As filed with the Securities and Exchange Commission on September __, 1998.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
-----------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XYBERNAUT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 3571 54-1799851
(Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification Number)
12701 Fair Lakes Circle, Fairfax, Virginia 22033, (703) 631-6925
(Address and telephone number
of registrant's principal executive offices)
Edward G. Newman
12701 Fair Lakes Circle
Fairfax, Virginia 22033
(703) 631-6925
(Name, address and telephone number of agent for service)
-----------
Copies of communications to:
Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
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Approximate date of proposed commencement of sale to public: As soon as
practicable after this Registration Statement becomes effective.
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, please 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 registration statement for the same
offering. |_| ___________
If the 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 Maximum Proposed Maximum
Title of Each Class Amount to be Offering Price Aggregate Offering Amount of
of Securities to be Registered Registered (1) per Share (2) Price Registration Fee
- -------------------------------------------- --------------- ------------------------ --------------------- -----------------
<S> <C> <C> <C>
Common Stock, $.01 par value per share...... 1,995,000 $5.0469 $10,068,565 $2,970.21
Common Stock, $.01 par value per share...... 105,000 $11.3555 (3) $1,192,328 $351.74
Total Registration Fee...................... .............................................................. $3,321.95
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</TABLE>
(1) Represents the shares of Common Stock being registered for offer by the
Company in connection with a proposed financing (the "Financing
Arrangement"). Pursuant to Rule 416, the shares of Common Stock offered
hereby also include such presently indeterminate number of shares of Common
Stock as shall be issued by the Company in connection with the Financing
Arrangement between the Company and the investor. Such number of shares 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. 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 issuable upon exercise of the Warrants. See "Risk Factors
-- Dilution"; and "Description of Securities."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (g) of the Securities Act of 1933, as amended
(the "Securities Act"); based on the average ($5.0469) of the bid
(($5.0313) and asked ($5.0625) price on the Nasdaq SmallCap Market on
September 25, 1998.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) of the Securities Act, based on, according to the
terms of the warrant, 225% of the average price ($5.0469) of the Nasdaq
SmallCap Market on September 25, 1998.
------------------------
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
-2-
<PAGE>
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 SEPTEMBER __, 1998
PROSPECTUS
2,100,000 Shares*
XYBERNAUT CORPORATION
This Prospectus covers an aggregate of 2,100,000 shares (the "Shares") of
common stock, par value $.01 per share (the "Common Stock"), of Xybernaut
Corporation, a Delaware corporation (the "Company"), which may be offered, from
time to time, by the Company or the selling stockholder named herein. See
"Description of Securities." The Company is offering the Shares in connection
with a proposed financing (the "Financing Arrangement") whereby the Company, at
its option, may issue up to (a) $31,200,000 of Common Stock to an investor (the
"Selling Stockholder") over a twelve month period based on weekly, monthly or
quarterly draw downs at a per share purchase price equal to the lesser of (i)
100% of the average of the daily volume weighted average price of the Common
Stock on NASDAQ SmallCap Market for a certain number of consecutive trading days
preceding the funding date of the draw down and (ii) $8.00; provided, however,
that if the purchase price of the Common Stock is less than $3.00, the investor
will not be obligated to fund such weekly, monthly or quarterly draw down, (b)
$31,200,000 of Common Stock pursuant to the option granted by the Company to the
investor to purchase an additional amount of Common Stock up to the maximum
amount of each draw down (the "Call Options"), and (c) approximately 105,000
Shares, which Shares will be issued upon exercise of the warrants which the
Company will issue to the investor at each draw down (the "Warrants"). Each
Warrant will give the investor the right to purchase shares of Common Stock at
an exercise price of 225% of the average daily price on the date the Company
furnishes the Selling Stockholder with a draw down notice. See "Financing
Arrangement."
The actual number of Shares of Common Stock offered by the Company will,
in certain cases, be subject to increase or decrease dependent upon the purchase
price per share in effect on the actual date of sale by the Company. The Company
will receive the net proceeds from the aggregate number of draw downs requested
by the Company, the aggregate number of Call Options exercised by the investor
and the aggregate exercise price of the warrants exercised by the investor. Such
aggregate net proceeds will be used by the Company for general corporate
purposes. The Company will not receive any proceeds from the sale of the Shares
by the Selling Stockholder. See "Use of Proceeds." 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 Stockholder against certain liabilities, including liabilities under the
Securities Act. See "Selling Stockholder" and "Plan of Distribution."
The Common Stock is quoted on the NASDAQ SmallCap Market under the symbol
"XYBR". On September 24, 1998, the closing bid price of the Common Stock as
reported by NASDAQ was $5.4375.
*Pursuant to Rule 416, the shares of Common Stock offered hereby include
such presently indeterminate number of shares of Common Stock as shall be issued
by the Company to the investor pursuant to the Financing Arrangement upon
exercise of warrants to be issued to the investor thereunder. Such number of
shares 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. 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 issuable
under the financing arrangement. See "Risk Factors -- Dilution"; and
"Description of Securities."
The Company's executive offices are located at 12701 Fair Lakes Circle,
Fairfax, Virginia 22033 and its telephone number is (703) 631-6925.
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 8 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
<PAGE>
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
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in
such Registration Statement and the exhibits thereto. For further information
with respect to the Company and the Shares, reference is hereby made to the
Registration Statement, exhibits and schedules which may be inspected without
charge at the public reference facilities maintained at the principal office of
the Commission at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549 and
at the Commission's regional offices at 7 World Trade Center, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained upon written
request from the public reference section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Electronic registration
statements made through the Electronic Data Gathering, Analysis, and Retrieval
System are publicly available through the Commission's Web site
(http://www.sec.gov). Statements contained in the Prospectus as to the contents
of any contract or other document referred to herein are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Commission. Such reports and other information filed by the
Company may 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, Seven World Trade Center, 13th Floor, New York, New York 10048; and
Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can 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 maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically. Reports and
other information concerning the Company may also be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
This Prospectus contains 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 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
interests of investors to take advantage of the "safe harbor" provisions of that
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, could cause the Company's actual results, performance, and
achievements to differ materially from those described or implied in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the Company's ability to profit
from the Mobile Assistant(R) as expected (see "Products and Product
Development"), the Company's ability to meet competition (see "Competition"),
the Company's ability to maintain superior technological capability, foreseeing
changes and continuing to identify, develop and commercialize innovative and
competitive products and systems (see "Research and Development"), the Company's
ability to penetrate different markets and successfully expand its market base
(see "Marketing and Sales"), the Company's ability to attract and retain
technologically qualified personnel, particularly in the areas of research and
development (see "Employees"), and the Company's ability to generate cash flows
and obtain financing to support its operations and growth (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
- 4 -
<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 Company
Xybernaut Corporation, a Delaware corporation (the "Company"), is
engaged in the research, development and commercialization of mobile computer
systems and related software solutions designed to enhance personal
productivity, especially in commercial, industrial and military applications.
