As filed with the Securities and Exchange Commission on July 16, 1998
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
XYBERNAUT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1799851
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
12701 Fair Lakes Circle
Fairfax, Virginia 22033
(703) 631-6925
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(Address, including zip code, and telephone number, Including area code,
of registrant's principal executive offices)
Edward G. Newman
12701 Fair Lakes Circle
Fairfax, Virginia 22033
(703) 631-6925
------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
Including area code, of agent for service)
Copy to:
Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
---------------------------
Approximate date of commencement of proposed sale to public: As soon
as practicable after the effective date of this Registration Statement.
If the only securities on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_| __________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| __________
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==========================================================================================
Proposed Proposed
Title of each Maximum maximum Amount of
class of securities Amount to Aggregate price Aggregate registration
to be registered be registered Per share offering price fee
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value
per share 165,441(1)(3) $4.734375(2) $783,260 $231.07
==========================================================================================
</TABLE>
(1) Represents the registration for resale of 150% of the number of shares of
the Company's common stock that would be issuable upon conversion by three
holders of 375 shares of the Company's Series C Preferred Stock at a price
of $3.40 per share of common stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (g); based on the average ($4.734375) of the
bid ($4.718750) and asked ($4.750000) price on the Nasdaq SmallCap Market
on July 9, 1998.
(3) The shares of Common Stock offered hereby include the resale of such
presently indeterminate number of shares of Common Stock as shall be
issued in respect of all shares of Common Stock issuable upon conversion
of 375 shares of the Company's Series C Preferred Stock, par value $.01
(the "Series C Preferred Stock"), issued in a private placement in May
1998 (the "Private Placement"). The number of shares of Common Stock
indicated to be issuable in connection with such transaction and offered
for resale hereby is an estimate and is, based on a Registration Rights
Agreement (the "Registration Rights Agreement") among the Company and the
Selling Stockholders, 150% of the number of shares that would be issuable
upon conversion of 375 shares of the Series C Preferred Stock at a price
of $3.40 per share, and is subject to adjustment and could be materially
less than such estimated amount depending upon factors that cannot be
predicted by the Company at this time, including, among others, the future
market price of the Common Stock. If however, all 375 shares of the Series
C Preferred Stock currently outstanding were converted at the closing bid
price of the Common Stock as reported by NASDAQ on July 9, 1998, the
Company would be obligated to issue a total of 79,470 shares of Common
Stock. This presentation is not intended to constitute a prediction as to
the future market price of the Common Stock or as to the number of shares
of Common Stock into which the Series C Preferred Stock will be converted.
See "Risk Factors -- Series C Preferred Stock" and "Description of
Securities -- Preferred Stock -- Series C Preferred Stock."
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE>
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED JULY___, 1998
PROSPECTUS
165,441 Shares of Common Stock
(par value $.01 per share)
XYBERNAUT CORPORATION
This Prospectus pertains to the offer and sale, from time to time,
by or for the account of certain stockholders (the "Selling Stockholders") of
Xybernaut Corporation (the "Company"), of up to 165,441 shares (the "Shares") of
common stock, par value $.01 per share (the "Common Stock"), of the Company. See
"Description of Securities."
The Shares offered hereby may be sold by the Selling Stockholders
directly or through agents, underwriters or dealers as designated from time to
time or through a combination of such methods. The Company will not receive any
of the proceeds from any sale of Shares by or for the account of the Selling
Stockholders. The Selling Stockholders and any broker-dealers that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be underwriters and any commissions received or profit realized by them in
connection with the resale of the Shares might be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act"). See "Selling Stockholders" and "Plan of Distribution." The
Company has agreed to bear all expenses relating to this registration, other
than underwriting discounts and commissions. In addition, the Company has agreed
to indemnify the Selling Stockholders against certain liabilities, including
liabilities under the Securities Act. See "Selling Stockholders" and "Plan of
Distribution."
The Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "XYBR". On July 9, 1998, the closing bid price of the Common Stock as
reported by NASDAQ was $4.718750.
The Company's executive offices are located at 12701 Fair Lakes
Circle, Fairfax, Virginia 22033 and its telephone number is (703) 631-6925.
The shares of Common Stock offered hereby include the resale of such
presently indeterminate number of shares of Common Stock as shall be issued in
respect of all shares of Common Stock issuable upon conversion of 375 shares of
the Company's Series C Preferred Stock, par value $.01 (the "Series C Preferred
Stock"), issued in a private placement in May 1998 (the "Private Placement").
The number of shares of Common Stock indicated to be issuable in connection with
such transaction and offered for resale hereby is an estimate and is, based on a
Registration Rights Agreement (the "Registration Rights Agreement") among the
Company and the Selling Stockholders, 150% of the number of shares that would be
issuable upon conversion of 375 shares of the Series C Preferred Stock at a
price of $3.40 per share, and is subject to adjustment and could be materially
less than such estimated amount depending upon factors that cannot be predicted
by the Company at this time, including, among others, the future market price of
the Common Stock. If however, all 375 shares of the Series C Preferred Stock
currently outstanding were converted at the closing bid price of the Common
Stock as reported by NASDAQ on July 9, 1998, the Company would be obligated to
issue a total of 79,470 shares of Common Stock. This presentation is not
intended to constitute a prediction as to the future market price of the Common
Stock or as to the number of shares of Common Stock into which the Series C
Preferred Stock will be converted. See "Risk Factors -- Series C Preferred
Stock" and "Description of Securities -- Preferred Stock -- Series C Preferred
Stock."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE
FACTORS SPECIFIED UNDER THE CAPTION "RISK FACTORS"
LOCATED ON PAGE 4 OF THIS PROSPECTUS.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ______, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048; and Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains an Internet site on the World Wide Web that contains
reports, proxy and information statements and other information filed
electronically by the Company (http://www.sec.gov). Such reports, proxy
statements and other information can also be inspected at the offices of The
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus does not contain all the information set forth in the
Registration Statement on Form S-3 (File No. 333- _____) (the "Registration
Statement") of which this Prospectus forms a part, including exhibits relating
thereto, which has been filed with the Commission in Washington, D.C. Copies of
the Registration Statement and the exhibits thereto may be obtained, upon
payment of the fee prescribed by the Commission, or may be examined without
charge, at the offices of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997; (ii) the Quarterly Report on Form 10-QSB for the period
ended March 31, 1998; (iii) the Report on Form 8-K dated June 30, 1997; (iv) the
Registration Statement on Form S-3 (Commission File No. 333-36077) filed with
the Commission on September 22, 1997 and Amendment No. 1 to such Registration
Statement filed with the Commission on May 8, 1998; (v) the Registration
Statement on Form S-3 (Commission File No. 333-43696) filed with the Commission
on January 2, 1998 and Amendment No. 1 and Amendment No. 2 to such Registration
Statement filed with the Commission on January 22, 1998 and May 8, 1998,
respectively; (vi) the Registration on Form S-3 (Commission File No. 333-52567)
filed with the Commission on May 13, 1998 and Amendment No. 1 thereto filed with
the Commission on May 21, 1998; (vii) the Registration Statement on Form S-3
(Commission File No. 333- ) filed with the Commission on July ___, 1998; and
(ix) the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A filed on July 15, 1996 under the Exchange Act
(File No. 0-15086), each as filed with the Commission under the Exchange Act,
are incorporated into this Prospectus by reference.
Each document filed subsequent to the date of this Prospectus
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act before the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such previous statement.
Any statement so modified or superseded shall not be deemed to be a part hereof
except as so modified or superseded.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL
REQUEST OF ANY SUCH PERSON, A COPY OF ANY DOCUMENT INCORPORATED BY REFERENCE IN
THIS PROSPECTUS (OTHER THAN EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS SHOULD BE DIRECTED TO THE
COMPANY, 12701 FAIR LAKES CIRCLE, FAIRFAX, VIRGINIA 22033, (703) 631-6925.
ATTENTION: W. JEFF PAGANO.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
and notes thereto appearing elsewhere or incorporated by reference in this
Prospectus.
To inform investors of the Company's future plans and objectives,
this Prospectus (and other reports and statements issued by the Company and its
officers from time to time) contain certain statements concerning the Company's
future results, future performance, intentions, objectives, plans and
expectations that are or may be deemed to be "forward-looking statements." The
Company's ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), which provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company believes it
is in the best interest of investors to take advantage of the "safe harbor"
provisions of the Reform Act. Such forward-looking statements are subject to a
number of known and unknown risks and uncertainties that, in addition to general
economic and business conditions and those described in "Risk Factors" could
cause the Company's actual results, performance and achievements to differ
materially from those described or implied in the forward-looking statements.
THE OFFERING
Securities Registered..................... 165,441 shares of Common Stock
Common Stock outstanding
prior to the offering hereby........... 20,887,915 shares of Common Stock(1)
Common Stock outstanding
after the offering hereby.............. 21,053,356 shares of Common Stock(1)
Common Stock trading symbol
on NASDAQ.............................. XYBR
- ---------------------
(1) Does not include (i) 1,390,430 shares of Common Stock reserved for
issuance upon the exercise of outstanding options granted pursuant to Rule
701 of the Securities Act, the Company's 1996 Omnibus Stock Incentive Plan
and the 1997 Stock Incentive Plan; (ii) 5,173,402 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants to purchase
Common Stock, which includes 4,583,402 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants issued in connection with
the Company's initial public offering (the "IPO"); and (iii) 420,000
shares of Common Stock reserved for issuance upon exercise of an option
granted pursuant to the Company's IPO to purchase 210,000 shares of Common
Stock and 210,000 redeemable warrants, each such warrant to purchase one
share of Common Stock at an exercise price of $9.075. See "Risk Factors --
Effect of Possible Non-Cash Future Charge" and " -- Securities Issuable
Pursuant to Options, Warrants and the Unit Purchase Option."
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<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information set forth in this
Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.
HISTORY AND EXPECTATION OF FUTURE LOSSES; NEED FOR ADDITIONAL FINANCING
The Company was incorporated in October 1990 and commenced operations
in November 1992. In the fiscal years ended March 31, 1994 and 1995, the Company
incurred a net loss of $47,352 and $1,303,892, respectively. In the years ended
December 31, 1996 and 1997, the Company incurred a net loss of $5,238,536 and
$9,479,966, respectively. The Company incurred a net loss of $1,489,321 for the
quarter ended March 31, 1998 and expects to incur a substantial loss for the
quarter ended June 20, 1998. The consolidated balance sheets as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended, incorporated by
reference in this Prospectus, have been incorporated herein in reliance on the
report dated March 31, 1998, which includes an explanatory paragraph, concerning
the Company's ability to continue as a going concern, of PricewaterhouseCoopers
LLP, independent accountants, given on their authority as experts in accounting
and auditing. The Company intends to conduct significant additional research,
development and testing that, together with establishment of marketing and
distribution capabilities, are expected to require substantial funding and to
result in continuing operating losses until such time as sufficient gross
margins from revenues are generated to cover operating costs. There can be no
assurance that, notwithstanding these efforts and the expenditure of substantial
funds, the Company ever will achieve substantial sales of any of its products or
profitable operations or that it will be able to meet the competitive demands of
the industry in which it operates. The success of the Company will be affected
by expenses, operational difficulties and other factors frequently encountered
in the development of a business enterprise in a competitive environment, many
of which may be beyond the Company's control. See "Risk Factors - Competition."
LIQUIDITY; WORKING CAPITAL NEEDS
To meet working capital cash requirements, the Company intends to
obtain a working capital line of credit and/or complete additional financings
including the exercise of its put option under the April 1998 Private Equity
Line of Credit Private Placement (the "Put Option") which contemplates the sale
of up to $11,000,000 of the Company's Common Stock over a period of up to two
years. To date, the Company has sold $1,000,000 worth of shares of Common Stock
and exercised a put option in the aggregate principal amount of $3,000,000 (the
"Initial Put Option"), each under the April 1998 Private Equity Line of Credit
Private Placement. However, there can be no assurance that the Company can or
will obtain sufficient funds to meet, in whole or in part, its working capital
needs from collections of product sales. There can be no assurance that the
Company will be capable of raising additional capital thereafter or of
establishing and obtaining funds from a working capital line of credit, that the
exercise of a put option will be accepted by the particular investor or that
such exercise will be deemed advisable at such times as funds may be required,
or that the terms upon which such capital or line of credit would be available
to the Company would be acceptable, in which case the Company could be required
to curtail materially, suspend or cease operations.
DILUTION; IMPACT OF SALE OF COMMON STOCK UPON CONVERSION OF OUTSTANDING
OPTIONS, WARRANTS, THE UNIT PURCHASE OPTION AND CERTAIN REPRICING OPTIONS
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<PAGE>
The purchasers of the Shares offered hereby will experience immediate
and substantial dilution in the net tangible value of their Shares in the event
of conversion of outstanding options, warrants and the issuance of shares of
Common Stock pursuant to certain repricing arrangements entered into by the
Company in connection with its exercise of the Initial Put Option. Specifically,
certain options and warrants are convertible into Common Stock at discounts from
future market prices of the Common Stock, which could result in substantial
dilution to existing holders of Common Stock. The sale of such Common Stock
acquired at a discount could have a negative impact on the trading price of the
Common Stock and could increase the volatility in the trading price of the
Common Stock.
At the date of this Prospectus, the Company has reserved an aggregate
of 6,983,832 shares of Common Stock for issuance on exercise of outstanding
options and warrants. The exercise price of the options presently outstanding is
between $1.37 and $6.00 for 1,290,430 shares granted from April 1, 1995 to July
9, 1998. The exercise price of the 287,860 warrants outstanding as of July 9,
1998 is between $1.76 and $18.00 per share. In connection with the Company's
IPO, warrants to purchase 3,846,429 shares were originally issued that entitle
the holder to purchase a share of common stock for $9.00 until July 19, 1999.
These warrants contain anti-dilution provisions that have resulted in the number
of shares to be issued upon a complete warrant exercise increasing to 4,583,402.
At the completion of the IPO, the Representative received an option (the "Unit
Purchase Option") to purchase 210,000 Units (the "Units"), each unit consisting
of one share of Common Stock and one Redeemable Warrant (a "Warrant") to
purchase one share of Common Stock, at a price of $9.075 per Unit during a
period of four years commencing July 18, 1997. The Warrants included in the Unit
Purchase Option are exercisable at $12.60 per share. During the terms of the
outstanding options, warrants and the Unit Purchase Option, the holders are
given the opportunity to profit from a rise in the market price of the Common
Stock, and their exercise may dilute the ownership interest of existing
stockholders, including investors in this offering. The existence of the
options, the warrants and the Unit Purchase Option may adversely affect the
terms on which the Company may obtain additional equity financing. Moreover, the
holders are likely to exercise their rights to acquire Common Stock at a time
when the Company would otherwise be able to obtain capital on terms more
favorable than could be obtained through the exercise of such securities.
