SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30,1997 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from___________to______________
Commission file number: 0-15086
XYBERNAUT CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware 54-1799851
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
12701 Fair Lakes Circle, Fairfax, VA 22033
(Address of principal executive offices with zip code)
Registrant's telephone number, including area code: (703) 631-6925
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ____ NO ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES ____ NO ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest date.
Class Outstanding at November 11, 1997
----- --------------------------------
Common stock - $0.01 par value 14,209,112
<PAGE>
INDEX
PAGE
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COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Conditions 8
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31,
ASSETS (unaudited) 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 520,779 $ 6,274,967
------------ ------------
Accounts receivable 236,315 427,790
Inventories 1,253,541 402,381
Prepaid and other current assets 774,670 197,711
------------ ------------
Total current assets 2,785,305 7,302,849
------------ ------------
Fixed assets:
Property and equipment, net of accumulated depreciation of
$282,235 in 1997 and $126,139 in 1996 499,629 323,828
------------ ------------
Other assets:
Patent costs, net of accumulated amortization of $150,360 in
1997 and $82,588 in 1996 395,612 247,612
Tooling costs 395,988 106,738
Other 77,236 33,547
------------ ------------
Total other assets 868,836 387,897
------------ ------------
Total assets $ 4,153,770 $ 8,014,574
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ 80,000 $ 7,849
Accounts payable 396,368 250,944
Deferred licensing revenue (see note 4) 0 60,000
Accrued expenses 766,948 571,742
------------ ------------
Total current liabilities 1,243,316 890,535
------------ ------------
Long-term liabilities:
Notes and loans payable 0 44,080
Deferred licensing revenue (see note 4) 0 190,000
------------ ------------
Total long-term liabilities 0 234,080
------------ ------------
Total liabilities 1,243,316 1,124,615
------------ ------------
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, $.01 par value 1,756,097
Common stock, $.01 par value 142,121 142,591
Authorized: 30,000,000 shares, Issued: 14,209,112 shares
Additional paid-in capital 16,851,693 15,520,245
Accumulated deficit (15,839,457) (8,772,877)
------------ ------------
Total stockholders' equity 2,910,454 6,889,959
------------ ------------
Total liabilities and stockholders' equity $ 4,153,770 $ 8,014,574
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Product Sales and leases $ 129,365 $ 326,020 $ 349,822 $ 903,733
Consulting and license 227,000 22,049 257,000 60,683
------------ ------------ ------------ ------------
Total revenue 356,365 348,069 606,822 964,416
Cost of sales 169,588 290,480 583,157 785,193
------------ ------------ ------------ ------------
Gross margin 186,777 57,589 23,665 179,223
Operating expenses:
Sales and marketing 1,010,118 322,456 2,529,151 784,185
General and administrative 933,128 692,109 2,639,263 1,375,302
Research and development 568,058 528,522 1,791,680 1,226,905
------------ ------------ ------------ ------------
Total operating expenses 2,511,304 1,543,087 6,960,094 3,386,392
------------ ------------ ------------ ------------
Operating loss (2,324,527) (1,485,498) (6,936,429) (3,207,169)
Interest income, net 24,916 109,120 74,045 38,266
------------ ------------ ------------ ------------
Net loss $ (2,299,611) $ (1,376,378) $ (6,862,384) $ (3,168,903)
Dividend on Preferred Stock $ 37,500 $ -- $ 37,500 $ --
Deemed dividend accretion on
preferred stock 164,634 164,634
------------ ------------
Loss attributable to holder of
Common Stock $ (2,501,745) $ (1,376,378) $ (7,064,518) $ (3,168,903)
============ ============ ============ ============
Net loss attributable to Common
Stock $ (0.20) $ (0.10) $ (0.55) $ (0.25)
============ ============ ============ ============
Weighted average number of
common shares outstanding 12,758,568 13,776,754 12,758,929 12,469,139
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss attributable to common stock $ (7,064,518) $ (3,168,903)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 226,223 203,334
Non cash charges for preferred stock dividends and accretion 202,134 --
Non cash charges for stock and options issued for services -- 85,037
(Increase) decrease in assets:
Inventories (851,159) 65,280
Accounts receivable 191,475 (274,962)
Prepaid and other current assets (576,960) (249,918)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 312,582 220,618
Deferred licensing revenue (250,000) 265,500
------------ ------------
Net cash used in operating activities (7,810,223) (2,854,514)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment, net (331,896) (81,866)
Acquisition of patents and related costs (215,772) (56,883)
Capitalization of tooling costs and other assets (334,338) 20,256
------------ ------------
Net cash used in investing activities (882,006) (118,493)
------------ ------------
Cash flows from financing activities:
Proceeds from:
Series A preferred stock 3,000,000 --
Issuance of debentures -- 1,000,000
Initial Public Offering, gross -- 13,282,500
(Payments for)/Proceeds from:
Notes and loans 4,572 (166,449)
Financing costs and fees (66,531) (2,607,531)
------------ ------------
Net cash used in financing activities 2,938,041 11,508,520
------------ ------------
Net decrease in cash and cash equivalents (5,754,188) 8,535,513
Cash and cash equivalents, beginning of period 6,274,967 508,666
------------ ------------
Cash and cash equivalents, end of period 520,779 9,044,179
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
XYBERNAUT CORPORATION
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been reflected in such financial statements. Results of operations for the nine
months ended September 30,1997 are not necessarily indicative of results of
operations expected for the full year. The Company's fiscal year ends December
31.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Xybernaut Corporation ("the Company") and its wholly-owned subsidiary, Tech
International of Virginia Inc. ("Tech Virginia"). All material intercompany
accounts and transactions have been eliminated.