The Company's current mobile computing product is the Mobile Assistant(R) 133P
model, which is a full-function, body-worn, voice-controlled 133 MHZ Pentium(R)
computer with a head-mounted video display ("133P"). The Company has begun
production of its next-generation MMX Pentium(R) Mobile Assistant(R) ("MA IV").
With the speed, memory, processing, multimedia and communication capabilities of
a desktop personal computer ("PC") in a lightweight unit, the Mobile
Assistant(R) Series combines full-function PC features with hands-free operation
and simultaneous user mobility. The Mobile Assistant(R) is a combination of
hardware and software specifically designed for body-worn mobile computing (the
"Mobile Assistant(R) Series"). The Mobile Assistant(R) Series with application
software is designed to allow workers with minimal training to perform complex
and time consuming tasks such as maintenance, repair and inspection of complex
technological and mechanical systems, retrieval and analysis of medical
information from remote locations, and coordination of remote commercial and
industrial activities and military field operations, in a more efficient manner
than current technology allows. Purchasers of the Mobile Assistant(R) Series
have included, among others, AT&T, Lucent, NTT (Nippon Telegraph and Telephone),
Eaton Corporation, Fujitsu, Battelle Memorial Institute, Shell Oil, Mitsubishi,
Rockwell International, Lockheed Martin, and the United States Army and Navy. In
March 1996, Rockwell International, which manufactured the computing unit
utilized in the Mobile Assistant I(R), licensed from the Company the right to
manufacture and market mobile computers utilizing certain intellectual property
and related technical know-how which has been developed by the Company.
The Mobile Assistant(R) Series can utilize technologically advanced
features such as real time two-way video and audio communications through radio
frequency transmissions, integrated cellular linkups, global positioning system
tracking capabilities and access to information through the Internet and World
Wide Web. The new head-mounted display unit ("HMD") includes a two-way audio
system and optional built-in video camera, weighs approximately l5 ounces and
presents a desk-top quality full VGA color image that is approximately
equivalent to that of a 15" VGA monitor at a distance of approximately two feet.
An optional light-weight, 6.4 inch, full VGA color, flat panel display ("FPD"),
with integrated digitizer, is offered for users who do not desire an HMD or do
not need to be 100% hands-free and feet-free to perform their job. The body-
worn computing unit is designed to allow operation in environmental conditions
in which conventional portable computers could not previously operate, weighs
less than two pounds and is capable of running software
- 5 -
<PAGE>
applications designed for Microsoft(R) Windows(R) 3.11, Windows(R) 95 and 98,
Windows(R) NT(TM), DOS, SCO UNIX(R) and LINUX.
The Company offers novel software products, to get user documentation
up and running on the Mobile Assistant quickly, that can be used on the Mobile
Assistant(R) or conventional desktop or laptop computers. The following two
products are available now with others under development. The Company's
linkAssist(TM) software allows users to develop applications that need for
information to be quickly and easily linked together regardless of the format of
the data or where it is stored, avoiding the need to change, convert or reenter
the existing information or to use the very technical HTML tagging process. An
interesting and useful feature of this product is that the linked words or
phrases can then be activated by voice automatically, with no development work
by the author of the documentation or databases. The webAssist(TM) software
offered by the Company allows voice navigation of HTML document links such as
those found on web sites on the World Wide Web and intranets. This provides the
user with hands-free access to all of the information found on, for example,
manufacturer and supplier and company-owned, web sites.
The Company was incorporated in Virginia as Contemporary Products &
Services, Inc. in November 1990 and changed its name to Computer Products &
Services, Inc. in November 1992. In April 1996 the Company merged with Xybernaut
Corporation, a Delaware corporation, in order to change its name and
reincorporate in Delaware.
The Company's executive and administrative offices are located at 12701
Fair Lakes Circle, Fairfax, Virginia 22033. Its telephone number is (703)
631-6925, and its e-mail address is [email protected].
- 6 -
<PAGE>
The Offering
Securities Offered by the Company.............. 2,100,000 Shares of Common Stock
Securities Offered by the Selling Stockholder.. 2,100,000 Shares of Common Stock
Common Stock Outstanding:
Before the Offering (1)..................... 20,958,506
After the Offering (1)...................... 23,058,506
Nasdaq Symbol.................................. XYBR
Use of Proceeds................................ The Company will not receive any
proceeds from the resale of the
Shares by the Selling
Stockholder. However, the
Company will receive proceeds
from the draw downs, the Call
Options, if any, and the
exercise of the warrants issued
pursuant to the Financing
Agreement and will use such
proceeds for general corporate
purposes. See "Use of Proceeds."
Risk Factors................................... An investment in the securities
offered hereby involves a high
degree of risk and immediate
substantial dilution to public
investors. See "Risk Factors."
- ---------------------
(1) Based on shares of Common Stock outstanding at September 24, 1998, and
does not include (i) 1,234,550 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, (iii) 141,700 shares of
Common Stock registered in connection with the Series C Preferred
Stock but unissued, (iv) 595,360 shares of Common Stock registered in
connection with the April 1998 Private Equity Line of Credit Private
Placement but unissued, and (v) 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
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. For the six months ended June 30, 1998, the Company
incurred a loss of $3,792,505. The Company intends to conduct significant
additional marketing and distribution of its products that, together with
existing research and development programs, 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.
Management of the Company believes that as long as the Financing Arrangement is
in effect, the Company will not need additional financing in order to carry out
its programs. 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."
Going Concern Qualification
The report of the Company's independent accountants contains an
explanatory paragraph as to the Company's ability to continue as a going
concern. Among the factors cited by the independent accountants as raising
substantial doubt as to the Company's ability to continue as a going concern is
that the Company has incurred losses since inception and has a working capital
deficit. There can be no assurance that the Company will ever achieve
significant revenues or profitable operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined
Financial Statements and Notes thereto.
Liquidity; Working Capital Needs
To meet working capital cash requirements, the Company may obtain a
working capital line of credit and/or complete additional financings including
the sale of up to $31,200,000 of the Company's Common Stock over a period of
twelve months under the Financing Arrangement with the investor and up to an
additional $31,200,000 of the Company's Common Stock in the event that the
investor exercises a Call Option. To fully utilize the Financing Arrangement,
the Company may need to register additional shares of Common Stock. 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.
In the event the Financing Arrangement is terminated and funding thereunder is
not available, the Company may exercise a put option to sell shares of Common
Stock in the aggregate principal amount of $7,000,000 pursuant to an April 1998
Private Equity Line of Credit Agreement among the Company and several investors.
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 sale of shares of Common Stock by the Company under its
Private Equity Line of Credit Agreement and its Financing Arrangement 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.
