<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------------------------
For the quarterly period ended June 30, 1998
Commission File Number: 0-20376
XXSYS TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0161808
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4619 Viewridge Avenue
San Diego, California 92123
(Address of principal executive offices)
(619) 974-8200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:Common Stock, no par value -
12,361,800 shares outstanding on August 2, 1998.
Transitional Small Business Disclosure Format (check one): Yes [X] No [ ]
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XXSYS TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis 8-10
PART II -- OTHER INFORMATION 10-11
</TABLE>
2
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,862 $ 33,846
Restricted certificates of deposit (Note 8) 551,000 551,000
Trade accounts receivable 435,405 504,644
Other accounts receivable (Note 5) 3,287 --
Stock subscription receivable (Note 2) 206,500 366,000
Inventory and work in process 580,127 80,496
Prepaid expenses and other 287,692 130,289
------------ ------------
Total current assets 2,085,873 1,666,275
Machinery, equipment and furniture, net of
accumulated depreciation of $1,005,240 and $787,878 1,476,635 1,587,246
Deferred costs 4,219 12,661
Licenses and Patents, net of amortization of $159,606 and $128,956 289,948 142,340
------------ ------------
Total assets $ 3,856,675 $ 3,408,522
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,437,463 $ 613,811
Accrued compensation 88,606 68,382
Accrued liabilities 318,107 283,687
Related party accrued expenses 24,207 49,247
Current portion, long-term debt 59,781 94,763
------------ ------------
Total current liabilities 1,928,164 1,109,890
Long-term debt, less current portion 60,184 70,668
Commitments and contingencies (Note 3)
Shareholders' equity (Note 4):
Preferred stock, par value $100
Shares authorized -- 2,000,000;
Issued and outstanding - 500/4,500
(liquidation preference -- $50,000/$450,000 50,000 450,000
Common stock, no par value
Shares authorized -- 20,000,000;
Issued and outstanding -- 12,361,800/9,362,371 21,195,952 19,262,052
Accumulated deficit (19,111,251) (17,148,248)
Note receivable for stock (Note 5) (266,374) (335,840)
Deferred compensation -- --
------------ ------------
Total shareholders' equity 1,868,327 2,227,964
------------ ------------
Total liabilities and shareholders' equity $ 3,856,675 $ 3,408,522
============ ============
</TABLE>
See accompanying notes.
3
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commercial sales and services $ 359,098 $ 56,999 $ 775,353 $ 132,621
Government research contracts 17,385 72,993 26,652 260,683
----------- ----------- ----------- -----------
Total revenues 376,483 129,992 802,005 393,304
Operating expenses:
Cost of services 331,390 214,798 708,442 525,287
Selling, general and administrative 671,592 1,178,344 2,100,109 3,009,948
Research and development 218,093 104,279 369,090 214,310
----------- ----------- ----------- -----------
Total operating expenses 1,221,075 1,497,421 3,177,641 3,749,545
----------- ----------- ----------- -----------
Operating loss (844,592) (1,367,429) (2,375,636) (3,356,241)
Interest income 13,411 13,231 44,187 38,844
Other income (Note 6) 0 0 374,995 231,575
Interest expense (1,800) (1,964) (6,549) (8,383)
----------- ----------- ----------- -----------
Net loss $ (832,981) $(1,356,162) $(1,963,003) $(3,094,205)
=========== =========== =========== ===========
Net loss per share $ (.07) $ (.17) $ (.19) $ (.41)
=========== =========== =========== ===========
Weighted average number of shares
outstanding 11,210,107 7,887,369 10,078,987 7,520,568
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,963,003) $ (3,094,205)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 238,143 226,818
Non-cash compensation -- --
Stock issued for services -- 9,725
Accrued interest income 69,466 (36,400)
Changes in assets and liabilities:
Restricted certificates of deposit -- (450,000)
Accounts receivable 65,952 (162,889)
Cash in escrow -- 175,000
Inventories and work in process (499,631) (167,479)
Prepaid expenses and other 39,397 18,939
Accounts payable 823,652 284,436
Accrued liabilities 54,644 224,594
Related party accrued expenses (25,040) 15,356
----------- -------------
Net cash used in operating activities (1,196,420) (2,956,105)
Cash flows from investing activities:
Purchase of machinery and equipment (80,145) (822,291)
Deferred costs 0 (133,071)
Other assets (66,253) (31,981)
----------- -------------
Net cash used in investing activities (146,398) (987,343)
Cash flows from financing activities:
Sale of common stock 1,376,300 3,752,933
Stock issued for pledge of collateral -- 11,790
Exercise of warrants -- 25,000
Issuance of other notes payable -- 32,400
Repayment of notes payable (45,466) (61,773)
Payments of related party debt -- --
----------- -------------
Net cash from financing activities 1,330,834 3,760,350
Net increase (decrease) in cash (11,984) (183,098)
Cash and cash equivalents -- beginning of period 33,846 184,489
----------- -------------
Cash and cash equivalents at end of period $ 21,862 $ 1,391
=========== =============
</TABLE>
See accompanying notes.