3. INCOME TAX
To date, the Company has a history of operating losses and has not
had any taxable income. Subject to realization, the Company has generated net
operating losses of approximately $14.1 million that can be used to offset
taxable operating income in the future. The Company's future operations, if
profitable, will be subject to income tax expense not previously incurred by the
Company once all net operating losses are fully utilized to offset taxable
operating income.
4. LICENSING AGREEMENT
In March 1996, the Company entered into a non-exclusive five-year
licensing agreement with Rockwell International, which was subsequently
transferred to its wholly-owned subsidiary, Rockwell Collins, Inc. ("Rockwell").
Pursuant to this agreement, the Company received an initial cash payment of
$300,000 and the release of the Company from the obligation to pay Rockwell
$1,395,000 pursuant to a purchase order between the Company and Rockwell. The
initial cash payment of $300,000 has been recorded as deferred licensing revenue
and was being recognized as revenue on a straight-line basis over the five-year
term. During the quarter ending September 30, 1997, Rockwell informed the
Company that as a result of the restructuring of the business operations for
both Rockwell International and Rockwell, it had elected to not continue with
its business activities under the license. Given Rockwell's stated intent to not
to continue conducting business operations under the license, the remaining
deferred licensing revenue of $220,000 at June 31, 1997 has been recorded as
revenue in the third quarter.
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<PAGE>
5. SERIES A PREFERRED STOCK
On June 30, 1997, the Company completed a $3 million private
placement of an aggregate of 3,000 shares of the Company's Series A Preferred
Stock, par value $0.01 per share ("Series A Preferred Stock"). The Series A
Preferred Stock has a stated value of $1,000 per share and a holder of the
Series A Preferred is entitled to receive, if and when declared by the Company,
a dividend equal to 5% of the stated value per share per annum payable in shares
of common stock of the Company, par value $0.01 per share (the "Common Stock")
or in cash. The Series A Preferred Stock provides the Company with several
redemption options and alternatively allows for the periodic conversion of
portions of unredeemed Series A Preferred Stock to Common Stock over a one-year
period from the date of issuance. Any Series A Preferred Stock outstanding on
June 30, 1999 must be converted into Common Stock at that date.
6. DEEMED DIVIDEND ON SERIES A PREFERRED STOCK
Effective July 1, the Company recorded a deemed dividend on the
Series A Preferred Stock of approximately $659,000, or $219.51 per share of
Series A Preferred Stock, in accordance with the Securities and Exchange
Commission's position on accounting for preferred stock which is convertible at
a discount to the market price for common stock. The effect of this dividend was
to reduce the par value of Series A Preferred Stock by approximately $659,000,
resulting in a negative value for the Series A Preferred Stock on the balance
sheet, and increased additional paid-in capital by the same amount, with no
impact on the total amount of equity. This dividend will be accreted over the
twelve-month period ending June 30, 1998, the conversion period of the Series A
Preferred Stock. The effect of this accretion was to increase the value of the
Series A Preferred Stock for the three months ended September 30, 1997 by
approximately $164,000 and reduce the accumulated deficit by the same amount.