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<PAGE>
Dilution; Impact of Sale of Common Stock Upon Conversion of Outstanding Options,
Redeemable Warrants, the Unit Purchase Option and Certain Repricing Options
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 the continuous sale of Common Stock by the Company under the Financing
Arrangement with the Selling Stockholder, the 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 a $3,000,000 Put Option under the April 1998 Private Equity Line of
Credit Agreement (the "Initial Put Option"). Specifically, certain options and
warrants (other than the 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 6,827,952 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 1,234,550 shares granted from April 1, 1995 to
September 24, 1998. The exercise price of the 590,000 warrants outstanding as of
September 24, 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 holders thereof to purchase a share of common stock for $9.00 until
July 17, 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 underwriter 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
"Redeemable 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, 1996. The
Redeemable Warrants included in the Unit Purchase Option are exercisable at
$12.60 per share. During the terms of the outstanding options, Redeemable
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 Redeemable 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 Completion of the Investment
Pursuant to the terms of a Subscription Agreement between the Company
and HSBC James Capel Canada, Inc. ("HSBC"), the Company, at its option, may
issue up to a total of $31,200,000 million of Common Stock over a twelve month
period. The Financing Arrangement provides however that if the purchase price of
the Common Stock at the time of the draw down is less than $3.00, HSBC will not
be required to fund a draw down. On September 24, 1998, the closing bid price
for a share of Common Stock as quoted on the NASDAQ SmallCap Market was $5.4375.
There can be no assurances that the closing bid price for a share of Common
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<PAGE>
Stock will equal or exceed $3.00 in the future. If a draw down is not completed,
the Company will receive significantly less proceeds than is estimated in this
Prospectus. See "Financing Arrangement." As a result, the financial condition
and results of operations of the Company could be materially adversely affected.
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 from December 31, 1997
through June 30, 1998 had sold and delivered Mobile Assistant(R) systems valued
at approximately $357,000. The Company commenced delivery of the Pentium(R)
Mobile Assistant P-133(TM) in August 1997 and has announced that it will
commence delivery of Mobile Assistant(R) IV, a Pentium 233 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 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.
- 10 -
<PAGE>
Dependence upon Suppliers
The Company has entered into supplier relationships with Sony Digital
Products and Shimadzu, among others, for the production of the MA IV system. The
Company has also 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.
Currency Fluctuations
Exchange rates for some local currencies in countries where the Company
operates may fluctuate in relation to the U.S. dollar and such fluctuations may
have an adverse effect on the Company's expenses, earnings or assets when local
currencies are translated into U.S. dollars. The Company has entered into a
supplier arrangement with Sony Digital Products for the production of the MA IV
system. The fees payable to Sony Digital Products are paid in Japanese yen. Any
weakening of the value of the U.S. dollar against the Japanese yen could result
in higher production expenses for the Company when U.S. dollars are translated
into Japanese yen. Therefore, there can be no assurance that currency exchange
rates will not 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 MA IV, which
is expected to be available for sale in late 1998, and the P-133 model based on
a 133 MHZ Intel Pentium(R) processor. 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 $5,000 to $8,995 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 available 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."
- 11 -
<PAGE>
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 Xybernaut(R) trademarks on the Principal
Register of the United States Patent and Trademark Office ("Patent Office") and
the patent and trademark offices in several foreign countries.
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 and April 1996,
the Company received separate reexamination notifications from the Patent
Office, which reexaminations of the Patent were initiated as a result of a
request from one of the Company's competitors. 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
and the six months ended June 30, 1998 and 1997 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 other patents held by the Company
and to recover any damages suffered as a result of any alleged infringement.
Since July 1996, the Company has filed twenty patent applications
covering various aspects of computers in general and wearable computers in
particular. Of these twenty applications, six additional patents have been
issued, one patent has been allowed pending issuance and thirteen 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. The Company has
implemented a trade secret management program to further protect its trade
secrets and proprietary information. 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.
- 12 -
<PAGE>
Dependence upon and Need for Key Personnel
The Company's success depends to a significant extent upon the efforts
of senior management personnel and a group of employees with longstanding
industry relationships and technical knowledge of the Company's business and
operations. The loss of certain key members of senior management and the
inability to replace such member could have a material adverse effect on the
Company's business and operations. 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.
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 Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. The Company's total Year 2000 project cost and estimates to
complete include the estimated costs and time associated with the impact of a
third party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company has determined it has no exposure to contingencies related to the Year
2000 Issue for the products it has sold.
- 13 -
<PAGE>
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company plans to complete the Year 2000 project within six months. The total
remaining cost of the Year 2000 project is estimated at $6,000. Of the total
project cost, approximately $1,700 is attributable to the purchase of new
software which will be capitalized. The remaining $4,300, which will be expensed
as incurred over the next six months, is not expected to have a material effect
on the results of operations. To date, the Company has incurred and expensed
approximately $1,000 related to the assessment of, and preliminary efforts in
connection with, its Year 2000 project and the development of a remediation
plan.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
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), certain agreed upon amounts of the
Escrowed Shares will be returned to 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
which, depending on the price per share, may 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 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 expenditures related to
the 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 thereby resulting in 750,000
shares of stock being canceled from the escrow pool, which will result in a
reduction of 3.6% of the Company's outstanding shares of Common Stock.
High Concentration of Common Stock Held 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
- 14 -
<PAGE>
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 24,155,566 shares of Common Stock that will be
outstanding or registered for sale upon the completion of this offering,
22,391,426 will be freely tradeable without restriction or further registration
under the Securities Act. This includes 19,194,366 shares of Common Stock which
are issued and outstanding, 141,700 unissued shares of Common Stock registered
in connection with the Series C Preferred Stock, 955,360 unissued shares of
Common Stock registered in connection with the April 1998 Equity Line of Credit
Private Placement and the 2,100,000 unissued shares of Common Stock registered
in connection with the Financing Arrangement. The remaining 1,764,140 shares
include 1,500,000 shares of Common Stock which are "Escrowed Shares" (see
"Executive Compensation -- Escrowed Shares") and are subject to incremental
release over a two-year period if certain share targets are met, and 264,140
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.
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.
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
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<PAGE>
of the Company. The Company has no present intention to issue any additional
Preferred Stock. See "Description of Securities -- Preferred Stock."
The Board of Directors has a classified or staggered Board of Directors
which limits an outsider's ability to effect a rapid change of control of the
Board. In addition, at the upcoming annual meeting of stockholders of the
Company to be held on September 24, 1998, the shareholders of the Company will
vote on proposed measures to amend the Company's Certificate of Incorporation
and By-laws, where applicable, to (i) implement an advance notice procedure for
the submission of director nominations and other business to be considered at
annual meetings of stockholders; (ii) permit only the President, the Vice
Chairmen of the Board, the Secretary or the Board of Directors to call special
meetings of stockholders and to limit the business permitted to be conducted at
such meetings to be brought before the meetings by or at the direction of the
Board of Directors; (iii) provide that a member of the Board of Directors may
only be removed by the stockholders of the Company for cause by an affirmative
vote of holders of at least 66 2/3% of the voting power of the then outstanding
shares of any class or series of capital stock of the Company entitled to vote
generally in the election of directors voting together as a single class (the
"Voting Stock"); (iv) fix the size of the Board of Directors at a maximum of
twelve directors, with the authorized number of directors set at ten, and the
Board of Directors having the sole power and authority to increase or decrease
the number of directors acting by an affirmative vote of at least a majority of
the total number of authorized directors most recently fixed by the Board of
Directors; (v) provide that any vacancy on the Board of Directors may be filled
for the unexpired term (or for a new term in the case of an increase in the size
of the board) only by an affirmative vote of at least a majority of the
remaining directors then in office even if less than a quorum, or by the sole
remaining director; (vi) eliminate stockholder action by written consent; (vii)
require the approval of holders of 80% of the then outstanding Voting Stock
and/or the approval of 66 2/3% of the directors of the Company for certain
corporate transactions; and (viii) require an affirmative vote of 66 2/3% of the
Voting Stock in order to amend or repeal any adopted amendments to the
Certificate of Incorporation and Bylaws adopted at the meeting.