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XXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the information contained therein. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes for the year ended September 30, 1997, contained
in the Company's Form 10-K. The results of operations for the nine-month period
ended June 30, 1998 are not necessarily indicative of results for the entire
year.
2. STOCK SUBSCRIPTIONS RECEIVABLE
The stock subscriptions receivable at June 30, 1998, of $206,500
represent cash received by the Company in July and August 1998 as partial
payment for stock purchased under stock purchase agreements that the Company
signed on December 30, 1997. The stock subscriptions receivable at September 30,
1997 of $366,000 represent $190,000 in cash received by the Company from October
1, 1997 to December 31, 1997 as part of a restricted stock purchase agreement
that the Company signed on June 16, 1997 and payment of $176,000 in October 1997
for the principal balance due the Company under a note payable and stock
purchase agreement signed on September 1, 1995. The stock subscriptions
receivable are shown as current assets because the amounts were received prior
to the issuance of the financial statements for each of the periods ended
September 30, 1997, and June 30, 1998.
3. COMMITMENTS
At June 30, 1998, the Company had a commitment to complete construction
of a column wrapping machine designated for wrapping columns up to six feet in
diameter. The balance to be paid prior to taking delivery of the machine, Robo
2.2(TM), is $140,500. The machine successfully passed performance tests in the
third fiscal quarter 1998 and delivery is expected during the fourth fiscal
quarter 1998.
4. SHAREHOLDERS' EQUITY
Common Stock:
During the period from October 1, 1997 to June 30, 1998, the Company
received cash in the amount of $599,067 from an individual for 1,091,130 shares
of restricted Common Stock in a private placement under Regulation S, for an
average price per share of $0.55. Of the total received, $190,000 was reported
as a subscription receivable at September 30, 1997. Also during the period,
$441,233 and $160,000 was received from two individuals for 765,919 and 369,726
shares of restricted common stock under two private placements under Regulation
D, for average Common Stock share prices of $0.58 and $0.43 respectively.
In October 1997, the Company received $212,170 from a relative of the
Company's chairman in final payment of a two-year note given as part of a
$1,056,000 private placement made with the Company in October 1995 in exchange
for 211,200 shares of Common Stock. The Common Stock was issued in October 1995
in exchange for $880,000 in cash and a two-year note for $176,000. The payment
in October 1997 for the note included $36,170 in accrued and unpaid interest.
On March 19, 1998 the holder of Company's $100 Par Series "A" Preferred
Stock exercised his right to convert 4,000 shares into 320,000 shares of Common
Stock, for an average conversion price per share of Common Stock of $1.25.
On June 1, 1998, the Company issued a total of 50,000 shares of Common
Stock in the names of the Regents of the University of California and two
university professors, as partial payment of license issue fees for two licenses
signed with the Company in the prior year. The certificates are held in escrow
with an independent third party escrow agent,
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pending satisfactory resolution of technology/knowledge transfer issues that the
Company has with the University with regard to commercialization of the licensed
inventions. Payments of stock due the University are necessary to maintain the
licenses, and have been valued at $120,300, or $2.406 a share, based on the
negotiated number of shares of Common Stock of the Company at the share price on
the date of signing the agreement in June 1997.
On June 24, 1998, the Company issued 300,000 shares of Common Stock and
options to purchase an additional 50,000 shares at $2.00 per share and 50,000
shares at $3.00 per share to Continental Capital & Equity Corporation in return
for a two-year consulting agreement which began on April 15, 1998. The stock was
valued at $196,800, or $0.656 a share, which was the price of the stock on April
15, 1998. No value was assigned to the options.
In July and August 1998 the Company received $206,500 for 449,631 shares
of restricted Common Stock as part of a $1,500,000 private placement under
Regulation D signed on December 30, 1997. The amount received is shown as a
subscription receivable at June 30, 1998. The average price per share of the
Common Stock issued was $0.46.