In addition, the Company agreed to certain repricing arrangements in
connection with its exercise of the Initial Put Option. Pursuant to such
arrangement, one-sixth of the 545,454 shares of Common Stock (the "Initial Put
Shares") issued upon exercise of the Initial Put Option, are subject to monthly
repricing commencing on September 30, 1998. Under the repricing calculation, if
the closing price of the Common Stock on the trading date immediately preceding
the repricing date is less than $7.20 per share, the shares of Common Stock
subject to repricing shall be repriced at the lowest closing bid price of the
Common Stock for the 30 days preceding such repricing date (the "Initial Put
Reset Price"). The Company shall issue to the investors such number of shares
(the "Initial Put Repricing Shares") equal to the difference between (a) the
quotient of 500,000 and the Initial Put Reset Price and (b) the number of shares
subject to repricing. No additional shares of Common Stock shall be issued if
the Initial Put Reset Price is equal to or greater than $5.50.
UNCERTAINTY OF MARKET DEVELOPMENT AND PRODUCT ACCEPTANCE
The mobile computing market is emerging and relatively undeveloped.
The Company sold its first Mobile Assistant(R) in 1993 and as of December 31,
1997 had sold and delivered approximately $1.8 million of Mobile Assistant(R)
systems. The Company commenced delivery of the Pentium(R) Mobile Assistant
P-133(TM) in August 1997 and has announced that it expects to commence delivery
of Mobile Assistant(R) IV, a Pentium 266 MHZ based system ("MA IV"), in the
quarter ending December 31, 1998. In September 1997, the Company announced
linkAssist(TM), a software development toolkit, which provides speech linking of
data in almost any format, without
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altering the original data and webAssist(TM) software that allows voice
navigation of HTML links found on the Internet and intranet. The size of the
mobile computing market is currently limited by the high unit prices of mobile
computers as compared to laptops and other portable computers, the specialized
nature of each application and the need for custom applications and system
integration and the limited supply to date of components for completed systems.
The potential size of the market will be limited by the rate at which
prospective customers recognize and accept the functions and capabilities of
integrated mobile computing systems. There can be no assurance that a
significant market will develop for mobile computing systems or, if a market
develops, that the Mobile Assistant(R) series and any of the Company's other
products will become a significant factor in any market that develops. In
addition, there is no assurance that the Company will obtain the working capital
needed to meet the competitive demands of the industry in which it operates. See
"Risk Factors - Liquidity; Working Capital Needs; -- Competition."
The commercial success of the Mobile Assistant(R) series,
linkAssist(TM), webAssist(TM) and software toolkits enabling the Company's
customers to more rapidly create customized software applications on a
stand-alone basis or for use with the Mobile Assistant(R) series, and any other
product that the Company may develop will depend upon acceptance by the
commercial, healthcare, education and military markets, of which there can be no
assurance.
The Company believes that any product acceptance will be
substantially dependent upon educating the commercial, healthcare, education and
military markets as to the capabilities, characteristics, benefits and efficacy
of the Mobile Assistant(R) series and the Company's other products, of which
there can be no assurance.
COMPETITION
The computer industry is intensely competitive and is characterized
by rapid technological advances, evolving industry standards and technological
obsolescence. Many of the Company's current competitors have longer operating
histories and greater financial, technical, sales, marketing and other resources
than the Company. Several other companies are engaged in the manufacture and
development of body-mounted or hand-held computing systems that compete with the
Mobile Assistant(R) series, including Computing Devices International, a
division of Ceridian Corporation, ViA Inc., Texas Microsystems, Telxon, Norand
and Teltronics, Inc., a subsidiary of Interactive Solutions, Inc., Raytheon and
a consortium of Litton and TRW. Personal digital assistants and laptop and
notebook computers also are products that could compete against the Mobile
Assistant(R) in applications where hands-free, voice-activated operation is not
required. Many of these computers are manufactured by major domestic and foreign
computer manufacturers which possess far more resources than the Company and can
be expected to compete vigorously with the Company for the market at which the
Mobile Assistant(R) is directed. In addition, new and competing technologies are
being developed in hands-free mobile computing systems. There can be no
assurance that the Company will be able to compete successfully against its
competitors, that it will have the working capital needed to incorporate the
constant technological advances in its products or that the competitive
pressures faced by the Company will not adversely affect its financial
performance.
DEPENDENCE UPON SUPPLIERS
To prepare the Mobile Assistant(R) P-133 for delivery to customers,
the Company purchases system components from several suppliers, who manufacture,
assemble, integrate and test these components. The Company then combines those
components and performs system tests prior to shipping. Certain components are
currently purchased from single suppliers. The Company expects that the MA IV
will be assembled,
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<PAGE>
integrated and tested by third party. The Company has entered into written
agreements with its suppliers for batteries, head-mounted displays and computing
units. Although the Company believes there are multiple sources for many parts
and components, the Company currently depends heavily on its current suppliers.
Although management believes that the Company could adapt to any supply
interruptions, such occurrences could necessitate changes in product design or
assembly methods for the Mobile Assistant(R) series and cause the Company to
experience temporary delays or interruptions in supply while such changes are
incorporated. Further, because the order time for certain components may range
up to approximately three months, the Company also could experience delays or
interruptions in supply in the event the Company is required to find a new
supplier for any of these components. Any disruptions in supply of necessary
parts and components from the Company's key suppliers could have a material
adverse effect on the Company's results of operations. Any future shortage or
limited allocation of components for the Mobile Assistant(R) could have a
material adverse effect on the Company.
SUBSTANTIAL DEPENDENCE UPON SINGLE PRODUCT LINE;
POSSIBILITY OF UNSUCCESSFUL NEW PRODUCT DEVELOPMENT
The Mobile Assistant(R) series currently consists of the P-133 model
based on a 133 MHZ Intel Pentium(R) processor and the MA IV, which is expected
to be available in late 1998. The Mobile Assistant(R) series are the Company's
principal products, and its success will depend upon its commercial acceptance,
which cannot be assured. For single unit purchases, the Mobile Assistant(R)
P-133 currently is priced from $7,196 to $8,995 and up, depending upon the
discount and selected features. As technological developments cause declines in
hardware costs, the Company expects that mobile computer sales will be driven by
system capabilities and integration. There is no assurance that the Mobile
Assistant(R) will offer the performance capabilities or features that customers
will value and, if not, the Company could be required to modify the design of
the Mobile Assistant(R) which may require the expenditure of additional capital
currently unavailable to the Company. While linkAssist(TM) and the Company's
planned software toolkits are intended for use both with the Mobile Assistant(R)
series and independently, there can be no assurance that a separate market for
the Company's existing and planned software products will develop. There can be
no assurance that any products, if sold, will generate significant revenues or
any profits. The Company is also developing additional products for the Mobile
Assistant(R) series for introduction in the future and intends to modify the
Mobile Assistant(R) series for use in other applications and to develop other
products using its core technologies. Additional product development will result
in the Company incurring significant research and development expenses that may
be unrecoverable should commercialization of new products prove unsuccessful.
The Company also could require additional funding if research and development
expenses are greater than anticipated. There can be no assurance that the
Company will be successful in its future product development efforts or in
diversifying its product line. See "Risk Factors - Liquidity; Working Capital
Needs."
UNCERTAIN PROTECTION OF PATENT AND PROPRIETARY RIGHTS;
NO ASSURANCE OF ENFORCEABILITY OR SIGNIFICANT COMPETITIVE ADVANTAGE
The Company considers its patent, trade secrets, and other
intellectual property and proprietary information to be important to its
business prospects. The Company relies on a combination of patent, trade secret,
copyright and trademark laws and contractual restrictions to establish and
protect its proprietary rights. The Company has entered into confidentiality and
invention assignment agreements with its employees, and enters into
non-disclosure agreements with its suppliers, VARs, OEMs and actual and
potential customers to limit access to and disclosure of its proprietary
information. The Company has registered its Mobile Assistant(R) and
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Xybernaut(R) trademarks on the Principal Register of the United States Patent
and Trademark Office ("Patent Office").
In April 1994, U.S. patent number 5,305,244 ("hands-free,
user-supported portable computers") (the "Patent") for the Mobile Assistant(R)
Series was granted to the Company. This patent was previously assigned to the
Company by several employees of the Company. In September 1995, the Company
received a notification from the Patent Office entitled "office action in
reexamination," which indicated that certain claims under the Patent were
subject to reexamination and were preliminarily rejected. The reexamination of
the Patent was initiated as a result of a request from one of the Company's
competitors. In May 1996, the Company was successful in the reexamination and
the Patent Office issued a Notice of Intent to Issue Reexamination Certificate
and Reexamination Reasons for Patentability/Confirmation with respect to the
issues raised by the request for reexamination, wherein it concluded that the
Company's claims are patentable with respect to the issues raised by the request
for reexamination. In April 1996, the Company received notification that a
second reexamination request had been filed with the Patent Office by the same
competitor that had initiated the prior reexamination, and in September 1996 the
Company received a notification from the Patent Office entitled "office action
in reexamination," which indicates that certain claims under the patent were
subject to reexamination and were preliminarily rejected. In November 1996, the
Company filed a written response to the request for reexamination and
preliminary rejection. The second re-examination has been concluded and the
Patent Office indicated that the Company was successful in the reexamination and
sent the Company a "Notice of Intent to Issue Reexamination Certificate"
indicating that the Patent Office ruled in the Company's favor. Subsequently on
September 23, 1997, the Patent Office issued the Reexamination Certificate to
the Company indicating successful results for the Company in the second
re-examination. Most of the Company's revenue for the twelve months ended
December 31, 1997 and 1996 were derived from products included within the scope
of the patent. The Company has notified several of its competitors of the
existence of the Patent, which the Company's counsel believes may have been
infringed by some of such competitors. The Company intends to take any and all
appropriate measures, including legal action, necessary to maintain and enforce
its rights under the Patent and to recover any damages suffered as a result of
any alleged infringement.
Since July 1996, the Company has filed fifteen patent applications
covering various aspects of computers in general and wearable computers in
particular. Of these fifteen applications, five additional patents have been
issued, one patent has been allowed pending issuance and nine patents are
pending. Most of these applications have also been filed in European countries,
The People's Republic of China, Japan, Republic of Korea, Republic of China
(Taiwan), Canada and Australia. All patents obtained by Company employees under
pending and future applications have been and will be assigned to the Company
under existing invention assignments.
Notwithstanding the foregoing, there can be no assurance that the
Company's pending patent applications will issue as patents, that any issued
patent will provide the Company with significant competitive advantages or that
challenges will not be instituted against the validity or enforceability of any
patent held by the Company. The cost of litigation to uphold the validity and
prevent infringement of patents can be substantial. There also can be no
assurance that others will not independently develop similar or more advanced
products, design patentable alternatives to the Company's products or duplicate
the Company's trade secrets. The Company may in some cases be required to obtain
licenses from third-parties or to redesign its products or processes to avoid
infringement. The Company also relies on trade secrets and proprietary
technology and enters into confidentiality agreements with its employees and
consultants. There can be no assurance that the obligation to maintain the
confidentiality of such trade secrets or proprietary information will not be
breached by employees or consultants or that the Company's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors in such a manner that the Company has no practical
recourse.
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LIMITED MARKETING AND DIRECT SALES EXPERIENCE;
DEPENDENCE ON OTHERS FOR MARKETING AND SALES.
The Company intends to continue development of a sales organization
to market and sell its mobile computing products to value-added resellers
("VARs"), original equipment manufacturers ("OEMs"), distributors and end users.
The Company is also developing a network of VARs, distributors and OEMs and
intends to enter into joint ventures and licensing or other collaborative
arrangements to market and sell its mobile computing products. Such arrangements
may result in a loss of control by the Company over the marketing and sale of
its products. There can be no assurance that the Company will be successful in
entering into such additional arrangements or be able effectively to manage and
maintain its relationships with others, or that any marketing and sales efforts
undertaken for the Company by others will be successful. The Company also
markets its products outside of the United States. A number of risks are
inherent in international transactions, such as the imposition of governmental
controls including restrictions on the exporting of currency, fluctuations in
foreign currency exchange rates, export license requirements, political and
economic instability, trade restrictions, changes in tariffs and difficulties
and expenses in managing international operations. These and other factors
beyond the Company's control may adversely affect the Company's ability to
achieve significant sales.
DEPENDENCE UPON AND NEED FOR KEY PERSONNEL; LIMITED MANAGEMENT TEAM
The Company's success depends to a significant extent on Edward G.
Newman, its President, Chief Executive Officer and Chairman of its Board of
Directors. The loss of Mr. Newman would have a material adverse effect on the
Company's progress and ultimate likelihood of success. Because the Company is
substantially dependent on Mr. Newman's services and there are currently only
two other board-elected officers of the Company, the Company may be considered
to have limited management. Although the Company has entered into a three-year
employment agreement with Mr. Newman, this agreement may not assure the Company
the continued services of Mr. Newman. The Company has obtained a key-person life
insurance policy on the life of Mr. Newman in the amount of $2,000,000. The
Company's success also will depend upon its ability to attract and retain highly
qualified and experienced management and technical personnel. The Company faces
competition for such personnel from numerous other entities, many of which have
significantly greater resources than the Company. There can be no assurance that
the Company will be successful in recruiting such personnel or that, if
recruited, such persons would succeed in establishing profitable operations for
the Company.
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<PAGE>
CUSTOMER CONCENTRATION
For the twelve month period ended December 31, 1996, two of the
Company's customers accounted for 64% and 24%, respectively, of the Company's
revenues. For the fiscal year ended December 31, 1997, two customers accounted
for 34% and 10%, respectively of the Company's revenues. Accordingly, the
Company is significantly dependent on revenues derived from a limited number of
customers. The loss of one or more significant customers may have a material
adverse effect on the ability of the Company to achieve profitability. To the
extent the Company's dependence increases on large corporate customers in the
future, the Company will be subject to an increased risk that the loss of any
such customers will have a material adverse effect on the Company's results of
operations. The Company may remain dependent in the immediate future upon a
limited number of customers (the identity of which may be subject to change) for
a material percentage of its annual operating revenue.
RAPID TECHNOLOGICAL CHANGE AND RISK OF OBSOLESCENCE
The market for computer products is characterized by rapid
technological advances, evolving industry standards, changes in end user
requirements and frequent new product introductions and enhancements. The
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. The Company's success
will depend upon its ability to enhance its current products and develop and
successfully introduce and sell new products that keep pace with technological
developments and respond to evolving end user requirements. Any failure by the
Company to anticipate or respond adequately to technological developments or end
user requirements, or any significant delays in product development or
introduction, could damage the Company's competitive position in the marketplace
and reduce revenues. The Company expects to increase the use of additional
external and internal resources in the near term to meet these challenges. There
can be no assurance that the Company will be successful in hiring, training and
retaining qualified product development personnel to meet its needs. There can
be no assurance that the Company will be successful in developing and marketing
new products or product enhancements on a timely basis. Any failure to
successfully develop and market new products and product enhancements would have
a material adverse effect on the Company's results of operations.
YEAR 2000 ISSUES
The Company is aware of the computing issues associated with the
coming of the millennium (year 2000), most notably whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. Based on preliminary investigations and the
representations of several of its suppliers, the Company currently believes that
computers and software used in its operations and sold by the Company are year
2000 compliant. The Company is working with its suppliers and customers to
either verify year 2000 compliance or identify and execute appropriate changes
to make such systems year 2000 compliant. The Company believes that the cost of
completing any modifications for year 2000 compliance to the systems used or
sold by the Company will not be material. However, there can be no assurance
that the Company's suppliers will be correct in their assertions that their
products are year 2000 compliant or that the Company's estimate of the cost of
systems modifications for year 2000 compliance will prove ultimately to be
correct.