Such measures, if adopted, in addition to the existing 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."
- 16 -
<PAGE>
FINANCING ARRANGEMENT
Pursuant to the Subscription Agreement between the Company and HSBC
James Capel Canada, Inc. (the "Selling Stockholder" or "HSBC"), HSBC will
purchase, at the Company's request, up to $31,200,000 of Common Stock of the
Company during the twelve month period following the initial draw down.
Pursuant to the terms of the Subscription Agreement, immediately
following the effective date of the Registration Statement of which this
Prospectus is an integral part, the Company, at its option, may present the
Selling Stockholder with a weekly, monthly or quarterly draw down request for
the purchase of up to $600,000, $2,400,000 and $7,200,000, respectively, of the
Company's Common Stock (each request a "Draw Down Request") during the twelve
month period commencing on the date of the initial draw down. The purchase price
of such shares shall be equal to the lesser of (i) 100% of the average of the
daily volume weighted average price of the Common Stock on NASDAQ SmallCap
Market as reported by Bloomberg Financial using the AQR function for a certain
number of consecutive trading days preceding the draw down payment date and (ii)
$8.00; provided, however, that if the purchase price is less than $3.00 the
Selling Stockholder will not be required to fund such draw down.
The Company will set the lowest price at which it will issue its shares
under the Financing Arrangement (the "Threshold Price"). The Threshold Price may
not be set below $3.00. If the average daily price on a given trading day is
less than the Threshold Price then HSBC's payment obligation under the draw down
will be reduced by 1/5th, 1/20th or an agreed upon fraction for a weekly,
monthly or quarterly draw down, respectively.
Upon acceptance of the Company's draw down Request, the Selling
Stockholder, at its option, may purchase an additional amount of Common Stock up
to the maximum amount of each draw down at a price per share equal to the daily
volume weighted average price of the Company's Common Stock on the NASDAQ Small
Cap Market as reported by Bloomberg Financial using the AQR function on the date
the Company furnishes the Selling Stockholder with a Draw Down Request. The
Selling Stockholder's right to purchase additional shares of the Company may be
exercised only with respect to each Draw Down Request and is waived for the
period it remains unexercised.
In addition, for each draw down, the Selling Stockholder will receive a
Warrant to purchase 12,500, 50,000 and 150,000 shares of Common Stock for each
weekly, monthly and quarterly draw down, respectively. Each Warrant will have a
three-year exercise period commencing six months from the funding date of the
draw down. The exercise price of the warrants is 225% of the average daily price
of the Common Stock on the date the Company furnishes HSBC with a draw down
notice.
The shares issuable upon acceptance of all Draw Down Requests and upon
exercise of the Warrants are the subject of this Prospectus.
The term of the Financing Arrangement is for twelve months from the
initial Draw Down, unless earlier terminated by either party or extended by
mutual consent of the parties.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
by the Selling Stockholder. However, the Company will receive proceeds from the
draw downs, the Call Options, if any, and the exercise of the warrants issued
pursuant to the Financing Arrangement. The Company expects to use the net
proceeds (after deduction of estimated offering expenses payable by the Company)
from the Financing Arrangement for general corporate purposes.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently anticipates that it will retain all available funds
for use in the operation of its business, and therefore does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On July 18, 1996, the Company successfully completed its IPO and sold
2,415,000 Units at a price of $5.50 per Unit. Each Unit consisted of one share
of Common Stock and one Redeemable Warrant to purchase a share of Common Stock
at $9.00 ("Unit"). Units were traded on the NASDAQ SmallCap Market from July 18,
1996 until August 20, 1996, at which time the Units were delisted from the
exchange. The Common Stock and the Redeemable Warrants have traded separately on
the NASDAQ SmallCap Market since July 29, 1997 under the symbols XYBR and XYBRW.
As of June 30, 1998, there are approximately 1,200 holders of Common
Stock. There have been no cash dividends paid on the Company's Common Stock to
date and the Company does not anticipate the payment of dividends in the
foreseeable future.
The table below sets forth by quarter, for the periods indicated, the
high and low market prices of the Company's Common Stock and Redeemable
Warrants. Quotations reflect prices between dealers, without retail mark-up,
mark down or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1996
1st Quarter.................... -- -- -- --
2nd Quarter................... -- -- -- --
3rd Quarter................... 12 4 1/2 6 1/4 1 3/8
4th Quarter................... 4 7/8 1 1/2 2 1/4 5/8
Fiscal 1997
1st Quarter.................... 4 11/16 1 29/32 1 11/32 13/32
2nd Quarter.................... 3 1/2 1 5/16 7/16 3/16
3rd Quarter.................... 5 9/16 2 3/8 23/32 3/16
4th Quarter.................... 4 1 25/32 17/32 5/32
Fiscal 1998
1st Quarter.................... 2 1/2 1 3/8 13/32 5/32
2nd Quarter.................... 8 7/16 1 13/32 1 3/4 1/8
</TABLE>
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1997, and for
each of the two years then ended, have been derived from the Company's
consolidated financial statements, which statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report dated March 31, 1998, which includes an explanatory paragraph, concerning
the Company's ability to continue as a going concern. The selected financial
data as of June 30, 1998 and for the six months ended June 30, 1998 and 1997,
have been derived from the unaudited consolidated financial statements of the
Company and, in the opinion of management, contain all adjustments (consisting
only of normal and recurring adjustments) that the Company considers necessary
for a fair presentation of such data. The result of the interim periods are not
necessarily indicative of the results of a full year. All of the financial data
set forth below should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus and also with the information appearing under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases $555,522 $ 928,732 $356,861 $220,458
Consulting and license 257,000 164,609 1,839 30,000
------- ------- --------- -----------
Total revenue 812,522 1,093,341 358,700 250,458
Cost of sales 1,225,572 1,081,197 379,476 409,790
--------- --------- ------- -------
Gross profit (loss) (413,050) 12,144 (20,776) (159,332)
Operating expenses:
Sales and marketing 3,280,356 1,442,146 1,151,147 1,489,195
General and administrative 3,518,868 2,158,212 1,617,879 1,885,214
Research and development 2,350,237 1,773,015 1,010,769 1,196,319
--------- --------- --------- ---------
Total operating expenses 9,149,461 5,373,373 3,779,795 4,570,728
--------- --------- --------- ---------
Operating loss (9,562,511) (5,361,229) (3,800,571) (4,730,060)
Interest income, net 82,545 122,693 8,066 49,129
------ ------- ------ -------
Net loss (9,479,966) (5,238,536) (3,792,505) (4,680,931)
---------- ---------- ----------- -----------
Provisions for preferred stock 571,598 --- 2,344 ---
---------- ---------- ----------- -----------
Net loss applicable to holders of
common stock $(10,051.564) $5,238,536 $3,794,849 $4,680,931
============= ============ ============ ===========
Net loss per share applicable to
holders of common stock $ (0.78) $ (0.47) $ (0.22) $ (0.38)
============= ============ ============= ============
