SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from___________to______________
Commission file number: 0-15086
XYBERNAUT CORPORATION
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(Exact Name of registrant as specified in its charter)
Delaware 54-1799851
- ------------------------------ ---------------------------------
(State or other jurisdiction of
incorporation) (I.R.S. Employer Identification No.)
12701 Fair Lakes Circle, Fairfax, VA 22033
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(Address of principal executive offices with zip code)
Registrant's telephone number, including area code: (703) 631-6925
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest date.
Class Outstanding at August 13, 1998
----- ------------------------------
Common stock - $0.01 par value 20,934,765
<PAGE>
INDEX
PAGE
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COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Conditions 7
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1998 December 31,
(unaudited) 1997
----------------------- ----------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,014,723 $ 952,366
Accounts receivable 182,363 216,767
Inventories 1,172,699 1,607,781
Prepaid and other current assets 399,883 334,245
----------------------- ----------------------
Total current assets 5,769,668 3,111,159
----------------------- ----------------------
Fixed assets:
Property and equipment, net 773,788 505,695
----------------------- ----------------------
Other assets:
Patent costs, net 414,683 384,422
Tooling costs, net 312,368 376,990
Other 163,396 153,351
----------------------- ----------------------
Total other assets 890,447 914,763
----------------------- ----------------------
Total assets $ 7,433,903 $ 4,531,617
======================= ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ - $ 19,530
Accounts payable 468,337 429,780
Accrued expenses
809,068 908,372
----------------------- ----------------------
Total current liabilities 1,277,405 1,357,682
----------------------- ----------------------
Total liabilities 1,277,405 1,357,682
----------------------- ----------------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 6,000,000 shares authorized;
3,000 shares designated as Series A, 2,250 shares issued and
outstanding as of December 31, 1997; 4,180 and 3,180 shares
designated as Series B, 3,180 shares issued and outstanding as
of December 31, 1997; 375 shares designated as Series C, 375
shares issued and outstanding as of June 30, 1998, at net
carrying value 364,754 4,193,355
Common stock, $.01 par value, 40,000,000 shares authorized;
20,934,765 and 14,360,515 issued and outstanding as of June
30, 1998 and December 31, 1997, respectively 209,348 143,605
Additional paid-in capital 27,636,785 17,181,329
(91,511)
Deferred compensation (9,042)
Accumulated deficit (22,045,347) (18,252,843)
----------------------- ----------------------
Total stockholders' equity 6,156,498 3,173,935
----------------------- ----------------------
Total liabilities and stockholders' equity $ 7,433,903 $ 4,531,617
======================= ======================
</TABLE>
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases $ 229,634 $ 125,032 $ 356,861 $ 220,458
Consulting and license 1,839 15,000 1,839 30,000
------------------ ------------------ ----------------- ------------------
Total revenue 231,473 140,032 358,700 250,458
Cost of sales 271,905 258,229 379,476 409,790
------------------ ------------------ ----------------- ------------------
Gross profit (loss) (40,432) (118,197) (20,776) (159,332)
Operating expenses:
Sales and marketing 656,042 729,655 1,151,147 1,489,195
General and administrative 966,199 893,803 1,617,879 1,885,214
Research and development 643,413 564,398 1,010,769 1,196,319
------------------ ------------------ ----------------- ------------------
Total operating expenses 2,265,654 2,187,856 3,779,795 4,570,728
------------------ ------------------ ----------------- ------------------
Operating loss (2,306,086) (2,306,053) (3,800,571) (4,730,060)
Interest income, net 2,902 7,773 8,066 49,129
------------------ ------------------ ----------------- ------------------
Net Loss (2,303,184) (2,298,280) (3,792,505) (4,680,931)
------------------ ------------------ ------------------ ------------------
Provision for preferred stock
dividends accrued 2,344 --- 2,344 ---
------------------ ------------------ ------------------ ------------------
Net loss applicable to holders
of common stock $ (2,305,528) $ (2,298,280) $ (3,794,849) $ (4,680,931)
================== ================== ================= ==================
Per common share (basic and
diluted):
Net loss before provision for
preferred stock dividends
accrued $ (0.12) $ (0.18) $ (0.22) $ (0.38)
Provision for preferred stock
dividends --- --- --- ---
------------------ ------------------ ------------------ ------------------
Net loss applicable to holders $ (0.12) $ (0.18) $ (0.22) $ (0.38)
of common stock ================== ================== ================= ==================
Weighted average number of
common shares outstanding
(basic and diluted) $ 18,843,590 $ 12,459,112 $ 17,016,067 $ 12,459,112
================== ================== ================= ==================
</TABLE>
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------
1998 1997
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities
Net loss attributable to common stock $ (3,792,505) $ (4,680,931)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 152,185 160,547
Provision for bad debts (30,697) -
Non cash charges for tooling costs 138,682 -
Non cash charges for stock and options issued for services 82,469 125,488
Inventories 109,731 (295,792)
Accounts receivable 65,101 (2,338)
Prepaid and other current assets (65,638) (184,312)
Other assets (10,528) (4,798)
Accounts payable and accrued expenses (14,873) (74,373)
Deferred licensing revenue - (30,000)
------------------- --------------------
Net cash used in operating activities (3,366,073) (4,986,509)
------------------- --------------------
Cash flows from investing activities:
Acquisition of property and equipment, net (33,515) (306,962)
Acquisition of patents and related costs (91,190) (155,888)
Capitalization of tooling costs and other assets (74,060) (284,294)
------------------- --------------------
Net cash used in investing activities (198,765) (747,144)
------------------- --------------------
Cash flows from financing activities:
Proceeds from:
Preferred stock offerings 1,348,496 2,785,000
Common stock offerings 5,307,048 -
Initial Public Offering, gross - 215,000
Payments for:
Notes and loans (19,530) (48,924)
Other (8,819) -
------------------- --------------------
Net cash used in financing activities 6,627,195 2,951,076
------------------- --------------------
Net decrease in cash and cash equivalents 3,062,357 (2,782,577)
Cash and cash equivalents, beginning of period 952,366 6,274,967
------------------- --------------------
Cash and cash equivalents, end of period $ 4,014,723 $ 3,492,390
=================== ====================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,500 $ 8,527
=================== ====================
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividend requirements $ 84,022 $ -
=================== ====================
Common stock issued for services rendered $ 98,438 $ -
=================== ====================
</TABLE>
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<PAGE>
XYBERNAUT CORPORATION
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited, consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been reflected in such financial statements. Results of operations for the six
months ended June 30,1998 are not necessarily indicative of results of
operations expected for the full year. The Company's fiscal year ends December
31.