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INDUSTRY CYCLICALITY
The computer industry historically has been affected by periodic
downturns, which have had an adverse economic effect on manufacturers of
computer hardware and software as well as upon end users of computers. In
addition, the life cycle of existing computer products and timing of new product
development and introduction can affect demand for computer products. The
Company's results of operations for any particular period may be adversely
affected by numerous factors, such as the loss of key suppliers or customers,
price competition, problems encountered in managing inventories or receivables,
the timing or cancellation of purchase orders with suppliers and the timing of
expenditures in anticipation of increased sales and customer product delivery
requirements, if any. Price competition in the computer industry in which the
Company competes is intense and could result in gross margin declines which
could have an adverse impact on the Company's financial performance.
EFFECT OF POSSIBLE NON-CASH FUTURE CHARGE
As a condition to the Company's initial public offering (the "IPO"),
certain of the Company's stockholders, primarily officers and directors, have
been required to deposit an aggregate of 1,800,000 shares of Common Stock into
an escrow account (the "Escrowed Shares"). The Escrowed Shares are subject to
incremental release 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 equal or exceed certain gross revenue and
earnings (loss) per share targets. If such per share targets are not met in any
of the relevant 12-month periods (and the price of the Common Stock does not
meet or exceed 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
the then Escrowed Shares will be released to the stockholders if the closing
price of the Common Stock as reported on The Nasdaq SmallCap Market following
this offering 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 and 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. Assuming the price of Common Stock is equal
to or greater than the initial offering price of the shares at the Company's IPO
(of which there can be no assurance), the release of the Escrowed Shares would
result in an earnings charge that 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 excludes shares issued pursuant to a unit purchase option granted
pursuant to the IPO, extraordinary items or compensation expense charged to the
Company related to the release of the Escrowed Shares. The stock and earnings
targets for escrow release for September 30, 1997 were not achieved and 300,000
shares were canceled from the escrow pool, which resulted in a reduction of 2.1%
of the Company's outstanding shares of Common Stock. Given the expected start of
full-scale production of the MA IV in the quarter ending December 31, 1998, the
Company's management believes that it is likely that the Company's gross
revenues and allowable losses will not meet the Performance Targets for the
12-month period ending September 30, 1998. Accordingly, the release of the
escrow shares for this period is only likely if the stock price equals or
exceeds $11.00 for 25 consecutive trading days or 30 out of 35 consecutive
trading days prior to September 30, 1998. If conditions are not met for release
from escrow, then 750,000 shares of stock will be returned to the Company on
September 30, 1998 and canceled, resulting in no earnings impact and a
commensurately lower number of outstanding shares.
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CONTROL BY EXISTING STOCKHOLDERS
Following this offering, the Company's executive officers, directors
and principal stockholders will, in the aggregate, beneficially own
approximately 29.3% of the Company's outstanding shares of Common Stock. These
stockholders, if acting together, will be able to effectively control most
matters requiring approval by the stockholders of the Company, including the
election of directors. The voting power of these stockholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company.
LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that directors of
the Company shall not be personally liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, subject to
limited exceptions. Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission,
these provisions of the Certificate of Incorporation could prevent the recovery
of monetary damages against directors of the Company. See "Indemnification for
Securities Act Liabilities."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock
in the public market following this offering could adversely affect the market
price of the Common Stock. Of the 22,009,108 shares of Common Stock that will be
outstanding or registered for sale upon the completion of this offering,
11,484,031 will be freely tradeable without restriction or further registration
under the Securities Act. Such number includes 3,846,429 shares of Common Stock
distributed in the IPO, 1,958,984 shares of Common Stock registered and issued
upon conversion of the Series A Preferred Stock, 3,172,239 shares of Common
Stock registered and issued upon conversion of the Series B Preferred Stock,
2,340,938 shares of Common Stock registered in connection with the April 1998
Private Equity Line of Credit Private Placement, and the 165,441 additional
shares of Common Stock registered in this offering. The remaining 10,525,077
shares of the Common Stock are "restricted securities" as that term is defined
in Rule 144 promulgated under the Securities Act, and in the future may only be
sold pursuant to an effective registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. In the absence of any agreement to the
contrary, the outstanding restricted Common Stock could be sold in accordance
with one or more other exemptions under the Securities Act (including Rule 144).
Rule 144, as amended, permits sales of restricted securities by any person
(whether or not an affiliate) after one year, at which time sales can be made
subject to the Rule's existing volume and other limitations and by
non-affiliates without adhering to Rule 144's existing volume or other
limitations after two years. Future sales of substantial amounts of shares in
the public market, or the perception that such sales could occur, could
adversely affect the price of the shares in any market that may develop for the
trading of such shares. In addition, pursuant to the terms of agreements entered
into pursuant to the IPO, the holders of 9,905,437 shares of Common Stock may
not sell or dispose of their shares of Common Stock until July 18, 1998 without
prior written consent of the representative of the underwriter in the IPO (the
"Representative").
NO DIVIDENDS ANTICIPATED
The Company has never paid any dividends on its securities and does
not anticipate the payment of dividends in the foreseeable future.
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VOLATILITY OF STOCK PRICE
The trading price of the Common Stock has been volatile, and it may
continue to be so. Such trading price could be subject to wide fluctuations in
response to announcements of business and technical developments by the Company
or its competitors, quarterly variations in operating results, and other events
or factors, including expectations by investors and securities analysts and the
Company's prospects. In addition, stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of development stage companies, at times for reasons unrelated to
their operating performance. Such broad market fluctuations may adversely affect
the price of the Common Stock.
ANTI-TAKEOVER CONSIDERATION; RIGHTS OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
up to 6,000,000 shares of $.01 par value preferred stock (the "Preferred
Stock"). As of the date of this Prospectus, only the Series C Preferred Stock
are issued and outstanding. The authorized and unissued Preferred Stock may be
issued with voting, conversion or other terms determined by the Board of
Directors which could be used to delay, discourage or prevent a change of
control of the Company. Such terms could include, among other things, dividend
payment requirements, redemption provisions, preferences as to dividends and
distributions and preferential voting rights. The issuance of Preferred Stock
with such rights could have the effect of limiting stockholder participation in
certain transactions such as mergers or tender offers and could discourage or
prevent a change in management of the Company. The Company has no present
intention to issue any additional Preferred Stock. See "Description of
Securities -- Preferred Stock."
In addition, the Board of Directors of the Company recently adopted
resolutions which implemented a classified or staggered Board of Directors which
would limit an outsider's ability to effect a rapid change of control of the
Board.
The ability of the Board of Directors to issue "blank check"
Preferred Stock and the staggered Board of Directors could have the effect of
delaying, deterring or preventing a change in control of the Company without any
further action by the shareholders. In addition, issuance of Preferred Stock,
without shareholder approval, on such terms as the Board of Directors may
determine, could adversely affect the voting power of the holders of the Common
Stock, including the loss of voting control to others. See "Description of
Securities."
USE OF PROCEEDS
The Shares being offered hereby are being registered for the account
of the Selling Stockholders, and, accordingly, the Company will not receive any
of the proceeds from the sale of the Shares.
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SELLING STOCKHOLDERS
The Shares being offered for resale by the Selling Stockholders were
acquired in connection with the May 1998 Private Placement. The following table
sets forth certain information regarding the ownership of shares of Common Stock
by the Selling Stockholders as of July 9, 1998, and as adjusted to reflect the
sale of the Shares. The information in the table concerning the Selling
Stockholders who may offer Shares hereunder from time to time is based on
information provided to the Company by such stockholder. Information concerning
the Selling Stockholders may change from time to time and any changes of which
the Company is advised will be set forth in a Prospectus Supplement to the
extent required. See "Plan of Distribution."
Shares of
Common Stock Owned
after Offering (2)
-------------------
Shares of
Common Stock Shares of
Owned Prior to Common Stock
Offering (1) to be Sold Number Percent
-------------- ------------ -------- -------
CPR (USA) Inc. 120,882 120,882 120,882 0.57%
Libertyview Plus Fund 34,853 34,853 34,853 0.17%
Libertyview Fund, LLC 9,706 9,706 9,706 0.05%
------- ------- ------- ------
Total 165,441 165,441 165,441 0.79%
======= ======= ======= ======
- -----------------
(1) Assumes that each Selling Stockholder will exercise all of its Series C
Preferred Stock into Common Stock. See "Description of Securities."
(2) Each Selling Stockholder has agreed that it will not be, following any
conversion of the Series C Preferred Stock the Put Shares, the beneficial
owner of 4.99% or more of the then issued and outstanding shares of Common
Stock.
The Selling Shareholders are not affiliated with the Company. Other
than being the sole investors in a June 1997 private placement of the Company's
Series A Preferred Stock, the Selling Stockholders have not had any material
relationship with the Company within the past three years.
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DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 40,000,000
shares of Common Stock, par value $.01 per share, and 6,000,000 shares of
Preferred Stock, par value $.01 per share. As of the date hereof, there are
20,887,915 shares of Common Stock and 375 shares of Series C Preferred Stock
issued and outstanding. The Company currently has reserved 6,546,692 shares of
Common Stock for issuance pursuant to outstanding options and warrants.
THE PRIVATE PLACEMENT
On May 22, 1998 (the "Closing Date"), the Company consummated a
private placement of 110,294 shares of Common Stock at a price of $3.40 per
share and 375 shares of Series C Preferred Stock at a price of $1,000 per share
for an aggregate purchase price of $750,000. The shares of Common Stock and the
shares of Series C Preferred Stock were issued by the Company in reliance upon
the provisions of Section 4(2) and Regulation D of the Securities Act.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. The
Company's Certificate of Incorporation and By-Laws do not provide for cumulative
voting rights in the election of directors. Accordingly, holders of a majority
of the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. Holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in the assets remaining after payment of
liabilities. Holders of Common Stock have no preemptive, conversion or
redemption rights. All of the outstanding shares of Common Stock are fully-paid
and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further stockholder
approval, to issue up to 6,000,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in each
such series, and to fix the designations, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock, if any, or could adversely affect the rights and
powers, including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuances could have the effect of decreasing the market
price of the Common Stock.
SERIES C PREFERRED STOCK
On May 15, 1998, the Board of Directors authorized the issuance of a
series of Preferred Stock consisting of 375 shares (the "Series C Preferred
Stock"), each such share of Series C Preferred Stock has a stated value of
$1,000 (the "Liquidation Preference"), pursuant to a Certificate of Designation
(the "Certificate of Designation").
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Dividends. The holders of the shares of Series C Preferred Stock are
entitled to receive, when and as declared by the Board of Directors of the
Company, dividends at the rate of five percent of the stated Liquidation
Preference per share per annum, and no more, payable, at the discretion of the
Board of Directors, in Common Stock or cash. Dividends accrue on each share of
Series C Preferred Stock from the date of initial issuance. Such dividends are
in preference to any distributions on any outstanding shares of Common Stock or
any other equity securities of the Company that are junior to the Preferred
Stock as to the payment of dividends.
Preferences on Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of the Series C Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, an amount equal to the Liquidation Preference for each share of
Series C Preferred Stock owned by such holder, plus all accrued and unpaid
dividends thereon to the date of payment. If upon liquidation, dissolution, or
winding up of the Company, the assets of the Company available for distribution
to its stockholders shall be insufficient to pay the holders of the Series C
Preferred Stock the full Liquidation Preference plus accrued and unpaid
dividends to which they respectively shall be entitled, the holders of the
Series C Preferred Stock together with the holders of any other series of
Preferred Stock ranking on a parity with the Series C Preferred Stock as to the
payments of amounts upon liquidation, dissolution or winding up shall share
ratably in any distribution of assets according to the respective amounts which
would be payable in respect of all such shares held by the respective
stockholders. The sale or other disposition (for cash, shares of stock,
securities or other consideration), of all or substantially all of the assets of
the Company shall be deemed to be a liquidation, dissolution or winding up of
the Company but the merger or consolidation of the Company into or with another
corporation or into or with the Company, shall not be deemed to be a
liquidation, winding up or dissolution of the Company. The holders of Series C
Preferred Stock shall have no priority or preference with respect to
distributions made by the Company in connection with the repurchase of shares of
Common Stock issued to or held by employees, directors or consultants upon
termination of their employment or services pursuant to agreements providing for
the right of said repurchase between the Company and such persons.
Conversion Rights. The holders of Series C Preferred Stock shall have
conversion rights as follows: (i) no shares of Series C Preferred Stock may be
converted prior to August 15, 1998; (ii) at any time after August 15, 1998
through November 14, 1998, up to twenty-five (25%) percent of the shares of
Series C Preferred Stock then outstanding may be converted, at the option of the
holders thereof; and (iii) thereafter, on November 15, 1998, February 15, 1999
and May 15, 1999, an additional twenty-five (25%) percent of the shares of
Series C Preferred Stock then outstanding may be converted, on a cumulative and
pro rata basis, at the option of the holders thereof. The number of shares of
fully-paid and nonassessable Common Stock into which each share of Series C
Preferred Stock may be converted shall be determined by dividing the Liquidation
Preference by an amount (the "Conversion Price") equal to the lesser of (A) 100%
of the average closing bid price of the Common Stock as reported on the Nasdaq
SmallCap Market or any successor exchange in which the Common Stock is listed
for the five trading days preceding the date on which the holder of the Series C
Preferred Stock has telecopied a notice of conversion to the Company (the
"Conversion Date") and (B) $4.00.
In the event the shares of Series C Preferred Stock are not converted
within ten business days of receipt by the Company of a valid notice of
conversion, the Company shall pay to the holder, by wire transfer, as liquidated
damages for such failure and not as a penalty, an amount in cash equal to 1%
percent per day of the purchase price of the shares of Series C Preferred Stock
to be converted which shall run from the initial Conversion Date and the holder
has the option to withdraw the notice of conversion previously sent; provided,
that the Company shall not be responsible for or required to pay such liquidated
damages if such failure to convert was not caused by any actions or omissions of
the Company.
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No fractional shares of Common Stock shall be issued upon conversion
of the Series C Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock on the
Conversion Date, as determined by the Company's Board of Directors. The Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion unless either the certificates evidencing such
shares of Series C Preferred Stock are delivered to the Company or its transfer
agent as provided above, or the holder notifies the Company or its transfer
agent that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates.
Upon any conversion of Series C Preferred Stock, the shares of Series
C Preferred Stock that are converted shall not be reissued and shall not be
considered outstanding for any purposes. Upon conversion of all of the then
outstanding Series C Preferred Stock, shares of Series C Preferred Stock shall
not be deemed outstanding for any purpose whatsoever and all such shares shall
be retired and canceled and shall not be reissued.
On May 15, 2000, the holders of the Series C Preferred Stock shall be
required to convert all of their outstanding shares of Series C Preferred Stock
into shares of Common Stock. Until converted, the Company shall be entitled to
redeem shares of Series C Preferred Stock in accordance with the Certificate of
Designation, regardless of whether or not a notice of conversion has been
received by the Company with respect to such shares.