Weighted average number of common
shares outstanding (basic and diluted) 12,844,974 11,121,594 17,016,067 12,459,112
============= ============ ============= ============
</TABLE>
December 31, 1997 June 30, 1998
----------------- -------------
Balance Sheet Data:
Working capital..................... $1,753,477 $4,492,263
Total assets........................ 4,531,617 7,433,903
Total liabilities................... 1,357,682 1,277,405
Stockholders' equity................ 3,173,935 6,156,498
- 19 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and notes thereto, and is
qualified in its entirety by the foregoing and by other more detailed financial
information appearing elsewhere in this Prospectus.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of revenues for the years ended December 31, 1997 and 1996 and the
six month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, June 30, June 30,
1997 1996 1998 1997
<S> <C> <C> <C> <C>
Revenues................. 100.0% 100.0% 100% 100%
Cost of sales............ 150.8 98.9 105.8 163.6
----- ---- ----- -----
Gross margin........... (50.8) 1.1 (5.8) (63.6)
------ --- ----- ------
Operating expenses:
Sales and marketing................. 403.7 131.9 320.9 594.6
General and administrative.......... 433.1 197.4 451.0 752.7
Research and development............ 289.3 162.2 281.8 477.7
----- ----- ----- -----
Total operating expenses.............. 1,126.1 491.5 1,053.7 1,825.0
------- -----
Interest income, net.................. 10.2 11.3 2.2 19.6
---- ---- --- ----
Net loss.............................. (1,166.7) (479.1) (1,057.3) (1,869.0)
-------- ------ --------- ---------
Provisions for preferred stock........ 70.3 - 0.6 -
---------- ---------- ------- ----------
Net loss applicable to holders of
common stock................... (1,237.1)% (479.1) (1,057.9%) (1,869.0%)
========== ======= ========== ==========
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. Total revenues for the six months ended June 30, 1998 were
$358,700, an increase of $108,242, or 43%, 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 62%, 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 lower 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%, 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.
- 20 -
<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 23%,
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%, 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
partially 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, a decrease of $185,550,
or 16%, compared to $1,196,319 for the corresponding period in 1997. This
decrease resulted primarily from reduced activity and related expense given the
substantial completion of development for the head-mounted display and the
body-worn computing unit for the 133P, and the sharing of development expenses
for the Mobile Assistant IV System with the Company's development and
manufacturing partners.
Interest income, net. Net interest income for the six months ended June
30, 1998 was $8,066, a decrease of $41,063, or 84%, 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.
Dividend on preferred stock. The Company's Series C Preferred Stock was
issued on May 15, 1998 and accrues dividends at 5% per annum on the outstanding
principal amount. For the six months ended June 30, 1998, the amount of accrued
dividend was $2,344, with no comparable item for the corresponding period in
1997.
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
$3,794,849, a decrease of $886,082, or 19%, 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues for the year ended December 31, 1997 were $812,522,
a decrease of $280,819, or 26%, compared to $1,093,341 for the year ended
December 31, 1996. Product revenues for the year ended December 31, 1997 were
$555,522, a decrease of $373,210 or 40%, compared to $928,732 for the
corresponding period in 1996. The reduction in product revenues for the year was
related to the lower number of 133P Systems and Mobile Assistant(R) II Systems
that were sold during that period, compared to the higher number of 486 Systems
that were sold in the corresponding period in 1996. Consulting and license
revenues for the year ended December 31, 1997 were $257,000, an increase of
$92,391, or 56%, compared to $164,609 for the corresponding period in 1996.
During the year ended December 31, 1997, the Company's licensee informed the
Company that as a result of the restructuring of its business operations, the
licensee had elected to not continue with its business activities under the
license. A portion of the consideration received by the Company in March 1996
for granting this license was a $300,000 cash payment, which the Company
recorded as deferred license revenue and was amortizing this amount over a five
year period. Given the licensee's stated intent to not to continue conducting
business operations under the license, the remaining deferred licensing revenue
of $220,000 as of June 30, 1997 was recorded as revenue in the three months
ended September 30, 1997.
- 21 -
<PAGE>
Cost of sales. The cost of sales for the year ended December 31, 1997
was $1,225,572, an increase of $144,375, or 13%, compared to $1,081,197 for the
year ended December 31, 1996. The cost of goods sold decreased commensurately
with the decrease in product sales but was offset by charges of approximately
$725,000 to reduce the carrying value of the computing unit for the 486 System
and the Mobile Assistant(R) II to estimated market value and to reduce carrying
values of several components of the Company's head-mounted displays to estimated
market value.
Research and development expenses. Research and development expenses
for the year ended December 31, 1997 were $2,350,237, an increase of $577,222,
or 33%, compared to $1,773,015 for the year ended December 31, 1996. This
increase reflects the Company's ongoing research and development efforts,
including the addition of new personnel, the operation of the design center in
California, the internal development of a head-mounted display, the development
of the body-worn computing unit for the Mobile Assistant(R) II, the 133P and the
MA IV, and software development.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 1997 were $3,280,356, an increase of $1,838,210, or 128%,
compared to $1,442,146 for the year ended December 31, 1996. This increase
resulted mainly from increases in personnel, related travel, infrastructure
costs to support sales, VAR training programs, customer service, additional
marketing programs to support the launch of new products, and public and
investor relations efforts, and expenses related to the establishment of a
representative office in Tokyo, Japan and negotiations with potential licensees
in Far East and Europe, along with charges of approximately $253,000 related to
a receivables whose collectability was deemed to be doubtful and were written
off and an expense of approximately $125,000 related to the issuance of warrants
to a consultant.
General and administrative expenses. General and administrative
expenses for the year ended December 31, 1997 were $3,518,868, an increase of
$1,360,656, or 63%, compared to $2,158,212 for the year ended December 31, 1996.
This increase resulted primarily from an increase in personnel, consulting, and
travel expenses related to the expansion and continued development of the
Company's infrastructure, and activities related to discussions regarding
certain strategic partnerships and international operations.
Interest income, net. Net interest income for the year ended December
31, 1997 was $82,545, an decrease of $40,148, or 33%, compared to net interest
income of $122,693 for the year ended December 31, 1996. This decrease is
primarily the result of lower average monthly cash balances in fiscal 1997
versus those during fiscal 1996, when cash was received from the Company's IPO.