2. Principles of Consolidation
The consolidated financial statements include the accounts of Xybernaut
Corporation ("the Company") and its wholly-owned subsidiary, Tech International
of Virginia Inc. ("Tech Virginia"). All material intercompany accounts and
transactions have been eliminated.
3. New Accounting Pronouncements
The Financial Accounting Standards Board has issued two new standards
which become effective for reporting periods beginning after December 15, 1997.
SFAS No. 130, "Reporting Comprehensive Income", requires additional disclosures
with respect to certain changes in assets and liabilities that previously were
not required to be reported as results of operations for the period. SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
requires financial and descriptive information with respect to "operating
segments" of an entity based on the way management disaggregates the entity for
making internal operating decisions. There is no impact on the financial
statements from the adoption of these pronouncements.
In addition, the Financial Accounting Standards Board has issued, SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
becomes effective for years beginning after June 15, 1999. SFAS No. 133 requires
that every derivative instrument be recorded in the balance sheet as either an
asset or a liability measured at its basic value. The statement requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge amortizing criteria are met. The Company believes that the effect of the
adoption of SFAS No. 133 on the Company will not be material.
4. Preferred Stock
In January 1998, the Company placed 1,000 shares of Series B Preferred
Stock and received cash proceeds of approximately $974,000 from this issuance.
In connection with this placement and
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<PAGE>
the placement of 3,000 shares of Series B Preferred Stock in November 1997, the
placement agent received 50,000 shares of Common Stock in lieu of 60 shares of
Series B Preferred, warrants to purchase 25,000 shares of Common Stock at
$2.1313 and warrants to purchase 75,000 shares of Common Stock at $3.025. During
the six months ended June 30, 1998, 2,250 shares of Series A Preferred Stock and
4,180 shares of Series B Preferred Stock were converted to 4,878,074 shares of
Common Stock, pursuant to their respective terms. As of the current date, all of
the 3,000 shares of Series A Preferred Stock and 4,180 shares of Series B
Preferred Stock issued by the Company have been fully converted resulting in the
issuance of 1,958,984 and 3,172,239 shares of Common Stock, respectively.
In May 1998, the Company placed 375 shares of Series C Preferred Stock
and received cash proceeds of $375,000 from this issuance. No shares of Series C
Preferred Stock have been converted as of the date hereof.
5. Commitments
The Company entered into a Memorandum of Understanding ("MOU") with
Sony Digital Products ("SODP") on May 14, 1998. This agreement obligates the
Company to reimburse SODP Yen 100 million over a ten month period commencing
April 1998. These payments are reimbursements to SODP for engineering and
development of the Company's Mobile Assistant IV(TM). The Company, through June
1998, has remitted to SODP Yen 15 million under the Memorandum of Understanding
in accordance with the payment terms. The balance of the payments and the
related recognition of expense will occur as the services are provided by SODP
to the Company.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Overview
The Company was incorporated as a Virginia company in October 1990 and
commenced active operations in November 1992 as Computer Products & Services,
Inc. to develop, manufacture and sell mobile computing systems. Since commencing
operations, the Company has incurred significant operating losses. In April
1996, the Company was merged with Xybernaut Corporation in order to change the
company name and reincorporate in Delaware. In July 1996, the Company
successfully completed the initial public offering ("IPO") of its Common Stock
and Warrants which are traded on the NASDAQ SmallCap Market.
The first product to be commercialized by the Company is the proprietary
portable computer technology and related software applications embodied in its
Mobile Assistant(R) Series. The first product in this series was introduced in
1994 and uses "486" based technology ("486 System") that was produced in a
limited quantity and is no longer being manufactured. Product development has
been based on the expectation of the Company that continued improvements in
software for operating systems, applications and speech recognition software
will require continued improvements in the performance and capabilities of the
Mobile Assistant Series. Based on that expectation, the Company
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<PAGE>
undertook a product development program that resulted in the second product
offering in the Mobile Assistant(R) Series, which was introduced on a
preproduction basis in January 1997 and which used "586" based technology
("Mobile Assistant(R) II System"). The Mobile Assistant(R) II was replaced by
the third system in this product development program, which was introduced
during the third quarter of 1997 and uses a Pentium(R) processor running at 133
MHZ ("133P System"). The 133P System is tailored for those customers who require
additional processing capacity for their applications, such as a body-worn
server for wireless LAN applications, and also for those customers using new
continuous speech recognition or phonetic recognition software that require
higher processing speeds, such as that available from IBM Corporation, Dragon
Systems, Inc., and Texas Instruments, among others. In the fourth quarter of
1997, the Company announced the fourth system in this product development
program, the Mobile Assistant(R) IV ("MA IV"), which uses a Pentium chipset
known as the "Tillamook" that runs at up to 266 MHZ.
Additional software products are being developed and are planned for
development for use on the Mobile Assistant and other personal computers. In the
third quarter of 1997, the Company announced the introduction of linkAssist(TM),
a software product which provides a "windows" style graphical user interface
with speech navigation that allows data stored in almost any format, such as
commonly-used word processing, spreadsheet, data base, graphics or media files,
to be linked to most any application without altering the original data. The
Company has announced webAssist(TM), a software product that allows voice
navigation of HTML document links such as those found on the World Wide Web and
intranets.
The Company has derived its revenues from sales of the Mobile
Assistant(R) Series, less volume discounts, and from consulting services related
to the Mobile Assistant(R), application software for the Mobile Assistant(R),
and other computer platforms. During the three months ended June 30, 1998, the
Company derived 99% of its revenues from sales of the Mobile Assistant(R). For
the three months ended June 30, 1997, the Company derived approximately 89% of
its revenues from sales of the Mobile Assistant(R) and 11% of its revenues from
consulting services and licensing revenues. In the future, the Company expects
to derive additional revenues from the sale of software and additional optional
components of the Mobile Assistant(R) Series. Revenues from sales to customers,
VARs and OEMs are recognized when products are shipped. The Company's sales
agreements generally do not involve any significant obligations to customers
subsequent to delivery except as provided in separate service or support
agreements. Revenues from future software sales will be recognized at the time
the software master is delivered in accordance with Statement of Position No.
91-1. Cost of sales include the cost of components for the Mobile Assistant(R)
Series, direct labor and overhead expense, manuals, diskettes and duplication,
packaging materials, assembly, paper goods and shipping.