The Company shall at all times when any shares of Series C Preferred
Stock shall be outstanding, reserve and keep available out of its authorized but
unissued stock, such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Series C
Preferred Stock.
Redemption. At any time after May 15, 1998, the Company may, at the
option of the Board of Directors, redeem up to 100% of the outstanding shares of
the Series C Preferred Stock at the applicable redemption price, provided, that
(x) the Company shall have received a notice of conversion, and (y) the
Conversion Price is below $3.40. The Company shall give written notice by
telecopy, to the holder of Series C Preferred Stock to be redeemed at least one
business day after receipt of the notice of conversion prior to the date
specified for redemption (the "Redemption Date"). Such notice shall state the
Redemption Date, the Redemption Price (as hereinafter defined), the number of
shares of Series C Preferred Stock of such holders to be redeemed and shall call
upon such holders to surrender to the Company on the Redemption Date at the
place designated in the notice such holders' redeemed stock. If fewer than all
the outstanding shares of Series C Preferred Stock are to be redeemed, the
redemption shall be pro rata among the holders of Series C Preferred Stock and
subject to such other provisions as may be determined by the Board of Directors.
The Redemption Date shall be no more than 10 days after receipt of written
notice from the Company. If the Company fails to pay the Redemption Price on the
Redemption Date, the Company shall pay to the holder a penalty in an amount in
cash equal to 2% percent of the Redemption Price to be paid on such Redemption
Date. If the Company fails to pay the Redemption Price on the Redemption Date,
the holder shall have the right to convert the Series C Preferred Stock
previously presented to the Company and not redeemed. The Company shall have the
right to redeem the Series C Preferred Stock in any subsequent redemption;
provided, however, that if the Company fails to pay the Redemption Price in a
subsequent redemption within 10 days, the Company shall have the right to redeem
the Series C Preferred Stock thereafter only upon wiring the Redemption Price to
the holders simultaneously with sending the notice of redemption. On or after
the Redemption Date, the holders of shares of Series C Preferred Stock called
for redemption shall surrender the certificates evidencing the shares called for
redemption to the Company at the place designated in such notice and shall
thereupon be entitled to receive payment of the Redemption Price.
-17-
<PAGE>
The Company shall have the option to redeem all or a portion of all
the outstanding shares of Series C Preferred Sock at a cash price equal to $3.40
multiplied by the number of shares the Series C Preferred Stock would convert
into on the date of redemption.
From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
the holders of such shares shall continue), the holders of the shares of the
Series C Preferred Stock called for redemption shall cease to have any rights as
stockholders of the Company, except the right to receive, without interest, the
Redemption Price thereof upon surrender of certificates representing the shares
of Series C Preferred Stock, and such shares shall not thereafter be transferred
(except with the consent of the Company) on the books of the Company and shall
not be deemed outstanding for any purpose whatsoever.
There shall be no redemption of any shares of Series C Preferred
Stock of the Company where such action would be in violation of applicable law.
Voting Rights. Except as otherwise required by law, the holders of
the Series C Preferred Stock shall not be entitled to vote upon any matter
relating to the business or affairs of the Company or for any other purpose.
Status. In case any outstanding shares of Series C Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to be permanently
canceled and shall not resume the status of authorized but unissued shares of
Series C Preferred Stock.
Ranking; Changes Affecting Series C Preferred Stock. The Series C
Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, (i) rank senior to any of the Company's
Common Stock and any other class or series of stock of the Company which by its
terms shall rank junior to the Series C Preferred Stock, and (ii) rank junior to
any other class or series of stock of the Company which by its terms shall rank
senior to the Series C Preferred Stock and (iii) rank on a pari passu basis with
the Series C and any other series of Preferred Stock of the Company.
So long as any shares of Series C Preferred Stock are outstanding,
the Company shall not (i) alter or change any of the powers preferences,
privileges, or rights of the Series C Preferred Stock; or (ii) amend the
provisions of the Certificate of Designation affecting the ranking of the Series
C Preferred Stock, without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of at least a majority of
the outstanding shares of Series C Preferred Stock, as to changes affecting the
Series C Preferred Stock.
Other Designations of Preferred Stock
-------------------------------------
As of the date of this Prospectus, the Company has not designated any
shares of Preferred Stock other than the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock. There are no other shares of
Preferred Stock outstanding, and the Company currently has no plans to issue any
other shares of Preferred Stock.
-18-
<PAGE>
DELAWARE BUSINESS COMBINATION PROVISIONS
As a Delaware corporation, the Company is subject to Section 203
("Section 203") of the Delaware General Corporation Law (the "DGCL"), which
regulates large accumulations of shares, including those made by tender offers.
Section 203 may have the effect of significantly delaying a purchaser's ability
to acquire the entire interest in the Company if such acquisition is not
approved by the Company's Board of Directors. In general, Section 203 prevents
an "Interested Stockholder" (defined generally as a person with 15% or more of a
corporation's outstanding voting stock) from engaging in a "Business
Combination" (defined below) with a Delaware corporation for three years
following the date such person became an Interested Stockholder. For purposes of
Section 203, the term "Business Combination" is defined broadly to include
mergers and certain other transactions with or caused by the Interested
Stockholder, sales or other dispositions to the Interested Stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to 10% or more of the aggregate market value
of the corporation's consolidated assets or its outstanding stock; the issuance
or transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the Interested Stockholder (except for transfers in a
conversion or exchange or a pro-rata distribution or certain other transactions,
none of which increase the Interested Stockholder's proportionate ownership of
any class or series of the corporation's or such subsidiary's stock); or receipt
by the Interested Stockholder (except proportionately as a stockholder),
directly or indirectly, of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by Section
203 does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Company's Board of Directors approves either the
Business Combination or the transaction that resulted in the person becoming an
Interested Stockholder, (b) the Interested Stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction that made him or
her an Interested Stockholder (excluding from the 85% calculation shares owned
by directors who are also officers of the corporation and shares held by
employee stock plans which do not permit employees to decide confidentially
whether to accept a tender or exchange offer); or (c) on or after the date a
person becomes an Interested Stockholder, the Company's Board of Directors
approves the Business Combination, and it is also approved at a stockholder
meeting by two-thirds of the voting stock not owned by the Interested
Stockholder.
Under Section 203, the restrictions described above do not apply if,
among other things, the corporation's original certificate of incorporation
contains a provision electing not to be governed by Section 203. The Company's
Certificate of Incorporation does not contain such a provision. The restrictions
described above also do not apply to certain Business Combinations proposed by
an Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Stockholders may be
effected from time to time in one or more transactions (which may involve block
transactions), in special offerings, exchange distributions and/or secondary
distributions, in negotiated transactions, in settlement of short sales of
Shares, or a combination or such methods of sale, at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Such transactions may be effected on a stock exchange, on the
over-the-counter market or privately. The Selling Stockholders may effect such
transactions by selling the Shares to or through
-19-
<PAGE>
broker-dealers, and such broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Stockholders
for whom they may act as agent (which compensation may be in excess of customary
commissions). Without limiting the foregoing, such brokers may act as dealers by
purchasing any and all of the Shares covered by this Prospectus either as agents
for others or as principals for their own accounts and reselling such securities
pursuant to this Prospectus. The Selling Stockholders and any broker-dealers or
other persons acting on the behalf of parties that participate with such Selling
Stockholders in the distribution of the Shares may be deemed to be underwriters
and any commissions received or profit realized by them on the resale of the
Shares may be deemed to be underwriting discounts and commissions under the
Securities Act. As of the date of this Prospectus, the Company is not aware of
any agreement, arrangement or understanding between any broker or dealer and the
Selling Stockholders with respect to the offer or sale of the Shares pursuant to
this Prospectus.
At the time that any particular offering of Shares is made, to the
extent required by the Securities Act, a prospectus supplement will be
distributed, setting forth the terms of the offering, including the aggregate
number of Shares being offered, the names of any underwriters, dealers or
agents, any discounts, commissions and other items constituting compensation
from the Selling Stockholders and any discounts, commissions or concessions
allowed or reallowed or paid to dealers.
Each of the Selling Stockholders may from time to time pledge the
Shares owned by it to secure margin or other loans made to such Selling
Stockholder. Thus, the person or entity receiving the pledge of any of the
Shares may sell them, in a foreclosure sale or otherwise, in the same manner as
described above for such Selling Stockholder.
The Company will not receive any of the proceeds from any sale of the
Shares by the Selling Stockholders offered hereby.
Pursuant to the Registration Rights Agreements, the Company and the
Selling Stockholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act. The Company shall
bear customary expenses incident to the registration of the Shares for the
benefit of the Selling Stockholders in accordance with such agreements, other
than underwriting discounts and commissions directly attributable to the sale of
such securities by or on behalf of the Selling Stockholders.
The Company has agreed to maintain the Registration Statement, of
which this Prospectus is a part, effective until the earlier of (i) the date
that all of the Shares registered under such Registration Statement have been
sold; (ii) the date the holders of the Shares receive an opinion of counsel that
all of the Shares may be sold under the provisions of Rule 144 or (iii) five and
one-half years after the completion of the Private Placement.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the DGCL provides, in general, that a corporation
incorporated under the laws of the State of Delaware, such as the registrant,
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than a derivative action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the
-20-
<PAGE>
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. In the case of a derivative action, a Delaware corporation may
indemnify any such person against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
The Company's Certificate of Incorporation provides that directors
shall not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability
resulting from a breach of the director's duty of loyalty to the Company or its
stockholders, intentional misconduct or wilful violation of law, actions or
inactions not in good faith, an unlawful stock purchase or payment of a dividend
under Delaware law, or transactions from which the director derives improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Certificate of Incorporation also authorizes the Company to indemnify its
officers, directors and other agents, by bylaws, agreements or otherwise, to the
fullest extent permitted under Delaware law. The Company has entered into an
Indemnification Agreement (the "Indemnification Agreement") with each of its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Company's Certificate of
Incorporation or as otherwise permitted under Delaware law. Each Indemnification
Agreement may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as a director or officer, against liabilities arising
from willful misconduct of a culpable nature, and to obtain directors' and
officers' liability insurance if available on reasonable terms.
Pursuant to the Registration Rights Agreement, the Company and the
Selling Stockholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
The Company maintains a directors and officers liability policy with
Genesis Insurance Company that contains a limit of liability of $3,000,000 per
policy year.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Parker Chapin Flattau & Klimpl, LLP, New York, New York. Martin
Eric Weisberg, Esq., a member of the firm, is a Director and the Secretary of
the Company.
-21-
<PAGE>
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended, incorporated by reference in this Prospectus,
have been incorporated herein in reliance on the report dated March 31, 1998,
which includes an explanatory paragraph, concerning the Company's ability to
continue as a going concern, of PricewaterhouseCoopers LLP (Coopers & Lybrand
L.L.P.), independent accountants, given on their authority as experts in
accounting and auditing.
-22-
<PAGE>
- -------------------------------------- --------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS WITH RESPECT TO THE
OFFERING MADE HEREBY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS 165,441 SHARES OF COMMON STOCK
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE BUSINESS OF THE
COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
Page ----------
PROSPECTUS
Available Information............... 2 ----------
Incorporation of Certain Documents
by Reference................... 2
Prospectus Summary.................. 3
Risk Factors........................ 4
Use of Proceeds.....................13
Selling Stockholders ...............14
Description of Securities...........15 ____________, 1998
Delaware Business Combination
Provisions.....................19
Plan of Distribution ...............19
Indemnification for Securities Act
Liabilities....................20
Legal Matters.......................21
Experts ............................22
- -------------------------------------- --------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses which will be
paid by the Company in connection with the issuance and distribution of the
securities being registered on this Registration Statement. The Selling
Stockholders will not incur any of the expenses set forth below. All amounts
shown are estimates.
Filing fee for registration statement ............... $231.07
Legal fees and expenses ............................. $15,000
Miscellaneous expenses .............................. $ 1,000
-------
Total .......................................... $16,231
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") provides, in general, that a corporation incorporated under the
laws of the State of Delaware, such as the registrant, may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (other than a derivative action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In the case of a derivative action, a Delaware corporation
may indemnify any such person against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
The Company's Certificate of Incorporation provides that directors
shall not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability
resulting from a breach of the director's duty of loyalty to the Company or its
stockholders, intentional misconduct or wilful violation of law, actions or
inactions not in good faith, an unlawful stock purchase or payment of a dividend
under Delaware law, or transactions from which the director derives improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Certificate of Incorporation also authorizes the Company to indemnify its
officers, directors and other agents, by bylaws, agreements or otherwise, to the
fullest extent permitted under Delaware law. The Company has entered into an
Indemnification Agreement (the "Indemnification Agreement") with each of its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Company's Certificate of
Incorporation or as otherwise permitted under Delaware law. Each
II - 1
<PAGE>
Indemnification Agreement may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as a director or officer, against
liabilities arising from willful misconduct of a culpable nature, and to obtain
directors' and officers' liability insurance if available on reasonable terms.
The Company maintains a directors and officers liability policy with
Genesis Insurance Company that contains a limit of liability of $3,000,000 per
policy year.
ITEM 16. EXHIBITS.
NUMBER DESCRIPTION OF EXHIBIT
4.1 Certificate of Designation for Series C Preferred Stock
4.2 5% Convertible Preferred Stock and Common Stock Purchase
Agreement.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
10.1 Form of Registration Rights Agreement
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in their
opinion filed as Exhibit 5.1).
24.1 Power of Attorney (included on page II-4).
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
II - 2
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of the issue.
The undersigned small business issuer hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II - 3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fairfax, Commonwealth of Virginia on July 9, 1998.
XYBERNAUT CORPORATION
By: /s/ Edward G. Newman
-----------------------------
Edward G. Newman
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes Edward G. Newman and Steven A. Newman, each acting
alone, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement and to file the same with exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-3 has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Edward G. Newman Chairman of the Board, July 9, 1998
- ----------------------------- President and Chief Executive
Edward G. Newman Officer
/s/ Kaz Toyosato Executive Vice President - July 9, 1998
- ----------------------------- Asian Operations and Director
Kaz Toyosato
/s/ W. Jeff Pagano Comptroller July 9, 1998
- -----------------------------
W. Jeff Pagano
II - 4
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Martin Eric Weisberg Secretary and Director July 9, 1998
- -----------------------------
Martin Eric Weisberg
/s/ Harry E. Soyster Director July 9, 1998
- -----------------------------
Lt. Gen. Harry E. Soyster
/s/ James J. Ralabate Director July 9, 1998
- -----------------------------
James J. Ralabate
/s/ Keith P. Hicks Director July 9, 1998
- -----------------------------
Keith P. Hicks
/s/ Steven A. Newman Director July 9, 1998
- -----------------------------
Steven A. Newman
/s/ Phillip E. Pearce Director July 9, 1998
- -----------------------------
Phillip E. Pearce
/s/ Eugene J. Amobi Director July 9, 1998
- -----------------------------
Eugene J. Amobi
By: /s/ Edward G. Newman
-------------------------
Edward G. Newman
Attorney-in-fact
<PAGE>
SECURITIES AND
EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
-------------
EXHIBITS TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
XYBERNAUT CORPORATION
(EXACT NAME OF ISSUER AS SPECIFIED
IN ITS CHARTER)
JULY 16, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NO./REF.