7. SUBSEQUENT EVENT
On November 12, 1997, the Company completed a $3 million private
placement of an aggregate of 3,000 shares of the Company's Series B Preferred
Stock, par value $0.01 per share ("Series B Preferred Stock"). The Series B
Preferred Stock is entitled to receive, if and when declared by the Company, a
dividend equal to 4% of the stated value per share per annum, payable in shares
of the Common Stock or in cash, payable upon conversion of the Series B
Preferred Stock into Common Stock. The Series B Preferred Stock provides the
Company with several redemption options and alternatively allows for the
periodic conversion of portions of unredeemed Series B Preferred Stock into
Common Stock over a period of approximately five months from closing. Any Series
B Preferred Stock outstanding on November 12, 1999 must be converted into Common
Stock at that date.
-7-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
The Company was originally incorporated in Virginia in October 1990 as
Contemporary Products & Services, Inc. and changed its name to Computer Products
& Services, Inc. ("CPSI") in 1992. In April 1996, CPSI was merged with Xybernaut
Corporation to reincorporate in Delaware. Since the commencement of operations
in November 1992, the Company has been engaged in the research, development and
commercialization of hardware, software and services for body-worn computer
applications. Since commencing operations, the Company has incurred significant
operating losses.
The first product to be commercialized by the Company is the proprietary
portable computer technology and related software applications embodied in its
Mobile Assistant(R) series. The first product in this series was introduced in
1994 and uses "486" based technology ("486 System"): this product was produced
in a limited quantity and is no longer being manufactured. Product development
has been based on the expectation of the Company that continued improvements in
software for operating systems, applications and speech recognition software
will require continued improvements in the performance and capabilities of the
Mobile Assistant series. Based on that expectation, the Company undertook a
product development program that resulted in the second product offering in the
Mobile Assistant series, which was introduced on a preproduction basis in
January 1997 and which uses "586" based technology ("Mobile Assistant II
System"). The third system in this product development program was introduced
during the third quarter of 1997 and uses Pentium(R) based technology ("133P
System"). It is anticipated that these two new systems will address different
segments of the market for wearable computers. The Mobile Assistant II System
has a lower selling price than 133P Systems and is well suited for use in
applications such as "thin clients" in wireless LANs and for speech recognition
systems with discrete dictation speech technology. The 133P System is tailored
for those customers who require additional processing capacity for their
applications, such as a body-worn server for wireless LAN applications, and also
for those customers using new continuous speech recognition or phonetic
recognition software that require higher processing speeds, such as that
available from IBM Corporation, Dragon Systems, Inc., and Texas Instruments,
among others.
Additional software products are being developed and are planned for development
for use on the Mobile Assistant and other personal computers. In the third
quarter of 1997, the Company announced linkAssist(TM), a software product which
provides a "windows" style graphical user interface with speech navigation that
allows data stored in almost any format, such as commonly-used word processing,
spreadsheet, data base, graphics or media files, to be linked to most any
application without altering the original data. The Company currently expects to
begin shipments of linkAssist(TM) in the quarter ending December 31, 1997.
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<PAGE>
The Company's revenues include sales of the Mobile Assistant, license fees,
software, and consulting services which relate to the Mobile Assistant and to
other software applications. Cost of sales include the cost of Mobile Assistant
components, direct labor and overhead expense, manuals, diskettes and
duplication, packaging materials, assembly, paper goods, shipping, and warranty
reserves. Software development costs are expensed as incurred until
technological feasibility is established in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86 (Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed), after which any
additional development costs are capitalized until the software is ready for
release. No software development costs have been capitalized to date, but the
Company anticipates that costs for linkAssist will be capitalized in the quarter
ending December 31, 1997, and amortized over the estimated economic life of the
software.
The Company purchases numerous parts and components from third-party suppliers,
which the Company assembles into its products. The Company generally provides a
90 day warranty on parts and labor and a one year warranty on parts. The
Company's suppliers for most components provide the Company with warranties on
those components. While warranty claims in the past have been negligible, the
Company initiated a policy of recording warranty reserves in the third quarter
to provide for possible claims in the future.
Product sales are recorded on shipment pursuant to a valid customer purchase
order. For equipment shipped under equipment rental or leasing agreements,
revenue is recognized on a straight-line basis over the term of the rental or
lease agreement. Consulting revenue is recognized as the services are performed
pursuant to a written agreement with the client. Revenues from future software
sales will be recognized at the time the software program is delivered in
accordance with Statement of Position No. 91-1 of the American Institute of
Certified Public Accountants.