The Company intends to continue expenditures on research and
development of additional hardware and software products. Research and
development activities consist primarily of personnel engaged in the research
and design of new products, test components, consulting fees and equipment costs
required to conduct the Company's development activities. Software development
costs are expensed as incurred until technological feasibility is established in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS No. 86,
Accounting for the Costs of Computer
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<PAGE>
Software to be Sold, Leased or Otherwise Marketed), after which any additional
costs are capitalized until the software is ready for release. The Company
started limited shipments of its linkAssist(TM) software late in the year ended
December 31, 1997, but the costs eligible for capitalization under SFAS were
immaterial during this period and were not capitalized. The Company expects such
costs to be immaterial during the coming fiscal year. Research and development
expenses for the three months ended June 30, 1998 and 1997 were $643,413 and
$564,398, respectively, none of which was capitalized.
The Company's consolidated financial statements, for all periods
presented, include the results of operations of Tech Virginia, a wholly-owned
subsidiary that supplies software and consulting services to the United States
government and others. In July 1996, the Company exercised its option to
purchase all of the capital stock of Tech Virginia and completed payments under
this option during the year ended December 31, 1997. The consolidated financial
statements contain eliminations for all material transactions between the
Company and Tech Virginia for all periods presented.
The Company's consolidated financial statements do not contain a
provision for income tax expense due to the net operating losses incurred since
inception. Subject to realization, the Company has generated net operating
losses that can be used to offset taxable operating income in the future. The
Company's future operations, if profitable, will be subject to income tax
expense not previously incurred by the Company (see Note 9 to Consolidated
Financial Statements). At June 30, 1998, the Company had approximately
$16,000,000 of net operating loss carry forwards for federal income tax purposes
which expire in 2012. The use of these carry forwards may be limited in any one
year under Internal Revenue Code Section 382 if significant ownership changes
occur.
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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<PAGE>
Results of Operations
The following table sets forth items from the Consolidated Statements
of Income as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ---------------------------
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 117.5% 184.4% 105.8% 163.6%
------ ------ ------ ------
Gross margin (17.5)% (84.4)% (5.8)% (63.6)%
Operating expenses:
Sales & marketing 283.4% 521.1% 320.9% 594.6%
General & administrative 417.4% 638.3% 451.0% 752.7%
Research & development 277.9% 403.0% 281.8% 477.7%
------ ------ ------ ------
Total operating expense 978.7% 1,562.4% 1,053.7% 1,825.0%
Interest income 1.3% 5.6% 2.2% 19.6%
---- ---- ---- -----
Net loss (995.0%) (1,641.2%) (1,057.3%) (1,869.0%)
======== ========== ========== ==========
Provisions for preferred stock 1.0% - 0.6% -
======== ========== ========== ==========
Net loss applicable to holders (996.0%) (1,641.2%) (1,057.9%) (1,869.0%)
======== ========== ========== ==========
of of common stock
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues for the three months ended June 30, 1998 were
$231,473, an increase of $91,441, or 65.3%, compared to $140,032 for the
corresponding period in 1997. Product revenues for the three months ended June
30, 1998 were $229,634, an increase of $104,602 or 83.7%, compared to $125,032
for the corresponding period in 1997. The increase in product revenues for the
three months ended June 30, 1998 was related to the higher number of 133P
Systems that were sold during that period, compared to the higher number of 586
Systems that were sold in the corresponding period in 1997. Consulting and
license revenues for the three months ended June 30, 1998 were $1,839 a decrease
of $13,161 or 87.7%, compared to $15,000 for the corresponding period in 1997.
The decrease in consulting and license revenues was due to the lack of sales
activity under a License Agreement with Rockwell International that was related
to the restructuring of Rockwell's operations.
Cost of Sales. The cost of goods sold for the three months ended June
30, 1998 was $271,905, an increase of $13,676, or 5.3%, compared to $258,229 for
the corresponding period in 1997. The cost of goods sold increased
commensurately with the increase in product sales but was offset by a charge of
approximately $120,000 in 1997 to reduce the carrying value of an earlier
versions of the computing unit for Mobile Assistant II Systems to estimated
market value.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 1998 were $656,042, a decrease of $73,613, or 10.1%, compared to
$729,655 for the corresponding period in 1997. The decrease was due to a change
in compensation structure for sales personnel which resulted in lower base
salaries, a reduction in travel related expenses due to the centralization of
sales staff, and a decrease in the use of outside consultants for sales and
marketing programs.
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<PAGE>
General and Administrative. General and administrative expenses for the
three months ended June 30, 1998 were $966,199, an increase of $72,396, or 8.1%,
compared with $893,803 for the corresponding period in 1997. This increase
resulted primarily from an increase in activities related to discussions
regarding certain strategic partnerships and international operations.
Research and Development. Research and development expenses for the
three months ended June 30, 1998 were $643,413, an increase of $79,015, or
14.0%, compared with $564,398 for the corresponding period in 1997. This
increase is the primarily the result of increased development expenses for the
Mobile Assistant IV System.
Interest Income, Net. Net interest income for the three months ended
June 30, 1998 was $2,902, a decrease of $4,871, or 62.7%, compared with $7,773
for the corresponding period in 1997. This decrease is the result of reduced
interest income from the lower average cash balances in the three months ended
June 30, 1998 than for the corresponding period a year earlier, which reflected
the interest income on proceeds from the Company's Initial Public Offering that
was completed in July 1996.
Net Loss Attributable to Common Stock. As a result of the factors
described above, the net loss attributable to Common Stock for the three months
ended June 30, 1998 was $2,303,184, an increase of $4,904, or 0.2%, compared to
$2,298,280 for the corresponding period in 1997. Although the Company was
subject to taxation during the three months ended June 30, 1998 and June 30,
1997, the Company incurred net losses during these periods and no provision for
income taxes was made.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues for the six months ended June 30, 1998 were
$358,700, an increase of $108,242, or 43.2%, compared to $250,458 for the
corresponding period in 1997. Product revenues for the six months ended June 30,
1998 were $356,861, an increase of $136,403, or 61.9%, compared to $220,458 for
the corresponding period in 1997. The increase in product revenues for the three
months ended June 30, 1998 was related to the higher number of 133P Systems that
were sold during that period, compared to the higher number of 486 and 586
Systems that were sold in the corresponding period in 1997. The decrease in
consulting and license revenues was due to the lack of sales activity under a
license agreement with Rockwell International that was related to the
restructuring of Rockwell's operations.