- ----------- ----------------------- -------------
4.1 Certificate of Designation for Series C
Preferred Stock
4.2 5% Convertible Preferred Stock and Common
Stock Purchase Agreement.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
10.1 Form of Registration Rights Agreement
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP
(included in their opinion filed as Exhibit 5.1).
24.1 Power of Attorney (see page II-4 to the
Registration Statement).
-2-
Exhibit 4.1
---------------------------------------
CERTIFICATE OF DESIGNATION
OF
XYBERNAUT CORPORATION
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
---------------------------------------
SERIES C PREFERRED STOCK
Xybernaut Corporation, a Delaware corporation (the "Corporation"),
hereby certifies that the following resolution has been duly adopted by the
Board of Directors of the Corporation:
RESOLVED, that pursuant to the authority expressly granted to
and vested in the Board of Directors of the Corporation by the
provisions of the Certificate of Incorporation of the Corporation
(the "Certificate of Incorporation"), there hereby is created, out
of the 6,000,000 shares of Preferred Stock, par value $0.01 per
share, of the Corporation authorized in Article Fourth of the
Certificate of Incorporation (the "Preferred Stock"), a series of
the Preferred Stock of the Corporation consisting of 375 shares,
which series shall have the following powers, designations,
preferences and relative, participating, optional and other rights,
and the following qualifications, limitations and restrictions:
1. Designation and Amount. This series of Preferred Stock shall be
designated "Series C Preferred Stock" and the authorized number of
shares constituting such series shall be 375. The par value of the
Series C Preferred Stock shall be $0.01 per share. The Series C
Preferred Stock shall have a stated value of $1,000 per share.
2. Dividends.
(a) The holders of shares of Series C Preferred Stock shall be
entitled to receive, out of any assets at the time legally available
therefor and when and as declared by the Board of Directors,
dividends at the rate of five percent (5%) of the stated Liquidation
Preference (as defined below) per share per annum, and no more,
payable, in the discretion of the Board of Directors of the
Corporation in shares of the common stock of the Corporation, par
value $0.01 per share (the "Common Stock"), or in cash. Such
dividends on the Series C Preferred Stock shall be payable only at
conversion of the Series
<PAGE>
C Preferred Stock into shares of Common Stock. Such dividends on the
Series C Preferred Stock are prior and in preference to any
declaration or payment of any distribution (as defined below) on any
outstanding shares of Common Stock or any other equity securities of
the Corporation ranking junior to the Preferred Stock as to the
payment of dividends. Such dividends shall accrue on each share of
Series C Preferred Stock from day to day from the date of initial
issuance thereof whether or not earned or declared so that if such
dividends with respect to any previous dividend period at the rate
provided for herein have not been paid on, or declared and set apart
for, all shares of Series C Preferred Stock at the time outstanding,
the deficiency shall be fully paid on, or declared and set apart
for, such shares on a pro rata basis with all other equity
securities of the Corporation ranking on a parity with the Preferred
Stock as to the payment of dividends before any distribution shall
be paid on, or declared and set apart for Common Stock or any other
equity securities of the Corporation ranking junior to the Preferred
Stock as to the payment of dividends.
(b) For purposes hereof, unless the context otherwise
requires, "distribution" shall mean the transfer of cash or property
without consideration, whether by way of dividend or otherwise,
payable other than in shares of Common Stock or other equity
securities of the Company, or the purchase or redemption of shares
of the Corporation (other than redemptions set forth in Paragraph 5
below or repurchases of Common Stock held by employees or
consultants of the Corporation upon termination of their employment
or services pursuant to agreements providing for such repurchase)
for cash or property.
3. Preferences on Liquidation.
(a) In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Corporation, the holders of shares
of the Series C Preferred Stock then outstanding, shall be entitled
to be paid, out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or
earnings, before any payment shall be made in respect of the
Corporation's Common Stock, an amount equal to the sum of one
thousand dollars ($1,000.00) per share of Series C Preferred Stock
(the "Liquidation Preference"), plus all accrued and unpaid
dividends thereon to the date of payment.
(b) If upon liquidation, dissolution, or winding up of the
Corporation, the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the
holders of the Series C Preferred Stock the full Liquidation
Preference plus accrued and unpaid dividends to which they
respectively shall be entitled, the holders of the Series C
Preferred Stock together with the holders of any other series of
Preferred Stock ranking on a parity with the Series C Preferred
Stock as to the payments of amounts upon liquidation, dissolution or
winding up shall share ratably in any distribution of assets
according to the respective amounts which would be payable in
respect of all such shares held by the respective stockholders
thereof upon such distribution if all amounts payable on or with
respect to said shares were paid in full.
(c) For purposes of this Paragraph 2, the sale or other
disposition (for cash, shares of stock, securities or other
consideration), of all or substantially all of the assets of the
Corporation shall be deemed to be a liquidation, dissolution or
winding up of the Corporation but the merger or consolidation of the
Corporation into or with another corporation into or with the
Corporation, shall not be deemed to be a liquidation, winding up or
dissolution of the Corporation.
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(d) The holders of Series C Preferred Stock shall have no
priority or preference with respect to distributions made by the
Corporation in connection with the repurchase of shares of Common
Stock issued to or held by employees, directors or consultants upon
termination of their employment or services pursuant to agreements
providing for the right of said repurchase between the Corporation
and such persons.
4. Conversion Rights.
The holders of Series C Preferred Stock shall have conversion
rights as follows:
(a) No shares of Series C Preferred Stock may be converted
prior to August 15, 1998. At any time after August 15, 1998 through
November 14, 1998, up to twenty-five (25%) percent of the shares of
Series C Preferred Stock then outstanding may be converted, at the
option of the holders thereof, and thereafter on November 15, 1998,
February 15, 1999 and May 15, 1999, an additional twenty-five (25%)
percent of the shares of Series C Preferred Stock then outstanding
may be converted, on a cumulative and pro rata basis, at the option
of the holders thereof. The number of shares of fully paid and
nonassessable Common Stock into which each share of Series C
Preferred Stock may be converted shall be determined by dividing the
Liquidation Preference by the Conversion Price (as hereinafter
defined) in effect on the Conversion Date.
(b) For purposes of this Paragraph 4, (i) "Conversion Price"
means an amount equal to the lesser of (a) 100 percent (100%) of the
average closing bid price of the Common Stock as reported by Nasdaq
Small Cap Market or any successor exchange in which the Common Stock
is listed for the five (5) trading days preceding the Conversion
Date, or (b) Four ($4.00) Dollars; and (ii) "Conversion Date" means
the date on which the holder of the Series C Preferred Stock has
telecopied the Notice of Conversion (as hereinafter defined) to the
Corporation.
(c) A holder may convert in whole or in part, the Series C
Preferred Stock into Common Stock held by such holder by telecopying
an executed and completed Notice of Conversion in the form annexed
hereto as Exhibit A (a "Notice of Conversion") to the Corporation
and delivering the original Notice of Conversion and the certificate
representing the shares of Series C Preferred Stock to the
Corporation by express courier within five (5) business days after
the date of the Notice of Conversion. Each date on which a Notice of
Conversion is telecopied to and received by the Corporation in
accordance with the provisions hereof shall be deemed a Conversion
Date. The Corporation will transmit the certificates representing
the Common Stock issuable upon conversion of all or any part of the
shares of Series C Preferred Stock (together with the certificate
representing portions of the shares of Series C Preferred Stock not
so converted) to the holder via express courier within five (5)
business days after the Corporation has received the original Notice
of Conversion and shares certificate being so converted. The Notice
of Conversion and certificate representing the portion of the shares
of Series C Preferred Stock converted shall be delivered to the
Corporation at its principal executive offices or to such other
person at such other place as the Corporation designates to the
holder in writing. In the event the shares of Series C Preferred
Stock are not converted within ten (10) business days of receipt by
the Corporation of a valid Notice of Conversion and certificates
representing the shares of Series C Preferred Stock to be converted,
the Corporation shall pay to the holder, by wire transfer, as
liquidated damages for such failure and not as a penalty, an amount
in cash equal to one (1%) percent per day of the purchase price of
the shares of Series C Preferred Stock to be converted which shall
run from the initial Conversion Date and the holder has the option
to withdraw the Notice of Conversion previously sent;
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provided, that the Corporation shall not be responsible for or
required to pay such liquidated damages if such failure to convert
was not caused by any actions or omissions of the Corporation.
(d) No fractional shares of Common Stock shall be issued upon
conversion of the Series C Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay cash equal to such fraction multiplied by
the fair market value of the Common Stock on the Conversion Date, as
determined by the Corporation's Board of Directors. The Corporation
shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon conversion unless either the
certificates evidencing such shares of Series C Preferred Stock are
delivered to the Corporation or its transfer agent as provided
above, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such
certificates.
(e) Subject to subparagraph (b) above, the Corporation shall,
as soon as practicable after such delivery, or after such agreement
and indemnification, issue and deliver at such office to such holder
of Series C Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which the holder shall be
entitled as aforesaid and a check payable to the holder, or order,
in the amount of any cash amounts payable as the result of a
conversion into fractional shares of Common Stock, plus any accrued
and unpaid dividends on the converted Series C Preferred Stock, and
a certificate for any shares of Series C Preferred Stock not so
converted.
(f) Upon any conversion of Series C Preferred Stock pursuant
to this Paragraph 4 the shares of Series C Preferred Stock which are
converted shall not be reissued and shall not be considered
outstanding for any purposes. Upon conversion of all of the then
outstanding Series C Preferred Stock pursuant to this Paragraph 4
and upon the taking of any action required by law, all matters set
forth in this Certificate of Designation shall be eliminated from
the Certificate of Incorporation, shares of Series C Preferred Stock
shall not be deemed outstanding for any purpose whatsoever and all
such shares shall be retired and canceled and shall not be reissued.
(g) Any transmittal or other communications required by the
provisions of this Paragraph 4 to be given to the holders of shares
of Series C Preferred Stock shall be deemed given if deposited in
the United States mail, first class, postage prepaid and addressed
to each holder of record at its address appearing on the books of
the Corporation.
(h) On May 15, 2000, the holder shall be required to convert
all of its outstanding shares of Series C Preferred Stock into
shares of Common Stock. Until converted in accordance with the terms
of this Paragraph 4, the Company shall be entitled to redeem shares
of Series C Preferred Stock in accordance with Paragraph 5 hereof,
regardless of whether or not a Notice of Conversion has been
received by the Corporation with respect to such shares.
(i) The Corporation shall at all times when any shares of
Series C Preferred Stock shall be outstanding, reserve and keep
available out of its authorized but unissued stock, such number of
shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of Series C
Preferred Stock.
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5. Redemption.
(a) At any time after May 15, 1998, the Corporation may, at
the option of the Board of Directors, redeem up to 100% of the
outstanding shares of the Series C Preferred Stock at the redemption
price set forth in subparagraph (b) below, provided, that (x) the
Corporation shall have received a Notice of Conversion, and (y) the
Conversion Price is below $3.40. The Corporation shall give written
notice by telecopy, to the holder of Series C Preferred Stock to be
redeemed at least one (1) business day after receipt of the Notice
of Conversion prior to the date specified for redemption (the
"Redemption Date"). Such notice shall be addressed to each such
stockholder at the address of such holder appearing on the books of
the Corporation or given by such holder to the Corporation for the
purpose of notice, or if no such address appears or is so given, at
the place where the principal office of the Corporation is located.
Such notice shall state the Redemption Date, the Redemption Price
(as hereinafter defined), the number of shares of Series C Preferred
Stock of such holders to be redeemed and shall call upon such
holders to surrender to the Corporation on the Redemption Date at
the place designated in the notice such holders' redeemed stock. If
fewer than all the outstanding shares of Series C Preferred Stock
are to be redeemed, the redemption shall be pro rata among the
holders of Series C Preferred Stock and subject to such other
provisions as may be determined by the Board of Directors. The
Redemption Date shall be no more than ten (10) days after receipt of
written notice from the Corporation. If the Corporation fails to pay
the Redemption Price on the Redemption Date, the Corporation shall
pay to the holder a penalty in an amount in cash equal to two (2%)
percent of the Redemption Price to be paid on such Redemption Date.
If the Corporation fails to pay the Redemption Price on the
Redemption Date, the holder shall have the right to convert the
Series C Preferred Stock previously presented to the Corporation and
not redeemed. The Corporation shall have the right to redeem the
Series C Preferred Stock in accordance with the terms of this
subparagraph (a) in any subsequent redemption; provided, however,
that if the Corporation fails to pay the Redemption Price in a
subsequent redemption within ten (10) days, the Corporation shall
have the right to redeem the Series C Preferred Stock thereafter,
only upon wiring the Redemption Price to the holders simultaneously
with sending the notice of redemption. On or after the Redemption
Date, the holders of shares of Series C Preferred Stock called for
redemption shall surrender the certificates evidencing the shares
called for redemption to the Corporation at the place designated in
such notice and shall thereupon be entitled to receive payment of
the Redemption Price.
(b) Subject to the terms of Paragraph 5(a) above, the Company
shall have the option to redeem all or a portion of all the
outstanding shares of Series C Preferred Stock at a cash price equal
to $3.40 multiplied by the number of shares the Convertible
Preferred Stock would convert into on the date of redemption (the
"Redemption Price").
(c) From and after the Redemption Date (unless default shall
be made by the Corporation in duly paying the Redemption Price in
which case all the rights of the holders of such shares shall
continue), the holders of the shares of the Series C Preferred Stock
called for redemption shall cease to have any rights as stockholders
of the Corporation, except the right to receive, without interest,
the Redemption Price thereof upon surrender of certificates
representing the shares of Series C Preferred Stock, and such shares
shall not thereafter be transferred (except with the consent of the
Corporation) on the books of the Corporation and shall not be deemed
outstanding for any purpose whatsoever.
(d) There shall be no redemption of any shares of Series C
Preferred Stock of the Corporation where such action would be in
violation of applicable law.
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6. Voting Rights.
Except as otherwise required by law, the holders of the Series
C Preferred Stock shall not be entitled to vote upon any matter
relating to the business or affairs of the Corporation or for any
other purpose.
7. Status.
In case any outstanding shares of Series C Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to be
permanently canceled and shall not resume the status of authorized
but unissued shares of Series C Preferred Stock.
8. Ranking; Changes Affecting Series C.
(a) The Series C Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and
dissolution, (i) rank senior to any of the Corporation's Common
Stock and any other class or series of stock of the Company which by
its terms shall rank junior to the Series C Preferred Stock, and
(ii) rank junior to any other class or series of stock of the
Company which by its terms shall rank senior to the Series C
Preferred Stock and (iii) shall rank on a pari passu basis with any
other series of Preferred Stock of the Corporation..
