and processes to upgrade aging bridges,
buildings and other privately owned structures by wrapping the structural
elements with composite materials.
In fiscal year 1998, the Company also intends to add concrete repair and
reinforcement products as a source of sales revenue, through an exclusive
license that the Company acquired in November 1997 from the Sho-Bond Corporation
of Japan for the sale of Sho-Bond's products in the United States and Canada
(See "Licenses and Distribution Agreements").
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
The Company's business consists of one business segment, the operations
of which are described below. For detailed financial information with respect to
the revenues, operating loss and assets and liabilities of the Company's
operations, see the consolidated financial statements and notes thereto included
elsewhere in this report.
GENERAL
The Company's technology involves a proprietary column wrapping machine
and process, the Robo-Wrapper(TM), which wraps deficient bridge and building
columns with a precise amount of continuous carbon fiber to produce a composite
jacket that has no seams, joints or potential weak spots. Industry efforts to
commercialize composites for use in the infrastructure have been supported by
both federal and state research and development (R&D) funds totaling about $5.2
million, including $1.2 million in grants directly to the Company. Carbon
composite jackets match or exceed the performance of steel jackets at a fraction
of the weight, and can be installed in less time. The Company's carbon jacketing
process has been demonstrated to work by structural testing of 4/10ths-scale and
full-scale columns under simulated seismic loads at the Powell Structural
Systems Research Laboratories at the University of California, San Diego
("UCSD"), full scale testing at Utah State University and 4/10ths-scale tests at
the University of Illinois. Since inception in 1985, the Company has been
engaged principally in R&D activities and revenue from operations to date have
been insignificant.
On April 10, 1996, the California Department of Transportation
("Caltrans") issued a procurement specification approving the use of the
Company's Robo-Wrapper(TM) technology as an alternative method of retrofitting
publicly-owned highway bridge columns in the State of California that meet
certain criteria in a composite specification (the "Composite Specification").
In January 1997 the Company completed its first seismic retrofit of a bridge for
Caltrans. Since issuance of the Composite Specification by Caltrans, the Company
has completed three seismic retrofit demonstration projects for the departments
of transportation for California, Utah and Washington. During the same period,
the Company completed three private sector building seismic retrofits. All
private sector retrofits were on building structures in Newport Beach and
Anaheim, California, and Salt Lake City, Utah.
In May 1997 the Company was awarded a $551,000 subcontract to retrofit
176 spandrel columns of the Arroyo Seco Bridge on Route 134 in Pasadena,
California. The Arroyo Seco Bridge is the first arch bridge to be designated by
Caltrans for retrofit with composite materials. The project start date was
delayed by Caltrans until structural tests could be performed at UCSD to confirm
the performance of the retrofit design. The structural tests have been
completed, and on December 15, 1997, the Company began column preparation work
on the job site. A number of factors could reduce the revenues to be earned from
the project, including the possibility of a change order to reduce the number of
columns to be wrapped.
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Prior to issuance of the Composite Specification in April 1996, the only
Caltrans-approved methods of retrofitting publicly-owned bridge columns in the
State of California required the use of steel jackets or reinforced concrete.
However, following issuance of the Composite Specification, implementation by
Caltrans of the composite retrofit design for State retrofit work has been much
slower than was expected by the Company. To date, only a very limited number of
projects designed for composite retrofits have been advertised for bids.
Furthermore, as to the mall number of projects designed for composite retrofits,
direction to proceed also has come slow. Given the lack of implementation of the
composite retrofit design in retrofit projects offered for bid by the State
agency, the Company has expressed its concerns to Caltrans officials over the
slow progress and has requested an update on the Caltrans seismic retrofit
program.
In response to the slow implementation of the Composite Specification by
Caltrans, the Company plans to expand into other complimentary products and
services. In fiscal 1997, the Company signed an exclusive license with Sho-Bond
Corporation of Japan to distribute its concrete repair products. Additionally,
the Company signed an exclusive license with UCSD which formed the basis for
developing a hand-wrap process to retrofit flat surfaces and non-columnar
structural shapes in tight spaces (See "Licensing and Distribution Agreements").
The Company continues to promote the benefits of using composites in
infrastructure renewal in seismic retrofits in California at the various design,
engineering, and construction organization levels at departments within Caltrans
and with those contractors who do work for Caltrans.
The Company will continue its marketing efforts on the planned
retrofitting of publicly-owned bridge and building columns in the states of
California, Utah and Washington, but increase its efforts to market its retrofit
technologies to structural engineers involved in private sector jobs, such as
the retrofit of parking structures and buildings. The Company intends to
demonstrate its composites technology in field applications in at least three
new states in 1998, in Illinois and Missouri, which are both in the New Madrid
Fault area of the Midwest, and in one state on the East Coast. The Company's
strategy and plan of operations over the next five years is to sell products and
services related to its patented machine wrap systems for columnar forms and its
proprietary hand-applied woven fiber reinforcement systems for flat surfaces, as
well as concrete repair products licensed exclusively by the Company for sale in
the United States and Canada. The Company will set up a sales and distribution
network throughout the United States and Canada for the licensed concrete repair
products from Sho-Bond. Robo-Wrapper(TM) technology will be marketed primarily
to those construction firms engaged in retrofitting building columns and
publicly-owned highway bridge columns for seismic safety and for corrosion
rehabilitation. The Company's proprietary hand-applied woven fiber reinforcement
systems will be marketed primarily to the private sector for seismic retrofit
and building re-strengthening. There can be no assurance as to when the Company
can get a significant number of retrofit contracts following the implementation
in these states.
RETROFIT OF BRIDGE COLUMNS--THE INFRASTRUCTURE PROBLEM
Published reports by the U.S. Department of Transportation have
indicated that approximately $35 billion a year is spent in the United States to
maintain the highway and bridge infrastructure. Conservative estimates indicate
that approximately $53 billion is necessary to maintain the highway and bridge
infrastructure in its current condition. An estimated 187,515 (32%) of the
nation's 576,460 bridges are classified as structurally deficient or
functionally obsolete. The primary concerns are seismic safety and corrosion
decay.
Subsequent to the collapse of numerous bridge structures during the 1971
San Fernando earthquake (magnitude 6.4 on the Richter scale) there has been an
increased awareness of the vulnerability of highway bridge support columns to
damage from earthquakes. This vulnerability was again demonstrated by the 1989
San Francisco earthquake with the collapse of the Cypress Viaduct of the Nimitz
Freeway, I-880 in Oakland, and the 1994 Los Angeles earthquake with the collapse
of numerous highways, including portions of the Santa Monica Freeway.
Particularly vulnerable are bridge structures designed and/or built prior to
1971, before the San Fernando earthquake prompted drastic revisions in the
seismic design code (which is still in use today).
While seismic risk is typically associated with California, it is of
concern throughout most of the United States. In 1990 the American Association
of State Highway and Transportation Officials adopted seismic design guide
specifications for the entire United States, recognizing the vulnerability of
the nation's bridge infrastructure to potential seismic activity along the West
Coast, the Midwest (New Madrid fault) and the Northeast. The seismic risk to
bridge structures differs from region to region due to different probable
earthquake magnitudes and recurrence periods as well as geological conditions,
but the unpredictable nature of seismic events and the vulnerability of the
majority of existing bridges necessitates the development and implementation of
innovative, fast, effective and economical retrofitting technologies to ensure
the safe and continued use of the nation's bridge infrastructure.
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THE XXSYS TECHNOLOGY
The Company's product is applied by a three-man crew using a patented
Robo-Wrapper(TM) machine and application process to wrap prepreg tow (carbon
fiber which has been pre-impregnated with resin) around the bridge column.
Columns are first inspected from a manlift and any defects such as holes or
sharp protrusions are repaired. The columns are then cleaned in preparation for
wrapping.
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 one Robo-Wrapper(TM) machine and a three-man crew will be able to
wrap one-to-three 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 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 currently uses
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
commercial curing system takes two to three consecutive cures of eight foot
sections requiring about eight hours per column, including setup and tear down,
with minimal monitoring during the 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 UCSD. The Powell Laboratory conducted tests of seven 4/10ths scale
concrete columns and a full scale column bent 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, and observed by, Caltrans and
were funded by grants from the U.S. Department of Defense and Department of
Transportation. 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. Additional validation testing was
performed successfully in 1997 on 4/10ths-scale columns at the University of
Illinois and full scale columns at Utah State University.
SENSOR AND NDE TECHNOLOGIES
The Company expects to utilize its prior expertise in sensor and
non-destructive testing ("NDE") technologies to develop quality assurance and
performance monitoring technologies to increase 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 manufacturing 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 an informed decision can
be made regarding maintenance and repair of the jacket. These research and
development efforts have been partially funded by the Advanced Technology
Program (ATP) from the National Institute of Standards and Technology (NIST). If
successful, these sensor and NDE technologies can be utilized for other
composite applications. The Company sold a small quantity of its sensors in the
private sector in 1997 to gain experience in other applications. The Company
intends to continue to pursue its NDE opportunities in fiscal 1998.
MANUFACTURING AND RAW MATERIALS
The Company designed the existing Robo-Wrapper(TM) and its curing system
and uses an original equipment manufacturer for the manufacture of
Robo-Wrapper(TM) and curing systems. To ensure confidentiality of trade secrets
the Company performs a small portion of the final assembly of the machines,
system integration, and quality assurance at the Company's facilities.
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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 initial
structural tests was supplied by Hercules Inc. (now Hexcel Corporation), the
largest supplier of carbon fiber in the United States. In 1997 the Company
qualified two additional suppliers of carbon fiber. 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 and the Company believes it has good relations with these
suppliers.
MARKETING AND SALES
In fiscal 1997, the Company completed three projects, including one
public sector demonstration project for the California Department of
Transportation and two private sector projects. As of today, the Company has now
completed public sector demonstration projects for three states--California,
Utah and Washington (December 1997). In the private sector the Company completed
two retrofits of building structures, at office complex in Anaheim, California,
and at a hospital in Salt Lake City, Utah. Also completed during the year was
the successful test at the University of Illinois of three 4/10ths scale columns
retrofitted by the Company for the Illinois Department of Transportation. Total
bookings for the fiscal year 1997 were $1.1 million. Backlog at September 30,
1997, stood at $729,000, representing retrofit projects to be completed on the
Arroyo Seco bridge, the I-5 and I-90 Interchange in Seattle, Washington, and a
small amount of funds remaining on the NIST grant.
The Company intends to earn revenues from the sale of materials, rental
of Robo-Wrapper(TM) equipment and fees for installation services as a specialty
subcontractor. The prime contractor will be responsible for bidding on public or
private retrofit projects, and conducting the majority of the retrofitting. The
Company will provide the Robo-Wrapper(TM) machine, raw material, curing ovens
and one or more technical assistants to the contractor directly conducting the
column retrofit, in return for which the Company is paid a fee or reimbursed for
cost of materials and other expenses, paid a rental fee for equipment and a
share of the project profits. The Company may also license its technology or
enter into joint venture arrangements with construction firms involved in
seismic retrofitting or re-strengthening as a specialty subcontractor.
The Company's marketing strategy is to educate those engineers,
contractors and government agencies involved in the retrofit industry on the
benefits of the Company's Robo-Wrapper(TM) and other composite retrofit
technology to obtain acceptance of its technology among them. Since state and
local government agencies strictly regulate building and construction standards,
it will be necessary for the Company to obtain various state government
approvals for its proprietary composite retrofit technologies. Retrofit
contractors need to be educated to accept the technology and incorporate it into
their bid proposals. Two states have issued composite design specifications,
California and Nevada, and the Company has completed field demonstrations for
two other state DOTs, Utah and Washington. In 1997, the Company completed tests
on three 4/10ths scale retrofitted columns at the University of Illinois.
Additionally, the Company has conducted half-day or full-day educational
seminars in both Utah and Washington and held site visitations where the field
demonstrations took place. The Company also conducted an educational seminar in
Taiwan in 1997.
There is a substantial risk that the contractors, engineers and
government authorities directly involved in highway retrofitting may not
appreciate the benefits or recognize the potential applications of the Company's
technology. Market acceptance of the Company's composite technology will depend
largely upon the ability of the Company to demonstrate to the industry the
constructability, durability, field quality assurance, and cost effectiveness of
the technology when compared to the current retrofit methods, of which there can
be no assurance.
Important aspects of the Company's marketing strategy has been and will
continue to be, to develop and disseminate educational materials for the various
target groups through seminars and trade shows that the Company attends and to
improve the Composite Specification, with the ultimate goal to obtain a national
standard for the specification. The objective is 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 as they bid. The Company can
give no predictions as to the amount of time it will take to obtain the various
approvals of its technologies in each of the states and their respective
approval agencies as well as the time it will take for market acceptance of its
technologies. The Company anticipates it will be primarily dependent on revenues
from the government and private sectors in the states of California, Utah,
Washington and Illinois in fiscal 1998, as government-funded research programs
wind down to completion.
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The Company does not have the capital, bonding capacity, or expertise
necessary to conduct large scale bridge column retrofit work as the prime
contractor. The successful commercialization of the Robo-Wrapper(TM) and other
of the Company's composite technologies may require that the Company enter into
collaborative arrangements with construction and engineering firms that will
conduct column retrofit jobs directly as either the prime or subcontractor.
There can be no assurance that the Company will be able to enter into such
collaborative arrangements.
GOVERNMENT REGULATION
Because of use of advance composite materials in civil engineering
projects is new and therefore has not been used extensively in many field
applications, the regulatory requirements governing applications such as the
Robo-Wrapper(TM) technology 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 the private sector, private
regulatory bodies, such as the International Conference of Building Officials,
the California Building Standards Commission, 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 market products.
COMPETITION
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 Fyfe Company, Hardcore Dupont and
Mitsubishi. Fyfe Company received approval from Caltrans to wrap structures in
April 1996, the same time as the Company. 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
that expected. Additionally, should any of 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,
1997, 1996, and 1995 were $485,397, $98,350, and $115,304 respectively. These
amounts represent direct expenditures by the Company and do not include
approximately $4 million of federal and state grant funds paid directly to third
parties, such as UCSD and Hexcel, Inc. (formerly Hercules, Inc.), for purposes
of validating the Robo-Wrapper(TM) technology.
The Company continues to participate in a $2.7 million program funded in
1995 by the U.S. Department of Commerce, National Institute of Standards and
Technology (NIST), which is scheduled for completion in February 1998. The
purpose of the NIST program has been 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; Hexcel, 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 jacked based on the particular
characteristics of the structure to be retrofitted. The Company's share of the
grant funds is $537,059, of which $524,067 has been earned program to date as of
September 30, 1997. The Company also had a $250,000 matching fund grant from the
State of California's Trade and Commerce Agency for the NIST program, which was
completed in fiscal 1997.
During the year, the Company completed work on a grant of $97,688 for
the development of a rugged low cost, easy to implement ultrasonic sensor system
that can be used for monitoring the manufacturing process of composite armor
structural parts, using the Company's wire waveguide technology.
The Company intends to conduct continued research and development in the
area of non-destructive testing and measurement, pursue research grants, and
invest a portion of the Company's own research and development budget in the
area of ultrasonic measurement and applications.
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INTELLECTUAL PROPERTY
In October 1997, the U.S. Patent Office issued Patent Number 5,680,739
for the Company's computer-controlled, fully-automated retrofitting machine,
Robo-Wrapper(TM). The Company filed its application on August 1, 1994. The new
patent covers the Company's automated composite jacketing process which provides
a fast, cost-effective solution for seismic retrofit and corrosion
rehabilitation of bridge and building columns up to seven feet in diameter.
Other patent applications are still outstanding. In December 1995 the Company
filed a patent application for the method of curing filament wound columns using
a radiant heater. In April 1996 the Company filed a patent application for a
method of measuring the cure rate of resins used with composites using an
ultrasonic wire waveguide. These remaining patent applications are pending. The
Company holds seven U.S. patents on its Ultrasonic Resin Analyzer technology.
The Company endeavors to maintain the confidentiality of its proprietary
technologies and know-how through technology license agreements, 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.
LICENSES AND DISTRIBUTION AGREEMENTS
On June 27, 1997, the Company acquired the exclusive license from UCSD
to commercialize a proprietary composite strengthening system called
Retrosafe(TM) to repair and retrofit masonry walls and slabs. A durable,
versatile composite sheet, Retrosafe(TM) is applied like wallpaper to masonry or
concrete flat-surfaced structures to help prevent their collapse due to
earthquakes or severe corrosion. Customized to fit a wide range of walls, beams
and slabs, Retrosafe(TM) can increase shear or flexural strength and ductility;
repair damage and defects; control crack propagation; and increase load-carrying
capacity. The technology was invented by Dr. Gilbert Hegemier and Dr. Frieder
Seible, engineering professors at UCSD, and was validated through extensive
small-scale and full-scale wall tests and a five-story building test at UCSD's
Powell Structural Research Laboratories. The technology is the subject of a
pending patent application. Under terms of the license agreement, the Company is
to pay $25,000 and distribute 25,000 shares of common stock to UCSD and the
inventors as an up-front license fee. The license has minimum annual royalties
as long as patents are pending, of $10,000 in 1999 and $15,000 a year
thereafter, and an annual maintenance fee of $10,000 until the last patent
expires.
On September 30, 1997, the Company signed an exclusive distribution
agreement with Sho-Bond Corporation of Japan to market and sell its complete
line of concrete repair and reinforcement products and technologies in the
United States and Canada. Sho-Bond is a recognized leader and specialist in the
Japanese repair and maintenance industry, with annual sales in excess of $720
million USD, and a publicly traded corporation on the Tokyo Stock Exchange.
Sho-Bond was the first to introduce epoxy-based adhesives into the civil
engineering and construction industry in Japan, in 1959. The Company has
commenced marketing for one of the licensed concrete repair products, a method
of concrete crack injection called BICS (Balloon Injection for Concrete
Structures), and its line of graffiti-proof paint. Some of the Sho-Bond products
will require federal and/or state approval before they can be sold in the United
States and Canada, a process that could take from three to eighteen months (See
"Government Regulation"). The distribution agreement is for a five-year term
after obtaining the necessary approvals. The Company's distribution rights are
subject to certain minimum purchase requirements.