Cost of Sales. The cost of goods sold for the six months ended June 30,
1998 was $379,476, a decrease of $30,314, or 7.4%, compared to $409,790 for the
corresponding period in 1997. The cost of goods sold increased commensurately
with the increase in sales but were offset by charges in 1997 of approximately
$97,000 of parts for 586 Systems that were replaced and written off, and by a
full reserve for obsolescence of approximately $225,000 for the remaining
computing units used in 486 Systems that are believed by Company management to
be saleable, but whose value is uncertain given changes in technology and
advances in the market.
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<PAGE>
Sales and marketing expenses. Sales and marketing expenses for the six
months ended June 30, 1998 were $1,151,147, a decrease of $338,048, or 22.7%,
compared to $1,489,195 for the corresponding period in 1997. This decrease was
due to a change in compensation structure for sales personnel which resulted in
lower base salaries, a reduction in travel related expenses due to the
centralization of sales staff, and a decrease in the use of outside consultants
for sales and marketing programs.
General and administrative expenses. General and administrative
expenses for the six months ended June 30, 1998 were $1,617,879, a decrease of
$267,335, or 14.2%, compared to $1,885,214 for the corresponding period in 1997.
This decrease resulted primarily from a reduction in personnel and related
occupancy expenses, along with a decrease in travel expenses. These were offset
by an increase in activities related to international operations.
Research and development expenses. Research and development expenses
for the six months ended June 30, 1998 were $1,010,769, an increase of $185,550,
or 15.5%, compared to $1,196,319 for the corresponding period in 1997. This
increase is the primarily the result of increased development expenses for the
Mobile Assistant IV System.
Interest income, net. Net interest income for the six months ended June
30, 1998 was $8,066, a decrease of $41,063, or 83.6%, compared to $49,129 for
the corresponding period in 1997. This decrease is the result of reduced
interest income from the lower average cash balances in the six months ended
June 30, 1998 than for the corresponding period in 1997, which reflected the
interest income on proceeds from the Company's initial public offering that was
completed in July 1996.
Net Loss Attributable to Common Stock. As a result of the factors
described above, the net loss for the six months ended June 30, 1998 was
$3,792,505, a decrease of $888,426, or 18.9%, compared to $4,680,931 for the
corresponding period in 1997. Although the Company was subject to taxation
during the six months ended June 30, 1998 and the six months ended June 30,
1997, the Company incurred net losses during these periods and no provision for
taxes was made.
Liquidity and Capital Resources
Since its inception until the completion of the IPO, the Company
financed its operations from the private sale of its securities, from vendor
credit and from short-term loans received from management, stockholders and
others.
From October 1994 to August 1995 the Company raised approximately
$1,243,000 from the private sale of shares of Common Stock at $6.00 per share.
In November 1995, the Company raised $1,505,000 through the private placement of
convertible debentures and in April 1996, the Company raised $1,000,000 through
a second private placement of convertible debentures. The Company received
approximately $2,140,000 from these financings net of offering costs. The
placement fees in respect of these financings were carried by the Company as
interest-bearing loans and were repaid
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<PAGE>
from the proceeds of the IPO and realized gross proceeds of approximately
$13,280,000 and net proceeds of approximately $10,840,000 after related
expenses.
On June 30, 1997, the Company completed a $3 million private placement of
an aggregate of 3,180 shares of the Company's Series A Preferred Stock, par
value $0.01 per share ("Series A Preferred Stock"), and realized gross proceeds
of $3,000,000 and net proceeds of approximately $2,762,000 after related
expenses. The Series A Preferred Stock has a stated value of $1,000 per share
and a holder of the Series A Preferred Stock is entitled to receive, if and when
declared by the Company, a dividend equal to 5% of the stated value per share
per annum, payable in shares of Common Stock or in cash, payable upon conversion
of the Series A Preferred Stock. The Series A Preferred provides the Company
with several redemption options and alternatively allows for the periodic
conversion of portions of unredeemed Series A Preferred Stock over a one-year
period ending June 30, 1998. Any Series A Preferred Stock outstanding on June
30, 1999 must be converted into Common Stock at that date.
On November 12, 1997, the Company completed a $3 million private
placement of an aggregate of 3,000 shares of the Company's Series B Preferred
Stock, par value $0.01 per share ("Series B Preferred Stock"), and realized
gross proceeds of $3,180,000 and net proceeds of approximately $2,950,000 after
related expenses. On February 23, 1998, the Company completed a follow-on
placement of its Series B Preferred and realized gross proceeds of $1,000,000
and net proceeds of approximately $990,000 after related expenses. The Series B
Preferred Stock has a stated value of $1,000 per share and a holder of the
Series B Preferred Stock is entitled to receive, if and when declared by the
Company, a dividend equal to 4% of the stated value per share per annum, payable
in shares of Common Stock or in cash, payable upon conversion of the Series B
Preferred Stock into Common Stock. The Series B Preferred Stock into Common
Stock also provides the Company with several redemption options and allows for
the period conversion of portions of unredeemed Series B Preferred Stock over a
five-month period from closing.
In April 1998, the Company entered into an equity line of credit
agreement with institutional investors who had formerly invested in the Company
in which the Company received an initial gross amount of $1,000,000 in exchange
for Common Stock. Under this line of equity the Company has the right, but not
the obligation, to obtain up to an additional $10,000,000 in a series of equity
drawdowns based on terms and conditions specified in the line of equity. In
connection with this line of equity, the Company issued warrants to purchase up
to 40,000 shares of stock at $1.76 and 20,000 shares of stock at $2.81 at any
time starting six months after closing and ending five years after closing. The
placement agent for this transaction received a cash fee of 5% and 50,000 shares
of unregistered stock.
In May 1998, the Company completed a $750,000 private placement of an
aggregate of 375 shares of the Company's Series C Preferred Stock, par value
$0.01 per share ("Series C Preferred Stock") and 110,294 shares of Common Stock
with institutional investors who had formerly invested in the Company. The
Series C Preferred Stock has a stated value of $1,000 per share and a holder of
the Series C Preferred Stock is entitled to receive, if and when declared by the
Company, a dividend equal to 5% of the stated value per share per annum, payable
in shares of Common Stock
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or in cash, payable upon conversion of the Series C Preferred Stock. The Series
C Preferred Stock also provides the Company with several redemption options and
allows for the periodic conversion of portions of unredeemed Series C Preferred
Stock over a two-year period ending May 15, 2000. Any Series C Preferred Stock
outstanding on May 15, 2000 must be converted into Common Stock at that date.
In June 1998, the Company completed a $1,000,000 private placement with
an institutional investor who had formerly invested in the Company in which the
Company issued 153,846 unregistered shares of Common Stock.