(b) So long as any shares of Series C Preferred Stock are
outstanding, the Corporation shall not (i) alter or change any of
the powers preferences, privileges, or rights of the Series C
Preferred Stock; or (ii) amend the provisions of this Paragraph 9,
in each case, without first obtaining the approval by vote or
written consent, in the manner provided by law, of the holders of at
least a majority of the outstanding shares of Series C Preferred
Stock, as to changes affecting the Series C Preferred Stock.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its President this 15th day of May, 1998.
/s/ Edward G. Newman
-------------------------------
Edward G. Newman, President
6
Exhibit 4.2
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR OTHER POLITICAL
SUBDIVISION OF THE UNITED STATES. THESE SECURITIES ARE BEING OFFERED PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SECURITIES ARE
"RESTRICTED" AND MAY NOT BE RESOLD, TRANSFERRED OR OFFERED FOR RESALE OR
TRANSFER OR PLEDGED OR HYPOTHECATED, EXCEPT AS PERMITTED UNDER THE ACT PURSUANT
TO REGISTRATION OR EXEMPTION THEREFROM. THIS SUBSCRIPTION AGREEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
5% CONVERTIBLE PREFERRED STOCK AND COMMON STOCK
PURCHASE AGREEMENT
XYBERNAUT CORPORATION
THIS AGREEMENT is made as of the 15th day of May, 1998, among
Xybernaut Corporation, Nasdaq Symbol "XYBR" (the "Company"), a Delaware
corporation, with its principal office at 12701 Four Lakes Circle, Fairfax, VA
22033, and Libertyview Plus Fund, Libertyview Fund, LLC and CPR (USA) Inc.,
(each a "Purchaser"), with their principal office at c/o Libertyview Capital
Management, 101 Hudson Street, Suite 3700, Jersey City, New Jersey 07302.
IN CONSIDERATION of the mutual covenants contained in this
Agreement, the Company and the Purchaser agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement:
"Agreement" means this 5% Convertible Preferred Stock and Common
Stock Purchase Agreement.
"Closing Date" means the date agreed to by the parties for the
delivery of the original stock certificate against a wire transfer of the funds
to the Company.
"Closing" means the completion of the purchase and sale of the
Shares on the Closing Date.
"Common Shares" means the shares of Common stock being issued and
sold pursuant to Section 2.2 hereof.
"Common Stock" means the Common Stock of the Company, $0.01 par
value per share.
"Conversion Date" means the date on which the Purchaser has
telecopied the Notice of Conversion to the Company.
<PAGE>
"Convertible Preferred Stock" means the shares of Series C Preferred
Stock of the Company convertible into Common Stock of the Company as hereinafter
provided; including the Certificate of Designation designating the Series C
Preferred Stock.
"Conversion Price" means an amount equal to the lesser of (a) 100
percent of the average closing bid price of the Common Stock as reported by
NASDAQ or any successor exchange in which the Common Stock is listed for the
five (5) trading days preceding the Conversion Date, or (b) Four ($4.00)
Dollars.
"Conversion Shares" means the shares of Common Stock issued upon the
conversion of the Convertible Preferred Stock.
"Purchase Price" means the aggregate purchase price of the Shares
purchased.
"Shares" means, collectively, the shares of Common Shares and
Convertible Preferred Stock purchased pursuant to this Agreement.
Section 2. Authorization and Sale of Shares.
2.1 Authorization. Subject to the terms and conditions of this
Agreement, the Company has authorized the sale and issuance of the Shares.
2.2 Agreement to Sell and Purchase the Shares. The offer and sale
of the Shares are being made hereunder in reliance upon the provisions of
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). The Company will sell and the Purchasers will buy Shares in
reliance upon the representations and warranties of the Company and Purchasers
contained in this Agreement, upon the terms and conditions hereinafter set
forth, 110,294 shares of Common Stock at a price of $3.40 per share (the "Common
Shares"), for an aggregate purchase price of $375,000 and 375 shares of
Convertible Preferred Stock for an aggregate purchase price of $375,000 based on
the purchase price of $1,000 per share. The Convertible Preferred Stock shall
pay a 5% cumulative dividend, payable in cash or Common Stock at the Conversion
Price, at the discretion of the Company, at the time of each conversion. The
purchase and sale of the Shares shall occur on the Closing Date.
2.3 Time and Place of Closing. The Closing shall be held at the
offices of Parker Chapin Flattau & Klimpl, LLP ("Escrow Agent"), 1211 Avenue of
the Americas, New York, NY 10036, as promptly as practicable as agreed to by the
parties to this Agreement.
2.4 Payment and Delivery. At or prior to the Closing, the
following shall occur:
(a) Purchasers shall remit by wire transfer the Purchase
Price to Escrow Agent pursuant to the Escrow Agreement, dated May 15, 1998,
among the Company, Purchasers and Escrow Agent (the "Escrow Agreement"),
attached hereto as Attachment 1, as payment in full for the Shares.
(b) Company shall deliver or cause to be delivered to Escrow
Agent a certificate representing the Shares, registered in the name of Purchaser
(or any nominee designated by Purchaser on the Closing Date), free and clear of
all liens, claims, charges and encumbrances.
(c) Wire instructions for Parker Chapin Flattau & Klimpl,
LLP are as follows:
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Citibank, N.A.
ABA No. 021000089
For Further Credit to
Parker Chapin Flattau & Klimpl, LLP, Attorney Trust Account
Account No. 37432544
All subscription funds shall be held in escrow by the Escrow Agent pursuant to
the terms and conditions set forth in the Escrow Agreement among the Company,
the Purchasers and the Escrow Agent.
Section 3. General Representations and Warranties of the Company.
The Company hereby represents and warrants to, and covenants with, the
Purchasers that the following are true and correct as of the date hereof and as
of the Closing Date.
3.1 Organization; Qualification. The Company is a corporation duly
organized and validly existing under the laws of the State of Delaware and is in
good standing under such laws. The Company has all requisite corporate power and
authority to own, lease and operate its properties and assets, and to carry on
its business as presently conducted. The Company is qualified to do business as
a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
3.2 Capitalization. The authorized capital stock of the Company
consists of 40,000,000 shares of Common Stock, $0.01 par value per share, and
6,000,000 shares of nonvoting Preferred Stock, $0.01 par value, of 3,000 shares
have been designated Series A Convertible Preferred Stock, par value $0.01 per
share, 4,180 have been designated as Series B Convertible Preferred Stock, par
value $.01 per share, and 375 have been designated as Series C Convertible
Preferred Stock, par value $.01 per share. As of May 15, 1998, none of such
Series A or Series B Preferred Stock is outstanding. All issued and outstanding
shares of Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable. The Company will reserve from its authorized but
unissued shares of Common Stock a sufficient number of shares of Common Stock to
permit the conversion in full of the Convertible Preferred Stock subject of this
Agreement. As of the Closing Date, the Company had reserved sufficient shares of
Common Stock for issuance upon exercise of the Convertible Preferred Stock which
are convertible, at Purchaser's option, at the Conversion Price, as per Section
9 of this Agreement.
3.3 Authorization. The Company has all requisite corporate right,
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of the
Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement by the Company, the
authorization, sale, issuance and delivery of the Shares and the performance of
the Company's obligations hereunder has been taken. This Agreement has been duly
executed and delivered by the Company and constitutes a legal, valid and binding
obligation of the Company enforceable in accordance with its terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies, and to limitations of public policy as they may apply
to the indemnification provisions set forth in Section 7.3 of this Agreement.
Upon their issuance and delivery pursuant to this
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Agreement, the Shares will be validly issued, fully paid and nonassessable and
will be free of any liens or encumbrances; provided, however, that the Shares
are subject to restrictions on transfer under state and/or federal securities
laws. The issuance and sale of the Shares will not give rise to any preemptive
right or right of first refusal or right of participation on behalf of any
person.
3.4 No Conflict. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a material adverse
effect on the Company's business and financial condition.
3.5 Accuracy of Reports and Information. The Company is in full
compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12 (g) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company has registered its Common Stock
pursuant to Section 12 of the Exchange Act and the Common Stock is listed and
trades on the Nasdaq National Small Cap Market.
The Company has filed all material required to be filed pursuant to
all reporting obligations, under either Section 13(a) or 15(d) of the Exchange
Act for a period of at least twelve (12) months immediately preceding the offer
to sale of the Shares (or for such shorter period that the Company has been
required to file such material).
3.6 SEC Filings/Full Disclosure. Since completion of the Company's
initial public offering in July 1996, none of the Company's filings with the
Securities and Exchange Commission contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made, not misleading. The Company has timely filed all requisite
forms, reports and exhibits thereto with the Securities and Exchange Commission.
There is no fact known to the Company (other than general economic
conditions known to the public generally) that has not been disclosed in writing
to the Purchasers which (i) could reasonably be expected to have a material
adverse effect on the business or financial condition, properties or assets of
the Company, or (ii) could reasonably be expected to materially and adversely
affect the ability of the Company to perform its obligations pursuant to this
Agreement.
3.7 Absence of Undisclosed Liabilities. The Company has no
material liabilities or obligations, absolute or contingent (individually or in
the aggregate), except as set forth in the financial statements or as incurred
in the ordinary course of business after the date of the financial statements.
3.8 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Shares, or the consummation of any other transaction contemplated hereby, except
the filing with the SEC of a registration
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statement on Form S-3 for the purpose of registering the Conversion Shares
underlying the Convertible Preferred Stock.
3.9 Intellectual Property Rights. Except as disclosed in the Form
10-KSB, Form 10-QSBs and Form 8-Ks filed by the Company for a period of at least
twelve (12) months immediately preceding this offer (the "Reports"), the Company
has sufficient trademarks, trade names, patent rights, copyrights and licenses
to conduct its business as presently conducted in the Reports. To the Company's
knowledge, neither the Company nor its products is infringing or will infringe
any trademark, trade name, patent right, copyright, license, trade secret or
other similar right of others currently in existence; and there is no claim
being made against the Company regarding any trademark, trade name, patent,
copyright, license, trade secret or other intellectual property right which
could have a material adverse effect on the business or financial condition of
the Company.
3.10 Material Contracts. Except as set forth in the Reports, the
agreements to which the Company is a party described in the Reports are valid
agreements, in full force and effect the Company is not in material breach or
material default under any of such agreements.
3.11 Litigation. Except as disclosed in the Reports, there is no
action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
conditions, affairs or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
3.12 Title to Assets. Except as set forth in the Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
3.13 Subsidiaries. Except as disclosed in the Reports, the Company
does not presently own or control, directly or indirectly, any interest in any
other corporation, partnership, association or other business entity.
3.14 Required Governmental Permits. The Company is in possession of
and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect.
3.15 Listing. The Company will maintain the listing of its Common
Stock on the Nasdaq National Small Cap Market or other organized United States
market or Quotation system.
3.16 Other Outstanding Securities/Financing Restrictions. Other
than warrants and options to acquire shares of Common Stock as disclosed in the
Reports, there are no other outstanding securities debt or equity presently
convertible into Common Stock. Other than as set forth in the Reports, the
Company has no outstanding restricted shares, or shares of Common Stock sold
under Regulation S, Regulation D or outstanding under any other exemption from
registration, which are available for sale as unrestricted ("free trading")
stock.
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3.17 Legal Opinion. Purchasers shall, upon purchase of the Shares,
receive an opinion letter from counsel to the Company, and the Company
represents that it will immediately obtain such an opinion from counsel to the
satisfaction of the Transfer Agent, to the effect that:
(i) The Company is incorporated and validly existing in the
jurisdiction of its incorporation. The Company and/or its subsidiaries are duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions where the Company and/or subsidiaries owns or leases properties,
maintains employees or conducts business, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect on the Company,
and has all requisite corporate power and authority to own its properties and
conducts its business.
(ii) There is no action, proceeding or investigation pending,
or to such counsel's knowledge, threatened against the Company which might
result, either individually or in the aggregate, in any material adverse change
in the business or financial condition of the Company.
(iii) To counsel's knowledge, the Company is not a party to or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality.
(iv) To counsel's knowledge, there is no action, suit,
proceeding or investigation by the Company currently pending.
(v) The Common Shares and the Convertible Preferred Stock,
which shall be issued at the Closing, are duly authorized and validly issued
under the Company's Certificate of Incorporation.
(vi) This Purchase Agreement, the issuance of the Common
Shares, the Convertible Preferred Stock and the Conversion Shares have been duly
approved by all required corporate action and that all such securities, upon
delivery, shall be validly issued and outstanding, fully paid and nonassessable.
(vii) The issuance of the Shares will not violate the
applicable listing agreement between the Company and any securities exchange or
market on which the Company's securities are listed.
(viii)Assuming the accuracy of the representation and
warranties of the Company and the Purchasers set forth in this Purchase
Agreement, the offer, issuance and sale of the Common Shares, the Convertible
Preferred Stock and the Conversion Shares to be issued to the Purchasers
pursuant to this Purchase Agreement, are exempt from the registration
requirements of the Securities Act.
3.18 Use of Proceeds. The Company represents that the net proceeds
from this offering will be used for general corporate purposes.
3.19 Dilution. The Company is aware and acknowledges that
conversion of the Convertible Preferred Stock could cause dilution to existing
shareholders and could significantly increase the outstanding number of shares
of Common Stock.
Section 4. Representations, Warranties and Covenants of the
Purchasers . Each Purchaser represents and warrants to, and covenants with, the
Company that the following are true and correct as of the date hereof and as of
the Closing Date.
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4.1 Authority. The Purchaser's signatory has all right, power,
authority and capacity to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Purchaser and will constitute the legal, valid and binding
obligations of the Purchaser, enforceable in accordance with its terms, subject
to laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies, and to limitations of public policy as they may apply
to the indemnification provisions set forth in Section 7.3 of this Agreement.
4.2 Investment Experience. Purchaser is an "accredited investor"
as defined in Rule 501(a) under the Securities Act. Purchaser is aware of the
Company's business and financial condition and has had access to and has
acquired sufficient information about the Company, including the Reports, to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser
has such business and financial experience as is required to give it the
capacity to protect its own interests in connection with the purchase of the
Shares. Purchaser has the ability to bear the economic risk of Purchaser's
investment pursuant to this Purchase Agreement. Purchaser has not been organized
for the purpose of investing in securities of the Company, although such
investment is consistent with Purchaser's purpose.
4.3 Investment Intent. Without limiting its ability to resell the
Shares and the Conversion Shares pursuant to an effective registration
statement, Purchaser represents that it is purchasing the Shares for its own
account as principal for investment purposes. Purchaser understands that its
acquisition of the Shares has not been registered under the Securities Act or
registered or qualified under any State securities law in reliance on specific
exemptions therefrom, which exemptions may depend upon, among other things, the
bona fide nature of Purchaser's investment intent as expressed herein. Purchaser
will not, directly or indirectly, offer, sell, pledge, transfer, hypothecate or
otherwise dispose of (or solicit any offers to buy, purchaser or otherwise
acquire or take a pledge of) any of the Shares except in compliance with the
Securities Act and any applicable state securities laws, and the rules and
regulations promulgated thereunder.