EMPLOYEES
At December 30, 1997, the Company had 23 full time employees, of whom
seven were in construction and manufacturing operations, eight in executive or
administrative positions, four engaged in engineering and research, three in
technical marketing and sales, and one in maintenance. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
that its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 14,000 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, pursuant to two leases that extend to October 31, 1998,
($6,702 per month for 6,927 square feet and $5,600 per month for 7,100 square
feet). Should additional facilities be required, the Company believes that
adequate space continues to be available in the San Diego area.
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ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the Company's security holders in the
fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the NASDAQ Small Cap Market
under the symbol XXSYS following the Company's initial public offering on July
31, 1992. The table below sets forth the quarterly high and low sales prices as
reported on NASDAQ for the two years ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ended September 30, 1997:
First Quarter 4 5/16 2 5/8
Second Quarter 4 1/2 1 7/8
Third Quarter 4 7/32 2 3/8
Fourth Quarter 2 11/16 1 1/4
Year ended September 30, 1996:
First Quarter 6 1/2 4 3/8
Second Quarter 6 2 1/4
Third Quarter 6 5/8 3 5/8
Fourth Quarter 4 1/4 2 11/16
</TABLE>
On December 19, 1997, the closing price for the Company's Common Stock
was $0.65625 per share. As of that date, the Company had 349 stockholders of
record and approximately 4,709 stockholders whose shares are held in brokerage
accounts.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This discussion 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 herein
and in other of the Company's registration statements and periodic reports on
file with the Securities and Exchange Commission. 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.
The Company is engaged in developing and commercializing the use of
composite materials in construction and transportation markets and developing
technologies for quantitative nondestructive evaluation of composite materials.
Through September 30, 1997, 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 and sales and marketing expense of promoting these new applications.
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RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to Fiscal Year 1996
Revenues for the fiscal year ended September 30, 1997, were $650,520
compared to $568,965 in the prior fiscal year, an increase of $81,555 or 14%.
The increase is primarily attributable to continued expansion of construction
contracting, which totaled $348,824 or 54% of revenues in 1997, compared with 6%
of revenues in fiscal 1996. The Company's construction contracting included the
completion of the first demonstration program for composites used in
retrofitting bridge columns for Caltrans. Another demonstration project was
completed for the Utah Department of Transportation (UDOT) in 1997. A third
demonstration project for the Washington Department of Transportation (WASHDOT)
had been signed, but work had not begun as of September 30, 1997. In the private
sector, construction work included completion of a parking structure for a
hospital in Salt Lake City, Utah.
Government funded research in fiscal 1997 represented $301,696 or 46% of
revenues for the year, including matching funds grants from the National
Institute of Standards and Technology (NIST) of $159,679, matching funds grants
from the State of California of $44,329, and the Army's Small Business
Innovative Research (SBIR) program ($97,688).
Total operating expenses increased by $2,239,609 (73%) in fiscal 1997 to
$5,290,528. The cost of services was $730,093, or 112% of contract revenues. In
comparison, the cost of services in fiscal 1996 was $550,315, or 97% of contract
revenues. The higher percentage in fiscal 1997 was the result of higher project
costs for the developmental nature of the demonstration projects in California
and Utah. Further, the majority of government research grant projects are based
on matching Company expenses. The Company's gross profit margin is expected to
improve as it moves from smaller demonstration projects to the more typical
larger scale contracts and private sector commercial contracts. Selling, general
and administrative expenses were $4,075,038 in fiscal 1997, an increase of
$1,672,784 or 70% over fiscal 1996. The increase reflects additional costs for
marketing and sales and work to obtain government funds for new technology
developments as part of the Government's long-range spending plans for highway
construction in the United States over the next five to seven years. Research
and development costs increased in fiscal 1997, to $485,397 from $98,350 in the
prior year, a four-fold increase as a greater portion of the Company's R&D
efforts was performed without government funded research contracts.
Other income of $429,349 in fiscal 1997 represents receipt of payments
as part of a consulting fee arrangement with a composite materials company. The
consulting fee was higher by $56,530 over the comparable period in 1996 due to
final settlement of a dispute with the former president over rights to the fee
and other matters. Interest income of $58,457 in fiscal 1997 was 32% lower than
in the prior year. The higher interest earned in the prior year was from
interest earned on cash received from a legal settlement and from the sale of
common stock. Interest expense decreased 81% to $9,929 in 1997 as the Company
had a significant reduction in its average borrowings.
The net loss for the year ended September 30, 1997, was $4,162,131
compared to $2,075,718 in the prior year, an increase of $2,086,413 or 101%. The
loss per share in fiscal 1997 was $0.53, compared to the loss per share of $0.33
in fiscal 1996. The higher losses were primarily the result of higher business
development and marketing expenses as the Company launched its new products and
technology in a number of new states, including Utah, Washington, Illinois,
Missouri and other New Madrid Fault states.
The Company had current assets of $1,666,275 as of September 30, 1997,
representing an increase of $146,804 over the prior fiscal year ended September
30, 1996. Funds raised by the Company have been necessary to construct
Robo-Wrapper(TM) equipment, establish collateral for material payment and
performance bonds, and support business development activities intended to help
generate revenues in the future. In February 1997 the Company took delivery of
Robo Jr.(TM), a machine which wraps columns up to 30 inches in diameter, and is
designed specifically for tight spaces such as in multi-story parking lots. The
Company maintained a modest cash position of $33,846 at September 30, 1997,
compared with $184,489 at the end of the prior fiscal year. Net cash used in
operating activities of $4,165,098 and $1,120,048 in investing activities was
funded by $5,134,503 in financing activities. Financing activities included the
receipt of $5,075,933 from the sale of common stock.
9
<PAGE> 10
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues for the fiscal year ended September 30, 1996, were $568,965
compared to $408,867 in the prior fiscal year, an increase of $160,098 or 39%.
The increase is primarily attributable to continued work performed under the
matching funds grants of $537,059 from the National Institute of Standards and
Technology (NIST) and $514,000 from the Advanced Research Projects Agency
(ARPA), which were used to help commercialize the Company's carbon composite
jacketing technology for seismic retrofit. The grant funds were instrumental in
the Company obtaining approval of the Company's composite retrofit technology by
the California Department of Transportation ("Caltrans") in April 1996. The
Company also completed its first seismic retrofit of a parking structure in
California and a demonstration project for corrosion rehabilitation on a bridge
structure for the Utah Department of Transportation in fiscal year 1996.
The Company continued to depend on federal and state grant programs for
its primary revenue sources in fiscal 1996. Revenues in fiscal 1996 were derived
primarily from work performed under the NIST grant, which represented $269,320,
or 47% of Company revenues and the ARPA grant, representing $116,279 or 20% of
revenues. Work performed by the Company under the NIST program also earned
$151,876 or 27% of Company revenues from the State of California. At September
30, 1996, the Company had approximately $156,748 of funding remaining under the
NIST grant and $44,329 of funding from the California matching funds grant.
Total operating expenses increased by $946,993 (45%) in fiscal 1996 to
$3,050,919. The cost of services was $550,315, or 97% of contract revenues. In
comparison, the cost of services in fiscal 1995 was $225,202, or 55% of contract
revenues. This higher percentage in fiscal 1996 was the result of the cost of
penetration and introduction of the Company's technology in the form of
demonstration projects in new commercial markets. The Company's gross profit
margin is expected to improve as it moves from smaller demonstration projects to
the more typical larger scale contracts. Selling, general and administrative
expenses were $2,402,254 in fiscal 1996, an increase of $638,834 or 36% over
fiscal 1995. The increase reflects additional staffing costs in support of
expanded bidding on contract work, as well as increased expenses for marketing
and sales, investor relations and fund raising activities. Research and
development costs decreased in fiscal 1996, to $98,350 from $115,304 in the
prior year, a decrease of 15%, as a greater portion of the Company's R&D efforts
was performed under funded research contracts.
Other income of $372,819 represented a consulting fee arrangement with a
composite materials company. Interest income of $85,493 in fiscal 1996 was 78%
higher than in the prior year, the result of interest earned on cash received
from a legal settlement and from the sale of common stock. Interest expense
decreased 51% to $52,076 as the Company had a significant reduction in its
average borrowings.
The net loss for the year ended September 30, 1996, was $2,075,718
compared to $1,753,121 in the prior year, an increase of $322,597 or 18%. The
loss per share in fiscal 1996 was $0.33, compared to the loss per share of $0.34
in fiscal 1995. The decline on a per share basis is the result of a higher
average number of shares outstanding.
The Company had current assets of $1,519,471 as of September 30, 1996,
representing an increase of $890,686 over the prior fiscal year ended September
30, 1995. The increase is primarily the result of the sale of Common Stock
throughout the year to fund operations. Funds raised by the Company have been
necessary for the construction of Robo-Wrapper(TM) equipment and marketing and
sales activities that will generate revenues in the future. The Company
continued modest increases in its cash position to $184,489, and increase of
$35,927 over the prior year. Net cash used in operating activities of $2,057,596
was funded by $1,672,916 in financing activities and $420,607 from investing
activities. Financing activities included the receipt of $705,000 from the sale
of common stock and $623,783 from exercises of warrants and employee stock
options to purchase Common Stock.
Liquidity and Capital Resources
The Company operated with modest cash resources in 1997, as it did in
1996. In order to meet all of its operating expenses in 1997, the Company relied
heavily on the sale of common stock for additional funds. Last year, in early
January 1997, the Company had estimated that it would require approximately $5.5
million for the purchase of machines and for working capital. Net cash received
from the sale of common stock in fiscal 1997 was $5,075,933, or $424,067 under
the estimate. Funds raised in 1997 were used to support operating expenses and
to provide collateral for a letter of credit from the bank to a surety company
to increase the Company's ability to provide material payment and performance
bonds on construction projects in the future. Additionally, in the 1997 fiscal
year, the Company received approximately $159,000 pursuant to grants from
several government agencies in support of research and development
10
<PAGE> 11
activities. As of September 30, 1997, backlog of other projects to be completed
stood at $729,000, representing retrofit projects to be completed on the Arroyo
Seco bridge, the I-5 and I-90 Interchange in Seattle, Washington, and a small
amount of funds remaining on the NIST matching funds grant.
As of September 30, 1997, the Company had total current assets of
$1,666,275, including cash and cash equivalents of $33,846, trade accounts
receivable of $279,445, restricted cash funds used for letters of credit
totaling $551,000, stock subscriptions receivable of 366,000, and other
receivables of $225,199. The Company's current liabilities as of September 30,
1997, were $1,109,890. The Company had positive working capital of $556,385 as
of the same date, which represents a decline of $392,758 compared with the
working capital position at September 30, 1996.
As of September 30, 1996, the Company had total current assets of
$1,519,471, including cash and cash equivalents of $184,489, accounts receivable
of $75,602 and stock subscriptions receivable of $1,149,933. The Company's
current liabilities as of September 30, 1996, were $570,328. The Company had
positive working capital of $949,143 as of the same date, which represents an
improvement of $1,828,657 over the working capital position at September 30,
1995. As of September 30, 1995, the Company had cash and cash equivalents of
$148,562 and accounts receivable of $46,623 and stock subscriptions receivable
of $380,000. As of September 30, 1995, the Company had current assets of
$1,508,299 and a working capital deficit of $879,514.
For the 1998 fiscal year, the Company estimates that it will require
approximately $5.0 million of additional capital for the purchase of capital
equipment and working capital. These funds are believed necessary to further
advance the commercialization of Robo-Wrapper(TM) technology. The Company
expects to continue commercialization in 1998 as an extension of past
developments. Such commercialization includes validation testing in new states,
further research and development on new materials, further demonstration
projects and process improvements. The Company intends to sell additional stock
as the primary means to support this commercialization effort. On December 30,
1997, the Company signed agreements for two outside investors to purchase
restricted Common Stock under Regulation D aggregating $3,000,000. The shares
are to be purchased from December 30, 1997, through September 30, 1998. Also,
the Company intends to pursue bridge loans and lease of equipment as financing
alternatives, however there can be no assurances that such financing can be
obtained. Further, there can be no assurance that the Company will be able to
obtain all the capital it needs for the coming fiscal year, to support its
business development objectives.
Impact of Inflation
Inflation has not had any significant effect on the Company's operating
costs.
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report 12
Consolidated Balance Sheets at September 30, 1997 and 1996 13
Consolidated Statements of Operations for the years ended 14
September 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the three 15
years ended September 30, 1997
Consolidated Statements of Cash Flows for the years ended 16
September 30, 1997, 1996 and 19954
Notes to Consolidated Financial Statements 17
</TABLE>
11
<PAGE> 12
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
XXsys Technologies, Inc.
We have audited the accompanying consolidated balance sheets of XXsys
Technologies, Inc. and subsidiaries as of September 30, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years ended September 30, 1997. 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 audits.
We conducted our audits 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. and subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of its operations and cash flows for each of the three
years ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Feldman Radin & Co., P.C.
------------------------------
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, New York
December 30, 1997
12
<PAGE> 13
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 33,846 $ 184,489
Restricted certificates of deposit 551,000 --
Accounts receivable 504,644 75,602
Stock subscription receivable (Note 1) 366,000 1,149,933
Inventory 80,496 19,480
Prepaid expenses and other 130,289 89,967
------------ ------------
Total current assets 1,666,275 1,519,471
Machinery, equipment and furniture, net of
accumulated depreciation of $787,878 and $ 478,640 1,587,246 962,705
Cash in escrow (Note 2) -- 175,000
Deferred costs 12,661 --
Licenses and patents, net of amortization
of $128,956 and $ 121,058 142,340 44,532
------------ ------------
Total assets $ 3,408,522 $ 2,701,708
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 613,811 $ 324,823
Accrued compensation 68,382 37,119
Accrued liabilities 283,687 112,019
Related party accrued expenses 49,247 20,564
Current portion, long-term debt 94,763 75,803
------------ ------------
Total current liabilities 1,109,890 570,328
Long-term debt, less current portion (Note 3) 70,668 67,848
Commitments and contingencies (Note 5)
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
Shares authorized -- 20,000,000;
Issued and outstanding -- 9,362,371 / 7,270,101 19,262,052 15,099,537
Accumulated deficit (17,148,248) (12,986,117)
Note receivable for preferred stock (335,840) (306,288)
Note receivable for common stock -- (193,600)
Deferred compensation -- --
------------ ------------
Total stockholders' equity 2,227,964 2,063,532
------------ ------------
Total liabilities and shareholders' equity $ 3,408,522 $ 2,701,708
============ ============
</TABLE>
13
<PAGE> 14
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product Sales $ 3,000 $ -- $ --
Contract revenues 647,520 568,965 408,867
----------- ----------- -----------
Total revenues 650,520 568,965 408,867
Operating expenses:
Cost of product sales 2,493 -- --
Cost of services 727,600 550,315 225,202
Selling, general and administrative 4,075,038 2,402,254 1,763,420
Research and development 485,397 98,350 115,304
----------- ----------- -----------
Total operating expenses 5,290,528 3,050,919 2,103,926
----------- ----------- -----------
Operating loss (4,640,008) (2,481,954) (1,695,059)
Interest income 58,457 85,493 48,098
Other income 429,349 372,819 --
Interest expense (9,929) (52,076) (106,160)
----------- ----------- -----------
Net loss $(4,162,131) $(2,075,718) $(1,753,121)
----------- ----------- -----------
Net loss per share $ (0.53) $ (0.33) $ (0.34)
=========== =========== ===========
Weighted average number of shares
outstanding 7,815,522 6,231,437 5,083,169
=========== =========== ===========
</TABLE>
See accompanying notes.