Dividend on preferred stock, deemed dividend accretion on preferred
stock. The Company's Series A Preferred Stock was issued on June 30, 1997 and
accrues dividends at 5% per annum on the outstanding principal amount. The
Company's Series B Preferred Stock was issued on November 11, 1997 and accrues
dividends at 4% per annum on the outstanding principal amount. For the year
ended December 31,1997, the amount of accrued dividend was $82,905, with no
comparable item for the corresponding period in 1996. In accordance with the
Emerging Issues Task Force report from the Securities and Exchange Commission
titled "Accounting for the Issuance of Convertible Preferred Stock and Debt
Securities with a Nondetachable Conversion Feature," a deemed dividend was
assumed for the Series A and Series B Preferred Stock, which will be accreted
periodically as portions of the Series A and Series B Preferred Stock are
convertible into Common Stock. The amount of this accretion for the year ended
December 31, 1997 was $488,693, with no comparable item for the corresponding
period in 1996. Additional paid in capital is reduced by the amount of accretion
and preferred stock is increased by the amount of accretion, resulting in no
impact on the overall amount of stockholder's equity.
- 22 -
<PAGE>
Net loss attributable to holders of common stock. As a result of the
factors described above, the net loss attributable to holders of Common Stock
for the year ended December 31, 1997 was $10,051,564, an increase of $4,813,028,
or 92% compared to $5,238,536 for the year ended December 31, 1996. Although the
Company was subject to taxation during the year ended December 31, 1997 and the
year ended December 31, 1996, 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 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. All of such Series A Preferred Stock has been converted as of the date
hereof resulting in the issuance of 1,958,984 shares of Common Stock.
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 Stock and realized gross proceeds of $1,000,000 and net
proceeds of approximately $990,000 after related expenses. All of such Series B
Preferred Stock has been converted as of the date hereof resulting in the
issuance of 3,172,239 shares of Common Stock.
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 draw
downs based on terms and conditions specified in the line of credit. 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 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
- 23 -
<PAGE>
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 at a price of $6.50
per share.
In June 1998, the Company amended and exercised a put option in the
aggregate principal amount of $3,000,000 under the private equity line of credit
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.
For the year ended December 31, 1997, the Company's operating activities
used cash of $10,062,427 compared to a use of $5,133,942 for the year ended
December 31, 1996. The net use of cash during the year ended December 31, 1997
was primarily the result of a $9,479,966 net loss and cash used by inventory of
$1,930,378, offset by a net increase in accounts payable and accrued expenses of
$515,466 and depreciation and amortization of $277,299. Cash used by investing
activities for the year ended December 31, 1997 was $866,228, which included
$364,678 for the acquisition of property and equipment, $231,298 related to
obtaining and maintaining patents and $270,252 in capitalized tooling costs.
Proceeds from the Company's financing activities for the year ended December 31,
1997 were $5,606,054 which primarily consisted of $5,710,406 from the issuance
of the Company's Series A Preferred Stock and Series B Preferred Stock, and
$56,500 of proceeds from notes and loans, offset by payments on notes and loans
totaling $72,232, and $16,667 for the remaining payment on the acquisition of
Tech Virginia and repayment of loans. As a result of the above, cash and cash
equivalents on hand as of December 31, 1997 was $952,366, a decrease of
$5,322,601 from the $6,274,967 of cash on hand as of December 31, 1996.
- 24 -
<PAGE>
For the year ended December 31, 1996, the Company's operating activities
used cash of $5,133,942. The use of cash by operations for the year ended
December 31, 1996 was primarily the result of a $5,238,536 net loss combined
with $354,871 of cash used by inventories, $337,065 used by accounts receivable
and $177,094 for prepaid and other assets, offset by an increase in accounts
payable and accrued expenses of $177,619 and an increase in deferred licensing
revenue of $250,000. Cash used by investing activities in the year ended
December 31, 1996 consisted of $315,257 for the acquisition of property and
equipment, $114,618 related to the acquisition of patents, and $106,738 of
capitalized tooling and other assets. Proceeds from the Company's financing
activities in the year ended December 31, 1996 consisted primarily of
$13,282,500 raised at the Company's Initial Public Offering ("IPO") and
$1,000,000 from the placement of Convertible Debentures prior to the IPO, offset
by fees of $2,561,149 and net loan repayments of $251,161.
At June 30, 1998, the Company had no material capital commitments and
working capital of $4,492,263.
In September 1998, the Company entered into the Financing Arrangement with
the Selling Stockholder pursuant to which, the Company may, at its option, sell
up to $31,200,000 of Common Stock to the Selling Stockholder during a twelve
month period, and the Selling Stockholder may exercise its Call Option for an
additional $31,200,000. To fully utilize the Financing Arrangement, the Company
may need to register additional shares of Common Stock. See "Financing
Arrangement."
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
entered into the Financing Arrangement with the Selling Stockholders (see
"Financing Arrangement") and in the event the Financing Arrangement is
terminated and funding thereunder is not available, the Company may also
exercise an existing put option to sell up to $7,000,000 of Common Stock under
the Private Equity Line of Credit Agreement described above. In addition, the
Company intends to use funds from operations, and may obtain a working capital
line of credit and/or complete additional financings, if necessary. 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) will
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 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.
- 25 -
<PAGE>
Exchange rates for some local currencies in countries where the Company
operates may fluctuate in relation to the U.S. dollar and such fluctuations may
have an adverse effect on the Company's earnings when local currencies are
translated into U.S. dollars.
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), certain agreed upon amounts of the
Escrowed Shares will be returned to 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
which, depending on the price per share, may 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 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 expenditures related to
the 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 thereby resulting in 750,000
shares of stock being canceled from the escrow pool, which will result in a
reduction of 3.6% of the Company's outstanding shares of Common Stock..
- 26 -
<PAGE>
BUSINESS
General
The Company is engaged in the research, development and commercialization
of mobile computer systems and related software solutions designed to enhance
personal productivity, especially in commercial, industrial and military
applications. The Company's current mobile computing product is the Mobile
Assistant(R) 133P model, which is a full-function, body-worn, voice-controlled
133Pentium computer with a head-mounted video display. The Company has delivered
both developmental and sales samples of its new MA IV system, and will begin
full production of this next-generation series. With the speed, memory,
processing, multimedia and communication capabilities of a desktop PC in a
lightweight unit, the Mobile Assistant(R) Series combines full-function PC
features with hands-free operation and simultaneous user mobility. The Mobile
Assistant(R) is a combination of hardware and software specifically designed for
body-worn mobile computing. The Mobile Assistant(R) Series with application
software is designed to allow workers with minimal training to perform complex
and time consuming tasks such as maintenance, repair and inspection of complex
technological and mechanical systems, retrieval and analysis of medical
information from remote locations, and coordination of remote commercial and
industrial activities and military field operations, in a more efficient manner
than current technology allows. Purchasers of the Mobile Assistant(R) Series
have included, among others, AT&T, Lucent, NTT (Nippon Telegraph and Telephone),
Eaton Corporation, Fujitsu, Battelle Memorial Institute, Shell Oil, Mitsubishi,
Rockwell International, Lockheed Martin, and the United States Army and Navy. In
March 1996, Rockwell International, which manufactured the computing unit
utilized in the Mobile Assistant I(R), licensed from the Company the right to
manufacture and market mobile computers utilizing certain intellectual property
and related technical know-how which has been developed by the Company.