4.4 Registration or Exemption Requirements. Purchaser further
acknowledges and understands that the Shares may not be transferred, resold or
otherwise disposed of except in a transaction registered under the Securities
Act and any applicable State securities laws or unless an exemption from such
registration is available. Purchaser understands that the certificate(s)
evidencing the Shares will be imprinted with a legend that prohibits the
transfer of the Shares unless (i) they are registered or such registration is
not required, and (ii) if the transfer is pursuant to an exemption from
registration other than Rule 144 under the Securities Act and, if the Company
shall so request in writing, an opinion of counsel reasonably satisfactory to
the Company is obtained to the effect that the transaction is so exempt.
4.5 No Legal, Tax or Investment Advice. Purchaser understands that
nothing in this Agreement or any other materials presented to Purchaser in
connection with the purchase and sale of the Shares constitutes legal, tax or
investment advice. Purchaser has relied on, and has consulted with, such legal,
tax and investment advisors as it, in its sole discretion, has deemed necessary
or appropriate in connection with its purchase of the Shares.
4.6 Purchaser Review. Purchaser hereby represents and warrants
that the Purchaser has carefully examined the Reports and the financial
statements contained therein. The Purchaser acknowledges that the Company has
made available to the Purchaser all documents and information that it has
requested relating to the Company and has provided answers to all of its
questions concerning the Company and the Shares.
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Nothing stated in the previous two sentences, however, shall be deemed to affect
the representations and warranties of the Company contained in this Agreement.
4.7 Restrictions on Conversion of Shares. The Purchaser or any
subsequent holder of the shares (the "Holder") shall be prohibited from
converting any portion of the Convertible Preferred Stock which would result in
the Purchaser or the Holder being deemed the beneficial owner, in accordance
with the provisions of Rule 13d-3 of the Exchange Act, of 4.99% or more of the
then issued and outstanding Common Stock of the Company.
Section 5. Conditions to the Purchaser's Obligation to Purchase. The
Company understands that each Purchaser's obligation to purchase the Shares is
conditioned upon:
(a) Acceptance by Purchaser of this Agreement for the purchase of
the Shares, as evidenced by the execution of this Agreement by an authorized
officer;
(b) Delivery of the Shares into Escrow;
(c) Execution and delivery by the Company of the Escrow Agreement
and the Registration Rights Agreement in the form of Attachment I and Attachment
11;
(d) Delivery of a filed Certificate of Designation; and
(e) Delivery of an Opinion of Counsel as per Section 3.17 herein.
Section 6. Conditions to Company's Obligation to Sell. Purchasers
understand that the Company's obligation to sell the Shares is conditioned upon:
(a) The receipt and acceptance by the Company of this Agreement
for all of the Shares as evidenced by execution of this Agreement by an
authorized officer.
(b) Delivery into escrow by Purchasers of good funds as payment in
full for the purchase of the Shares; and
(c) Execution and delivery by the Purchasers of the Escrow
Agreement and the Registration Rights Agreement in the forms of Attachment I and
Attachment II.
Section 7. Compliance with the Securities Act.
7.1 Registration Rights Agreement. The parties will enter into a
Registration Rights Agreement, annexed hereto as Attachment II.
7.2 Underwriter. The Company understands that the Purchasers
disclaim being an "underwriter" (as such term is defined under the Securities
Act and the rules and regulations promulgated thereunder (an "Underwriter")),
but Purchasers being deemed an Underwriter shall not relieve the Company of any
obligation it has hereunder, except as may be required by law.
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7.3 Indemnification. Each of the Company and the Purchasers agree
to indemnify the other and to hold the other harmless from and against any and
all losses, damages, liabilities, costs and expenses (including reasonable
attorneys' fees) which the other may sustain or incur in connection with the
breach by the indemnifying party of any representation, warranty or covenant
made by it in this Agreement.
7.4 Information Available. So long as any registration statement
is effective covering the resale of the Common Shares and the Conversion Shares,
the Company will furnish to Purchasers :
(a) as soon as possible after available (but in the case of the
Company's Annual Report to Stockholders, within 150 days after the end of each
fiscal year of the Company), one copy of (i) its Annual Report to Stockholders
(which Annual report shall contain financial statements audited in accordance
with generally accepted accounting principles in the United States of America by
a national firm of certified public accountants); (ii) each of its Quarterly
Reports to Stockholders, and its Quarterly Reports on Form 10-QSB; and (iii) a
full copy of the registration statement covering the Conversion Shares (the
foregoing, in each case, including exhibits); and
(b) upon the reasonable request of Purchasers , such other
information that is generally available to the public.
7.5 Temporary Cessation of Offers and Sales by Purchasers . The
Purchasers acknowledge that there may occasionally be times when the Company may
be required to suspend the use of the prospectus forming part of the
Registration Statement until such time as an amendment to the Registration
Statement has been filed by the Company and declared effective by the
Commission, until the prospectus is supplemented or amended to comply with the
Securities Act, or until such time as the Company has filed an appropriate
report with the Commission pursuant to the Exchange Act. The Company agrees to
file any necessary amendments, supplements and reports as soon as practicable
under the circumstances. Purchasers hereby covenant that it will not sell any
Common Stock pursuant to said prospectus during a period of not more than 45
days commencing at the time at which the Company gives the Purchasers notice of
the suspension of the use of said prospectus and ending at the time the Company
gives the Purchasers notice that the Purchasers may thereafter effect sales
pursuant to said prospectus, as the same may have been supplemented or amended.
7.6 Transfer of Common Stock After Registration. Purchasers hereby
covenant with the Company not to make any sale of the Common Stock except either
(i) in accordance with the Registration Statement, in which case Purchasers
covenant to comply with the requirement of delivering a current prospectus, or
(ii) such time as all of the Common Stock may be sold in any three-month period
pursuant to Rule 144 under the Securities Act.
7.7 Termination of Obligations. The obligations of the Company
pursuant to the Registration Rights Agreement shall cease and terminate upon the
earlier to occur of (i) such time as, all of the Conversion Shares have been
sold by Purchasers , or (ii) such time as all of the Conversion Shares may be
sold in any three month period pursuant to Rule 144 under the Securities Act.
7.8 Legend. The certificate or certificates representing the
Shares and, upon conversion, the Conversion Shares shall be subject to a legend
restricting transfer under the Securities Act of 1933, such legend to be
substantially as follows:
9
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"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT, AND MAY NOT BE TRANSFERRED OR DISPOSED OF UNLESS (1) A REGISTRATION
STATEMENT UNDER THE ACT IS THEN IN EFFECT WITH RESPECT THERETO AND SUCH SALE IS
MADE PURSUANT TO SUCH REGISTRATION STATEMENT OR (2) A WRITTEN OPINION FROM
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT
SUCH TRANSFER OR DISPOSITION WILL NOT VIOLATE THE ACT AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER."
Such securities shall also include any legends required by any
applicable state securities laws.
With respect to the Shares and the Conversion Shares, the legend(s)
shall be removed and the Company shall issue a replacement certificate without
such legend to the holder of such certificate if such holder provides to the
Company an opinion of counsel reasonably acceptable to the Company, to the
effect that a sale, transfer or assignment of such securities may be made
without registration.
7.10 Permissive Redemption. The Company has the right to redeem the
Convertible Preferred Stock, in whole or in part, in cash or in Common Stock, as
follows:
When a conversion request is submitted and when the Conversion Price
is below $3.40, the Company has the option to redeem all or a portion of the
outstanding Convertible Preferred Stock for a redemption price equal to $3.40
multiplied by the number of shares the Convertible Preferred Stock would convert
into on the date of redemption (the "Redemption Price").
The Company shall give written notice by telecopy to the Purchasers
of its election to redeem the Convertible Preferred Stock one (1) business day
after receipt of the Notice of Conversion. Upon notice of its right to redeem
the Convertible Preferred Stock the Company shall wire transfer the appropriate
amount of funds which shall include Redemption Price, as defined in Certificate
of Designation filed May 15, 1998, and any and all penalties and liquidated
damages, if any, to Purchasers within ten (10) days of such notice. If the
Company does not wire the appropriate amounts of funds to Purchasers , the
Company shall pay to the Purchasers a penalty in an amount in cash equal to two
(2%) percent of the Redemption Price to be paid for such redemption. If the
Company fails to pay the Redemption Price on the Redemption Date, as defined in
the Certificate of Designation filed May 15, 1998, the Purchasers shall have the
right to convert the Convertible Preferred Stock previously presented to the
Company and not redeemed. The Company shall have the right to redeem the
Convertible Preferred Stock in accordance with the terms of this paragraph in
any subsequent redemption; provided, however, that if the Company fails to pay
the Redemption Price in a subsequent redemption within ten (10) days, the
Company shall have the right to redeem the Convertible Preferred Stock
thereafter, only upon wiring the Redemption Price to the holders simultaneously
with sending the notice of redemption. On or after the Redemption Date, the
holders of Convertible Preferred Stock called for redemption shall surrender the
certificates evidencing the shares called for redemption to the Company at the
place designated in such notice and shall thereupon be entitled to receive
payment of the Redemption Price.
Section 8. Legal Fees and Expenses. Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys, accountants,
appraisers or others engaged by such party) in connection with this Agreement
and the transactions contemplated hereby.
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Section 9. Conversion. Conversion of the Convertible Preferred Stock
may be made at the Conversion Price as follows:
No shares of Series C Preferred Stock may be converted prior to
August 15, 1998. At any time after August 15, 1998 through November 14, 1998, up
to twenty-five (25%) percent of the shares of Convertible Preferred Stock then
outstanding may be converted, at the option of the holders thereof, and
thereafter on November 15, 1998, February 15, 1999 and May 15, 1999, an
additional twenty-five (25%) percent of the shares of Convertible Preferred
Stock then outstanding may be converted, on a cumulative and pro rata basis, at
the option of the holders thereof. The number of shares of fully paid and
nonassessable Common Stock into which each share of Convertible Preferred Stock
may be converted shall be determined by dividing the Liquidation Preference by
the Conversion Price in effect on the Conversion Date.
9.1 Notice of Conversion. Purchasers may convert, in whole or in
part, the Convertible Preferred Stock into Common Stock by telecopying an
executed and completed Notice of Conversion (in the form annexed hereto as
Exhibit A) to the Company and delivering the original Notice of Conversion and
the certificate representing the Convertible Preferred Stock to the Company by
express courier within five (5) business days of exercise. Each date on which a
Notice of Conversion is telecopied to and received by the Company in accordance
with the provisions hereof shall be deemed a Conversion Date. The Company will
transmit the certificates representing the Common Stock issuable upon conversion
of all or any part of the Convertible Preferred Stock (together with the
certificates representing portions of the Convertible Preferred Stock not so
converted) to the Purchasers via express courier within five (5) business days
after the Company has received the original Notice of Conversion and shares
certificate being so converted. The Notice of Conversion and certificate
representing the portion of the Convertible Preferred Stock converted shall be
delivered as follows and become effective upon delivery to each of the persons
below:
To the Company:
Xybernaut Corporation
12701 Four Lakes Circle
Fairfax, VA 22033
Attn: Edward G. Newman, President
(Tele) (703) 631-6925
(Fax) (703) 631-7070
with copies to:
Xybernaut Corporation
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12701 Four Lakes Circle
Fairfax, VA 22033
Attn: John Moynahan, Treasurer
(tele) (703) 631-6925
(fax) (703) 631-3903
Steven A. Newman
303 Avenida Cerritos
Newport Beach, CA 92660
(tele) (714) 760-5470
(fax) (714) 760-3865
Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10019
(tele) (212) 704-6000
(fax) (212) 704-6288
Christopher Auguste, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10019
(tele) (212) 704-6000
12
<PAGE>
(fax) (212) 704-6288
or to such other person at such other place as the Company shall designate to
the Purchasers in writing.
In the event that the Convertible Preferred Stock is not converted
within ten (10) business days of receipt by the Company of a valid Notice of
Conversion and certificates representing the Convertible Preferred Stock to be
converted (such date of receipt referred to as the "Conversion Date"), the
Company shall pay to the Purchasers , by wire transfer, as liquidated damages
for such failure and not as a penalty, an amount in cash equal to one (1%)
percent per day of the purchase price of the Convertible Preferred Stock to be
converted which shall run from the initial Conversion Date and Purchaser has the
option to withdraw the Notice of Conversion previously sent; provided, that the
Company shall not be responsible for (or required to pay) such liquidated
damages if such failure to convert was not caused by any actions or omissions of
the Company.
Section 10. [Intentionally blank]
Section 11. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first class
registered or certified airmail, postage prepaid, and shall be deemed given when
so mailed:
(a) if to the Company, to
Xybernaut Corporation
12701 Four Lakes Circle
Fairfax, VA 22033
Attn: Edward G. Newman, President
(Tele) (703) 631-6925
(Fax) (703) 631-7070
copy to:
Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
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<PAGE>
(Tele) (212) 704-6050
(Fax) (212) 704-6288
or to such other person at such other place as the Company shall designate to
the Purchasers in writing;
(b) if to the Purchasers , to
Libertyview Plus Fund
c/o Libertyview Capital Management
101 Hudson Street
Suite #3700
Jersey City, New Jersey 07302
(tele) 201-200-9093
(fax) 201-200-1140
copy to:
Sheldon E. Goldstein, P.C.
65 Broadway, 10th Fl.
New York, NY 10006
Attn: Sheldon E. Goldstein
(tele) (212) 809-4220
(fax) (212) 809-4228
or at such other address or addresses as may have been furnished to the Company
in writing; or
(c) if to any transferee or transferees of a Purchaser, at such
address or addresses as shall have been furnished to the Company at the time of
the transfer or transfers, or at such other address or addresses as may have
been furnished by such transferee or transferees to the Company in writing.
Section 12. Miscellaneous.
12.1 Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior oral or written agreements and understandings
relating to the subject matter hereof. No statement, representation, warranty,
14
<PAGE>
covenant or agreement or any kind not expressly set forth in this Agreement
shall affect, or be used to interpret, change or restrict, the express terms and
provisions of this Agreement.
12.2 Amendments. This Agreement may not be modified or amended
except pursuant to an instrument in writing signed by the Company and by the
Purchasers.
12.3 Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
12.4 Severability. In case any provision contained in this
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
12.5 Governing Law/Jurisdiction. This Agreement will be construed
and enforced in accordance with and governed by the laws of the State of New
York, except for matters arising under the Securities Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the courts of or located in the State of New York, specifically the Southern
District of New York and/or the Supreme Court of the State of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non conveniens, to the bringing of any such proceeding in such
jurisdictions. Each party hereby agrees that if another party to this Agreement
obtains a judgment against it in such a proceeding, the party which obtained
such judgment may enforce same by summary judgment in the courts of any country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
12.6 Certificate of Designation. In the event of any inconsistency
or conflict between the terms and provisions of this Agreement and the terms and
provisions of the Certificate of Designation, the terms and provisions of the
Certificate of Designation shall control.
12.7 Recovery of Attorney's Fees. Should any party bring an action
to enforce the terms of this Agreement then, if Purchasers prevail in such
action it should be entitled to recovery of its attorney's fees from the
Company, and if the Company prevails in such action it shall be entitled to
recovery of its attorney's fees from the Purchasers .
12.8 Fees. Notwithstanding Section 12.7, the Company acknowledges
that Purchasers shall have no responsibility for the payment of any of its fees
in connection with this offering.