Research and development expenses consist primarily of consulting fees and test
components, as well as salaries and related benefits paid to Company personnel
engaged in the research and design of new products. Salaries paid to Xybernaut
employees, fees and expenses paid to outside software development consulting
firms for further development and enhancement after technological feasibility of
a product has been established, will be capitalized in the future in accordance
with SFAS No. 86.
The Company's consolidated financial statements include the results of
operations for Tech Virginia, a wholly-owned subsidiary that supplies software
and consulting services to the United States government and others. The
consolidated financial statements eliminate all material intercompany accounts
and transactions between the Company and Tech Virginia.
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<PAGE>
The following table sets forth items from the Consolidated Statements of Income
as a percentage of revenues:
Three Months Ended ine Months Ended
------------------ ----------------
9/30/97 9/30/96 9/30/97 9/30/96
-------- -------- ---------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 47.6% 83.5% 96.1% 81.4%
-------- -------- ---------- --------
Gross margin 52.4% 16.5% 3.9% 18.6%
Operating expenses:
Sales & marketing 283.5% 92.6% 416.8% 81.3%
General & administrative 261.8% 198.8% 434.9% 142.6%
Research & development 159.4% 151.8% 295.3% 127.2%
-------- -------- ---------- --------
Total operating expense 704.7% 443.2% 1,147.0% 351.1%
Interest income 7.0% 31.4% 12.2% 4.0%
-------- -------- ---------- --------
Net loss (645.3%) (395.3%) (1,130.9%) (328.5%)
======== ======== ========== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Total revenues for the three months ended September 30, 1997 were
$356,365, a decrease of $8,296, or 2.4%, compared to $348,069 for the
corresponding period in 1996. Product revenues for the three months ended
September 30, 1997 were $129,365, a decrease of $196,655 or 60.3%, compared to
$326,020 for the corresponding period in 1996. The reduction in product revenues
for the three months ended September 30, 1997 was related to the lower number of
133P Systems that were sold during that period, compared to the higher number of
486 Systems that were sold in the corresponding period in 1996. Consulting and
license revenues for the three months ended September 30, 1997 were $227,000, an
increase of $204,951 or 929.5%, compared to $22,049 for the corresponding period
in 1996. During the three months ended September 30, 1997, the Company's
licensee informed the Company that as a result of the restructuring of its
business operations, the licensee had elected to not continue with its business
activities under the license. A portion of the consideration received by the
Company in March 1996 for granting this license was a $300,000 cash payment,
which the company recorded as deferred license revenue and was amortizing this
amount over a five year period. Given the licensee's stated intent to not to
continue conducting business operations under the license, the remaining
deferred licensing revenue of $220,000 as of June 30, 1997 has been recorded as
revenue in the three months ended September 30, 1997.
COST OF SALES. The cost of goods sold for the three months ended September 30,
1997 was $169,588, a decrease of $120,892, or 41.6%, compared to $290,480 for
the corresponding period in 1996. The cost of goods sold decreased
commensurately with the decrease in product sales but was offset by a charge of
approximately $60,000 to reduce the carrying value of an earlier versions of the
computing unit for Mobile Assistant II Systems to estimated market value.
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<PAGE>
SALES AND MARKETING. Sales and marketing expenses for the three months ended
September 30, 1997 were $1,010,118, an increase of $687,662, or 213.3%, compared
to $322,456 for the corresponding period in 1996. This increase resulted from an
increase in personnel and infrastructure, the expansion of marketing activities
to Europe and Asia, the development of training programs for Value-Added
Resellers ("VARs"), customer service, additional marketing programs to support
the launch of new products, public relations efforts and related travel, along
with a charge of approximately $129,000 related to a receivable whose
collectability was deemed to be doubtful and was written off.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
months ended September 30, 1997 were $933,128, an increase of $241,019, or
34.8%, compared with $692,109 for the corresponding period in 1996. This
increase resulted primarily from an increase in personnel, consulting, and
travel expenses related to the expansion and continued development of the
Company's infrastructure, and activities related to discussions regarding
certain strategic partnerships and international operations.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three months
ended September 30, 1997 were $568,058, an increase of $39,536, or 7.5%,
compared with $528,522 for the corresponding period in 1996. This increase is
the primarily the result of increased research and development personnel, the
use of outside consultants, and the planning and development efforts for the
Company's head mounted display, Mobile Assistant II System, 133P System, and
software, particularly for the linkAssist software product.