14
<PAGE> 15
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK NOTES DEFERRED
PREFERRED ------------------------- RECEIVABLE ACCUMULATED COMPEN-
STOCK SHARES AMOUNT FOR STOCK DEFICIT SATION
--------- --------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994 $ 450,000 4,257,989 $ 9,836,305 $ (218,697) $ (9,157,278) $ (34,375)
Stock issued in settlement of debt 84,789 84,789
Increase in interest receivable on note (45,001)
Conversion of notes issued in
Regulation S offering 1,231,030 800,000
Exercise of warrants 200,000 45,000
Sale of common stock 211,200 1,056,000 (176,000)
Warrants issued with debt 56,268
Warrants issued for services 100,000
Stock issued for services 82,074 90,173
Amortization of deferred
compensation 34,375
Net loss (1,753,121)
--------- --------- ------------ ---------- ------------ ---------
Balances at September 30, 1995 $ 450,000 6,067,082 $ 12,068,535 $ (439,698) $(10,910,399) $ --
Stock issued in settlement of debt 196,152 549,227
Increase in interest receivable on notes (60,190)
Exercise of employee stock options 32,751 75,000
Exercise of warrants 452,884 548,783
Sale of common stock 514,997 1,474,933
Stock issued for services 6,235 24,057
Warrants issued for services 120,000
Assignment of stock powers 239,002
Net loss (2,075,718)
--------- --------- ------------ ---------- ------------ ---------
Balances at September 30, 1996 $ 450,000 7,270,101 $ 15,099,537 $ (499,888) $(12,986,117) $ --
--------- --------- ------------ ---------- ------------ ---------
Decrease in interest receivable on notes 164,048
Exercise of warrants 31,250 25,000
Sale of common stock 2,054,759 4,116,000
Stock issued for services 3,261 9,725
Stock issued for guarantee 3,000 11,790
Net loss (4,162,131)
--------- --------- ------------ ---------- ------------ ---------
Balances at September 30, 1997 $ 450,000 9,362,371 $ 19,262,052 $ (335,840) $(17,148,248) $ --
--------- --------- ------------ ---------- ------------ ---------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balances at September 30, 1994 $ 875,955
Stock issued in settlement of debt 84,789
Increase in interest receivable on note (45,001)
Conversion of notes issued in
Regulation S offering 800,000
Exercise of warrants 45,000
Sale of common stock 800,000
Warrants issued with debt 56,268
Warrants issued for services 100,000
Stock issued for services 90,173
Amortization of deferred
compensation 34,375
Net loss (1,753,121)
------------
Balances at September 30, 1995 $ 1,168,438
Stock issued in settlement of debt 549,227
Increase in interest receivable on notes (60,190)
Exercise of employee stock options 75,000
Exercise of warrants 548,783
Sale of common stock 1,474,933
Stock issued for services 24,057
Warrants issued for services 120,000
Assignment of stock powers 239,002
Net loss (2,075,718)
------------
Balances at September 30, 1996 $ 2,063,532
------------
Decrease in interest receivable on notes 164,048
Exercise of warrants 25,000
Sale of common stock 4,116,000
Stock issued for services 9,725
Stock issued for guarantee 11,790
Net loss (4,162,131)
------------
Balances at September 30, 1997 $ 2,227,964
------------
</TABLE>
See accompanying notes
15
<PAGE> 16
XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,162,131) $(2,075,718) $(1,753,121)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 385,038 172,180 241,538
Non-cash compensation 9,725 143 224,548
Accrued interest income (47,104) (60,190) (45,001)
Changes in assets and liabilities:
Restricted certificates of deposit (551,000) -- --
Accounts receivable (411,490) (28,979) (6,223)
Cash in escrow 175,000 (175,000) --
Inventories (61,016) (19,480) 26,045
Prepaid expenses (40,322) (36,367) (47,928)
Accounts payable 288,988 (196,876) (385)
Accrued liabilities and other 220,531 241,105 51,686
Related party accrued expenses 28,683 120,586 35,767
----------- ----------- -----------
Net cash used in operating activities (4,165,098) (2,057,596) (1,273,074)
Cash flows from investing activities:
Purchase of machinery and equipment (933,779) (622,078) (275,790)
Deferred acquisition costs (80,563) 1,102,181 --
Other assets (105,706) (19,496) (30,096)
----------- ----------- -----------
Net cash used in investing activities (1,120,048) 420,607 (305,886)
Cash flows from financing activities:
Sales of common stock 5,075,933 705,000 500,000
Exercise of warrants and stock options 25,000 623,783 45,000
Assignment of stock powers -- 239,002 --
Stock issued for guarantee 11,290 -- --
Issuance of convertible notes -- -- 800,000
Issuance of other notes payable 117,852 234,184 564,500
Repayment of notes payable (96,072) (283,533) (190,700)
Payments of related party debt -- 154,480 --
----------- ----------- -----------
Net cash from financing activities 5,134,503 1,672,916 1,718,800
Net increase (decrease) in cash (150,643) 35,927 139,840
Cash and cash equivalents -- beginning of year 184,489 148,562 8,722
----------- ----------- -----------
Cash and cash equivalents at end of year $ 33,846 $ 184,489 $ 148,562
=========== =========== ===========
Supplemental information:
Cash interest paid $ 9,929 $ 23,610 $ 15,208
Issuance of warrants $ -- $ 120,000 $ 156,268
Stock issued for accounts payable $ -- $ -- $ 84,789
Stock issued for services $ 9,725 $ 23,914 $ 90,173
</TABLE>
See accompanying notes.
16
<PAGE> 17
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 subsidiaries, Composite Retrofit
Corporation and TransRez Technologies Inc. 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.
Stock Subscriptions Receivable. 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 19, 1997, as payment for common stock
purchased under a stock purchase agreement that the Company signed on June 16,
1997, and payment of $176,000 in October 1997, for the balance due the company
under a note payable and stock purchase agreement signed on September 1, 1995.
The interest portion of the note is reported in Other Receivables and was
received along with the principal payment. The stock subscription receivable at
September 30, 1996, of $1,149,933 represents cash received by the Company from
October 1, 1996, to December 31, 1996, as payment for stock purchased under a
stock purchase agreement that the Company signed on September 12, 1996. The
stock subscriptions receivable are shown as current assets because the amounts
were received prior to the issuance of the financial statements for both the
1996 and 1997 fiscal years. An amount owed the Company on September 30, 1996, as
part of a stock purchase agreement signed on September 1, 1995, totaling
$193,600 (including accrued interest of $17,600) as of September 30, 1996, is
reported as a contra-equity account for the year ended September 30, 1996, and
is titled, "Note receivable for common stock."
Inventory. Inventory is stated at the lower of cost or market using the
first-in, first-out method of inventory valuation. Inventory as of September 30,
1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials $ 11,095 $ 1,555
Work in process 69,401 17,925
-------- --------
Total Inventory $ 80,496 $ 19,480
</TABLE>
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.
Licenses. Costs incurred in obtaining technology licenses have been
amortized over 17 years.
Patents. Costs incurred in obtaining patents are being amortized over
periods averaging seven years.
Revenue Recognition. The Company's revenues from construction contracts
have been recognized on the basis of completion milestones under terms of the
contracts. Revenues from research contracts from NIST are based on cost
reimbursement under the terms of the contract. Revenues from the Army's Small
Business Innovative Research contracts are recognized upon shipment of
deliverable items 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, 1997, these carry forwards were
approximately $17,000,000 and $8,500,000 for federal and state tax purposes,
respectively, and expire in 2001 through 2013. 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 carry forwards to
approximately $1,000,000 per year.
17
<PAGE> 18
Major Customers. In 1997, four major customers accounted for 40%, 22%
15%, and 7% of 1997 revenues. In 1996, three major customers accounted for 47%,
27% and 20% of revenues. In 1995 two customers represented 51% and 29% 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 1997 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 amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments. Effective March 31, 1996, the
Company adopted Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value Financial Instrument," which requires disclosure
of fair value information about financial instruments whether or not recognized
in the balance sheet. The carrying amounts reported in the balance sheet for
cash, trade receivables, accounts payable and accrued expenses approximate fair
value based on the short-term maturity of these instruments.
Impairment of Long-lived Assets. The Company has adopted Statement of
Financial Accounting Standards No. 121, "Accounting For The Impairment Of
Long-lived Assets And For Long-lived Assets To Be Disposed Of" as of October 1,
1996. Such adoption had no material effect of the financial statements of the
Company.
Accounting for Stock Options. The Company accounts for its stock option
plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
under which no compensation expense is recognized. For the fiscal years ended
September 30, 1997 and 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," for disclosure purposes; accordingly, no compensation
expense has been recognized in the results of operations for its stock option
plan as required by APB No. 25.
For disclosure purposes the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for stock options granted during
both years ended September 30, 1997 and 1996: annual dividends of $0.00,
expected volatility of 50%, risk-free interest rate of 5.7%, and expected life
of five years. The weighted-average fair value of the stock options granted
during the years ended September 30, 1997 and 1996 was $1.49 and $2.11,
respectively.
Under the above model, the total value of stock options granted in 1997
and 1996 was $791,000 and $510,900, respectively, which would be amortized
ratably on a pro forma basis over the option life. Had the Company determined
compensation cost for these plans in accordance with SFAS No. 123, the Company's
pro forma net loss and loss per share would have been $4.27 million and $0.55 in
1997 and $2.11 million and $0.34 in 1996.
2. CASH IN ESCROW
Cash in escrow in 1996 represents the Company's contractual share of
payment of a consulting fee made part of a settlement of a lawsuit in 1995, net
of legal fees. The funds had been held in escrow pending settlement of a dispute
between the Company and its former president. This dispute has been settled and
the funds have been received.
3. FINANCING ARRANGEMENTS
Long-term debt at September 30, 1997 and 1996, consists of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equipment financing - computers, printers $ 18,332 $ 26,113
Equipment financing - copiers 49,516 61,494
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
Financing of truck 30,705 --
Pre-paid insurance financing 66,878 56,044
--------- ----------
165,431 143,651
Less current portion 94,763 75,803
--------- ----------
$ 70,668 $ 67,848
</TABLE>
During the fiscal year ended September 30, 1997, the Company entered
into financing arrangements with credit companies for the purchase of a truck
and for prepaid insurance premiums. On May 8, 1997, the Company received
financing of $32,400 for the purchase of a truck, having monthly payments
extending over 59 months at an interest rate of 10%. On May 24, 1997, the
Company received financing on an insurance policy of $51,502, with monthly
payments extending over 10 months at an interest rate of 7.98%. On August 18,
1997, the Company received financing for a second insurance policy for $33,950,
with monthly payments extending over 9 months at an interest rate of 8.88%. Also
during the year the Company paid off all financing arrangements signed in fiscal
1996 for pre-paid insurance.
During the fiscal year ended September 30, 1996, the Company repaid or
converted to common stock all notes payable that were outstanding as of
September 30, 1995. In October 1995 the Company repaid $100,000 in notes
payable, originally borrowed from four individuals in May 1994. The notes had an
interest rate of 10% per annum. In December 1995, the Company repaid a note
payable for $93,000 borrowed from an individual in August and September 1995
plus accrued interest at 10% per annum. On August 16, 1996, the Company
converted $502,552 in debt plus $46,675 in accrued interest to 196,152 shares of
restricted common stock under Regulation S at a price of $2.80 a share.
Also during the year ended September 30, 1996, the Company entered into
financing arrangements with credit companies for both office equipment and for
prepaid insurance premiums. On January 23, 1996, the Company received financing
of $16,173 for a copy machine, having monthly payments extending over 48 months
at an interest rate of 8.435%. On May 24, 1996, the Company received financing
on an insurance policy of $41,340, with monthly payments extending over eleven
months at an interest rate of 7.74%. On June 30, 1996, the Company received
financing for a copier machine of $49,584, with monthly payments extending over
60 months at an interest rate of 10.1475%. On August 16, 1996, the Company
received an equipment loan of $26,113, at a rate of 17.626% with monthly
payments extending over a term of 34 months. On August 18, 1996, the Company
received financing for a second insurance policy premium for $32,976, with
payments extending over nine months at an interest rate of 7.3%.
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 October 1995.
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. See also, Preferred
Stock, Note 6, for additional transactions of the Chairman.
5. COMMITMENTS
In April 1997, the Company arranged for a $551,000 letter of credit with
its bank for the purposes of providing collateral in support of a material
payment bond and a performance bond issued by a surety company in connection
with work to be performed on certain construction projects. The $551,000 letter
of credit is fully supported by the pledge of Company's funds, which are held by
the Company's bank as collateral for the letter of credit. Such funds remain in
a restricted use account until the bond and letter of credit are no longer
required. The funds are regularly reinvested in short-term certificates of
deposit with the bank. Certain contractors and customers require the Company to
have bonding
19
<PAGE> 20
capacity in order to work on their projects. Presently, the Arroyo Seco project
requires the Company to have material payment and performance bonds in
connection with the Company's work on that project.
The Company leases its office facilities pursuant to two leases that
extend to October 31, 1998. The remaining rent commitment at September 30, 1997
is $147,624. Rent expense was $141,654 in fiscal year 1997, $86,158 in 1996, and
$63,790 in 1995. On March 1, 1997, the Company signed a lease for an apartment
in San Diego for use by its employees and consultants, for the purposes of
reducing hotel bills for employees and consultants who have residences outside
of the San Diego area and who travel extensively to San Diego. The San Diego
apartment rents for $950 a month and extends to February 28, 1998, for a
remaining rent commitment at September 30, 1997, of $4,750. On April 18, 1997,
the Company signed a lease for an apartment in Washington, D.C., which is used
extensively by the Chairman who travels monthly to the Capitol to work on grant
programs for composite technology development. The Washington apartment rents
for $1,175 a month and expires in January 1998, for a remaining rent commitment
at September 30, 1997, of $4,700.
On April 14, 1997, the Company signed a construction contract for
$501,138 (including tax) to design and build a second-generation
Robo-Wrapper(TM), which is expected to be completed in the Third Fiscal Quarter.
As of September 30, 1997, the Company still owed $241,138 on the contract.
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 a note and accrued interest payable to the
Company by making a cash payment of $309,916 and offsetting deferred salaries,
accrued vacation, and unreimbursed travel and entertainment expense through that
date, partially offset by other amounts she owed the Company, the net of which
reduced her note a further $137,012. The remaining balance due the Company under
the note together with accrued interest, which total $335,840 on September 30,
1997, $306,288 on September 30, 1996, and $263,698 on September 30, 1995, 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 a reduction of accrued interest and the remaining amount of $182,656
was applied to a reduction in principal on the note. The remaining principal
balance after her payment on the note at May 21, 1996, was $267,344.
Warrants:
At fiscal year ended September 30, 1994, the Company had warrants
outstanding which entitle the holders to purchase 3,069,405 shares of Common
Stock at prices from $0.20 to $6.00 a share.
Fiscal year 1995. In fiscal year 1995, the Company issued 1,553,422
warrants to purchase shares of Common Stock and 200,000 warrants were exercised.
In connection with services that have been or will be provided to the
Company, warrants were issued to purchase a total of 400,000 shares of Common
Stock. In March 1995 a director was granted a warrant to purchase 100,000 shares
at $0.25 per share and was 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. Warrants issued in June 1995 were above the market
price on the date of grant. Warrants issued to the Chairman and the directors
have a term of five years. The Chairman's warrants have immediate vesting and
the two directors' warrants vest over a two-year period of service.
20
<PAGE> 21
In connection with stock sales in fiscal 1995, the Company issued
427,740 warrants to purchase Common Stock at $1.95 to $6.00 a share. Included
were 75,740 underwriters warrants to purchase Common Stock at $1.95 a share were
issued in December 1994 in connection with a 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.
In connection with extension of debt, the Company issued warrants to
purchase a total of 725,682 shares of Common Stock. 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 issuance of 10% notes payable due October 11,
1996. The closing price of common stock on that date was 5 3/32, accordingly, no
value was assigned to the warrants.
In February 1995, a warrant to purchase 100,000 shares of Common Stock
at $0.20 a share was exercised. In March 1995, a warrant to purchase 100,000
shares of Common Stock at $0.25 a share was exercised.
Fiscal year 1996. During fiscal 1996 warrants to purchase 262,386 shares
of Common Stock were issued and warrants to purchase 487,720 shares of Common
Stock were exercised. 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 $44,000 and
$76,000 respectively. The consulting agreement has been terminated. On September
27, 1996, a member of the board of directors was granted a five-year warrant to
purchase 25,000 shares of Common Stock at $5.50 a share for serving on the board
of directors. The closing price for the Common Stock was $3.156 that day so,
accordingly no value was assigned to the warrant. See also Note 6, "Common
Stock" for Common Stock issued as a result of exercises of warrants.
Fiscal year 1997. During fiscal 1997, warrants to purchase 70,000 shares
of Common Stock were issued, warrants to purchase 31,250 shares of Common Stock
were exercised, and warrants to purchase 280,000 shares expired. During October
and November 1996, warrants to purchase 31,250 shares at $0.80 a share were
exercised. On March 21, 1997, the Vice Chairman was issued a five-year warrant
to purchase 25,000 shares of Common Stock at $4.188 a share for serving on the
board of directors. On that date the closing price for the Common Stock was
$4.1875, accordingly, no value was assigned to the warrant. On April 17, 1997,
the Company issued a five-year warrant to purchase 40,000 shares of Common Stock
at $3.93 a share in connection with a third-party pledge of capital for the
purposes of assisting the Company in obtaining a letter of credit. On that day,
the closing price for the Common Stock was $3.1875. On June 17, 1997, an
additional five-year warrant to purchase 5,000 shares of Common Stock at $2.625
was issued to the same party for extension of the third-party pledge. On that
day, the closing price for the Common Stock was $2.50. Given the higher prices
for the warrants, no value was placed on the issuance of either of the warrants.
(See Note 1, "Commitments").
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>
COMMON PRICE PER VALUATION
SHARES SHARE RECORDED
---------- ------------- ------------
<S> <C> <C> <C>
Balance - September 30, 1994 3,069,405
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
Warrants issued for services 125,000 $3.16 - $4.00 120,000
Warrants issued with debt extension 137,386 $ 6.00 --
Warrants redeemed (2,248,140) $ 4.00 --
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C> <C>
Warrants exercised (487,720) $0.80 - $4.00 --
-------
Balance - September 30, 1996 1,949,353
Warrants issued for services 25,000 $ 4.19 --
Warrants issued with debt 45,000 $2.63 - $3.93 --
Warrants expired (280,000) $3.00 - $5.40
Warrants exercised (31,250) $ 0.80 --
-------
Balance - September 30, 1997 1,708,103
</TABLE>
22
<PAGE> 23
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>
DATE OF COMMON DATE OF
NUMBER OF WARRANT WARRANT STOCK PRICE EXERCISE OR
DATE OF GRANT WARRANTS EXERCISE PRICE EXPIRATION DATE OF GRANT REDEMPTION
------------- -------- -------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
2/92-7/92 112,500 $ 0.80000 5 Years $ 2.50000 81,250 by 9/96
2/1/92 2,620 $ 0.68700 1/21/97 $ 2.50000 4/3/96
7/31/92 2,400,000 $ 4.00000 7/30/97 $ 3.00000 9/12/96
7/31/92 240,000 $ 5.40000 7/30/97 $ 3.00000 Expired
2/12/93 10,000 $ 0.80000 2/11/98 $ 2.50000 6,250 in 5/96
2/12/93 40,000 $ 3.00000 1/31/97 $ 2.50000 Expired
10/21/93 14,285 $ 1.75000 10/20/00 $ 1.75000
5/10/94 50,000 $ 1.00000 5/10/99 $ 1.25000 5/22/96
11/30/94 60,000 $ 1.00000 11/99/99 $ 1.56250 5/22/96
12/19/94 75,740 $ 1.95000 12/15/99 $ 1.75000 12/19/95
3/1/95 60,000 $ 1.00000 2/28/00 $ 1.75000 5/22/96
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
-------
Total/average
at 9/30/95 4,422,827 $ 4.01521 $ 3.23898
========= ========= =========
</TABLE>
Warrant balances as of September 30, 1996, are shown in the following
table categorized by exercise price for warrants granted, grant dates, shares
exercisable, and expiration dates.