In June 1998, the Company amended and exercised a put option in the
aggregate principal amount of $3,000,000 under the private line of equity
agreement mentioned above. In connection with such action, the Company issued
545,454 shares of Common Stock. Such shares are subject to restrictions on
resale for a period of nine months and to repricing upon occurrences of certain
conditions. In addition, the Company issued five-year warrants to purchase up to
300,000 shares of Common Stock at a price of $5.25.
For the six months ended June 30, 1998, the Company's operating
activities used cash of $3,366,073. The net use of cash by operations for the
six months ended June 30, 1998 was primarily the result of a $3,792,505 net
loss. This was offset by a net decrease in inventories of $109,731, depreciation
and amortization of $152,185 and non-cash charges for tooling costs of $138,682.
Cash used for investing activities for the six months ended June 30, 1998 was
$198,765 which included $91,190 related to patents and $74,060 in capitalized
tooling costs. Proceeds from the Company's financing activities for the six
months ended June 30, 1998 were $6,627,195 which primarily consisted of
$5,307,048 from the issuance of the Company's Common Stock, net of related fees
and $1,348,496 from the issuance of the Company's Series B and Series C
Preferred Stock, net of related fees. As a result of the above, cash and cash
equivalents on hand as of June 30, 1998 was $4,014,723, an increase of
$3,062,357 from the $952,366 of cash and cash equivalents on hand as of December
31, 1997.
For the six months ended June 30, 1997, the Company's operating
activities used cash of $4,986,509. The net use of cash for the six month period
ended June 30, 1997 was primarily the result of a $4,680,931 net loss, an
increase in inventories of $295,792 largely related to the production of the 586
System and the Company's head mounted display, an increase in prepaid and other
current assets of $184,312, offset by depreciation and amortization costs of
$160,547 and non-cash compensation costs of $125,488. Cash used for investing
activities for the six months ended June 30, 1997 was $747,144 which included
$306,962 for the acquisition of property and equipment, $284,294 in capitalized
tooling costs related to the production of the 586 System and the Company's head
mounted display, and $155,188 related to patents. Proceeds from the Company's
financing activities for the six months ending June 30, 1997 were $2,951,076
which primarily consisted of $2,785,000 from the issuance of its Series A
Preferred Stock and deferred placement fees of $215,000. As a result of the
above, cash on hand as of June 30, 1997, was $3,492,390, a decrease of
$2,782,577 from the $6,274,967 of cash and cash equivalents on hand as of
December 31, 1996.
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At June 30, 1998, the Company had no material capital commitments and
working capital of $4,492,263.
On March 19, 1998, Matrix Corporation filed a summons against the
Company in the United States District Court, Eastern District of North Carolina,
alleging that: Matrix has been damaged by a purported breach of the December
Agreement by the Company; that the Company should return all goods shipped by
Matrix under both the June Agreement and the December Agreement; that the
Company did not intend to comply with the December Agreement and therefore the
governing contract between the two entities should revert to the June Agreement.
In addition, this summons requests that any damages incurred by Matrix as a
result of this purported breach of contract be trebled. On April 30, 1998, the
Company filed a motion in the same court to dismiss the complaints contained in
the March 19, 1998 filing by Matrix. While there can be no assurance of the
outcome of this legal proceeding, the Company's management believes that the
claims by Matrix are groundless and that the impact of this legal proceeding
will not be adversely material to the Company's operations. The maximum amount
payable by the Company under the December Agreement if Matrix performs defined
tasks is approximately $250,000 and the maximum amount of inventory that could
be assumed by the Company under the December Agreement is approximately
$600,000.
The Company anticipates that its working capital requirements and
operating expenses will increase as the Company expands production and sales of
the Mobile Assistant(R), and expands its full sales, service and marketing
functions, and develops the support structure for these activities. The timing
of increases in personnel and other expenses, the amount of working capital
consumed by operations, marketing and rollout expenses for the MA IV, and
competitive pressures on gross margins will impact the magnitude and timing of
the Company's cash requirements. To meet working capital needs, the Company has
completed a $10 million equity line of credit and intends to use funds from
operations, to obtain a working capital line of credit, and/or complete
additional financings. It is the opinion of the Company's management that
additional funding arrangements are readily available to the Company and the
execution of any such arrangement will depend on timing, market conditions and
the final terms and conditions of such arrangements. Full production of the MA
IV model of the Mobile Assistant(R) is expected to begin in the quarter ending
December 31, 1998 and receivables from sales of the MA IV are expected to
provide collateral for borrowing facilities at that point. Although there can be
no assurance that such facilities will be available, the Company intends to seek
to establish secured borrowing facilities at such time as appropriate collateral
is available. The Company's management believes that the combination of cash on
hand, operating cash flow, and outside funding will provide sufficient liquidity
to meet the Company's cash requirements until at least March 1999. However,
there can be no assurance that the Company can or will obtain sufficient funds
from operations or from a working capital line of credit or from closing
additional financings on terms acceptable to the Company.
Possible Impact on Near-Term Revenues
The Company has agreements with third-party suppliers to manufacture
and supply the body- worn computing unit, the HMD and the batteries for the 133P
and the MA IV. Production of the computing unit for the 133P has been
substantially curtailed pending the introduction of the MA IV
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<PAGE>
in the fourth quarter, although management believes that it can restart
production to meet large orders. As a result, revenue growth is expected to be
modest through the first three quarters of the year ending December 31, 1998,
until full-scale production by these MA IV suppliers is started and these units
are sold in volume, which is expected to begin in the quarter ending December
31, 1998. In the event that the start of full-scale production is delayed for
any reason, revenues for the year ending December 31, 1998 will be adversely
affected.
Possible Non-Cash Future Charge
In connection with the Company's IPO, the representative of the
underwriters for the transaction (the "Representative") required the Company's
officers, directors and certain other stockholders to deposit an aggregate of
1,800,000 shares of Common Stock into an escrow account (the "Escrowed Shares").