The Mobile Assistant(R) Series can utilize technologically advanced
features such as real time two-way video and audio communications through radio
frequency transmissions, integrated cellular linkups, global positioning system
tracking capabilities and access to information through the Internet and World
Wide Web. The new HMD/FPD includes a two-way audio system and optional built-in
video camera, weighs approximately 15 ounces and presents a desk-top quality
full VGA color image that is approximately equivalent to that of a 15" VGA
monitor at a distance of approximately two feet. An optional light-weight, 6.4
inch, full VGA color, flat panel display, with integrated digitizer, is offered
for users who do not desire an HMD or do not need to be 100% hands-free and
feet-free to perform their job. The body-worn computing unit is designed to
allow operation in environmental conditions in which conventional portable
computers could not previously operate, weighs less than two pounds and is
capable of running software applications designed for Microsoft(R) Windows(R)
3.11, Windows(R) 95 and 98, Windows(R) NT(TM), DOS, SCO UNIX(R) and LINUX.
The Company offers novel software products, including the following two
designed to get user documentation up and running on the Mobile Assistant
quickly, that can be used on the Mobile Assistant(R) or conventional desktop or
laptop computers. The Company's linkAssist(TM) software allows users to develop
applications that need for information to be quickly and easily linked together
regardless of the format of the data or where it is stored, avoiding the need to
change, convert or reenter the existing information or to use the very technical
HTML tagging process. An interesting and useful feature of this product is that
the linked words or phrases can then be activated by voice automatically, with
no development work by the author of the documentation or databases. The
webAssist(TM) software offered by the Company allows voice navigation of HTML
document links such as those found on web sites on the World Wide Web and
intranets. This provides the user with hands-free access to all of the
information found on, for example, manufacturer and supplier and company-owned,
web sites. Additional authoring and inspection toolkits are in development and
are expected to available this calendar year.
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Industry Overview
Since the introduction of the first large mainframe computers in the
1950's, there has been an ongoing evolution in computer hardware to reduce size
and increase performance and functionality. The commercialization of mobile
computing products combined with significant increases in the number and scope
of software applications has resulted in a multi-billion dollar market. The
Company sees the next phase in this evolution to be body-worn, voice-activated
computers, which will provide hands-free portability. The Company believes that
the potential to develop a substantial market for its mobile computing hardware
and software products is demonstrated by the substantial historic and projected
growth in all forms of mobile and portable computers. According to MarkIntel, a
service which compiles market research reports, total revenues from the overall
portable computer market (20 pounds or lighter), will have an average annual
growth of approximately 13% to over $23 billion through the year 2000. MarkIntel
reports that notebook computers (i.e. weighing from 5 to 8 pounds) currently
constitute over 70% of portable units sold. MarkIntel also states that
sub-notebook computers (3 to 5 pounds) currently constitute approximately 15% of
sales of portable computers and are expected to increase to almost 19% of sales
by the year 2000. Mini-computing and communication devices (3 pounds or less,
and which still are considered to be in an evolutionary cycle) are projected by
MarkIntel to experience an average annual revenue growth rate of 33%. The
Company believes that these projected figures demonstrate the significant
potential size of this still-evolving market for various forms of mobile and
portable computers.
In conjunction with the changes in computer hardware, a similar
evolution has occurred in computer software to move from processing data to
providing information. Mainframe computers were initially used to process vast
amounts of data such as population statistics, corporate accounting information,
etc., for users. With personal computers came software to provide information to
users in the form of analysis, relationships, etc. The Company believes that
providing "how to" knowledge to users is the next step in the evolution of the
computer software and one that is well suited for use with body-worn computers.
Business Strategy
The Company's objective is to be the leading provider of
voice-activated, hands-free mobile computing systems and related software to
enhance productivity in a wide variety of applications for commercial,
industrial and military customers. To achieve this objective, the Company
intends to pursue the following strategies:
Develop and Strengthen Strategic Alliances. The Company has established
and intends to continue to establish strategic alliances with world-class
distribution partners, as well as selected systems integrators, independent
software vendors, VARs, OEMs and industrial and commercial equipment and service
providers. The benefits that the Company receives from these associations
include access to a larger potential customer base, complementary technologies,
reduced capital investment through utilization of outside resources, and access
to manufacturing expertise and efficiencies of world-class manufacturers. The
Company has already announced signed distribution and support agreements with En
Pointe for North American distribution, Hewlett Packard for European, Middle
East and African distribution and support, and with Nissho Iwai for Far East
distribution. All agreements have resulted in a worldwide distribution network
to be operational this calendar year to support the launch of the MA IV Series.
Additionally, large systems integrators, such as DynCorp, have already been
signed to both provide implementation support for Xybernaut customers worldwide
as well as to place our products within their own client bases. The Company has
been pursuing, and will continue to pursue, additional strategic associations to
enhance its product offerings and expand its marketing activities.
In addition to marketing and support strategic relationships, the
company has signed and is executing other developmental relationships with
organizations such as the SBS in Europe (over 30 software companies serving as a
Xybernaut Center of Excellence for speech and wearable applications), and
companies in the USA and Asia for hardware development and field testing of
application-specific solutions for industry.
Provide Custom Software Solutions for Diverse Customer Needs. The
Company intends to continue the development, or acquisition of, software that
enables its customers to more rapidly create customized software applications
for use with the Mobile Assistant(R) Series and on conventional PCS. This
software will be designed
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to provide prepackaged application expertise that incorporates the end user's
existing programs, procedures and technical documentation, thereby permitting
the cost-effective development of productivity-enhancing software applications
by customers. The Company believes that revenue from software will become an
important contributor to operating margins in the future.
Penetrate Target Markets Through Licensees, OEMs, VARs, Distributors,
and Direct Sales. The Company believes that its mobile computing technology is
especially well suited for the repair and maintenance of commercial, industrial
and military equipment and facilities. The Company also believes that
forms-based applications, such as inventory and data collection, are extremely
well-suited for its flat panel display configuration, requiring the user to
carry only a 1 - 1 1/2 pound VGA color display/digitizer instead of their
current much heavier pen tablets offering only limited computing power. The
Company intends to penetrate its target markets through effective use OEMs, VARs
and distributors that demonstrate comprehensive market knowledge in their
markets. Through the use of already approved, as well as additional
Distributors, Systems Integrators, Industrial and Commercial Equipment
Suppliers, Independent Software Suppliers, OEMs and VARs, the Company intends to
leverage internal marketing and sales resources, and achieve rapid foreign and
domestic market penetration resulting in a diversified customer base. The
Company also intends to continue marketing directly to key national accounts in
order to build multiple reference accounts for its distributors to use to
quickly expand their own sales world-wide. These reference accounts also provide
the Company's RD&E organizations with valuable unfiltered feedback from
customers for future product development. The Company expects that as large
computer and equipment manufacturers attempt to enter the wearable or
user-supported computing marketplace that it will have numerous opportunities to
license its strong intellectual property. Such licensing, the Company believes,
will yield significant revenue as well as accelerated market penetration.