INTEREST INCOME, NET. Net interest income for the three months ended September
30, 1997 was $24,916, a decrease of $84,204, or 77.2%, compared with 109,120 for
the corresponding period in 1996. This decrease is the result of reduced
interest income from the lower average cash balances in the three months ended
September 30, 1997 than for the corresponding period a year earlier, which
reflected the interest income on proceeds from the Company's Initial Public
Offering that was completed in July 1996.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED STOCK. The
Company's Series A Preferred Stock was issued on June 30, 1997 and accrues
dividends at 5% per annum on the outstanding principal amount. For the three
months ended September 30,1997, the amount of accrued dividend was $37,500, with
no comparable item for the corresponding period in 1996. In accordance with the
Emerging Issues Task Force report from the Securities and Exchange Commission
titled "Accounting for the Issuance of Convertible Preferred Stock and Debt
Securities with a Nondetachable Conversion Feature," a deemed dividend was
assumed for the Series A Preferred Stock, which will be accreted quarterly as
portions of the Series A Preferred Stock are convertible into Common Stock. The
amount of this accretion for the three months ended September 30, 1997 was $164,
634, with no comparable item for the corresponding period in 1996.
NET LOSS ATTRIBUTABLE TO COMMON STOCK. As a result of the factors described
above, the net loss attributable to Common Stock for the three months ended
September 30, 1997 was $2,501,745, an
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<PAGE>
increase of $1,125,367, or 81.8%, compared to $1,376,378 for the corresponding
period in 1996. Although the Company was subject to taxation during the three
months ended September 30, 1997 and September 30, 1996, the Company incurred net
losses during these periods and no provision for income taxes was made.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Total revenues for the nine months ended September 30, 1997 were
$606,822, a decrease of $357,594, or 37.1%, compared to $964,416 for the
corresponding period in 1996. Product revenues for the nine months ended
September 30, 1997 were $349,822, a decrease of $553,911, or 61.3%, compared to
$903,733 for the corresponding period in 1996. The reduction in product revenues
for the nine months ended September 30, 1997 was related to the limited number
of preproduction Mobile Assistant II and production 133P Systems that were
available for sale during that period, compared to the higher number of 486
Systems that were sold during the corresponding period in 1996. Consulting and
license revenues for the nine months ended September 30, 1997 were $257,000, an
increase of $196,317 or 323.5%, compared to $60,683 for the corresponding period
in 1996. During the three months ended September 30, 1997, the Company's
licensee informed the Company that as a result of the restructuring of its
business operations, the licensee had elected to not continue with its business
activities under the license. A portion of the consideration received by the
Company in March 1996 for granting this license was a $300,000 cash payment,
which the company recorded as deferred license revenue and was amortizing this
amount over a five year period. Given the licensee's stated intent to not to
continue conducting business operations under the license, the Company elected
to have the remaining deferred licensing revenue of $220,000 as of June 30, 1997
recorded as revenue in the three months ended September 30, 1997.
COST OF SALES. The cost of goods sold for the nine months ended September 30,
1997 was $583,157, a decrease of $202,036, or 25.7%, compared to $785,193 for
the corresponding period in 1996. The cost of goods sold decreased
commensurately with the decrease in sales but were offset by charges of
approximately $152,000 to reduce earlier versions of the computing unit for the
Mobile Assistant II Systems to estimated market value and to write off parts for
these earlier versions of this computing unit that have been replaced with
upgraded parts, and by a full reserve for obsolescence of approximately $225,000
for the remaining computing units used in 486 Systems that are believed by
Company management to be saleable, but whose value is uncertain given changes in
technology and advances in the market.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine months
ended September 30, 1997 were $2,529,151, an increase of $1,744,966, or 222.5%,
compared to $784,185 for the corresponding period in 1996. This increase
resulted mainly from an increase in personnel, related travel, infrastructure to
support sales, VAR training programs, customer service, additional U.S. and
international marketing programs to support the launch of new products, and
public relations efforts. In addition, the Company recorded charges to sales
expense of approximately $200,000 for a receivable whose collectability was
deemed to be doubtful and was written off.