The Escrowed Shares will be subject to release to such stockholders in
increments over a three-year period only in the event the Company's gross
revenues and earnings (loss) per share for the 12-month periods ending September
30, 1997, 1998 and 1999 meet or exceed targets which have been established
through negotiations with the Representative (the "Performance Targets"). If the
Performance Targets are not met in any of the relevant 12-month periods (and the
price of the Common Stock has not met or exceeded the price described below),
the Escrowed Shares will be returned to the Company in amounts which have been
agreed upon between the Representative and the Company for each period and
canceled. In addition to the foregoing, all then Escrowed Shares will be
released to the stockholders if the closing price of the Common Stock as
reported on The NASDAQ SmallCap Market equals or exceeds $11.00 for 25
consecutive trading days or 30 out of 35 consecutive trading days during the
period ending September 30, 1999. In the event any Escrowed Shares held by
officers, employees or consultants are released, the difference between the
initial offering price and the market value of such shares at the time of
release will be deemed to be additional compensation expense to the Company. If
the price of the Common Stock at the time of any release of the Escrowed Shares
is greater than the value of the Common Stock at the time of the IPO, an
earnings charge could result which would have the effect of reducing or
eliminating any earnings per share and could have a negative effect on the
market price for the Common Stock. The earnings per share target calculation
will be based on the average number of shares issued and outstanding during each
period, but excluding shares issued pursuant to the Representative's option to
purchase units of Common Stock and Warrants issued at the Company's IPO ("Unit")
at a price of $9.075 per Unit (165% of the offering price of the Units) during a
period of four years commencing one year from the closing of the IPO,
extraordinary items, or compensation expense charged to the Company related to
the release of the Escrowed Shares.
The Company's gross revenues and allowable losses did not meet the
Performance Targets for the 12-month period ending September 30, 1997, and the
stock price did not meet the levels described above by that time. Pursuant to
the terms of the escrow agreement, 300,000 of the Escrowed Shares were canceled,
resulting in no earnings impact and a reduction in shares outstanding at that
time of approximately 2.1%. 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
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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.
Since the Company has reported losses, the loss per share for the
Company is calculated using outstanding shares less shares held in escrow to
avoid antidilution. Therefore, the cancellation of shares from escrow does not
affect the reported loss per share.
Certain statements in the foregoing Management's Discussion and
Analysis (the "MD&A") are not historical facts or information and certain other
statements in the MD&A are forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995 (the "Act"). In particular,
when used in the preceding discussion, the words "believes, expects, or intends
to" and similar conditional expressions are intended to identify forward-looking
statements within the meaning of the Act and are subject to the safe harbor
created by the Act. Such statements are subject to certain risks and
uncertainties and actual results could differ materially from those expressed in
any of the forward-looking statements. Such risks and uncertainties include, but
are not limited to, conditions in the general acceptance of the Company's
products and technologies, competitive factors, the ability to successfully
complete additional financings and other risks described in the Company's SEC
reports and filings.
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PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
*4.1 Private Line of Equity Agreement
*4.2 Form of Warrant A
*4.3 Form of Warrant B
4.4 Form of Warrant Issued in Connection with the Exercise of
the Put Option
10.1 Form of Amendment and Modification Agreement (Exercise of
$3,000,000 Put Option)
27.1 Financial Data Schedule
--------------------
* Incorporated by reference to the correspondingly numbered exhibit
included in the Company's Registration Statement on Form S-3, Commission File
No. 333-52567.
b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on June 4, 1998 to report the
resignation of John F. Moynahan from the Board of Directors effective June 3,
1998, and the appointment, effective June 5, 1998 of Mr. Kaz Toyosato to the
Board of Directors to fill such vacancy.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XYBERNAUT CORPORATION
By: /s/ Edward G. Newman
---------------------------------
Edward G. Newman
President and Chief Executive
Officer
/s/ W. Jeffrey Pagano
---------------------------------
W. Jeffrey Pagano
Controller
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SECURITIES AND
EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
-------------
EXHIBITS
TO
QUARTERLY REPORT
ON
FORM 10-QSB
FOR THE PERIOD
ENDED
JUNE 30, 1998
-------------
XYBERNAUT CORPORATION
(EXACT NAME OF ISSUER AS SPECIFIED
IN ITS CHARTER)
AUGUST 14, 1998
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------- -----------------------
*4.1 Private Line of Equity Agreement
*4.2 Form of Warrant A
*4.3 Form of Warrant B
4.4 Form of Warrant issued for Put Option
Exercise
10.1 Form of Amendment and Modification Agreement
27.1 Financial Data Schedule
* Incorporated by reference to the correspondingly numbered exhibit
included in the Company's Registration Statement on Form S-3,
Commission File No. 333-52567.
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Exhibit 4.4
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE STATE SECURITIES LAWS AND
HAS BEEN ISSUED IN RELIANCE UPON REGULATION D PROMULGATED UNDER THE SECURITIES
ACT. THIS WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY THE WARRANT IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL.
THIS WARRANT MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION DOES NOT
REQUIRE REGISTRATION OF THE WARRANT, WHICH OPINION AND WHICH COUNSEL SHALL BE
SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION.
No. ____
WARRANT
To Purchase 150,000 Shares of Common Stock of
XYBERNAUT CORPORATION
THIS CERTIFIES that, for value received,
______________________ (the "Investor"), is entitled, upon the terms and subject
to the conditions hereinafter set forth, at any time on or after July 2, 1998
and on or prior to July 2, 2001 (the "Termination Date") but not thereafter, to
subscribe for and purchase from Xybernaut Corporation, a corporation
incorporated in the State of Delaware (the "Company"), one hundred and fifty
thousand (150,000) shares (the "Warrant Shares") of Common Stock, par value US
$0.01 per share of the Company (the "Common Stock"). The purchase price of one
share of Common Stock (the "Exercise Price") under this Warrant shall be equal
to $5.25. The Exercise Price and the number of shares for which the Warrant is
exercisable shall be subject to adjustment as provided herein. This Warrant is
being issued in connection with the Agreement of Amendment and Modification
dated July 2, 1998 (the "Agreement") to the Private Equity Line Of Credit
Agreement dated as of April 13, 1998, and is subject to its terms and
conditions. In the event of any conflict between the terms of this Warrant and
the Agreement, the Agreement shall control.
Capitalized terms used herein and not defined shall have the
meanings given to them in the Agreement of Amendment and Modification dated as
of July 2, 1998 by and among the Company, the Investor and Balmore Funds, S.A.
1. Title of Warrant. Prior to the expiration hereof and
subject to compliance with applicable laws, this Warrant and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
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2. Authorization of Shares. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue).
3. Exercise of Warrant. Except as provided in Section 4 below,
exercise of the purchase rights represented by this Warrant may be made at any
time or times, before the close of business on the Termination Date, or such
earlier date on which this Warrant may terminate as provided in this Warrant, by
the surrender of this Warrant and the Notice of Exercise Form annexed hereto
duly executed, at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company) and
upon payment of the Exercise Price of the shares thereby purchased; whereupon
the holder of this Warrant shall be entitled to receive a certificate for the
number of shares of Common Stock so purchased. Certificates for shares purchased
hereunder shall be delivered to the holder hereof within three (3) business days
after the date on which this Warrant shall have been exercised as aforesaid.