5. NOTES RECEIVABLE FOR COMMON AND PREFERRED STOCK
On May 12, 1998, Dr. Ma reduced the balance of a promissory note and
accrued interest due the Company by $90,681, by relinquishing her rights to
certain deferred salaries and accrued vacation. The remaining balance due under
the promissory note of $266,374 on June 30, 1998, and $335,840 at September 30,
1997, continues to be reported as a contra-equity account, "Notes Receivable -
Preferred and Common Stock." Of the amount paid on the note by Dr. Ma in May
1998, $55,056 was first applied to reduction of accrued interest and the
remaining amount of $35,625 was applied to reduction in principal on the
promissory note.
6. OTHER INCOME
Other income of $374,995 in the first nine months of fiscal 1998
represents the net effect of the Company's receipt of payment of a final
consulting fee from a composite materials company in the First Fiscal Quarter
1998. Other income of $231,575 for the nine months ended June 30, 1997
represents consulting fees from a composite materials company and final
settlement with the former president of the Company over rights to a consulting
fee from the same company.
7. CONSULTING AGREEMENT
On April 15, 1998, the Company entered into a two-year consulting
agreement with Continental Capital & Equity Corporation (CCEC), a public
relations and direct marketing advertising firm located in Longwood, Florida,
specializing in the dissemination of information about publicly traded
companies. As part of the agreement, CCEC will publicize the Company to brokers,
prospective investors and shareholders, including preparation and mailing of
corporate information about the Company and field calls from firms, investors
and brokers inquiring about the Company. In consideration of the services to be
performed by CCEC, 300,000 shares of freely trading Common Stock were placed
into escrow, subject to certain performance milestones to be achieved by CCEC.
Additionally, the Company issued CCEC an option to purchase an additional 50,000
shares at $2.00 per share and 50,000 shares at $3.00 per share as part of the
agreement. (See Note 4 "Shareholders' Equity.") All Common Stock issued is to be
held in escrow for a specific period of time and is subject to repurchase by the
Company at designated prices for a limited period after issuance.
8. RESTRICTED CERTIFICATES OF DEPOSIT
In May 1997 the Company deposited $551,000 in its bank to provide
collateral for a letter of credit to its surety, Great American Insurance
Company, in order for the surety to issue material payment and performance bonds
to a prime contractor to obtain a $551,000 contract for the retrofit of the
Arroyo Seco arch bridge in Pasadena, California. The Company's funds deposited
with the bank for the surety are reported as restricted certificates of deposit.
The Company will not have access to these funds until there is a determination
by the Company's surety that such funds are no longer necessary as collateral
for the bonds on the Arroyo Seco project.
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<PAGE> 8
In May 1998, a dispute arose between the Company, its prime contractor
and Caltrans regarding the quality and acceptability of the work performed to
date and the unilateral elimination of the remaining two-thirds of the work by
Caltrans. The Company has requested a meeting with Caltrans officials to resolve
the issues on the project which will include testimony from independent
professionals knowledgeable of composites used in retrofitting this project and
other bridge structures. Such a review would likely determine the extent of
acceptability of the work performed to date, what work could be repaired to the
satisfaction of Caltrans and the method of repair, and/or whether the wrapping
performed to date should be rejected and removed. As of the date of this filing,
the review meeting had not been held, nor was a date for the meeting scheduled.
The surety has informed the Company that it intends to withhold release
of any of the Company's collateral held for the material payment and performance
bonds, pending the outcome of the review with Caltrans. There can be no
assurances as to when the meeting will be held, or whether the Company will be
successful in its bid to have Caltrans accept the columns wrapped to date. The
Company intends to press its claims for reimbursement of all costs incurred,
including those caused by delays and changes initiated by Caltrans. At June 30,
1998, approximately $483,000 of costs associated with the Arroyo Seco project
had been accumulated as work-in-process inventory, which could exceed the amount
eventually realized, depending on the outcome of the pending review with
Caltrans.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Third Quarter of Fiscal 1998 Compared to Third Quarter of 1997
Revenues of $376,483 were recorded in the fiscal quarter ended June 30,
1998, the third quarter of the Company's 1998 fiscal year, representing an
increase of $246,491, or 190%, compared with the third quarter of fiscal 1997.
The increase in revenues was accounted for by a six-fold increase in commercial
revenues partially offset by a $55,608 decrease in revenues from government
research grants. Commercial contracts represented 95% of revenues in the third
quarter 1998 compared to 44% of revenues in the third quarter 1997. Government
contracts represented 5% of revenues in fiscal 1998, compared to 56% government
contract work in 1997.
Total operating expenses of $1,221,075 in the third quarter 1998
decreased by $276,346, or 18%, compared with the third quarter of fiscal 1997.