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<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
nine months ended September 30, 1997 were $2,639,263, an increase of $1,263,961,
or 91.9%, compared to $1,375,302 for the corresponding period in 1996. This
increase resulted from an increase in personnel, consulting, and travel expenses
related to the expansion and continued development of the company's
infrastructure, activities related to discussions regarding certain strategic
partnerships and international operations, along with increases in legal,
accounting, investor relations and other costs associated with being a publicly
held company.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
nine months ended September 30, 1997 were $1,791,680, an increase of $564,775,
or 46.0%, compared to $1,226,905 for the corresponding period in 1996. This
increase is the primarily the result of increased research and development
personnel, the use of outside consultants, and the planning and development
efforts for the Company's head mounted display, Mobile Assistant II Systems,
133P Systems, and software, particularly for the linkAssist(TM) software
product.
INTEREST INCOME, NET. Net interest income for the nine months ended September
30, 1997 was $74,045, an increase of $35,779, or 93.5%, compared to $38,266 for
the corresponding period in 1996. This increase is the result of interest income
from the investment of cash balances in 1997 versus the net of interest income
related to proceeds from the Company's Initial Public Offering in the three
months ended September 30, 1996, and interest expense on convertible debentures
and other borrowings in the six months ended June 30, 1996.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED STOCK. The
Company's Series A Preferred Stock was issued on June 30, 1997 and accrues
dividends at 5% per annum on the outstanding principal amount. For the nine
months ended September 30, 1997, the amount of accrued dividend was $37,500,
with no comparable item for the corresponding period in 1996. In accordance with
the Emerging Issues Task Force report from the Securities and Exchange
Commission titled "Accounting for the Issuance of Convertible Preferred Stock
and Debt Securities with a Nondetachable Conversion Feature," a deemed dividend
was assumed for the Series A Preferred Stock, which will be accreted quarterly
as portions of the Series A Preferred Stock are convertible into Common Stock.
The amount of this accretion for the nine months ended September 30, 1997 was
$164,634, with no comparable item for the corresponding period in 1996.
NET LOSS ATTRIBUTABLE TO COMMON STOCK. As a result of the factors described
above, the net loss for the nine months ended September 30, 1997 was $7,064,518,
an increase of $3,895,615, or 122.9%, compared to $3,168,903 for the
corresponding period in 1996. Although the Company was subject to taxation
during the nine months ended September 30, 1997 and the nine months ended
September 30, 1996, the Company incurred net losses during these periods and no
provision for taxes was made.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In November 1995, the Company raised $1,505,000 through the private placement of
convertible debentures and in April 1996, the Company raised $1,000,000 through
a second private placement of convertible debentures. The Company received
approximately $2,140,000 from these financings net of offering costs. The
placement fees in respect of these financings were carried by the Company as
interest-bearing loans and were repaid from the proceeds of the Company's
initial public offering (the "IPO"). On July 18, 1996, the Company completed its
IPO and realized gross proceeds of approximately $13,280,000 and net proceeds of
approximately $10,840,000 after related expenses.
On June 30, 1997, the Company completed a $3 million private placement of an
aggregate of 3,000 shares of the Company's Series A Preferred Stock, par value
$0.01 per share. The Series A Preferred Stock has a stated value of $1,000 per
share and a holder of the Series A Preferred Stock is entitled to receive, if
and when declared by the Company, a dividend equal to 5% of the stated value per
share per annum, payable in shares of common stock of the Company, par value
$0.01 per share (the "Common Stock") or in cash, payable upon conversion of the
Series A Preferred Stock. The Series A Preferred provides the Company with
several redemption options and alternatively allows for the periodic conversion
of portions of unredeemed Series A Preferred Stock over a one-year period ending
June 30, 1998. Any Series A Preferred Stock outstanding on June 30, 1999 must be
converted into Common Stock at that date.
On November 12, 1997, the Company completed a $3 million private placement of an
aggregate of 3,000 shares of the Company's Series B Preferred Stock, par value
$0.01 per share ("Series B Preferred Stock"). The Series B Preferred Stock has a
stated value of $1,000 per share and a holder of the Series B Preferred Stock is
entitled to receive, if and when declared by the Company, a dividend equal to 4%
of the stated value per share per annum, payable in shares of Common Stock or in
cash, payable upon conversion of the Series B Preferred Stock into Common Stock.
The Series B Preferred Stock into Common Stock also provides the Company with
several redemption options and allows for the period conversion of portions of
unredeemed Series B Preferred Stock over a five-month period from closing.