<TABLE>
<CAPTION>
DATE OF COMMON DATE OF
NUMBER OF WARRANT WARRANT STOCK PRICE EXERCISE OR
DATE OF GRANT WARRANTS EXERCISE PRICE EXPIRATION DATE OF GRANT REDEMPTION
------------- -------- -------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
2/92-7/92 31,250 $ 0.80000 5 Years $ 2.50000 10/97 - 11/97
7/31/92 240,000 $ 5.40000 7/30/97 $ 3.00000 Expired
2/12/93 3,750 $ 0.80000 2/11/98 $ 2.50000
2/12/93 40,000 $ 3.00000 1/31/97 $ 2.50000 Expired
10/21/93 14,285 $ 1.75000 10/20/00 $ 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
12/15/95 137,386 $ 6.00000 12/14/00 $ 5.68750
1/17/96 50,000 $ 3.50000 1/16/00 $ 4.68750
1/17/96 50,000 $ 4.00000 1/16/00 $ 4.68750
9/27/96 25,000 $ 5.50000 9/26/01 $ 3.15625
------
Total/average
at 9/30/96 1,949,353 $ 4.65842 $ 4.01947
========= ========== =========
</TABLE>
23
<PAGE> 24
Warrant balances as of September 30, 1997, are shown in the following
table categorized by exercise price for warrants granted, grant dates, shares
exercisable, and expiration dates.
<TABLE>
<CAPTION>
DATE OF COMMON DATE OF
NUMBER OF WARRANT WARRANT STOCK PRICE EXERCISE OR
DATE OF GRANT WARRANTS EXERCISE PRICE EXPIRATION DATE OF GRANT REDEMPTION
------------- -------- -------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
2/12/93 3,750 $ 0.80000 2/11/98 $ 2.50000
10/21/93 14,285 $ 1.75000 10/20/00 $ 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
12/15/95 137,386 $ 6.00000 12/14/00 $ 5.68750
1/17/96 50,000 $ 3.50000 1/16/00 $ 4.68750
1/17/96 50,000 $ 4.00000 1/16/00 $ 4.68750
9/27/96 25,000 $ 5.50000 9/26/01 $ 3.15625
3/21/97 25,000 $ 4.18800 3/20/02 $ 4.18750
4/18/97 40,000 $ 3.93000 4/18/02 $ 3.81250
6/17/97 5,000 $ 2.62500 6/17/02 $ 2.50000
-----
Total/average
at 9/30/97 1,708,103 $ 4.63376 $ 4.21926
========= ========= =========
</TABLE>
Common Stock:
Fiscal year 1995. On December 12, 1994 the Company issued a 5%
Convertible Note due December 31, 1997 in the aggregate principal amount of
$800,000. The note was 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.
Also 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 a 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 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 common shares to be issued. In
connection with this transaction, the Company issued 352,000 five-year warrants
to purchase 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
24
<PAGE> 25
received until October 3, 1995 and is shown in the consolidated balance sheet as
a subscription receivable at September 30, 1995.
Fiscal year 1996. 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 a share under a purchase
agreement dated 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, and is reported as a contra-equity account in
shareholders equity.
During fiscal year 1996, holders of warrants exercised their rights to
purchase 452,884 shares of Common Stock at a net purchase price of $548,783. 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 a share. On April
3, 1996, the Company received $1,800 upon the exercise of a warrant that had
been issued prior to the Company's initial public offering in 1992, to purchase
2,620 restricted shares of common stock at $0.687 a share. On May 22, 1996, the
Company received $5,000 for the exercise of a warrant issued in connection with
a bridge loan prior to the Company's initial public offering in 1992 to purchase
6,250 restricted shares of Common Stock at $0.80 a share. On May 22, 1996, a
group of investors exercised their rights under a warrant agreement to receive
135,128 shares of restricted common stock in a "cash-less" exercise, by
tendering 34,872 of a total of 170,000 shares that could be purchased by these
investors under that same warrant agreement that were "in-the-money" by $3.875 a
share ($4.875 market price at the time of exercise less the $1.00 exercise
price).
On August 12, 1996, the Company called for redemption of its 1,600,000
publicly traded warrants (previously NASDAQ: XSYSW). Total cost of redemption
was $278,134, including $74,938 in payments to holders at $0.05 a warrant
(1,498,760 warrants actually redeemed) and $203,196 in other costs (primarily
filing fees and printing and legal expense) to register shares of Common Stock
underlying the publicly traded warrants and other warrants and restricted stock.
Holders of 101,240 publicly traded warrants exercised their rights to purchase
151,846 shares of Common Stock at $4.00 a share for $607,384.
During September 1996 the Company received $65,040 for the exercise of
warrants issued in connection with consulting services and bridge loans prior to
the Company's initial public offering in 1992, and the purchase of 81,300 shares
of Common Stock at $0.80 a share.
Other Common Stock transactions. 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. On May 21, 1996, the Company assigned its rights to redeem certain
restricted shares of common stock to a third party for $239,002. On August 16,
1996, the Company converted $502,552 in debt plus $46,675 in accrued interest to
196,152 shares of restricted common stock under Regulation S at a price of $2.80
a share.
On September 12, 1996, the Company agreed to two private placements
totaling $2,000,000 in exchange for common stock at a price equal to 80% of the
20 prior trading days. A portion of the cash ($325,000) was received prior to
the fiscal year ended September 30, 1996, and $1,149,933 was received between
October 1, 1996, and December 31, 1996, and is shown in the consolidated balance
sheet as a subscription receivable at September 30, 1996. The average share
price of the Common Stock issued to date as a result of this arrangement is
$2.86. The remaining funds to be received under this private placement are
$525,067.
Fiscal year 1997. During October and November 1996 the Company received
$25,000 from four individuals who exercised warrants to purchase 31,250 shares
of restricted Common Stock at $0.80 per share.
During the period from October 11, 1996, to April 10, 1997, the Company
received cash in the amount of $1,675,000 from two individuals in exchange for
595,649 shares of restricted Common Stock under Regulation S under two private
placement agreements for $2 million, signed on September 12, 1996. The average
share price of Common Stock issued to these two individuals during this period
was $2.81. The balance of funds totaling $325,000 war received in the prior
fiscal year.
25
<PAGE> 26
On March 18, 1997, the two individuals exercised their rights to
purchase an additional $2 million in exchange for 799,784 shares of restricted
Common Stock at an average price of $2.50 a share.
On April 21, 1997, the Company issued 3,000 shares of restricted Common
Stock to a third party as part of an agreement whereby the third party would
provide a pledge of collateral in support of a letter of credit issued by a bank
in favor of the Company, valued at $11,790, for a price per share of $3.93.
Also, on April 21, 1997, the Company issued 3,261 shares of restricted Common
Stock to a consultant in exchange for services rendered earlier in the year
valued at $9,725, for an average price per share of $2.98.
On June 16, 1997, the Company signed agreements for two outside
investors to purchase restricted Common Stock under Regulation S for $2 million,
of which the Company had received $1,400,933 in exchange for 840,179 shares of
restricted Common Stock before September 30, 1997, for an average price of $1.67
a share. From October 1, 1997 to December 19, 1997, the Company received an
additional $190,000 of these private placements in exchange for 226,145 shares
of restricted Common Stock, for an average price of $0.84 a share. The amounts
received after September 30, 1997, but before publication of this financial
statement are included in total Subscriptions Receivable at September 30, 1997.
The remaining funds to be received under one private placement as of December
19, 1997, is $409,067.
On December 30, 1997, the Company signed agreements for two outside
investors to purchase restricted Common Stock under Regulation D aggregating
$3,000,000. The shares are to be purchased from December 30, 1997, through
September 30, 1998.
7. STOCK OPTIONS
A total of 550,000 shares of common stock are reserved for issuance upon
the exercise of options to be granted pursuant to the Company's 1991 Stock
Option Plan and 1,000,000 shares for issuance under the 1996 Stock Option Plan.
Options may be granted to officers, directors and employees. Transactions in the
various plans are summarized below:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE GRANTED PRICE
FOR GRANT OPTIONS PER SHARE
--------- ------- ---------
1991 STOCK OPTION PLAN
- ----------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1993 419,400 130,600 $2.29-$2.63
Granted (89,000) 89,000 $0.75-$2.26
Canceled 56,049 (56,049) $1.52-$2.52
-------- ----------
Balance at September 30, 1994 386,449 163,551 $0.75-$2.52
Granted (332,249) 332,249 $1.50-$1.88
Canceled 108,800 (108,800) $1.50-$2.52
-------- ----------
Balance at September 30, 1995 163,000 387,000 $0.75-$2.50
Granted (163,000) 163,000 $3.63-$5.18
Canceled 0 0
-------- ----------
Balance at September 30, 1996 0 550,000 $0.75-$5.18
Granted (20,000) 20,000 $ 2.44
Canceled 99,000 (99,000) $3.75-$5.18
-------- ----------
Balance at September 30, 1997 79,000 471,000 $0.75-$5.00
1996 STOCK OPTION PLAN
- ----------------------
Balance at September 30, 1995 1,000,000 0
Granted (30,000) 30,000 $ 3.63
Canceled 0 0
-------- ----------
Balance at September 30, 1996 970,000 30,000 $ 3.63
Granted (583,500) 583,500 $1.56-$4.31
Canceled 196,000 (196,000) $2.50-$5.38
-------- ----------
Balance at September 30, 1997 582,500 417,500 $1.56-$4.19
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
<PAGE> 27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gloria C. L. Ma, Ph.D. 49 Chairman and Chief Executive Officer
Lawrence D. Cercone, Ph.D. 53 Vice President Engineering
Gregory P. Hanson, CMA 51 Chief Financial Officer
Roger W. Green 55 Vice President Sales
James T. Gasparo 49 Vice President Construction
Robert E. Farris 62 Vice Chairman and Director of the Company
William J. Dale 64 Director of the Company
Walter Geer 48 Director of the Company
</TABLE>
DR. MA is co-founder of the Company and served as President or Chairman
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 (Montreal) and a Ph.D. degree in molecular biology from
the University of California, San Diego. She is a member of the Board of
Directors for the American Road and Transportation Builders Association (ARTBA).
Other memberships include the President's Council on Competitiveness, the Board
of Overseers to the Chancellor of the University of California, San Diego, and
the San Diego Technology Council.
DR. CERCONE was appointed Vice President of Engineering in August 1994.
In April 1997, Dr. Cercone was named a finalist for Technical Innovator of the
Year, Transportation and Automotive category, by Discover Magazine. From 1989 to
1994 he was an adjunct professor at the University of Wyoming. From 1984 to 1989
Dr. Cercone owned an engineering firm specializing in the design and manufacture
of machinery used in the manufacture and treatment of composites. Prior to that,
he 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
(CFO) 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 CFO.
From January 1992 to May 1993, Mr. Hanson served at CFO of Onsite Energy, an
energy service and finance company. From February 1990 to December 1991, Mr.
Hanson was CFO for Catrel USA, a waste resource recovery company. Prior to 1989
he held management positions with Ford Motor Company and Solar Turbines
Incorporated (a Caterpillar subsidiary). 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. GREEN has served as Vice President Sales since January 31, 1997.
Green has more than 30 years experience in the construction industry. From 1995
to 1996 he was General Manager for National Ready Mixed Concrete Company. From
1994 to 1995 he was a consultant for the California Cement Producers' Coalition.
From 1994 to 1995 he was consultant to Mitsubishi Cement-Lucy Cement. From 1985
to 1994 he was Area Sales Manager for Mitsubishi Cement Corporation (formerly
Kaiser Cement). Prior to 1985 he worked for various companies in the concrete
and cement industry. Mr. Green received his education through several
institutions in England, including classes taken at Ashridge Management Business
School, Holly Ryod Business School, Manchester University, and Merchant Taylors'
School. Continuing educational courses were taken at the University of
California, Los Angeles.
27
<PAGE> 28
MR. GASPARO joined the Company on March 28, 1997, as Vice President of
Construction. Mr. Gasparo has 25 years of experience in the construction
industry. From January 1994 to March 1997, he was responsible for heavy
construction equipment sales at Rainbow Equipment Corporation. From December
1976 to May 1992, Mr. Gasparo owned and operated his own construction company,
Best Western Paving Company, Inc. Gasparo was President of the Southern
California Contractors Association in 1991 and a member of the board of
Associated General Contractors (AGC), Los Angeles District, from 1990-1991. He
was President of Southern California Grading and Paving Association in 1981. He
graduated from the University of Illinois in Urbana-Champaign with a B. S.
degree in Finance in 1970.
MR. FARRIS is a former Federal Highway Administrator. Mr Farris has a
long distinguished career in transportation administration, both at the federal
and state government level. For the past eight years, he has been working with
industry as an international consultant on transportation issues with special
emphasis on the development of public/private partnerships. From 1986 to 1989
Mr. Farris served as the Federal Highway Administrator, a position appointed by
President Reagan and confirmed by the United States Senate. This position is one
of four top administrative offices in the U.S. Department of Transportation. Mr.
Farris had responsibility for more than 3,000 employees and a budget in excess
of $13 billion.
MR. DALE is 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 dealing with corporate and
securities law matters. Prior to that, he was a sole practitioner for two years
and for eight years was general counsel for an agricultural management company.
Mr. Dale received a B.A. degree in Economics from Allegheny College and an LL.B.
degree from the University of Pennsylvania.
MR. GEER is a co-founder and 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.
Mr. Geer has over 25 years of building industry and construction experience,
working with both public and private sector organizations, particularly in the
field of introducing new and non-traditional building and construction
technologies. He has served as a consultant, speaker or expert witness to the
California State Senate, the United States Congress, the Harvard Joint Center
for Housing, the U.S./Mexico Border Trade Alliance, the American Institute of
Architects, the National Association of Home Builders, the State Senate of
Hawaii, the European Reconstruction Bank, and numerous local and regional
building departments and universities. 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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors, officers and each beneficial owner of more than 10% of the
Common Stock of the Company are required by Section 16(a) of the Securities
Exchange Act of 1934 to file reports periodically disclosing their transactions
in the Company's securities. Based on a review of such reports, the Company has
noted that Form 4 was not filed on the specified due dates by Gregory Hanson.
ITEM 10. EXECUTIVE COMPENSATION.
Item 10 is incorporated by reference to the proxy statement to be
filed on or about January 30, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Item 11 is incorporated by reference to the proxy statement to be
filed on or about January 30, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Item 12 is incorporated by reference to the proxy statement to be
filed on or about January 30, 1998.
28
<PAGE> 29
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(1) Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report 12
Consolidated Balance Sheets at September 30, 1997 and 1996 13
Consolidated Statements of Operations for the years ended 14
September 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the 15
three years ended September 30, 1997
Consolidated Statements of Cash Flows for the years ended 16
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 17
</TABLE>
(a)(2) Exhibits
The exhibits listed in the accompanying index to exhibits are filed as
part of this annual report.
(b) Reports on Form 8-K
On August 29, 1997, the Company filed a current report on Form 8-K
indicating it had entered into two private placements totaling
$2,000,000 in exchange for restricted common stock. The private
placements were conducted pursuant to Regulation S under the Securities
Act of 1933. There was no underwriter involved.
29
<PAGE> 30
XXSYS TECHNOLOGIES, INC.
INDEX TO EXHIBITS
(Item 13(a))
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C> <C>
3.1 (1) Restated Articles of Incorporation.
3.1.1 (3) Certificate of Amendment to Articles of Incorporation.
3.2 (1) Restated Bylaws.
4.0 (4) Certificate of Determination for Registrant's Series A Preferred Stock.
10.1 (1) Employment Agreement dated September 7, 1991 between Registrant and Gloria C.L. Ma.
10.2 Lease Agreement dated October 26, 1995 between Registrant and Viewridge Business Park.
10.3 (1) Form of Indemnification Agreement between Registrant and its officers and directors.
10.4 1991 Stock Option Plan dated December 14, 1991, as amended.
10.5 (2) Warrant dated August 12, 1992 issued to H. J. Meyers & Co., Inc.
10.6 (2) Stock Escrow Agreement among Registrant, American Stock Transfer and Trust Company and certain stockholders of
Registrant.
10.7 (2) Agreement between certain of Registrant's stockholders and H. J. Meyers & Co., Inc. with respect to transferability
of shares.
10.8 (2) Letter agreement between Registrant and H. J. Meyers & Co., Inc. pertaining to mergers and acquisitions.
10.9 (1) Form of Warrant issued in 1992 bridge financing.
10.10 (3) Memorandum of Understanding dated February 12, 1993 among the members of the Advanced Composite Technology Transfer
(ACTT) Consortium.
10.11 (3) Cooperation Agreement dated July 21, 1993 among Composite Retrofit Corporation, Hercules Incorporated, FCI
Constructors, and Ciba Composites Division, Ciba-Geigy Corporation.
10.12 (5) Warrant Agreement dated December 30, 1993 between the Company and Mr. S. Georgiev.
10.13 (6) Registrant's Promissory Note dated May 10, 1994 in the amount of $35,000.
10.14 (6) Registrant's Promissory Note dated May 10, 1994 in the amount of $20,000.
10.15 (6) Registrant's Promissory Note dated May 10, 1994 in the amount of $10,000.
10.16 (6) Registrant's Promissory Note dated May 10, 1994 in the amount of $35,000.
10.17 (6) Form of Warrant Agreement issued to holders of Registrant's Promissory Note dated May 10, 1994.
10.18 (7) Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May 10, 1994, in the amount of $35,000.
10.19 (7) Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May 10, 1994, in the amount of $20,000.
10.20 (7) Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May 10, 1994, in the amount of $10,000.
10.21 (7) Registrant's November 30, 1994 Amendment to Note and Warrant Agreement dated May 10, 1994, in the amount of $35,000.
10.22 (7) Form of Warrant Agreement issued to holders of Registrant's Promissory Notes, Amended November 30, 1994.
10.23 (7) Letter Agreement between Company and Steven Georgiev dated January 4, 1995.
10.24 (8) Agreement regarding separation of employment of Paul W. Pendorf and William J. Timmerman dated March 25, 1995.
10.25 (9) Registrant's Promissory Note dated March 25, 1995 in the amount of $200,000 and related Warrant Agreement.
10.26 (9) Registrant's Promissory Note dated March 26, 1995 in the amount of $100,000 and related Warrant Agreement.
10.27 (9) Registrant's Promissory Note dated May 10, 1995 in the amount of $110,000 and related Warrant Agreement.