Costs of services represented 88% and 165% of contract revenues in 1998 and 1997
third fiscal quarters respectively. Gross margins in the third quarter 1998 were
12% compared to a negative 65% in the comparable period in 1997. The improved
margin in the third quarter 1998 over the comparable period of 1997 is due
primarily to fewer demonstration projects in 1998 which typically have low or no
margins. Research and development costs in excess of reimbursements by
government agencies are reported as research and development expense. Selling,
general and administrative expenses decreased by $506,752, or 43%, to $671,592
in 1998 as a result of a smaller staff size in the administrative area. Interest
income during the third quarter 1998 increased to $13,411, compared to $13,231
in the third quarter of the prior year.
The net loss for the third quarter of fiscal 1998 of $832,981 represents
a decrease of $523,181 compared with the net loss of $1,356,162 in the third
quarter of 1997. On a per share basis, the net loss was $0.07 in the third
quarter 1998, compared to $0.17 in the third quarter of 1997. The lower
administrative cost was the primary reason for the smaller loss.
8
<PAGE> 9
Nine Months of 1998 Compared to Nine Months of 1997
Revenues of $802,005 were recorded for the nine months ended June 30,
1998, representing an increase of $408,701, or approximately double the revenues
for the first nine months of fiscal 1997. Revenues from commercial contracts in
the first nine months of 1998 were almost six times the commercial revenues for
the comparable period in 1997. Commercial revenues represented 97% of revenues
during the first nine months 1998 compared to 34% in the comparable period in
1997. Government contracts represented 3% of total revenues, compared to 66% in
1997. The increase in commercial revenues in fiscal 1998 is the result of more
commercial sales contracts and larger dollar amounts as compared to 1997, which
was represented primarily by demonstration projects.
Total operating expenses of $3,177,641 in the first nine months of 1998
decreased by $571,904, or 15%, compared with fiscal 1997. The cost of services
of $708,442 in the first nine months of 1998 represented 88% of contract
revenues, compared with $525,287 or 134% of contract revenues in the comparable
period in 1997. Selling, general and administrative expenses decreased by
$909,839, or 30%, to $2,100,109, as a result of a reduction in personnel and
expenses in the administrative area.
Interest income during the first nine months increased to $44,187,
compared to $38,844 in the first nine months of the prior year. Other income is
primarily the result of consulting fees received from a composite materials
company (see Note 6, Other Income).
The net loss for the first nine months of fiscal 1998 of $1,963,003
represents a decrease of $1,131,202 compared with the net loss of $3,094,205 in
the first nine months of 1997. On a per share basis, the net loss was $0.19 in
the first nine months of 1998, compared to $0.41 in the first nine months of
1997. Higher revenues and improvement in margins combined with lower
administrative expense in 1998 were the primary reasons for the lower losses.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1998, the Company continued to
incur losses in pursuing the commercialization of its composite retrofit
business primarily because of continued high business development expense and
cost of conducting small demonstration projects in new states and countries. The
Company has incurred costs of conducting small demonstration projects now in
primarily three states - California, Washington and Utah - and two countries
outside the United States, Canada and England. The Company believes that the
commercialization of the retrofit business throughout the United States will
come from such demonstration projects, which are expected to continue throughout
1998. The Company plans to take delivery of its fourth Robo-Wrapper(TM) machine
in the fourth fiscal quarter 1998.
Working capital at June 30, 1998, was $157,709, compared with $556,385
at September 30, 1997, for a decline of $398,676 during the first nine months.
Working capital for both periods includes $551,000 in restricted certificates of
deposit, which are necessary for material payment and performance bonds totaling
$551,000 on the Arroyo Seco bridge retrofit project. The Company will not have
access to these funds until work has been determined to be satisfactorily
installed and accepted by both the prime contractor and the California
Department of Transportation (Caltrans). (See Note 8.) The restrictions of the
bond combined with continued cost being incurred on the project during the first
nine months of fiscal 1998 without receiving any reimbursement for work
completed to date have contributed to the increase in accounts payable of
$823,652 between September 30, 1997, and June 30, 1998, and the decline in
working capital. The Company can give no assurances as to when a review will be
held between Caltrans and the Company on resolution of work issues on the
project, whether the work performed to date will be accepted, or when or how
much it will be paid by the prime contractor for the work performed on the
project to date or when the bond will be released, which could continue to have
a negative impact on the Company's working capital. Between June 30, 1998 and
the date of this filing, the working capital condition of the Company has not
improved for the reasons mentioned above. The Company continues to seek
additional financing, but there can be no assurances that it will be received.