For the nine months ended September 30, 1997, the Company's operating activities
used cash of $7,810,233, compared to a use of $2,854,514 for the corresponding
period in 1996. The net use of cash for the nine month period ended September
30, 1997 was primarily the result of a $7,064,518 net loss, along with an
increase in inventories of $851,159 largely related to the production of the
Mobile Assistant II System, the 133P System and the Company's head mounted
display; an increase in prepaid and other current assets of $576,960 and the
reduction in deferred licensing revenue of $250,000, offset by depreciation and
amortization expense of $226,225, a dividend and accretion of $202,134, recorded
in accordance with the Securities Exchange Commission report, a reduction in
receivables of $191,475 and an increase of payables and accrued expenses of
$312,582. Cash used for investing activities for the nine months ended September
30, 1997 was $331,896 for the acquisition of property and equipment, $334,338 in
capitalized costs related to the production of the Mobile Assistant II System,
the 133P System and the Company's head mounted display, and
-14-
<PAGE>
$215,772 related to patents. The Company's financing activities for the nine
months ending September 30, 1997 consisted of the placement of its Series A
Preferred Stock, which had net proceeds during the period of $2,938,041. As a
result of the above, cash on hand as of September 30, 1997, was $520,779.
At September 30, 1997, the Company had no material capital commitments and
working capital of $1,541,989.
The Company anticipates that its working capital requirements will increase as
the Company expands production and sales of the Mobile Assistant series,
continues to establish a full sales, service and marketing functions both in the
U.S. and internationally, expands the Company's ongoing research and development
efforts, and develops the support structure for these activities. The timing of
increases in personnel, research and development expenses, the amount of working
capital consumed by operations and competitive pressures on gross margins will
impact the magnitude and timing of the Company's cash requirements. Cash on hand
as of September 30, 1997 is not sufficient to meet the Company's operating and
working capital needs into the fourth quarter at current levels of cash usage
and the Company closed on a $3 million placement of Series B Preferred Stock on
November 10, 1997. To meet working capital needs thereafter, the Company intends
to reduce operating expenses, to obtain a working capital line of credit, and/or
complete additional financings. The Company has received several proposals for
financing and it is the opinion of the Company's management that such financing
arrangements are readily available to the Company and the execution of such
arrangements is a decision that will depend on timing, market conditions and the
final terms and conditions of such arrangements, as well as adherence to the
Company's objective of minimizing dilution to existing shareholders by raising
minimum amounts of equity at current stock prices. Receivables from sales of the
Mobile Assistant series are expected to provide collateral for working capital
borrowing facilities in the future. The Company has completed a series of
meetings with potential licensees, joint venture partners and investors in the
U.S., Europe and the Middle East, from which the Company expects to obtain
additional cash in the future. Company management believes that the combination
of cash on hand, reduced operating expenses, cash collections from sales of
products and services, and outside funding will provide sufficient liquidity to
meet the Company's cash requirements until at least March 1998. However, there
can be no assurance that the Company can or will obtain sufficient funds from
collections of product sales or from the establishment of a working capital line
of credit or from closing additional financings on terms acceptable to the
Company.
POSSIBLE IMPACT ON NEAR-TERM REVENUES
The Company has agreements with third-party suppliers to manufacture and supply
the body-worn computing unit, the head mounted display and the batteries for the
Mobile Assistant II System and 133P System. In the event that production is
interrupted for any reason, revenues will be adversely affected.