10.28 (10) Registrant's Promissory Note dated July 28, 1995 in the amount of $93,000 and related Warrant Agreement.
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C> <C>
10.29 (10) Registrant's Promissory Note in the amount of $247,202,
effective September 12, 1995, together with related Warrant
Agreement and rescission of agreement to accept common stock in
lieu of loan.
10.30 (10) Registrant's Promissory Note in the amount of $123,601,
effective September 12, 1995, together with related Warrant
Agreement and rescission of agreement to accept common stock in
lieu of loan.
10.31 (10) Registrant's Promissory Note in the amount of $131,749,
effective September 12, 1995, together with related Warrant
Agreement and rescission of agreement to accept common stock in
lieu of loan.
10.32 (10) Common stock purchase agreement between Biu Bui Law and the
Company dated August 30, 1995.
10.33 (11) Current report on Form 8-K, giving evidence of compliance with
the minimum listing requirements for Nasdaq.
10.34 (12) Common stock purchase agreements between the Company and Tung Bik
Lin and Li Sau Foon, dated September 15, 1996.
10.35 (13) Common stock purchase agreements between the Company and Tung Bik
Lin and Li Sau Foon, dated August 29, 1997.
10.36 License Agreement between the Regents of the University of
California and the Company, dated June 27, 1997.
10.37 Distributorship Agreement between the Sho-Bond Corporation and
the Company, dated June 27, 1997.
10.38 Common stock purchase agreements between the Company and Tung Bik
Lin and Li Sau Foon, dated December 30, 1997.
27 Financial Data Schedule.
</TABLE>
<TABLE>
<CAPTION>
Notes:
- ------
<S> <C>
(1) Incorporated by reference to Form S-1 dated July 16, 1992, File No. 33-47018.
(2) Incorporated by reference to Form 10-K for the year ended September 30, 1992.
(3) Incorporated by reference to Form 10-K for the year ended September 30, 1993.
(4) Incorporated by reference to Form 8-K dated May 12, 1994.
(5) Incorporated by reference to Form 10-QSB for the quarter ended December 31, 1993.
(6) Incorporated by reference to Form 10-QSB for the quarter ended June 30, 1994.
(7) Incorporated by reference to Form 10-QSB for the quarter ended December 31, 1994.
(8) Incorporated by reference to Form 8-K dated April 10, 1995.
(9) Incorporated by reference to Form 10-QSB for the quarter ended June 30, 1995.
(10) Incorporated by reference to the original Form 10-KSB for the year
ended September 30, 1995, filed on January 15, 1996.
(11) Incorporated by reference to Form 8-K dated October 31, 1996.
(12) Incorporated by reference to Form 10-KSB for the year ended September 30, 1996.
(13) Incorporated by reference to Form 8-K dated August 29, 1997.
</TABLE>
31
<PAGE> 32
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.
January 6, 1998 By: /s/ GLORIA C. L. MA
----------------------------------------
Gloria C. L. Ma
Chairman and Chief Executive Officer
By: /s/ GREGORY P. HANSON
----------------------------------------
Gregory P. Hanson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gloria C. L. Ma Chairman, Chief Executive January 6, 1998
- --------------------------------------- Officer and Director
Gloria C. L. Ma
/s/ Gregory P. Hanson Chief Financial Officer January 6, 1998
- ---------------------------------------
Gregory P. Hanson
/s/ Robert E. Farris Director January 6, 1998
- ---------------------------------------
Robert E. Farris
/s/ Walter Geer Director January 6, 1998
- ---------------------------------------
Walter Geer
/s/ William J. Dale Director January 6, 1998
- ---------------------------------------
William J. Dale
</TABLE>
32
<PAGE> 1
EXHIBIT 10.36
EXCLUSIVE LICENSE AGREEMENT
between
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
and
XXSYS TECHNOLOGIES INC.
for
"RETROFIT AND REPAIR OF CONCRETE AND MASONRY WALLS
WITH CARBON OVERLAYS",
UCSD CASE SD96-103
<PAGE> 2
UC Case No. SD 96-103
EXCLUSIVE LICENSE AGREEMENT
for
This License Agreement (the "Agreement") is made effective the date of
last signature (the "Effective Date") between THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA, a California corporation having its statewide administrative offices
at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550, ("The
Regents"), on behalf of the University of California, San Diego campus, and
XXSYS TECHNOLOGIES INC., a California corporation having a principal place of
business at 4619 Viewridge Avenue, San Diego, CA 92123 (the "Licensee").
BACKGROUND
1. Certain inventions, generally characterized as SD 96-103: "Retrofit
and Repair of Concrete and Masonry Walls with Carbon Overlays", which is the
subject of U.S. Patent Application No. 08/667,916 and attached here as Exhibit
A, (collectively the "Invention"), were made in the course of research at the
University of California, by Gilbert Hegemier and Frieder Seible and are covered
by Regents' Patent Rights as defined below;
2. The Licensee has evaluated the Invention under a Secrecy Agreement
with The Regents (SD Control No. 96-20-0074);
3. The Licensee wishes to obtain rights from The Regents for the
commercial development, use, and sale of products from the Invention, and The
Regents is willing to grant those rights so that the Invention may be developed
to its fullest and the benefits enjoyed by the general public; and
4. The Licensee is a "small business firm" as defined in 15 U.S.C. 632;
5. Both parties recognize and agree that royalties due under this
Agreement will be paid on both pending patent applications and issued patents;
6. This work was supported with federal funding from ARPA contract MDA
972-943-0030 and NSF grant MSS 90-24976.
- - oo 0 oo - -
In view of the foregoing, the parties agree:
1. DEFINITIONS
1.1 "Regents' Patent Rights" means any subject matter claimed in or
covered by any of the following: any pending or issued United States patent
based on and claiming the INVENTION of SD96-103, together with continuing
applications thereof including divisions and substitutions but
1
<PAGE> 3
excluding continuation-in-part applications claiming new matter developed by The
Regents, except to the extent enabled by the parent case; any patents issuing on
said applications including reissues, reexaminations and extensions; and any
corresponding foreign applications or patents.
1.2 "Licensed Product" means any material that is either covered by
Regents' Patent Rights, that is produced by the Licensed Method, or the use of
which would constitute, but for the license granted to the Licensee under this
Agreement, an infringement of any pending or issued claim within Regents' Patent
Rights.
1.3 "Licensed Method" means any method that is covered by Regents'
Patent Rights, or the use of which would constitute, but for the license granted
to the Licensee under this Agreement, an infringement of any pending or issued
claim within Regents' Patent Rights.
1.4 "Net Sales" means the total of the gross invoice prices of Licensed
Products sold by the Licensee, an Affiliate, or a sublicensee, less the sum of
the following actual and customary deductions where applicable: cash, trade, or
quantity discounts; sales, use, tariff, import/export duties or other excise
taxes imposed on particular sales; transportation charges and allowances; or
credits to customers because of rejections or returns or deductions for products
or services not associated with the Licensed Products. For purposes of
calculating Net Sales, transfers to an affiliate or sublicensee for end use by
the affiliate or sublicensee will be treated as sales at list price.
1.5 "Affiliate" means any corporation or other business entity in which
the Licensee owns or controls, directly or indirectly, at least fifty percent
(50%) of the outstanding stock or other voting rights entitled to elect
directors, or in which the Licensee is owned or controlled directly or
indirectly by at least 50% of the outstanding stock or other voting rights
entitled to elect directors; but in any country where the local law does not
permit foreign equity participation of at least 50%, then an "Affiliate"
includes any company in which the Licensee owns or controls or is owned or
controlled by, directly or indirectly, the maximum percentage of outstanding
stock or voting rights permitted by local law.
1.6 "Field of Use" means the construction, retrofit, repair, or
reinforcement of reinforced or unreinforced cementitious or masonry walls or
other structures.
2. LIFE OF PATENT EXCLUSIVE GRANT
2.1 Subject to the limitations set forth in this Agreement, The Regents
grants to the Licensee a world-wide license under Regents' Patent Rights to
make, have made, use, and sell Licensed Products and to practice Licensed
Methods.
2.2 Except as otherwise provided in this Agreement, the license granted
in Paragraph 2.1 is exclusive for the life of the Agreement.
2.3 The license granted in Paragraphs 2.1 and 2.2 is subject to all the
applicable provisions of any license to the United States Government executed by
The Regents and is subject to the overriding obligations to the U. S. Government
under 35 U.S.C. 200-212 and applicable governmental implementing regulations.
2.4 The licenses granted in Paragraphs 2.1 and 2.2 are limited to
methods and products that are within the Field of Use. For other methods and
products, the Licensee has no license under this Agreement.
2
<PAGE> 4
2.5 The Regents reserves the right to use the Invention and associated
technology for educational and research purposes.
3. SUBLICENSES
3.1 The Regents also grants to the Licensee the right to issue
sublicenses to third parties to make, have made, use, and sell Licensed Products
and to practice Licensed Methods, as long as the Licensee has current exclusive
rights thereto under this Agreement. To the extent applicable, sublicenses must
include all of the rights of and obligations due to The Regents (and, if
applicable, the United States Government) and contained in this Agreement.
3.2 The Licensee shall promptly provide The Regents with a copy of each
sublicense issued; and shall use best efforts to collect all payments due The
Regents from sublicensees; and summarize and deliver all reports due The Regents
from sublicensees.
3.3 Upon termination of this Agreement for any reason, any sublicenses
shall remain in effect and shall be assigned to The Regents, provided that: the
Licensee was not in breach of this Agreement when entering into the sublicense;
the sublicensee is not in breach of its sublicense at the time of the
termination of this Agreement; the rights of The Regents in the sublicense are
no less than the rights of The Regents hereunder; the obligations of The Regents
in the sublicense are no greater than the obligations of The Regents hereunder;
and the obligations of the sublicensee are no less than those of the Licensee
hereunder.
4. PAYMENT TERMS
4.1 Paragraphs 1.1, 1.2, and 1.3 define Regents' Patent Rights,
Licensed Products and Licensed Methods so that royalties are payable on products
and methods covered by both pending patent applications and issued patents.
Royalties will accrue in each country for the duration of Regents' Patent Rights
in that country and are payable to The Regents when Licensed Products' invoices
are collected. The Licensee shall use best efforts to collect on all invoices.
4.2 Licensee shall pay earned royalties quarterly on or before February
28, May 31, August 31 and November 30 of each calendar year. Each payment will
be for earned royalties accrued within the Licensee's most recently completed
calendar quarter.
4.3 All monies due The Regents are payable in United States dollars.
When Licensed Products are sold for monies other than United States dollars,
Licensee shall first determine the earned royalty in the currency of the country
in which Licensed Products were sold and then convert the amount into equivalent
United States funds, using the exchange rate quoted in the Wall Street Journal
on the last business day of the reporting period.
4.4 Royalties earned on sales occurring in any country outside the
United States may not be reduced by any taxes, fees, or other charges imposed by
the government of such country on the payment of royalty income. The Licensee is
also responsible for all bank transfer charges. Notwithstanding this, all
payments made by the Licensee in fulfillment of The Regents' tax liability in
any particular country will be credited against earned royalties or fees due The
Regents for that country.
4.5 If at any time legal restrictions prevent the prompt remittance of
royalties by the Licensee from any country where a Licensed Product is sold, the
Licensee shall convert the
3
<PAGE> 5
amount owed to The Regents into United States funds and shall pay The Regents
directly from its U.S. source of funds for as long as the legal restrictions
apply.
4.6 If any patent or patent claim within The Regents' Patent Rights is
held invalid in a final decision by a court of competent jurisdiction and last
resort and from which no appeal has or can be taken, all obligation to pay
royalties based on that patent or claim or any claim patentably indistinct
therefrom will cease as of the date of final decision.
4.7 No royalties may be collected or paid on Licensed Products sold to
the account of the U.S. Government, or any agency thereof, as provided for in
the License to the Government.
4.8 In the event payments, rebilling or fees are not received by The
Regents when due, the Licensee shall pay to The Regents interest charges at a
rate of ten (10) percent per annum. Interest is calculated from the date payment
was due until actually received by The Regents.
5. LICENSE-ISSUE FEE AND EQUITY ISSUANCE
5.1 The Licensee shall pay to The Regents a LICENSE ISSUE FEE of Twenty
Five Thousand Dollars ($25,000.00). The License Issue Fee shall be received by
The Regents no later than June 30, 1997.
5.2 Licensee shall issue Fourteen Thousand Three Hundred Seventy Five
(14,374) shares of XXSYS TECHNOLOGIES, INC. (ticker symbol: XSYS) common stock
to the Regents, and Five Thousand Three Hundred Thirteen (5,313) shares of
common stock to each the University of California San Diego inventors Gilbert
Hegemier and Frieder Seible within no later than one hundred twenty (120) days
after the Effective Date. Shares will be issued according to the rules and
conditions of Securities and Exchange Commission Rule 144, such that the shares
may be sold one (1) year after issuance from Licensee, provided that proper
notice of sale is filed on Form 144 with the Securities and Exchange Commission,
and the sale of the shares is properly transacted.
6. LICENSE MAINTENANCE FEE (MILESTONES)
The Licensee shall also pay to The Regents a royalty in the form of
LICENSE MAINTENANCE FEE of Ten Thousand Dollars ($10,000) beginning on August
31, 1998 and continuing annually on each anniversary of the Effective Date. The
maintenance fee is not due on any anniversary of this Agreement if on that date
Licensee is commercially selling Licensed Product and paying an earned royalty
of any amount to The Regents on the sales of that Licensed Product. License
maintenance fees are non-refundable and not an advance against earned royalties.
7. EARNED ROYALTIES AND MINIMUM ANNUAL ROYALTIES
7.1 The Licensee shall also pay to The Regents an EARNED ROYALTY of one
and one half percent (1.5%) of the Net Sales of Licensed Products.
7.2 The Licensee shall pay to The Regents a MINIMUM ANNUAL ROYALTY of
Ten Thousand Dollars ($10,000) due on August 31, 1999, and Fifteen Thousand
Dollars ($15,000) on February 28, 2000 and each year thereafter for the life of
Regents' Patent Rights. For the first year of commercial sales, the Licensee's
obligation to pay the minimum annual royalty will be pro-rated for the number of
months remaining in that calendar year when commercial sales commence and will
be due the following February 28, to allow for crediting of the pro-rated year's
earned
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royalties. For subsequent years, the minimum annual royalty will be paid to The
Regents by February 28 of each year and will be credited against the earned
royalty due for the calendar year in which the minimum payment was made.
8. DUE DILIGENCE
8.1 The Licensee, on execution of this Agreement, shall diligently
proceed with the development, manufacture and sale of Licensed Products and
shall earnestly and diligently endeavor to market the same within a reasonable
time after execution of this Agreement and in quantities sufficient to meet
market demands.
8.2 The Licensee shall endeavor to obtain all necessary governmental
approvals for the manufacture, use and sale of Licensed Products.
8.3 The Licensee shall:
8.3.1 market Licensed Products by June 1998;
8.3.2 obtain the necessary regulatory approvals in order to
introduce the Licensed Products in the state of California by
June 30, 2000; and
8.3.3 use best efforts to reasonably fill the market demand for
Licensed Products following commencement of marketing at any
time during the exclusive period of this Agreement.
If the Licensee is unable to perform any of the above provisions, then The
Regents has the right and option to either terminate this Agreement or reduce
the Licensee's exclusive license to a nonexclusive license. This right, if
exercised by The Regents, supersedes the rights granted in Article 2 (GRANT).
8.4 In addition to the obligations set forth above, the Licensee shall
spend an aggregate of not less than One Hundred Thousand Dollars ($100,000.00)
for the development (including testing, standards development and obtaining
approvals) of Licensed Products during the first two years of this Agreement.
9. PROGRESS AND ROYALTY REPORTS
9.1. Beginning February 28, 1998 and semi-annually thereafter, the
Licensee shall submit to The Regents a progress report of no more than five (5)
pages, covering the Licensee's (and any Affiliate or sublicensee's) activities
related to the development and testing of all Licensed Products and the
obtaining of the governmental approvals necessary for marketing. Progress
reports are required for each Licensed Product until the first commercial sale
of that Licensed Product occurs in the United States.
9.2 Progress reports submitted under section 7.1 should include, but are
not limited to, the following topics:
- summary of work completed
- key scientific discoveries
- summary of work in progress
- current schedule of anticipated events or milestones
- market plans for introduction of Licensed Products, and
- a summary of resources (dollar value) spent in the reporting
period.
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9.3 The Licensee has a continuing responsibility to keep The Regents
informed of the large/small business entity status (as defined by the United
States Patent and Trademark Office) of itself and its sublicensees and
Affiliates.
9.4 The Licensee shall report to The Regents in its immediately
subsequent progress and royalty report the date of first commercial sale of a
Licensed Product in each country.
9.5 After the first commercial sale of a Licensed Product anywhere in
the world, the Licensee shall make quarterly royalty reports to The Regents on
or before each February 28, May 31, August 31 and November 30 of each year.
Each royalty report will cover the Licensee's most recently completed calendar
quarter and will show (a) the gross sales and Net Sales of Licensed Products
sold during the most recently completed calendar quarter; (b) the number of each
type of Licensed Product sold; (c) the royalties, in U.S. dollars, payable with
respect to sales of Licensed Products; (d) the method used to calculate the
royalty; and (e) the exchange rates used.
9.6 If no sales of Licensed Products have been made during any reporting
period, a statement to this effect is required.
10. BOOKS AND RECORDS
10.1 The Licensee shall keep accurate books and records showing all
Licensed Products manufactured, used, and/or sold under the terms of this
Agreement. Books and records must be preserved for at least five (5) years from
the date of the royalty payment to which they pertain.
10.2 Books and records must be open to inspection by representatives or
agents of The Regents at reasonable times. The Regents shall bear the fees and
expenses of examination but if an error in royalties of more than five percent
(5%) of the total royalties due for any year is discovered in any examination
then Licensee shall bear the fees and expenses of that examination.