Payment of the Exercise Price of the shares may be by certified check or
cashier's check or by wire transfer to an account designated by the Company in
an amount equal to the Exercise Price multiplied by the number of Warrant
Shares.
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its
shareholder books or records in any manner which prevents the timely exercise of
this Warrant for a period of time in excess of five (5) trading days per year.
7. No Rights as Shareholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. Upon the surrender of
this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares
so purchased shall be and be deemed to be issued to such holder as the record
owner of such shares as of the close of business on the later of the date of
such surrender or payment.
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<PAGE>
8. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company).
9. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant certificate or any stock certificate relating to the Warrant
Shares, and in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and upon surrender and cancellation of such
Warrant or stock certificate, if mutilated, the Company will make and deliver a
new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of such Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
11. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, then the Warrant shall terminate if the Warrant has not
been exercised by the effective date of such transaction, the Company shall give
the holder of this Warrant thirty (30) days' notice of such termination and of
the proposed effective date of the transaction.
(b) In case the Company shall at any time effect a sale or
merger transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
12. Adjustments of Exercise Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
(a) In the event the Company elects to pay the Initial Put
Repricing Amount to the Investor in lieu of issuing the Initial Put Repricing
Shares, the Exercise Price shall be reduced to the then current market price of
the Common Stock.
(b) In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common
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<PAGE>
Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock or (iv) issue any shares of its capital stock in a reclassification of the
Common Stock, then the number of Warrant Shares purchasable upon exercise of
this Warrant immediately prior thereto shall be adjusted so that the holder of
this Warrant shall be entitled to receive the kind and number of Warrant Shares
or other securities of the Company which he would have owned or have been
entitled to receive had such Warrant been exercised in advance thereof. Upon
each such adjustment of the kind and number of Warrant Shares or other
securities of the Company which are purchasable hereunder, the holder of this
Warrant shall thereafter be entitled to purchase the number of Warrant Shares or
other securities resulting from such adjustment at an Exercise Price per such
Warrant Share or other security obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
purchasable pursuant hereto immediately prior to such adjustment and dividing by
the number of Warrant Shares or other securities of the Company resulting from
such adjustment. An adjustment made pursuant to this paragraph shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
13. Voluntary Adjustment by the Company. The Company may at
any time during the term of this Warrant, reduce the then current Exercise Price
to any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant
Shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares (and other securities or property) after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made. Such notice, in
absence of manifest error, shall be conclusive evidence of the correctness of
such adjustment.
15. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the NASDAQ Small Cap
Stock Market or any domestic securities exchange upon which the Common Stock may
be listed.
16. Call/Forced Exercise. The Company, at its option, may
redeem this Warrant for $0.01 per Warrant Share by giving the Holder written
notice (the "Call Notice") at any time if the closing Bid Price of the Common
Stock of the Company is greater than one hundred fifty (150%) percent of the
Exercise Price for twenty (20) consecutive Trading Days. To be effective, the
Call Notice must be given within three (3) Trading Days after the aforementioned
twenty day period. The
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<PAGE>
rights and privileges granted pursuant to this Warrant shall terminate thirty
(30) days after the Call Notice is sent to the Holder if the warrant is not
exercised during that period. In the event the Warrants are not exercised during
this period the Company will remit to the Holder $0.01 per Warrant Share upon
the Holder tendering to the Company the expired Warrant certificate.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws of New York without regard to its conflict
of law, principles or rules, and be subject to arbitration pursuant to the terms
set forth in the Agreement.
(b) Restrictions. The holder acknowledges and agrees that the
Warrant Shares shall be deemed to be "restricted securities" and may not be
sold, offered, pledged, transferred or otherwise disposed of before September
30, 1998 and may only be sold, offered, pledged, transferred or otherwise
disposed of after such date pursuant to an exemption from the registration
requirements under the Securities Act. The holder hereof acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal securities laws.
Each certificate representing the Warrant Shares issued to the Holder upon
exercise will bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT
FROM, OR NOT SUBJECT TO, SUCH REGISTRATION".
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof by the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
-26-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: July 2, 1998
XYBERNAUT CORPORATION
By
----------------------
Edward G. Newman
President
-27-
<PAGE>
NOTICE OF EXERCISE
To: XYBERNAUT CORPORATION
(1) The undersigned hereby elects to purchase ________ shares
of Common Stock, par value $ per shares (the "Common Stock") of XYBERNAUT
CORPORATION pursuant to the terms of the attached Warrant, and tenders herewith
payment of the exercise price in full, together with all applicable transfer
taxes, if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
(3) The shares of Common Stock being issued in connection with
the exercise of the attached Warrant are [not] being issued in connection with
the sale of the Common Stock.
Dated:
------------------------------
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights
evidenced thereby are hereby assigned to
_______________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ______________, 1998
Holder's Signature: _____________________________
Holder's Address: _____________________________
-----------------------------
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
Exhibit 10.1
Form of Agreement of Amendment and Modification
Agreement of Amendment and Modification made as of July 1, 1998, by and
among Xybernaut Corporation, a Delaware corporation (the "Company"), Balmore
Funds, S.A. and Austost Anstalt Schaan (collectively, the "Investors").
Capitalized terms used herein and not defined shall have the meanings
given to them in the Private Equity Line of Credit Agreement dated as of April
13, 1998 by and among the Company, the Investors and Settondown Capital
International Ltd. (the "Line of Credit Agreement").
Witnesseth:
Whereas, the Company and the Investors executed the Line of Credit
Agreement pursuant to which the Investors agreed, among other things, to
purchase, from time to time, up to $11,000,000 (the "Aggregate Purchase Price")
of the Common Stock of the Company;
Whereas, pursuant to the Line of Credit Agreement, the Investors
purchased securities of the Company for an aggregate purchase price of
$1,000,000;
Whereas, notwithstanding the limitations on the exercise of Put Options
by the Company set forth in Section 2.1 of the Line of Credit Agreement, the
Company, by execution hereof, hereby exercises, and the Investors hereby accept,
a Put Option in the aggregate principal amount of $3,000,000 (the "Initial Put
Option"); and
Whereas, the Company and the Investors desire to amend certain terms of
the Line of Credit Agreement to provide for the terms pertaining to the Initial
Put Option.