-15-
<PAGE>
POSSIBLE NON-CASH FUTURE CHARGE
In connection with the Company's IPO, the representative of the underwriters for
the transaction (the "Representative") required the Company's officers,
directors and certain other stockholders to deposit an aggregate of 1,800,000
shares of Common Stock into an escrow account (the "Escrowed Shares"). The
Escrowed Shares will be subject to release to such stockholders in increments
over a three-year period only in the event the Company's gross revenues and
earnings (loss) per share for the 12-month periods ending September 30, 1997,
1998 and 1999 meet or exceed targets which have been established through
negotiations with the Representative (the "Performance Targets"). If the
Performance Targets are not met in any of the relevant 12-month periods (and the
price of the Common Stock has not met or exceeded the price described below),
the Escrowed Shares will be returned to the Company in amounts which have been
agreed upon between the Representative and the Company for each period and
canceled. In addition to the foregoing, all then Escrowed Shares will be
released to the stockholders if the closing price of the Common Stock as
reported on The NASDAQ SmallCap Market equals or exceeds $11.00 for 25
consecutive trading days or 30 out of 35 consecutive trading days during the
period ending September 30, 1999. In the event any Escrowed Shares held by
officers, employees or consultants are released, the difference between the
initial offering price and the market value of such shares at the time of
release will be deemed to be additional compensation expense to the Company. If
the price of the Common Stock at the time of any release of the Escrowed Shares
is greater than the value of the Common Stock at the time of the IPO, an
earnings charge could result which would have the effect of reducing or
eliminating any earnings per share and could have a negative effect on the
market price for the Common Stock. The earnings per share target calculation
will be based on the average number of shares issued and outstanding during each
period, but excluding shares issued pursuant to the Representative's option to
purchase units of Common Stock and Warrants issued at the Company's IPO ("Unit")
at a price of $9.075 per Unit (165% of the offering price of the Units) during a
period of four years commencing one year from the closing of the IPO,
extraordinary items, or compensation expense charged to the Company related to
the release of the Escrowed Shares.
The Company's gross revenues and allowable losses did not meet the Performance
Targets for the 12-month period ending September 30, 1997 and 300,000 shares of
stock were canceled, resulting in no earnings impact and a reduction in shares
outstanding of approximately 2.1%.
Certain statements in the foregoing Management's Discussion and Analysis (the
"MD&A") are not historical facts or information and certain other statements in
the MD&A are forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995 (the "Act"). In particular, when used
in the preceding discussion, the words "believes, expects, or intends to" and
similar conditional expressions are intended to identify forward-looking
statements within the meaning of the Act and are subject to the safe harbor
created by the Act. Such statements are subject to certain risks and
uncertainties and actual results could differ materially from those expressed in
any of the forward-looking statements. Such risks and uncertainties include, but
are not limited to, conditions in the general acceptance of the Company's
products and technologies, competitive
-16-
<PAGE>
factors, the ability to successfully complete additional financings and other
risks described in the Company's SEC reports and filings.
-17-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders of the Company was held on August
28, 1997 for the purpose of (i) approving an amendment to the Company's Bylaws
to provide for the classification of the Board of Directors of the Company into
three classes, (ii) electing nine directors to serve, if the amendment to the
Company's Bylaws to create a classified Board of Directors is approved by the
stockholders, for terms of one, two or three years, as the case may be, and if
the amendment is not approved by the stockholders, until the next annual meeting
of stockholders and until their respective successors are elected and qualified,
(iii) approve an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock from 30,000,000 to
40,000,000 and the number of authorized shares of Preferred Stock from 5,000,000
to 6,000,000, and (iv) approving the Company's 1997 Stock Incentive Plan.
Proxies for the meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934 and there was no solicitation in opposition.
The proposal to approve the amendment to the Company's Bylaws was
approved by the following vote:
For Against Non Votes/Abstentions
--- ------- ---------------------
7,773,393 68,257 17,500
The following directors were elected by the following vote:
Votes
-----
For Against Term
--- ------- ----
Edward G. Newman 10,994,368 0 3 years
Steven A. Newman 10,994,368 0 3 years
James J. Ralabate 10,994,368 0 3 years
Eugene J. Amobi 10,994,368 0 2 years
Phillip E. Pearce 10,994,368 0 2 years
Harry E. Soyster 10,994,368 0 2 years
Keith P. Hicks 10,994,368 0 1 year
-18-
<PAGE>
John F. Moynahan 10,994,368 0 1 year
Martin Eric Weisberg 10,994,368 0 1 year
The proposal to approve the amendment to the Certificate of
Incorporation was approved by the following vote:
For Against Non Votes/Abstentions
--- ------- ---------------------
7,605,772 109,672 10,250
The proposal to approve the Company's 1997 Stock Incentive Plan was
approved by the following vote:
For Against Non Votes/Abstentions
--- ------- ---------------------
7,490,846 94,140 32,782
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
27.1 FINANCIAL DATA SCHEDULE
b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on August 14, 1997.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
XYBERNAUT CORPORATION
BY /s/ EDWARD G. NEWMAN
-------------------------
Edward G. Newman
President and Chief Executive
Officer
/s/ JOHN F. MOYNAHAN
-------------------------
John F. Moynahan
Senior Vice President and Chief
Financial Officer
-20-
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<NAME> XYBERNAUT CORPORATION
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1,756,097
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