11. LIFE OF THE AGREEMENT
11.1 Unless otherwise terminated by operation of law or by acts of the
parties in accordance with the terms of this Agreement, this Agreement will be
in force from the Effective Date until the last-to-expire patent licensed under
this Agreement; or until the last patent application licensed under this
Agreement is abandoned and no patent in Regents' Patent Rights ever issues.
11.2 Any termination of this Agreement will not affect the rights and
obligations set forth in the following Articles:
Article 10 Books and Records
Article 14 Disposition of Licensed Products on Hand on Termination
Article 15 Use of Names and Trademarks
Article 20 Indemnification
Article 24 Failure to Perform
Article 29 Secrecy
12. TERMINATION BY THE REGENTS
If the Licensee fails to perform or violates any term of this Agreement,
then The Regents may give written notice of default (Notice of Default) to the
Licensee. If the Licensee fails to repair the default within sixty (60) days of
the effective date of Notice of Default, The Regents
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may terminate this Agreement and its licenses by a second written notice (Notice
of Termination). If a Notice of Termination is sent to the Licensee, this
Agreement will automatically terminate on the effective date of that notice.
Termination will not relieve the Licensee of its obligation to pay any fees
owing at the time of termination and will not impair any accrued right of The
Regents. These notices are subject to Article 19 (Notices).
13. TERMINATION BY LICENSEE
13.1 The Licensee has the right at any time to terminate this Agreement
in whole or as to any portion of Regents' Patent Rights by giving notice in
writing to The Regents. Notice of termination will be subject to Article 21
(Notices) and termination of this Agreement will be effective ninety (90) days
from the effective date of notice.
13.2 Any termination under the above paragraph does not relieve the
Licensee of any obligation or liability accrued under this Agreement prior to
termination or rescind any payment made to The Regents or anything done by
Licensee prior to the time termination becomes effective. Termination does not
affect in any manner any rights of The Regents arising under this Agreement
prior to termination.
14. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION
Upon termination of this Agreement the Licensee is entitled to dispose
of all previously made or partially made Licensed Products, but no more, within
a period of one hundred and twenty (120) days provided that the sale of those
Licensed Products is subject to the terms of this Agreement, including but not
limited to the rendering of reports and payment of royalties required under this
Agreement.
15. USE OF NAMES AND TRADEMARKS
Nothing contained in this Agreement confers any right to use in
advertising, publicity, or other promotional activities any name, trade name,
trademark, or other designation of either party hereto (including contraction,
abbreviation or simulation of any of the foregoing). Unless required by law, the
use by the Licensee of the name, "The Regents of the University of California"
or the name of any campus of the University of California is prohibited.
16. LIMITED WARRANTY
16.1 The Regents warrants to the Licensee that it has the lawful right
to grant this license.
16.2 This license and the associated Invention are provided WITHOUT
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER
WARRANTY, EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY
THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR
OTHER PROPRIETARY RIGHT.
16.3 IN NO EVENT MAY THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL
OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF
THE INVENTION OR LICENSED PRODUCTS.
16.4 Nothing in this Agreement:
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16.4.1 is a warranty or representation by The Regents as to the
validity or scope of any Regents' Patent Rights;
16.4.2 is a warranty or representation that anything made, used,
sold or otherwise disposed of under any license granted in
this Agreement is or will be free from infringement of
patents of third parties;
16.4.3 is an obligation to bring or prosecute actions or suits
against third parties for patent infringement except as
provided in Article 19;
16.4.4 confers by implication, estoppel or otherwise any license
or rights under any patents of The Regents other than
Regents' Patent Rights as defined in this Agreement,
regardless of whether those patents are dominant or
subordinate to Regent's Patent Rights; or
16.4.5 is an obligation to furnish any know-how not provided in
Regents' Patent Rights.
17. PATENT PROSECUTION AND MAINTENANCE
17.1 As long as the Licensee has paid patent costs as provided for in
Paragraph 17.5, The Regents shall diligently endeavor to prosecute and maintain
the United States and foreign patents comprising Regents' Patent Rights using
counsel of its choice, and The Regents shall provide the Licensee with copies of
all relevant documentation so that the Licensee may be informed of the
continuing prosecution and the Licensee agrees to keep this documentation
confidential. The Regents' counsel will take instructions only from The Regents,
and all patents and patent applications under this Agreement will be assigned
solely to The Regents.
17.2 The Regents shall use all reasonable efforts to amend any patent
application to include claims reasonably requested by the Licensee to protect
the products contemplated to be sold under this Agreement.
17.3 The Licensee shall bear the costs of preparing, filing, prosecuting
and maintaining all United States and foreign patent applications contemplated
by this Agreement. Costs billed by The Regents' counsel will be rebilled to the
Licensee without markup and are due within 30 days of rebilling by The Regents.
These costs include patent prosecution costs for the Invention incurred by The
Regents prior to the execution of this Agreement and any patent prosecution
costs that may be incurred for patentability opinions, re-examination, re-issue,
interferences, or inventorship determinations. Prior costs will be due on
execution of this Agreement and billing by The Regents. Prior costs are
approximately Six Thousand Five Hundred Dollars ($6,500).
17.4 The Licensee may request The Regents to obtain patent protection on
the Invention in foreign countries if available and if it so desires. The
Licensee shall notify The Regents of its decision to obtain or maintain foreign
patents not less than sixty (60) days prior to the deadline for any payment,
filing, or action to be taken in connection therewith. This notice concerning
foreign filing must be in writing, must identify the countries desired, and must
reaffirm the Licensee's obligation to underwrite the costs thereof. The absence
of such a notice from the Licensee to The Regents will be considered an election
not to obtain or maintain foreign rights.
17.5 The Licensee's obligation to underwrite and to pay patent
prosecution costs will continue for so long as this Agreement remains in effect,
but the Licensee may terminate its obligations with respect to any given patent
application or patent upon three (3) months written
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notice to The Regents. The Regents will use its best efforts to curtail patent
costs when a notice of termination is received from the Licensee. The Regents
may prosecute and maintain such application(s) or patent(s) at its sole
discretion and expense, but the Licensee will have no further right or licenses
thereunder. Non-payment of patent costs may be deemed by The Regents as an
election by the Licensee not to maintain application(s) or patent(s).
17.6 The Regents may file, prosecute or maintain patent applications at
its own expense in any country in which the Licensee has not elected to file,
prosecute, or maintain patent applications in accordance with this Article, and
those applications and resultant patents will not be subject to this Agreement.
18. PATENT MARKING
The Licensee shall mark all literature and documentation for Licensed
Products made, used or sold under the terms of this Agreement, or their
containers, in accordance with the applicable patent marking laws.
19. PATENT INFRINGEMENT
19.1 If the Licensee learns of the substantial infringement of any patent
licensed under this Agreement, the Licensee shall call The Regents' attention
thereto in writing and provide The Regents with reasonable evidence of
infringement. Neither party will notify a third party of the infringement of any
of Regents' Patent Rights without first obtaining consent of the other party,
which consent will not be unreasonably denied. Both parties shall use their best
efforts in cooperation with each other to terminate infringement without
litigation.
19.2 The Licensee may request that The Regents take legal action against
the infringement of Regents' Patent Rights. Request must be in writing and must
include reasonable evidence of infringement and damages to the Licensee. If the
infringing activity has not abated within ninety (90) days following the
effective date of request, The Regents then has the right to:
19.2.1 commence suit on its own account; or
19.2.2 refuse to participate in the suit,
and The Regents shall give notice of its election in writing to the Licensee by
the end of the one-hundredth (100th) day after receiving notice of written
request from the Licensee. The Licensee may thereafter bring suit for patent
infringement, at its own expense, if and only if The Regents elects not to
commence suit and if the infringement occurred during the period and in a
jurisdiction where the Licensee had exclusive rights under this Agreement. If,
however, the Licensee elects to bring suit in accordance with this paragraph,
The Regents may thereafter join that suit at its own expense.
19.3 Legal action as is decided on will be at the expense of the party
bringing suit and all recoveries recovered thereby will belong to the party
bringing suit, but legal action brought jointly by The Regents and the Licensee
and fully participated in by both will be at the joint expense of the parties
and all recoveries will be shared jointly by them in proportion to the share of
expense paid by each party.
19.4 Each party shall cooperate with the other in litigation proceedings
instituted hereunder but at the expense of the party bringing suit. Litigation
will be controlled by the party
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bringing the suit, except that The Regents may be represented by counsel of its
choice in any suit brought by the Licensee.
20. INDEMNIFICATION
20.1 The Licensee shall indemnify, hold harmless and defend The Regents,
its officers, employees, and agents; the sponsors of the research that led to
the Invention; and the inventors of the patents and patent applications in
Regents' Patent Rights and their employers against any and all claims, suits,
losses, damage, costs, fees, and expenses resulting from or arising out of
exercise of this license or any sublicense. This indemnification includes, but
is not limited to, any product liability.
20.2 The Licensee, at its sole cost and expense, shall insure its
activities in connection with the work under this Agreement and obtain, keep in
force and maintain insurance as follows, or an equivalent program of self
insurance:
Comprehensive or commercial form general liability insurance (contractual
liability included) with limits as follows:
- Each Occurrence $1,000,000
- Products/Completed Operations Aggregate $2,000,000
- Personal and Advertising Injury $1,000,000
- General Aggregate (commercial form only) $2,000,000
The coverage and limits referred to under the above do not in any way
limit the liability of the Licensee. The Licensee shall furnish The Regents with
certificates of insurance showing compliance with all requirements. Certificates
must:
- Provide for thirty (30) day advance written notice to
The Regents of any modification.
- Indicate that The Regents has been endorsed as an
additional Insured under the coverage referred to under
the above.
- Include a provision that the coverage will be primary
and will not participate with nor will be excess over
any valid and collectable insurance or program of
self-insurance carried or maintained by The Regents.
20.3 The Regents shall notify the Licensee in writing of any claim or
suit brought against The Regents in respect of which The Regents intends to
invoke the provisions of this Article. The Licensee shall keep The Regents
informed on a current basis of its defense of any claims under this Article.
20.4 The Licensee agrees to purchase additional insurance coverage, such
that the Products/Completed Operations Aggregate shall be no less than
$5,000,000, no later than June 1, 2002.
21. NOTICES
Any notice or payment required to be given to either party is properly
given and effective (a) on the date of delivery if delivered in person or (b)
five (5) days after mailing if mailed by first-class certified mail, postage
paid, to the respective addresses given below, or to another address as is
designated by written notice given to the other party.
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In the case of the Licensee: Dr. Gloria Ma
XXSYS TECHNOLOGIES INC.
4619 Viewridge Avenue
San Diego, CA 92123
In the case of The Regents: THE REGENTS OF THE UNIVERSITY
OF CALIFORNIA
9500 Gilman Drive
Technology Transfer Office
Mail Code 0910
La Jolla, CA 92093-00910
Attention: Director;
Referring to: SD96-103
22. ASSIGNABILITY
This Agreement may be assigned by The Regents, but is personal to the
Licensee and assignable by the Licensee only to its United States Affiliates, or
with the written consent of The Regents, which consent will not be unreasonably
withheld.
23. NO WAIVER
No waiver by either party of any default of this Agreement may be deemed
a waiver of any subsequent or similar default.
24. FAILURE TO PERFORM
In either party finds it necessary to undertake legal action against the
other on account of failure of performance due under this Agreement, then the
prevailing party is entitled to reasonable attorney's fees in addition to costs
and necessary disbursements.
25. GOVERNING LAWS
THIS AGREEMENT WILL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or
patent application will be governed by the applicable laws of the country of the
patent or patent application.
26. PREFERENCE FOR UNITED STATES INDUSTRY
Because this Agreement grants the exclusive right to use or sell the
Invention in the United States, the Licensee agrees that any products sold in
the U.S. embodying this Invention or produced through the use thereof will be
manufactured substantially in the United States.
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27. GOVERNMENT APPROVAL OR REGISTRATION
If this Agreement or any associated transaction is required by the law
of any nation to be either approved or registered with any governmental agency,
the Licensee shall assume all legal obligations and bear all expenses, fees, and
penalties to do so.
28. EXPORT CONTROL LAWS
The Licensee shall observe all applicable United States and foreign laws
with respect to the transfer of Licensed Products and related technical data to
foreign countries, including, without limitation, the International Traffic in
Arms Regulations (ITAR) and the Export Administration Regulations.
29. SECRECY
29.1 With regard to confidential information ("Data" which is marked
'Confidential'), which can be oral or written or both (if oral, a written
version shall be transmitted to The Licensee within thirty (30) days), received
from The Regents regarding this Invention, the Licensee agrees:
29.1.1 not to use the Data except for the sole purpose of
performing under the terms of this Agreement;
29.1.2 to safeguard Data against disclosure to others with the
same degree of care as it exercises with its own data of a
similar nature;
29.1.3 not to disclose Data to others (except to its employees,
agents or consultants who are bound to the Licensee by a like
obligation of confidentiality) without the express written
permission of The Regents, except that the Licensee is not
prevented from using or disclosing any of the Data that:
29.1.3.1 the Licensee can demonstrate by written records
was previously known to it;
29.1.3.2 is now, or becomes in the future, public
knowledge other than through acts or omissions of the
Licensee; or
29.1.3.3 is lawfully obtained by the Licensee from
sources independent of The Regents; and
29.1.4 that the secrecy obligations of the Licensee with respect
to Data will continue for a period ending five (5) years from
the termination date of this Agreement.
30. MISCELLANEOUS
30.1 The headings of the several sections are inserted for convenience
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Agreement.
30.2 This Agreement is not binding on the parties until it has been
signed below on behalf of each party. It is then effective as of the Effective
Date.
30.3 No amendment or modification of this Agreement is valid or binding
on the parties unless made in writing and signed on behalf of each party.
30.4 This Agreement embodies the entire understanding of the parties and
supersedes all previous communications, representations or understandings,
either oral or written, between the
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parties relating to the subject matter hereof. The Secrecy Agreement dated June
11, 1996 is hereby terminated.
30.5 In case any of the provisions contained in this Agreement is held
to be invalid, illegal, or unenforceable in any respect, that invalidity,
illegality or unenforceability will not affect any other provisions of this
Agreement, and this Agreement will be construed as if the invalid, illegal, or
unenforceable provisions had never been contained in it.
30.6 This Agreement includes the attached Exhibits A - Patent
Application.
IN WITNESS WHEREOF, both The Regents and the Licensee have executed this
Agreement, in duplicate originals, by their respective and duly authorized
officers on the day and year written.
XXSYS TECHNOLOGY INC.: THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA:
By: /s/GLORIA MA By: /s/ MARTIN RACHMELER
------------------------------- -------------------------------
Name: Gloria Ma Name: Martin Rachmeler
Title: Chairman and CEO Title: Director, Technology
Transfer Office
Date: 27th June, 1997 Date: 6/27/97
----------------------------- -----------------------------
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EXHIBIT 10.37
Executed THIS 1ST DAY OF OCTOBER, 1997
BETWEEN
SHO-BOND CORPORATION
AND
XXSYS TECHNOLOGIES, INC.
******************************************
DISTRIBUTORSHIP AGREEMENT
*******************************************
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DISTRIBUTORSHIP AGREEMENT
This AGREEMENT has been made on this 1st day of October, 1997, by and between
SHO-BOND CORPORATION, a corporation duly organized and existing under the laws
of Japan with its principal place of business at 3-18, Kanda Nishiki-cho,
Chiyoda-ku Tokyo 101, Japan ("MANUFACTURER"), and XXsys TECHNOLOGIES, INC., a
corporation duly organized and existing under the laws of California with its
principal place of business at 4619 Viewridge Avenue San Diego, CA 92123,
U.S.A., ("DISTRIBUTOR").
WHEREAS, the MANUFACTURER is engaged in the business of the manufacture and sale
of the SHO-BOND BICS METHOD (concrete crack injection system) as well as the
related products (the "PRODUCTS"), such system, products and technical know how
as well as any other information associated with the products belonging to the
sole and proprietary ownership of the MANUFACTURER;
WHEREAS, the nature of such PRODUCTS and technical know how as well as any other
information associated with the PRODUCTS is such that any distribution or sale
thereof shall necessitate certain technical services (the "RELATED SERVICES")
and MANUFACTURER is desirous of developing its business in the Territory as
hereinafter defined by providing technical information and know-how appropriate
for the RELATED SERVICES as well as the PRODUCTS to DISTRIBUTOR;
WHEREAS, the DISTRIBUTOR is engaged in the business of earthquake retrofitting
and other infrastructure repair and is currently in the process of doing
qualification work on a variety of corrosion repair products and has the
technical capacity and strength to provide the RELATED SERVICES as well as
using, distributing and selling the PRODUCTS, and is desirous of doing so and
assisting MANUFACTURER in obtaining the required state and / or federal
approvals for use of the PRODUCTS in the aforementioned applications, is willing
to be appointed as the distributor authorized for the promotion, marketing and
distributing of the PRODUCTS and rendering the RELATED SERVICES hereinafter
defined;
WHEREAS, MANUFACTURER is desirous of granting DISTRIBUTOR such distributorship
for the PRODUCTS and RELATED SERVICES in the Territory upon the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth,
it is agreed between the parties as follows:
ARTICLE 1. DEFINITIONS
(1) "PRODUCTS" as used in this Agreement shall mean SHO-BOND BICS METHOD
(concrete crack injection system) as well as products associated with
them presently manufactured by MANUFACTURER, and such other related
products, including but not limited to, the following products: concrete
slab reinforcement, concrete protection,
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corrosion restoration and repair, concrete girder reinforcement, repair
of piers and abutments, binders for resin mortar and resin concrete, and
any and all improvements or enhancements thereof as MANUFACTURER may
develop from time to time.
(2) "RELATED SERVICES" as used in this Agreement shall mean certain technical
services including supervision and training in the use or application of
the PRODUCTS. To effectively offer the RELATED SERVICES, DISTRIBUTOR may,
in any way, elect to the form of an entity, division of subsidiary to
perform infrastructure repair, upgrade and/or rehabilitation services
utilizing the PRODUCTS.
(3) "Territory" as used in this Agreement shall mean the United States of
America and Canada.
(4) "Person" as used in this Agreement shall mean an individual, partnership,
firm, corporation, association, government and any other organization.