Now, therefore, in consideration of the mutual covenants, conditions
and promises contained herein, the parties hereto agree as follows:
1. Section 1.20 of the Line of Credit Agreement is hereby modified by
adding the following text at the end thereof:
"The Maximum Put Amount set forth in the table above shall not
be applicable to the exercise by the Company of the Initial Put Option."
2. Section 2.1 of the Line of Credit Agreement is hereby modified by
adding the following subsection (c):
"(c) Initial Put Option. The Company hereby exercises a
Put Option in the principal aggregate amount of $3,000,000 (the "Initial Put
Option") and the Investors hereby accept the
-2-
<PAGE>
exercise of such Initial Put Option. The number of shares of Common Stock
issuable upon exercise of such Initial Put Option shall be calculated by
dividing $3,000,000 by $5.50, the purchase price per share of Common Stock for
the Initial Put Option.
(i) As additional consideration for the acceptance of the
Initial Put Option, the Investors shall receive non-transferable and
non-tradeable warrants (the "Initial Put Warrants") to purchase a total
of 300,000 shares of Common Stock of the Company. Such warrants, which
shall be exercisable upon issuance, shall have a term of 3 years and
shall be exercisable at a price per share equal to the closing price on
the trading day immediately preceding the closing of the Initial Put
Option hereunder.
(ii) The shares of Common Stock issuable upon exercise of the
Initial Put Option and the Initial Put Warrants may not be sold,
transferred or otherwise disposed of before September 30, 1998.
(iii) Notwithstanding Section 2.9 to the contrary, commencing
on September 30, 1998, and monthly thereafter (each an "Initial Put
Repricing Date"), one-sixth of the shares of Common Stock issued upon
exercise of the Initial Put Option shall be subject to repricing on
each Initial Put Repricing Date. If the closing price of the Common
Stock on the trading date immediately preceding the Initial Put
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 the Initial Put 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.
(iv) If the closing price on the trading day immediately
preceding the applicable Initial Put Repricing Date (the "Closing
Price") or the Initial Put Reset Price of the Common Stock is less than
$5.00 per share on the Initial Put Repricing Date, the Company at its
option may pay to the Investors an amount, in cash, equal to 105% of
the Closing Price to be issued to the Investors (the "Initial Put
Repricing Amount") in lieu of issuing the Initial Put Repricing Shares
(which Initial Put Repricing Amount shall be multiplied by the number
of Initial Put Repricing Shares). If the Company elects to pay the
Initial Put Repricing Amount to the Investors in lieu of issuing the
Initial Put Repricing Shares the Company shall notify the Investors of
that election on the applicable Initial Put Repricing Date, and the
exercise price of the Initial Put Warrants shall be reduced to the then
Closing Price of the Common Stock. If the Company elects to pay the
current Initial Put Repricing Amount but fails to pay the Initial Put
Repricing Amount within five (5) business days of notifying the
Investors of such election, the Company will forfeit the right to pay
the Initial Put
-3-
<PAGE>
Repricing Amount in cash at any time in the future. If the Company does
not make the election to pay the Initial Put Repricing Amount, the
Company shall deliver the Initial Put Repricing Shares to the Investors
within seven (7) business days of the applicable Initial Put Repricing
Date. However, in the event the Company is unable to issue Initial Put
Repricing Shares which have been included in a registration statement,
which at that time is effective, the Company must pay the Initial Put
Repricing amount in cash as set forth herein.
(v) The shares of Common Stock issued at the closing of the
Initial Put Options and the Initial Put Repricing Shares are included
under the current effective registration statement filed in connection
with the equity line (the "Current Registration Statement"). The shares
issuable upon exercise of the Initial Put Warrants shall not be
registered under the Current Registration Statement, but will be
afforded piggyback registration rights.
(vi) The Investors agree not to enter into any put option,
short position or other similar position with respect to the shares of
Common Stock issued at the closing of the Initial Put Option or the
Initial Put Repricing Shares.
(vii) Notwithstanding the provisions of Section 2.3, the
Investors shall wire $3,000,000 for the Common Stock issuable upon
exercise of the Initial Put Option to Parker Chapin Flattau & Klimpl,
LLP, who will serve as escrow agent for the receipt of executed
documents, original securities and the purchase price for the Initial
Put Option only. The wire instructions for Parker Chapin Flattau &
Klimpl, LLP are as follows: CITIBANK N.A., 153 East 53rd Street, New
York, New York 10043, Account Name: Parker Chapin Flattau & Klimpl,
LLP, Attorney Trust Account, Account No.: 37432544, Citibank ABA No.:
021000089, for International: Swift No. CITI-US 33."
3. The Company represents and warrants to the Investors that
the Form S-3 Registration Statement (also referred to as the Current
Registration Statement in Section 2(v) above) of the Company that was declared
effective on June 11, 1998, registered 1,045,296 shares of Common Stock in
respect of the Initial Put Option and pursuant to Rule 416 promulgated under the
Securities Act of 1933, as amended, an indeterminate number of shares of Common
Stock to cover Initial Put Repricing Shares.
4. This Agreement of Amendment and Modification may be
executed in counterparts, all of which shall be deemed to be duplicate originals
of the same document.
5. Except for this Agreement of Amendment and Modification,
all the terms, conditions and covenants of the Line of Credit Agreement shall
remain in full force and effect.
-4-
<PAGE>
In Witness Whereof, the parties hereto have executed this
Agreement of Amendment and Modification as of the date first set forth above.
Xybernaut Corporation
By:
Name:
Title:
Balmore Funds, S.A.
By:
Name:
Title:
Austost Anstalt Schaan
By:
Name:
Title:
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013148
<NAME> Xybernaut Corporation
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Apr-01-1998
<PERIOD-END> Jun-30-1998
<PERIOD-TYPE> 3-MOS
<CASH> 4,014,723
<SECURITIES> 0
<RECEIVABLES> 204,876
<ALLOWANCES> 22,513
<INVENTORY> 1,172,699
<CURRENT-ASSETS> 5,769,668
<PP&E> 1,173,511
<DEPRECIATION> 399,723
<TOTAL-ASSETS> 7,433,903
<CURRENT-LIABILITIES> 1,277,405
<BONDS> 0
<COMMON> 209,348
0
364,754
<OTHER-SE> 5,582,396
<TOTAL-LIABILITY-AND-EQUITY> 7,433,903
<SALES> 229,634
<TOTAL-REVENUES> 231,473
<CGS> 271,905
<TOTAL-COSTS> 271,905
<OTHER-EXPENSES> 2,265,654
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,303,184)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,303,184)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,303,184)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