If it is not received, the Company may be forced to curtail operations.
The sale of Common Stock continues to be the Company's supplemental
source of funds while the Company continues to commercialize its retrofit
business and launch a full scale marketing program for the licensed Sho-Bond
product. The Company reported at the beginning of its fiscal year that
approximately $5.0 million in capital will be necessary to sustain operations
and capital equipment purchases throughout the 1998 fiscal year. During the nine
months ended June 30, 1998, the Company received $1,200,300 from the sale of
2,226,775 shares of restricted Common Stock through three
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private placements and $176,000 from the receipt of a final payment on a
two-year note receivable from a relative of the Chairman to purchase Common
Stock. An additional $206,500 was received in July and August 1998 as part of
the sale of 449,631 shares of restricted Common Stock under the private
placements. The amount of capital remaining to be received under existing
private placements under Regulation D is $2,242,267, but there can be no
assurances that such funds will be received.
This Form 10-QSB contains forms of forward-looking statements that are
based on the Company's beliefs as well as assumptions made by and information
currently available to the Company. Such statements are subject to certain
risks, uncertainties and assumptions, which are identified and described in the
Company's registration statements and periodic reports on file with the SEC,
including the Company's 1997 Annual Report on Form 10-KSB and subsequent
Quarterly Reports on Form 10-QSB. In particular, there is a risk that the
parties to the stock purchase agreements signed in December 1997 may not be able
to fulfill their remaining funding obligations. If the remaining funding
obligations should not be timely received or not received at all, then it will
be necessary for the Company to obtain substantial additional capital from other
sources which may be at unfavorable prices or not obtained at all, in which case
the Company may have to reduce, curtail or sell operating activities and assets.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results could vary from those
anticipated, estimated, or projected and the variation may be material.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operating
costs.
YEAR 2000 COMPLIANCE
After detailed investigation, the Company has determined that all
software currently in use is year 2000 compliant. The applications do not
require any maintenance versions nor depend on other vendor's products to manage
year 2000 issues. The Company will continue to test any new applications for
year 2000 compliance.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently subject to certain claims and legal actions
arising in the ordinary course of its business. In the opinion of management,
all such matters are adequately covered by insurance or will not have a material
adverse effect on the Company's financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period of this report, the Company received $1,200,300 from
the sale of 2,226,775 shares of restricted Common Stock through three private
placements and $176,000 from receipt of a final payment on a note receivable
from a relative of the Chairman to purchase Common Stock. An additional $206,500
was received in July and August 1998 as part of the sale of 449,631 shares of
restricted Common Stock under the private placements. See Note 4 of the
accompanying financial statements for complete details.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
At the Company's Annual Meeting of Stockholders held on April 23, 1998,
shareholders elected the following four individuals as directors of the Company,
as nominated in the Proxy Statement accompanying the notice of meeting:
Gloria C. L. Ma, Ph.D.
William J. Dale
Robert E. Farris
Walter Geer
At the same meeting, shareholders voted to approve the retention of Feldman
Radin & Co., P.C. as the Company's independent accountants for fiscal 1998.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Reports on Form 8-K:
None
(b) Incorporated by reference is Form S-8, filed on May 29, 1998.
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.
August 10, 1998
By: /s/ Gloria C. L. Ma, Ph.D.
-------------------------------
Gloria C. L. Ma, Ph.D.
Chief Executive Officer (Principal
Financial and Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE FISCAL QUARTER JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 21,862
<SECURITIES> 0
<RECEIVABLES> 645,192<F1>
<ALLOWANCES> 0
<INVENTORY> 580,127
<CURRENT-ASSETS> 2,085,873
<PP&E> 2,481,875
<DEPRECIATION> 1,005,240
<TOTAL-ASSETS> 3,856,675
<CURRENT-LIABILITIES> 1,928,164
<BONDS> 0
0
50,000
<COMMON> 21,195,952
<OTHER-SE> (266,374)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 3,856,675
<SALES> 802,005
<TOTAL-REVENUES> 802,005
<CGS> 708,442
<TOTAL-COSTS> 708,442
<OTHER-EXPENSES> 2,469,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,549
<INCOME-PRETAX> (1,963,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,963,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,963,003)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES STOCK SUBSCRIPTION RECEIVABLE $206,500
<F2>NOTE RECEIVABLE FOR PREFERRED STOCK OF $266,374 IS SHOWN AS CONTRA-EQUITY
ACCOUNT.
</FN>
</TABLE>