(5) "Qualification/Qualified" as used in this Agreement shall mean obtaining
the necessary approvals from governmental and standardization agencies
necessary to use the PRODUCTS on highways and buildings. Qualification in
any jurisdiction shall be deemed to have occured on the date the last
such approval is obtained in that jurisdiction.
Exhibits hereto attached and herein referred to are incorporated and made a part
hereof as if their contents are fully set forth herein.
ARTICLE 2. DISTRIBUTORSHIP
(1) MANUFACTURER hereby appoints DISTRIBUTOR to be its exclusive distributor
for the promotion, marketing and distribution of the PRODUCTS and the
performance of RELATED SERVICES in the Territory. DISTRIBUTOR agrees to
act as such an exclusive distributor and to diligently perform its
duties to the best of its ability under the terms and conditions of this
Agreement.
(2) MANUFACTURER shall deliver to DISTRIBUTOR know how and any other
technical information and assistance necessary and appropriate for the
Qualification, sale or use of the PRODUCTS or the rendering of the
RELATED SERVICES.
(3) Any inquiry received by MANUFACTURER with respect to the PRODUCTS from
any person in the Territory or with respect to sales in the Territory,
shall be referred to DISTRIBUTOR.
(4) Unless otherwise agreed, DISTRIBUTOR shall not sell, transfer or
otherwise make the PRODUCTS available for delivery or provide RELATED
SERVICES outside the Territory, nor shall it sell, transfer or otherwise
make the PRODUCTS available or provide RELATED SERVICES to any person
who, to DISTRIBUTOR'S actual
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knowledge, intends to sell, transfer or otherwise make the PRODUCTS
available for delivery outside the Territory.
(5) DISTRIBUTOR shall neither directly nor indirectly purchase, import,
sell, manufacture or otherwise deal, nor have purchased imported, sold,
manufactured or otherwise deal in any products competitive with or
similar to the PRODUCTS in the Territory without prior written consent
of MANUFACTURER.
ARTICLE 3. QUALIFICATION OF PRODUCTS
MANUFACTURER acknowledges that DISTRIBUTOR will have little, if any, sales of
the PRODUCTS or RELATED SERVICES, unless and until the PRODUCTS are Qualified in
at least one jurisdiction. The parties have agreed to share the costs of
obtaining such Qualifications as set forth in Exhibit A.
ARTICLE 4. SALES CONTRACT
(1) MANUFACTURER shall sell the PRODUCTS exclusively to DISTRIBUTOR for
resale in the Territory under the terms and conditions hereof. Unless
otherwise agreed, relevant provisions in this Agreement shall be
applicable to each sales contract to be made hereunder between the
parties.
(2) No sales contract shall be binding unless and until accepted by
MANUFACTURER.
(3) MANUFACTURER shall use its best efforts to accept any reasonable orders
for the PRODUCTS placed by DISTRIBUTOR, provided, however, that it shall
not be required to accept a Distributor's order or any part thereof
when:
(a) there is not a sufficient amount of PRODUCTS available to fill
the order, other orders placed by DISTRIBUTOR, or the orders of
other customers; or
(b) MANUFACTURER has discontinued the manufacture or sale of the
PRODUCTS ordered at the time the order is received.
ARTICLE 5. PRICE
(1) The price list applicable to the orders received by MANUFACTURER through
June 30, 1998 is attached hereto as Exhibit B. Thereafter, the price
shall be set forth in the price list of MANUFACTURER as received and
effective from time to time; provided that no new price list shall be
effective until three (3) months from the date of notification by
MANUFACTURER to DISTRIBUTOR of such revised pricing.
(2) The price of the PRODUCTS quoted by MANUFACTURER to DISTRIBUTOR shall be
CIF Long Beach, price in Japanese Yen.
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ARTICLE 6. PAYMENT
Unless otherwise agreed, DISTRIBUTOR shall cause an irrevocable and confirmed
letter of credit to be made available to MANUFACTURER against sight draft, to be
opened for each sales contract through Sanwa Bank at least 10 days prior to the
dates of shipment therein set forth.
ARTICLE 7. MINIMUM PURCHASE REQUIREMENT
(1) DISTRIBUTOR agrees to use its best efforts to purchase the PRODUCTS from
MANUFACTURER as follows:
(a) no minimum purchase quantities prior to the first Qualification;
(b) 2,000 BL-INJECTORs for the first year following the date of first
Qualification of the BICS PRODUCTS;
(c) 5,000 injectors for the second years following first
Qualification;
(d) 10,000 injectors for the third, fourth and fifth years following
first Qualification.
(2) If the volume of actual purchases during any one year period is below
the minimum purchase requirement for the year set forth in the preceding
paragraph, the volume not achieved shall be carried forward and added on
to the minimum requirement amount of the next succeeding year, subject
only to the provisions of Article 15 (2)(iii).
(3) DISTRIBUTOR shall sell the PRODUCTS and render the RELATED SERVICES in
the Territory in such a manner as will ensure that the PRODUCTS and the
RELATED SERVICES meet the MANUFACTURER'S quality standards and
specifications using the MANUFACTURER's Intellectual Properties, as
defined in Article 8, with the degree of care of a good manager, and
deviation from the MANUFACTURER's quality standards and specifications
shall require the prior written consent of MANUFACTURER.
(4) DISTRIBUTOR shall sell the PRODUCTS and render the RELATED SERVICES in
the Territory hereunder for its own account and risk using fair business
practices and DISTRIBUTOR shall in no way be a representative or agent
of MANUFACTURER and have no authority to act or assume any obligation on
behalf of MANUFACTURER.
ARTICLE 8. INTELLECTUAL PROPERTIES; TECHNICAL ASSISTANCE; RESALE
(1) MANUFACTURER hereby grants to DISTRIBUTOR a non-assignable right and
license to use the trademarks, patents, designs or copyrights embodied
in the PRODUCTS and the technical know-how referred to in Article 13
(all of the foregoing collectively the "Intellectual Properties") solely
for the purpose of Qualification and subsequent sales of the PRODUCTS
and rendering by DISTRIBUTOR of the RELATED SERVICES during the term of
this Agreement in the Territory.
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<PAGE> 6
(2) MANUFACTURER shall promptly upon execution hereof disclose the
Intellectual Properties, notably the know-how and other technical
information which are necessary and sufficient for DISTRIBUTOR to carry
out its obligations for applying for and communicating with the
authorities concerned with Qualification, and to distribute and sell the
PRODUCTS as well as render the RELATED SERVICES hereunder.
(3) Upon request of DISTRIBUTOR, and at a time and in a circumstance
convenient to MANUFACTURER, MANUFACTURER shall provide technical
assistance either in Japan or in California, U.S.A. in the degree and
scope necessary and appropriate so that DISTRIBUTOR shall be in a
position to better and sooner acquire the know-how and other technical
information which will assist DISTRIBUTOR in applying for Qualification
as well as selling the PRODUCTS and rendering the RELATED SERVICES.. The
costs of providing such technical assistance and obtaining the
Qualifications are to be shared by the parties as set forth on Exhibit
A. Nothing set forth above shall be interpreted as an excuse for
DISTRIBUTOR in the case of its failure to obtain Qualification, and
DISTRIBUTOR shall not raise any claim whatsoever against manufacture in
such an event for any reason including without limitation in relation to
the sufficiency or appropriateness of MANUFACTURER's assistance.
(4) The aforementioned technical assistance as well as the grant of the
license to use the Intellectual Properties by MANUFACTURER to
DISTRIBUTOR will be given without compensation (other than as set out
above), on the mutual understanding, agreement and condition that
DISTRIBUTOR shall in good faith assume (except for those costs and
expenses specified in Exhibit A) all actions necessary or appropriate as
the intermediary in applying to and communicating with the authorities
concerning Qualification.
ARTICLE 9. WARRANTY
(1) MANUFACTURER hereby warrants that each of the PRODUCTS is free from
material defects in respect of material and workmanship. MANUFACTURER
further warrants that the PRODUCTS reasonably conform to the test data,
specifications, drawings and quality standards and any other technical
or sales information delivered to DISTRIBUTOR under this Agreement
.
(2) As a condition to MANUFACTURER's warranty, and DISTRIBUTOR's right to
make a claim hereunder, DISTRIBUTOR shall notify MANUFACTURER of any
such defect in writing within thirty (30) days of its knowledge of the
specific defect and six (6) months after the delivery date of such
PRODUCTS to DISTRIBUTOR, and arrange, if requested by MANUFACTURER, for
the PRODUCTS in question to be inspected by MANUFACTURER, at
MANUFACTURER's expense, within sixty (60) days of the discovery of the
alleged defect, or alternatively, provide MANUFACTURER a detailed
written explanation along with the photographs and other data reasonably
evidencing such defect. Otherwise, MANUFACTURER shall not be liable to
DISTRIBUTOR for any damages or losses incurred by DISTRIBUTOR as a
result of any defect, either express or
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<PAGE> 7
hidden, in the PRODUCTS. MANUFACTURER agrees to provide lot control
numbers and manufacture dates on all product containers.
(3) Except as expressly stated herein, to the maximum extent permitted by
law, MANUFACTURER has not, and does not, make any representations,
warranties or guaranties of any kind, oral or written, express or
implied, patent or latent, concerning marketability, profitability,
compliance with applicable laws and regulations, suitability or fitness
for a particular use or purpose, of the PRODUCTS. Any warranty shall
also be excluded against any damages or losses attributable to
DISTRIBUTOR or any entity referred to in Article 1(2).
(4) Without limiting the general disclaimer in the foregoing sentence, the
warranty hereunder shall not apply to:
(i) any of the PRODUCTS, which has been subject to abuse or neglect
in shipment, use, maintenance or service.
(ii) any defect caused by, resulting from or in connection with,
alteration of the PRODUCTS involved or their improper storage, or
any deviation from or non-observance of the quality standards,
specifications other technical information in providing or
otherwise concerning the RELATED SERVICES; and
(iii) any repair or replacement made necessary by normal wear and tear
after one (1) year for injection materials and six (6) months for
sealing materials each from the date of manufacture as indicated
on the container can in English.
(5) As the primary remedy of DISTRIBUTOR under said warranty, any warranty
by MANUFACTURER shall be limited to either the shipment to DISTRIBUTOR
of all parts necessary for repair of the defective PRODUCTS, replacement
of the defective PRODUCTS, each without charge, or reduction of the
purchase price corresponding to the extent of such defects, at the full
discretion of the MANUFACTURER.
(6) MANUFACTURER shall take out such product liability insurance on the
PRODUCTS as will ordinarily be available to a manufacturer of products
similar to the PRODUCTS, covering all relevant damages, losses, claims
or proceedings alleging the defects in the PRODUCTS of not less than
$3,000,000.
(7) DISTRIBUTOR shall effect the insurance on any services rendered by it
under this Agreement, especially installation and supervision of such
installation carried out by DISTRIBUTOR or any entity referred to in
Article 1(2), in such amounts as may be required by its customers.
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ARTICLE 10. STOCK AND REPAIR SERVICES
DISTRIBUTOR shall maintain sufficient stock of the PRODUCTS for the purpose of
display, demonstration and distribution, and keep itself manned with technical
personnel so that adequate warranty services may be offered to the customers for
all the PRODUCTS sold hereunder.
ARTICLE 11. PROMOTION AND ADVERTISING
DISTRIBUTOR shall exert its best efforts in promoting the sale of the PRODUCTS
in the Territory at its own cost. MANUFACTURE shall provide DISTRIBUTOR free of
charge with such quantities of catalogs, leaflets, posters and other advertising
materials as MANUFACTURER considers necessary, adequate and reasonable for the
promotion and advertising of the PRODUCTS in the Territory. With respect to
promotion and advertising, both parties shall agree every year on the annual
plan for the next one year period and also occasionally consult with each other
as to the promotion and advertising activities in the Territory. MANUFACTURER
may, when it deems proper, perform for its own account the promotion and
advertising activities for the PRODUCTS in the Territory.
ARTICLE 12. REPORTS
DISTRIBUTOR shall furnish MANUFACTURER with quarterly reports setting forth the
quantities of the PRODUCTS of each model sold by DISTRIBUTOR, the number and
type of customers / markets, the quantities of the PRODUCTS carried by
DISTRIBUTOR in stock at the end of such quarter, details of the claims and
suggestions made by customers with respect to the PRODUCTS, information on the
market conditions in the Territory, including the information on competitive
products, and DISTRIBUTOR's suggestions and recommendations, if any, as to the
PRODUCTS and the marketing thereof. MANUFACTURER may, from time to time, request
that DISTRIBUTOR provide other reasonable information related to the sale of the
PRODUCTS or market conditions in the Territory.
ARTICLE 13. TRADEMARK AND OTHER RIGHTS
(1) All the PRODUCTS sold in the Territory shall bear MANUFACTURER's and no
other, trademark specified below:
"SHO-BOND"
Such trademark and any goodwill created in connection therewith as well
as other kinds of the Intellectual Properties shall be sole properties
of MANUFACTURER, and DISTRIBUTOR shall not acquire by execution of this
Agreement or performance thereunder or otherwise any right with respect
to such trademark or goodwill or other Intellectual Properties other
than to use them to distribute the PRODUCTS and render the RELATED
SERVICES hereunder, during the term thereof. DISTRIBUTOR shall not use
or register MANUFACTURER's trademark as its corporate name or a part
thereof.
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<PAGE> 9
(2) During the term of this Agreement and thereafter DISTRIBUTOR shall not
apply for or acquire the registration of MANUFACTURER's trademark, nor
shall DISTRIBUTOR contest MANUFACTURER's right in or disturb
MANUFACTURER's use of such trademark or goodwill. Should DISTRIBUTOR
have the MANUFACTURER's trademark registered in its name or the name of
any other person, MANUFACTURER shall have right to have the registration
canceled or transferred to it at DISTRIBUTOR's cost. DISTRIBUTOR shall
not use or register MANUFACTURER's trademark as its corporate name or a
part thereof and MANUFACTURER shall have the right to require
DISTRIBUTOR to discontinue such use or to cancel such registration of
the trademark.
(3) DISTRIBUTOR shall discontinue and cause its dealers to discontinue the
use of the MANUFACTURER's trademark free of compensation upon termination
of this Agreement, whether upon expiration of the term or any other
reason whatsoever and thereafter shall not use or cause to be used the
MANUFACTURER's trademark or any similar trademark or other Intellectual
Properties, provided, however, that DISTRIBUTOR and its dealers may sell
the PRODUCTS bearing MANUFACTURER's trademark held by them in stock at
the time of termination of this Agreement for the period of six (6)
months following such time. Alternatively, MANUFACTURER shall have the
option, but not the obligation, to repurchase existing inventory at
DISTRIBUTOR's landed cost.
(4) Any patent, design or copyright embodied in the PRODUCTS shall be sole
property of MANUFACTURER, and DISTRIBUTOR shall not acquire any right in
them by execution of this Agreement or performance thereunder or
otherwise and shall not use any of them after termination of this
Agreement for expiration of its term or any other reason whatsoever. This
shall apply mutatis mutandis to any and all information or reports
obtained by MANUFACTURER from DISTRIBUTOR and those delivered or made
available by MANUFACTURER to DISTRIBUTOR according to any provisions
provided for herein or by any transaction contemplated herein.
(5) MANUFACTURER has obtained patents for the SHO-BOND BICS METHOD in the
U.S. and Canada. Copies of such patents are attached as Exhibit C.
MANUFACTURER shall indemnify, defend and hold DISTRIBUTOR harmless from
any claim of infringement or alleged infringement of patent, trademark,
copyright or other industrial property right that may be brought by a
third party with respect to the PRODUCTS sold hereunder. DISTRIBUTOR
shall render full non-financial assistance to MANUFACTURER in defending
all such claims.
ARTICLE 14. TERM OF AGREEMENT
This Agreement shall come into force on the date first above written and, unless
earlier terminated, remain in force for a period of five (5) years from
Qualification, and shall be automatically renewed and continued from year to
year unless either party gives to the other a notice not to renew the Agreement
at least three (3) months before the end of the term then in effect.
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ARTICLE 15. TERMINATION.
(1) Neither party may terminate this Agreement during the Qualification
period, except upon written notice in the following circumstances
(i) If the other party become insolvent or a petition for bankruptcy,
corporate reorganization or any similar relief is filed by or
against the other party, or a receiver or provisional receiver is
appointed with respect to any of the assets of the other party,
or liquidation proceeding is commenced by or against the other
party, or a resolution for voluntary winding up is made; or
(ii) if the whole or an important part of the business of the other
party is transferred to a third party by agreement, order of
court or otherwise; or
(2) After Qualification, either party in the case of (ii) below and for the
reasons set forth in 1(i) or 1(ii) above, and MANUFACTURER in the case
of (I) and (iii) below, may terminate this Agreement:
(i) DISTRIBUTOR has failed to make any payment for the PRODUCTS for
the second time in any 12 month period except if any such
non-payment is strictly limited to the PRODUCTS subjected to a
bona fide dispute regarding defects and or warranty issues under
Article 9;
(ii) if the other party defaults in any of the provisions of this
Agreement and does not remedy the default within thirty (30) days
after a written notice is given requesting to remedy the default;
or
(iii) if DISTRIBUTOR has failed to achieve the minimum purchase
requirement in the Article 7(1) herein for two (2) successive
years (excluding any carry-forward as set out in Article 7(2) to
the third year), or twice annually in 3 years (without any
carry-forward as set out in Article 7(2) to the succeeding year).
In the case of the failure by DISTRIBUTOR to meet the minimum
purchase requirements, MANUFACTURE may have the right in its sole
discretion, but shall not be bound, to deem DISTRIBUTOR as a
non-exclusive distributor and to appoint another person or
persons as distributors in the Territory and enter into
respective agreements with them and DISTRIBUTOR shall raise no
objection or claim whatsoever against such appointments.
(3) If the PRODUCTS do not receive Qualification in at least one
jurisdiction within one year from the date of this Agreement,
DISTRIBUTOR may terminate this Agreement upon thirty (30) days written
notice.