12.9 Counterparts/Facsimile. This Agreement may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which, when taken together, shall constitute but one instrument, and shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other party. In lieu of the original, a facsimile
transmission or copy of the original shall be as effective and enforceable as
the original.
12.10 Publicity. The Purchasers shall not issue any press releases
or otherwise make any public statement with respect to the transactions
contemplated by this Agreement without the prior written consent of the Company,
except as may be required by applicable law or regulation.
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12.11 Survival. The representations and warranties in this Agreement
shall survive Closing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their duly authorized representatives the day and year first above
written.
XYBERNAUT CORPORATION
By ____________________________
Officer
LIBERTYVIEW PLUS FUND, Purchaser
By ____________________________
Officer
LIBERTYVIEW FUND, LLC, Purchaser
By ____________________________
Officer
CPR (USA) INC., Purchaser
By ____________________________
Officer
16
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EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the
5% Series C Convertible Preferred Stock)
The undersigned hereby irrevocably elects to convert shares of 5%
Convertible Preferred Stock, Certificate No. (the "Preferred Stock") into shares
of common stock of Xybernaut Corporation (the "Company") according to the
conditions hereof, as of the date written below.
The undersigned represents and warrants that
(i) All offers and sales by the undersigned of the shares of
Common Stock issuable to the undersigned upon conversion of the Preferred Stock
shall be made in compliance with Regulation D, pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), or pursuant to registration of the Common Stock under the Act, subject to
any restrictions on sale or transfer set forth in the Preferred Stock Purchase
Agreement between the Company and the original holder of the Certificate
submitted herewith for conversion.
(ii) Upon conversion pursuant to this Notice of Conversion, the
undersigned will not own or deemed to beneficially own (within the meaning of
the Securities Exchange Act of 1934, as amended) 4.99% or more of the then
issued and outstanding shares of the company.
_________________________ ___________________________
Date of Conversion Applicable Conversion Price
_________________________ ___________________________
Number of Common Shares upon $ Amount of Conversion
Conversion
_________________________ ___________________________
Signature Name
Address: Delivery of Shares to:
17
Exhibit 5.1
July 15, 1998
Xybernaut Corporation
12701 Fair Lakes Circle
Fairfax, Virginia 22033
Gentlemen:
We have acted as counsel to Xybernaut Corporation, a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 (the "Registration Statement") being filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the offering of 165,441 shares (the "Shares") of Common Stock, par value $.01
per share (the "Common Stock") of the Company.
Capitalized terms used herein and not defined shall have the meanings
given to them in the Registration Statement.
In connection with the foregoing, we have examined originals or
copies, satisfactory to us, of the Company's (i) Certificate of Incorporation,
(ii) By-laws and (iii) resolutions of the Company's board of directors. We have
also reviewed such other matters of law and examined and relied upon all such
corporate records, agreements, certificates and other documents as we have
deemed relevant and necessary as a basis for the opinion hereinafter expressed.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
with the original documents of all documents submitted to us as copies or
facsimiles. As to any facts material to such opinion, we have, to the extent
that relevant facts were not independently established by us, relied on
certificates of public officials and certificates of officers or other
representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion that
the Shares, when issued pursuant to the terms and conditions of the 5%
Convertible Preferred Stock and Common Stock Purchase Agreement will be validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Parker Chapin Flattau & Klimpl, LLP
---------------------------------------
PARKER CHAPIN FLATTAU & KLIMPL, LLP
Exhibit 10.1
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated May 15, 1998, between the
person and/or entity whose name and address appears on the signature page
attached hereto (individually a "Holder" or collectively with the holders of the
other Securities issued pursuant to a 5% Convertible Preferred Stock and Common
Stock Purchase Agreement of even date herewith, as defined below, the "Holders")
and Xybernaut Corporation, a corporation having its principle place of business
at 12701 Four Lakes Circle, Fairfax, VA 22033.
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Holders are purchasing from the Company, pursuant to a 5%
Convertible Preferred Stock Securities Purchase Agreement dated the date hereof
(the "Agreement"), 110,294 shares of Common Stock, par value $.01 per share (the
"Common Shares") at a price of $3.40 per share, and 375 shares of Series C
Preferred Stock of the Company, par value $.01 per share (the "Convertible
Preferred Stock") at a price of $1,000 per share, each share convertible into
one share of the Company's Common Stock, $0.01 par value per share (the
"Conversion Shares" , and, collectively with the Common Shares, the "Shares"),
for an aggregate purchase price of $750,000; and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein with respect to the Shares.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
"Registrable Security" means each of the Conversion Shares; provided, however,
that with respect to any particular Registrable Security, such security shall
cease to be a Registrable Security when, as of the date of determination, (i) it
has been effectively registered under the Securities Act of 1933, as amended
(the "Securities Act") and disposed of pursuant thereto, (ii) registration under
the Securities Act is no longer required for the immediate public distribution
of such security as a result of the provisions of Rule 144, or (iii) it has
ceased to be outstanding. The term "Registrable Securities" means any and/or all
of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change affecting the Common Stock, such adjustment
shall be made in the definition of "Registrable Security" as is appropriate in
order to prevent any dilution or enlargement of the rights granted pursuant to
this Section 1.
Section 2. Restrictions on Transfer. The Holder acknowledges and
understands that unless registered, the Conversion Shares, Common Shares and the
Convertible Preferred Stock are "restricted securities" as defined in Rule 144
promulgated under the Act. The Holder understands that no disposition or
transfer of the Common Shares, Conversion Shares or the Convertible Preferred
Stock may be made by Holder in the absence of (i) an opinion of counsel
reasonably satisfactory to the Company that such transfer may be made or (ii) a
registration statement under the Securities Act is then in effect with respect
thereto.
Section 3. Registration Rights. (a) The Company shall prepare and
file a registration statement (the "Registration Statement") with the Securities
and Exchange Commission ("SEC"), on one occasion, at the sole expense of the
Company (except as provided in Section 3(c) hereof), in respect of all holders
of Registrable Securities, so as to permit a non-underwritten public offering
and sale of the Registrable Securities under the Act. The number of Registrable
Securities to be registered shall be one hundred fifty (150%) percent of the
number of shares that would be required if all the Registrable Securities were
converted at a price of $3.40 per share on the effective date of the
Registration Statement.
<PAGE>
(b) The Company will maintain any Registration Statement or
post-effective amendment filed under this Section 3 hereof current under the
Securities Act until the earlier of (i) the date that all of the Registrable
Securities have been sold pursuant to the Registration Statement, (ii) the date
the holders thereof receive an opinion of counsel that the Registrable
Securities may be sold under the provisions of Rule 144 or (iii) the second
anniversary of the effective date of the Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of any
Registration Statement under subparagraph 3(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys'
fees) shall be borne by the Company. The Holder shall bear the cost of
underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and the fees and expenses of its counsel. The
Company shall use its best efforts to qualify any of the securities for sale in
such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 6 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holder with copies of such Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3 to include
a Holder's Registrable Securities in any Registration Statement which is to be
filed if, in the opinion of counsel for the Company the proposed offering or
other transfer as to which such registration is requested is exempt from
applicable federal and state securities laws and would result in all purchasers
or transferees obtaining securities which are not "restricted securities", as
defined in Rule 144 under the Securities Act.
(e) In the event the Registration Statement to be filed by the
Company pursuant to Section 3 (a) above is not declared effective by the SEC
within ninety (90) days of the Closing Date, as defined in the Agreement, then,
unless waived by Holder, the Company will pay Holder, as liquidated damages for
such failure and not as a penalty, two (2%) percent of the outstanding principal
amount of the Preferred Shares for each month thereafter until the Company
procures registration of the Conversion Shares.
If the Company does not remit the damages to the Holder as set forth
above, the Company will pay the Holder's reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. Such payment
shall be made to the Holder immediately if the registration of the Conversion
Shares are not effected; provided, however, that the payment of such liquidated
damages shall not relieve the Company from its obligations to register the
Conversion Shares pursuant to this Section. The registration of the Conversion
Shares pursuant to this provision shall not affect or limit Holder's other
rights or remedies as set forth in this Agreement. Any payment pursuant to this
Section 3(e) shall be made either in cash or paid in additional shares of Common
Stock at the discretion of the Company.
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any Registration Statement in which it is
required to include Registrable Securities pursuant to this Section 3.
Section 4. Cooperation with Company. Holders will cooperate with the
Company in all respects in connection with this Agreement, including, timely
supplying all information reasonably requested by the Company and executing and
returning all documents reasonably requested in connection with the registration
and sale of the Registrable Securities.
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Section 5. Registration Procedures. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and to comply
with the provisions of the Act with respect to the sale or other disposition of
all securities covered by such registration statement whenever the Holder or
Holders of such securities shall desire to sell or otherwise dispose of the same
(including prospectus supplements with respect to the sales of securities from
time to time in connection with a registration statement pursuant to Rule 415 of
the SEC);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Act, and such other documents, as such Holder may reasonably request in
order to facilitate the public sale or other disposition of the securities owned
by such Holder;
(c) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as the Holder, shall reasonably request, and do any
and all other acts and things which may be necessary or advisable to enable each
Holder to consummate the public sale or other disposition in such jurisdiction
of the securities owned by such Holder, except that the Company shall not for
any such purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified or to file therein any
general consent to service of process;
(d) use its best efforts to list such securities on NASDAQ or any
securities exchange on which any securities of the Company is then listed, if
the listing of such securities is then permitted under the rules of such
exchange or NASDAQ;
(e) enter into and perform its obligations under an underwriting
agreement, if the offering is an underwritten offering, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering;
(f) notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the Act, of the
happening of any event of which it has knowledge as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
Section 6. Indemnification.
(a) In the event of the filing of any Registration Statement with
respect to Registrable Securities pursuant to Section 3 hereof, the Company
agrees to indemnify and hold harmless the Holder ("Distributing Holders")
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all attorneys' fees), to which
the Distributing Holders may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such Registration
Statement, or any related preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
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misleading; provided, however, that the Company will not be liable (i) in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such Registration Statement, preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto in reliance upon, and in conformity with, written information
furnished to the Company by the Distributing Holders, specifically for use in
the preparation thereof, or (ii) to pay any amounts paid in settlement of any
loss, claim, damage or liability if such settlement is effected without the
consent of the Company. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such officer,
or director may become subject under the Securities Act or otherwise, insofar as
such losses claims, damages or liabilities (or actions in respect thereof);
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in a Registration Statement requested by such
Distributing Holder, or any related preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
such Distributing Holder, specifically for use in the preparation thereof and,
provided further, that the indemnity agreement contained in this Section 6(b)
shall not inure to the benefit of the Company with respect to any person
asserting such loss, claim, damage or liability who purchased the Registrable
Securities which are the subject thereof if the Company failed to send or give
(in violation of the Securities Act or the rules and regulations promulgated
thereunder) a copy of the prospectus contained in such Registration Statement to
such person at or prior to the written confirmation to such person of the sale
of such Registrable Securities, where the Company was obligated to do so under
the Securities Act or the rules and regulations promulgated thereunder. This
indemnity agreement will be in addition to any liability which the Distributing
Holders may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section 6. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, assume the defense thereof, subject to the provisions
herein stated and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party under this Section 6 for any legal
or other reasonable out-of-pocket expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless the indemnifying party shall not pursue the
action to its final conclusion. The indemnified party shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and reasonable out-of-pocket expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is the
Distributing Holder, the reasonable fees and out-of-pocket expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party, or (ii) the named parties to any such action (including any impleaded
parties) include both
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the Distributing Holder and the indemnifying party and the Distributing Holder
shall have been advised by such counsel that there may be one or more legal
defenses available to the indemnifying party different from or in conflict with
any legal defenses which may be available to the Distributing Holder (in which
case the indemnifying party shall not have the right to assume the defense of
such action on behalf of the Distributing Holder, it being understood, however,
that the indemnifying party shall, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable only for
the reasonable fees and out-of-pocket expenses of one separate firm of attorneys
for the Distributing Holder, which firm shall be designated in writing by the
Distributing Holder). No settlement of any action against an indemnified party
shall be made without the prior written consent of the indemnified party, which
consent shall not be unreasonably withheld.
Section 7. Notices. Any notice pursuant to this Agreement by the
Company or by the Holder shall be in writing and shall be deemed to have been
duty given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery, or (iii) if mailed by certified mail, return receipt requested,
postage prepaid, addressed as follows:
(a) If to the Holder, to its, his or her address set forth on the
signature page of this Agreement, with a copy to the person designated in the
Agreement.
(b) If to the Company,
at Xybernaut Corporation,
12701 Four Lakes Circle
Fairfax, VA 22033
Attn: Edward G. Newman, President,
(tele) (703) 631-6925
(fax) (703) 631-7070
and a copy to
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attn: Martin Eric Weisberg, Esq.
or to such other address as any such party may designate by notice
to the other party. Notices shall be deemed given at the time they are delivered
personally or five (5) days after they are mailed in the manner set forth above.
If notice is delivered by facsimile to the Company and followed by mail,
delivery shall be deemed given two (2) days after such facsimile is sent.
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Section 8. Assignment. This Agreement is binding upon and inures to
the benefit of the parties hereto and their respective heirs, successors and
permitted assigns. This Agreement cannot be assigned, amended or modified by the
parties hereto, except by written agreement executed by the parties. If
requested by the Company, the Holder shall have furnished to the Company an
opinion of counsel reasonably satisfactory to the Company to such effect.
Section 9. Conflicts. In the event of any inconsistency or conflict
between the terms and provisions of this Agreement, and the terms and provisions
of the Purchase Agreement or the Certificate of Designation, the terms and
provisions of the Certificate of Designation shall prevail.
Section 10. Counterparts. This Agreement may be executed i
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 11. Headings. The Headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 12. Governing Law; Venue. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed entirely within such State, without regard
to its principles of conflicts of laws. Each of the parties hereto agrees that
ion the event of any dispute arising hereunder venue shall be New York, New York
and each party hereby submits to the jurisdiction of the United States Federal
Court in the Southern District of New York.
Section 13. Severability. If any provision of this Agreement shall
for any reason be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable provision had never been
contained herein.
[End of Page]
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, on the day and year first written.
XYBERNAUT CORPORATION
By _____________________________
Officer
LIBERTYVIEW PLUS FUND, Purchaser
By _____________________________
Officer
Address: Libertyview Plus Fund
c/o Libertyview Capital Management
101 Hudson Street
Suite #3700
Jersey City, New Jersey 07302
(tele) 201-200-9093
(fax) 201-200-1140
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LIBERTYVIEW FUND, LLC, Purchaser
By _____________________________
Officer
CPR (USA) INC., Purchaser
By _____________________________
Officer
8
Ex. 23.1 - Consent of PricewaterhouseCoopers LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form
S-3 of our report, which includes an explanatory paragraph concerning the
Company's ability to continue as a going concern, dated March 31, 1998 on our
audits of the financial statements of Xybernaut Corporation. We also consent to
the reference to our firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
-----------------------------------
PricewaterhouseCoopers LLP
McLean, VA
July 13, 1998