(4) Termination of this Agreement under Articles 14 and 15 shall be without
prejudice to and the right to terminate shall be additional to any right
and remedy available to the terminating party under the provisions of
this Agreement, law, statute or otherwise. Upon
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<PAGE> 11
termination of this Agreement all the payment to be made under this
Agreement or in connection with the sale of the PRODUCTS shall become
immediately due and payable.
ARTICLE 16. OBLIGATIONS AFTER TERMINATION
(1) The provisions of this Agreement shall, in the event of expiration or
termination thereof, continue to apply to the rights and duties of the
parties existing under this Agreement or sales contracts thereunder, at
the time of termination or expiration of this Agreement, provided,
however, that DISTRIBUTOR shall only be required to pay for PRODUCTS
ordered prior to the effective termination date and shall not be liable
for unpurchased minimum quantities. MANUFACTURER shall have an option to
cancel without any liability any order accepted but not performed before
such termination or expiration. The provisions of Article 8, paragraph
(1); Article 9; Article 13; Article 16; and Article 17 of this Agreement
shall survive such termination or expiration.
(2) DISTRIBUTOR shall refrain from any use or disposition of any of the
PRODUCTS or Intellectual Properties, except for disposition of inventory
as set forth in Section 13(3).
ARTICLE 17. PATENT; SECRECY
(1) MANUFACTURER has obtained patent Nos. 4430841, 4555295, and 4555286 (the
"PATENT" ) for the SHO-BOND BICS METHOD in the U.S. and Canada. Copies
of which PATENT are attached hereto as Exhibit C. MANUFACTURER shall
indemnify, defend and hold DISTRIBUTOR harmless from any claim of
infringement of the PATENT that may be brought by a third party with
respect to the PRODUCTS sold hereunder. DISTRIBUTOR shall promptly
notify MANUFACTURER of any claim or suit for patent infringement against
DISTRIBUTOR or its customers based on the use, distribution or sale of
the PRODUCTS in the Territory and request MANUFACTURER to defend any
such suit, and shall render full non-financial assistance to
MANUFACTURER in defending all such claims.
(2) DISTRIBUTOR hereby acknowledges that all of the Intellectual Properties
constitute commercially valuable properties and confidential information
of MANUFACTURER, and hereby undertakes to MANUFACTURER to use the PATENT
and other Intellectual Properties made available to it hereunder only in
connection with and for the purpose of distribution, use and sale of the
PRODUCTS as well as the rendition of the RELATED SERVICES, to hold them
confidential, and not to reveal any of the Intellectual Properties to
any other Person.
(3) In handling the Intellectual Properties DISTRIBUTOR shall use the same
degree of care as DISTRIBUTOR would normally exercise to protect its own
proprietary information. DISTRIBUTOR may, however, disclose the
Intellectual Properties to persons such as its employees to the extent
as may be required by law or necessary in order to effect distribution,
use or sale of the PRODUCTS, and then only after obtaining from each
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Person an agreement against further disclosure by such Person. The
obligation imposed by this Article 17 shall not apply to any or all
information:
(i) which at the time of the disclosure by MANUFACTURER is in the
public domain;
(ii) which, after the time of disclosure by MANUFACTURER, becomes part
of the public domain without fault of DISTRIBUTOR;
(iii) which at the time of disclosure is already in the possession of
DISTRIBUTOR and was not acquired directly or indirectly from
MANUFACTURER ; or
(iv) which is lawfully received by DISTRIBUTOR from a third party who
has the right to disclose it.
ARTICLE 18. NOTICE
Any notice or request required or permitted to be given or made in connection
with this Agreement or performance thereunder to either party shall be sent to
the addresses first above written, or such other addresses as the parties may
notify each other from time to time, by a registered air mail, telefax or
telegram, including telex, followed immediately by a confirmation letter by a
registered air mail. When the letter, telefax or telegram is dispatched as
provided for above, the notice shall be deemed to be made when the letter,
telefax or telegram arrives at the addresses.
ARTICLE 19. ARBITRATION
Any and all disputes, controversies or differences arising from or in connection
with this Agreement or a transaction conducted under this Agreement shall be
settled by mutual consultation between parties in good faith as promptly as
possible, but failing an amicable settlement, shall be settled by arbitration in
San Diego , California if MANUFACTURER is the party initiating the arbitration,
and in Tokyo, Japan, if Distributor is the party initiating the arbitration, in
either case in accordance with the Commercial Arbitration Rules of the
International Chamber of Commerce. The award of the Arbitration shall be final
and binding upon the parties.
ARTICLE 20. GOVERNING LAW
This Agreement shall be interpreted and construed in accordance with the law of
the State of California.
ARTICLE 21. ASSIGNMENT OF AGREEMENT
Neither party shall assign, pledge or otherwise dispose of its right, or benefit
or delegate its obligation or duty under this Agreement, without a prior written
consent of the other party. This shall not, however, prohibit the merger or
consolidation of either party into or with a third party if
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<PAGE> 13
the survivor of or the new company formed by the merge or consolidation shall
expressly assume the obligations of the party hereto merged or consolidated.
ARTICLE 22. AMENDMENT
This Agreement may be amended only by a written instrument signed by duly
authorized representatives of both parties and expressly stating that it is an
amendment to this Agreement.
ARTICLE 23. ENTIRE AGREEMENT
This Agreement supersedes and cancels any and all previous agreement, contracts
or understandings, express or implied, between the parties relating to the
PRODUCTS and RELATED SERVICES and expresses the complete and final agreement of
the parties in respect thereof.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
by their duly authorized representatives in duplicate the day and year first
above written.
Date: September 30, 1997 Date: September 30, 1997
MANUFACTURER: DISTRIBUTOR:
SHO-BOND CORPORATION XXsys TECHNOLOGIES, INC.
/s/ AKIRA UEDA /s/ GLORIA MA
- -------------------------- --------------------------
By: Mr. Akira Ueda By: Dr. Gloria Ma
Chairman Chairman and Chief Executive Officer
Page 13
<PAGE> 1
EXHIBIT 10.38
[XXSYS LETTERHEAD]
December 30, 1997
Ms. Tung Bik Lin
c/o Wardley Securities Ltd.
3rd Floor Hutchison House
10 Harcourt Road
Hong Kong
Re: Investment in XXsys Technologies, Inc.
Dear Ms. Tung:
This Letter Agreement will confirm our recent discussions relating to a
proposed investment (the "Investment Transaction") by Ms. Tung Bik Lin
("Investor") in XXsys Technologies, Inc., a California corporation ("Company"),
in accordance with the terms described below. On the basis of our discussions,
the Company and Investor hereby confirm our agreement to consummate the
Investment Transaction on the following terms and conditions.
1. Structure of Transaction. Subject to the terms and conditions herein
stated, the Company agrees to sell and issue to Investor, and Investor agrees to
purchase from the Company, $1,500,000 ("Cash Consideration") worth of the shares
("Shares") of the no par value common stock ("Common Stock") of the Company. The
parties agree that the Investor shall purchase the Shares from time to time
during the period commencing on the date of this Letter Agreement and ending on
September 30, 1998 by tendering to the Company all or a portion of the Cash
Consideration. The parties further agree that the purchase price of the Shares
shall be eighty percent (80%) of the average last sale price for the Common
Stock, as quoted on the NASDAQ Small Cap or any alternative electronic stock
exchange, during the twenty (20) trading days immediately preceding the
Company's receipt of any portion of the Cash Consideration. Investor agrees to
use its best efforts to tender one-third (1/3) of the Cash Consideration no
later than March 31, 1998, an additional one-third (1/3) of the Cash
Consideration no later than June 30, 1998 and the balance of the Cash
Consideration no later than September 30, 1998.
2. Warranties, Representations and Indemnity. Each party represents and
warrants that it has full and absolute right, power and authority and legal
capacity to execute, deliver and perform this Letter Agreement and, upon such
execution, this Letter Agreement will be the valid and binding obligation of the
party, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization and moratorium laws and other laws of
general application affecting enforcement of creditors rights generally. Each
party represents and warrants to the other that the execution, delivery, and
performance of this Letter Agreement by such party does not and will not reach,
violate, conflict with or permit the cancellation of, any agreement to which the
Company or Investor is a party or by which any of its properties are bound.
3. SEC Reports. The Company has delivered to Investor its annual report
on Form 10-
<PAGE> 2
Ms. Tung Bik Lin
December 30, 1997
Page 2
KSB for the fiscal year ended September 30, 1996 and all quarterly
reports on Form 10-QSB subsequently filed with the U.S. Securities and Exchange
Commission (collectively, the "SEC Reports"). The information in the SEC Reports
is true and correct in all material respects and does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
4. Due Diligence/Access. The Company has given and shall continue to
give to Investor and its counsel, accountants and other advisors, agents,
consultants and representatives, full access, during normal business hours
throughout this Letter Agreement, to all of the properties, books, contracts,
commitments and records of the Company, and has furnished and will continue to
furnish during such period all such information concerning it (including its
operations, financial condition and business plan) as Investor may reasonably
request.
5. Confidentiality. Each party agrees on behalf of itself and its
employees, agents, accountants, attorneys and other advisors, that they will not
divulge confidential information obtained from the other to third parties (other
than their employees, agents, accountants and attorneys). In this regard,
Investor acknowledges it is aware, and that it's representatives will be made
aware, that in connection with its discussions with the Company regarding the
Investment Transaction, it may come into possession of material, non-public
information about the Company. Accordingly, Investor agrees that it will not
trade (or cause or encourage any third party to trade), and it will use its best
efforts to assure that none of its representatives will trade (or cause or
encourage any third party to trade), in any securities of the Company while in
the possession of such material non-public information.
6. Acquisition for Investment. Investor is acquiring the Shares for its
own account, for investment purposes only and not with a view to, or for sale in
connection with, a distribution, as that term is used in Section 2(11) of the
Securities Act of 1933 ("1933 Act"), thereof in a manner which would require
registration under the 1933 Act or any state securities laws. Investor
understands that the Shares cannot be sold or assigned without registration
and/or qualification under the 1933 Act and applicable state securities laws.
Investor understands and acknowledges that the certificates evidencing the
Shares will bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR THE
SECURITIES LAWS OF ANY STATE. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED FOR VALUE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION THEREOF UNDER THE
SECURITIES ACT OF 1933 AND/OR THE SECURITIES ACT OF ANY STATE
HAVING JURISDICTION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SUCH ACT
OR ACTS.
<PAGE> 3
Ms. Tung Bik Lin
December 30, 1997
Page 3
7. Miscellaneous.This Letter Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns. The rights and obligation of either party to this Letter Agreement may
not be assigned by such party without the prior written consent of the other
party. This Letter Agreement contains the entire agreement of the parties hereto
and may not be modified, altered or changed in any manner whatsoever, except by
a written agreement signed by the parties hereto. This Letter Agreement may be
executed in two counterparts, each signed by one of the parties and both of said
counterparts together shall constitute one and the same instrument. The parties
agree that facsimile signatures may be relied upon by each of the parties hereto
as original signatures. This Letter Agreement shall be construed and interpreted
in accordance with and governed and enforced in all respects by the laws of the
State of California.
If the matters set forth herein accurately reflect the terms and
conditions of the proposed Investment Transaction, please execute a copy of this
Letter Agreement in the location provided below and return an executed copy to
me. Thank you.
Very truly yours,
XXSYS TECHNOLOGIES, INC.
By: /s/ GLORIA MA
--------------------------------
Dr. Gloria Ma,
Chief Executive Officer
ACKNOWLEDGED AND AGREED:
/s/ TUNG BIK LIN
- ---------------------------------
Tung Bik Lin
<PAGE> 4
[XXSYS LETTERHEAD]
December 30, 1997
Mrs. Li Sau Foon
c/o Wardley Securities Ltd.
3rd Floor Hutchison House
10 Harcourt Road
Hong Kong
Re: Investment in XXsys Technologies, Inc.
Dear Mrs. Li:
This Letter Agreement will confirm our recent discussions relating to a
proposed investment (the "Investment Transaction") by Mrs. Li Sau Foon
("Investor") in XXsys Technologies, Inc., a California corporation ("Company"),
in accordance with the terms described below. On the basis of our discussions,
the Company and Investor hereby confirm our agreement to consummate the
Investment Transaction on the following terms and conditions.
1. Structure of Transaction. Subject to the terms and conditions herein
stated, the Company agrees to sell and issue to Investor, and Investor agrees to
purchase from the Company, $1,500,000 ("Cash Consideration") worth of the shares
("Shares") of the no par value common stock ("Common Stock") of the Company. The
parties agree that the Investor shall purchase the Shares from time to time
during the period commencing on the date of this Letter Agreement and ending on
September 30, 1998 by tendering to the Company all or a portion of the Cash
Consideration. The parties further agree that the purchase price of the Shares
shall be eighty percent (80%) of the average last sale price for the Common
Stock, as quoted on the NASDAQ Small Cap or any alternative electronic stock
exchange, during the twenty (20) trading days immediately preceding the
Company's receipt of any portion of the Cash Consideration. Investor agrees to
use its best efforts to tender one-third (1/3) of the Cash Consideration no
later than March 31, 1998, an additional one-third (1/3) of the Cash
Consideration no later than June 30, 1998 and the balance of the Cash
Consideration no later than September 30, 1998.
2. Warranties, Representations and Indemnity. Each party represents and
warrants that it has full and absolute right, power and authority and legal
capacity to execute, deliver and perform this Letter Agreement and, upon such
execution, this Letter Agreement will be the valid and binding obligation of the
party, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization and moratorium laws and other laws of
general application affecting enforcement of creditors rights generally. Each
party represents and warrants to the other that the execution, delivery, and
performance of this Letter Agreement by such party does not and will not reach,
violate, conflict with or permit the cancellation of, any agreement to which the
Company or Investor is a party or by which any of its properties are bound.
3. SEC Reports. The Company has delivered to Investor its annual report
on Form 10-
<PAGE> 5
Mrs. Li Sau Foon
December 30, 1997
Page 2
KSB for the fiscal year ended September 30, 1996 and all quarterly
reports on Form 10-QSB subsequently filed with the U.S. Securities and Exchange
Commission (collectively, the "SEC Reports"). The information in the SEC Reports
is true and correct in all material respects and does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
4. Due Diligence/Access. The Company has given and shall continue to
give to Investor and its counsel, accountants and other advisors, agents,
consultants and representatives, full access, during normal business hours
throughout this Letter Agreement, to all of the properties, books, contracts,
commitments and records of the Company, and has furnished and will continue to
furnish during such period all such information concerning it (including its
operations, financial condition and business plan) as Investor may reasonably
request.
5. Confidentiality. Each party agrees on behalf of itself and its
employees, agents, accountants, attorneys and other advisors, that they will not
divulge confidential information obtained from the other to third parties (other
than their employees, agents, accountants and attorneys). In this regard,
Investor acknowledges it is aware, and that it's representatives will be made
aware, that in connection with its discussions with the Company regarding the
Investment Transaction, it may come into possession of material, non-public
information about the Company. Accordingly, Investor agrees that it will not
trade (or cause or encourage any third party to trade), and it will use its best
efforts to assure that none of its representatives will trade (or cause or
encourage any third party to trade), in any securities of the Company while in
the possession of such material non-public information.
6. Acquisition for Investment. Investor is acquiring the Shares for its
own account, for investment purposes only and not with a view to, or for sale in
connection with, a distribution, as that term is used in Section 2(11) of the
Securities Act of 1933 ("1933 Act"), thereof in a manner which would require
registration under the 1933 Act or any state securities laws. Investor
understands that the Shares cannot be sold or assigned without registration
and/or qualification under the 1933 Act and applicable state securities laws.
Investor understands and acknowledges that the certificates evidencing the
Shares will bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR THE
SECURITIES LAWS OF ANY STATE. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED FOR VALUE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION THEREOF UNDER THE
SECURITIES ACT OF 1933 AND/OR THE SECURITIES ACT OF ANY STATE
HAVING JURISDICTION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SUCH ACT
OR ACTS.
<PAGE> 6
Mrs. Li Sau Foon
December 30, 1997
Page 3
7. Miscellaneous.This Letter Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns. The rights and obligation of either party to this Letter Agreement may
not be assigned by such party without the prior written consent of the other
party. This Letter Agreement contains the entire agreement of the parties hereto
and may not be modified, altered or changed in any manner whatsoever, except by
a written agreement signed by the parties hereto. This Letter Agreement may be
executed in two counterparts, each signed by one of the parties and both of said
counterparts together shall constitute one and the same instrument. The parties
agree that facsimile signatures may be relied upon by each of the parties hereto
as original signatures. This Letter Agreement shall be construed and interpreted
in accordance with and governed and enforced in all respects by the laws of the
State of California.
If the matters set forth herein accurately reflect the terms and
conditions of the proposed Investment Transaction, please execute a copy of this
Letter Agreement in the location provided below and return an executed copy to
me. Thank you.
Very truly yours,
XXSYS TECHNOLOGIES, INC.
By: /s/ GLORIA MA
--------------------------------
Dr. Gloria Ma,
Chief Executive Officer
ACKNOWLEDGED AND AGREED:
/s/ LI SAU FOON
- ---------------------------------
Li Sau Foon
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 33,846
<SECURITIES> 0
<RECEIVABLES> 870,644<F1>
<ALLOWANCES> 0
<INVENTORY> 80,496
<CURRENT-ASSETS> 1,666,275
<PP&E> 2,375,124
<DEPRECIATION> 787,878
<TOTAL-ASSETS> 3,408,522
<CURRENT-LIABILITIES> 1,109,890
<BONDS> 0
0
450,000
<COMMON> 19,262,052
<OTHER-SE> (335,840)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 3,408,522
<SALES> 650,520
<TOTAL-REVENUES> 650,520
<CGS> 730,093
<TOTAL-COSTS> 730,093
<OTHER-EXPENSES> 4,560,435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,929
<INCOME-PRETAX> (4,162,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,162,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,162,131)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES STOCK SUBSCRIPTION RECEIVABLE $366,000
<F2>NOTE RECEIVABLE FOR PREFERRED STOCK OF $335,840 IS SHOWN AS CONTRA-EQUITY
ACCOUNT.
</FN>
</TABLE>