Achieve and Maintain Technology Leadership. The Company is committed to
achieving and maintaining technological superiority of the Mobile Assistant(R)
Series and its other mobile computing hardware and software products through the
continuous reassessment of product performance and the utilization and
integration of state of the art hardware and software technologies. The Company
believes that the substantial expenditure of time and effort in developing the
Mobile Assistant(R) Series has resulted in a set of core competencies which
provide the Company with a solid foundation in the hands-free, mobile computing
industry. The Company intends to maintain this advantage through ongoing
research and development, which will ensure that the Mobile Assistant(R) Series
will continue to provide a full range of PC capabilities, including two-way
video communication and access to the Internet, intranets, remote databases and
other computerized reference resources. The Company also intends to rely heavily
on joint developments with its strategic partners worldwide, and cross-licensing
of its valuable intellectual property to build and market new technology. The
current MA IV Series, for example, was the result of the Company's successful
relationships with Fujitsu, Sony Digital Products, Hitachi, Shimadzu, Toshiba,
JAE and Moli Energy, all under the auspices of the Company's Japanese
operations.
Commitment to Open Architecture. The Company utilizes standard PC
hardware and software architectures and designs its products using open systems
technologies, including industry standard operating systems and open system
computer platforms. The Company continually evaluates the feasibility of
integrating its software and hardware products with new technologies as these
are developed and accepted in the marketplace. The Company anticipates that its
current products will be upgraded to incorporate, and its future products
designed using open architectures to allow use with existing and emerging
standards in hardware and software technology.
Leverage Core Competencies. The Company believes its core competencies,
which have been developed since its inception, are the integration and
adaptation of innovative computer hardware and software technologies into
hands-free mobile computing products that enhance end user productivity. The
Company will seek to expand applications for its technologies and to capitalize
on the breadth of its expertise by assisting its customers in the development of
new hardware and software products. Consistent with this strategy, the Company
will continue to focus on integration of hands-free mobile computing hardware
with internally developed, or acquired, software applications and hardware
products. The Company's goal is to adhere to the model of an Intellectual
Property-Virtual Hardware-Communications-Software Company, concentrating on RD&E
and marketing strategies. It intends to continue to allow its strategic partners
to execute the Company's
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manufacturing, service, sales and marketing functions, under the watchful eye of
Company management. The Company intends to remain small and nimble, able to
react quickly to market needs and world economic changes.
Products and Product Development
In order to address the market, which the Company believes exists for
body-worn mobile computers, the Mobile Assistant(R) Series has been designed
with five key features:
o Compact, lightweight and rugged hardware specifically designed for
mobile, body-worn use
o Easy to use human interface
o Voice command control
o Head-worn miniature display
o Flat panel miniature display/digitizer
Compact Hardware for Mobile, Body-Worn Use. The MA IV currently
utilizes primarily off-the- shelf miniaturized hardware components in a
body-worn computing package weighing under two pounds. Design features for the
MA IV currently include:
o Intel Pentium(R) 200 or 233 MHZ processor w/ 512 KB L2 cache (266 MHZ
scheduled for early 1999)
o Extended Data Output ("EDO") RAM (currently ranging from 32 Mb to 128
Mb)
o Internal hard disk currently ranging from 2 - 4 GB ( 8GB scheduled
for early 1999)
o Protected internal dual PC Card readers using CardBus
(industry-standard peripheral cards)
o Enclosure to allow use in a wide range of environmental conditions
o Advanced-technology, hot-swappable lithium-ion battery and charger
o HMD/FPD, USB, Power and Replicator ports
o Mini-port replicator for mobile use, and desk-top port replicator
o Wrist-mounted miniature keyboard
o Miniature integrated full color video camera
o Compatibility with DOS, Windows(R) 3.11(TM), Windows(R) 95 and 98,
Windows(R) NT(TM) , SCO UNIX(R) and LINUX operating systems
o Integrated pointing device (mouse)
o Built-in sound system for speech recognition and generation
The Mobile Assistant(R) Series are full-featured "Wintel" PCS, which
can readily be used as a desktop PC and allows for the incorporation of a wide
range of capabilities including portable CD-ROM readers, bar code readers,
battery-operated printers, still and motion video cameras, global positioning
technologies, cellular and radio frequency communications and interfaces for
medical and test equipment.
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Voice Command Control. The Mobile Assistant(R) supports
state-of-the-art voice recognition software, hardware and algorithms to
communicate digitized speech as input to the processor through an integrated
analog- to-digital/digital-to-analog circuit. Significant user training
generally is not required because the operable vocabulary is created in advance
to be recognizable by a wide range of users or a phonetic engine is utilized.
The system can also be programmed to "learn" the user, on the fly, during
real-time field use. The speaker-independent approach works well for the menu
and button-driven programs used in the Mobile Assistant(R). System accuracy is
improved greatly since the words and phrases for each menu screen can be
predetermined and used to limit recognition ranges to the screen at hand. The
combination of voice recognition and head-worn display provides the user of the
Mobile Assistant(R) with hands-free access to information and the ability to
apply this information to operations and tasks with direct lines of sight and
tactile access. In addition to basic command-and-control speech recognition, the
MA IV also offers dictation features, and natural language speech processing is
planned for introduction in 1999. The Company's main speech development partners
are IBM and Texas Instruments.
Head-Worn Miniature Display. The MA IV uses a lightweight HMD with 640
X 480 pixels (VGA color). It is anticipated that this display will be offered in
color SVGA, 1280 X 1024 pixel resolution, and eventually in color resolutions
exceeding those planned for High-Definition TV. All displays are approximately
one square inch in size and use advanced optics to present an image to the user
that is equivalent to a 15" desktop monitor at a distance of two feet. These
displays are available in monocular form, and can be worn on a mounting device
similar to a runner's visor or sunglasses, or on helmets, hardhats, soft
baseball caps or similar headgear. These high quality, miniature displays
present information in a heads-mounted display format without completely
occluding vision.
Flat Panel Display. The MA IV uses an optional light-weight, 6.4 inch,
full VGA color, flat panel display ("FPD"), with integrated digitizer, which is
offered for users who do not desire an HMD or do not need to be 100% hands-free
and feet-free to perform their job.
Computer Software for Mobile, Body-worn and Desk-top Use. The Company
has two software products ready for the market, and two others in preparation
for the market. All products, while designed to speed up the development of
applications for the Company's line of wearable computers, are equally
applicable to lap-top and desk-top applications.
The Company offers novel software products, including the following two designed
to get user documentation up and running on the Mobile Assistant(TM) quickly,
that can be used on the Mobile Assistant(R) or conventional desktop or laptop
computers. The Company's linkAssist(TM) software allows users to develop
applications that need for information to be quickly and easily linked together
regardless of the format of the data or where it is stored, avoiding the need to
change, convert or reenter the existing information or to use the very technical
HTML tagging process. An interesting and useful feature of this product is that
the linked words or phrases can then be activated by voice automatically, with
no development work by the author of the documentation or databases. The
webAssist(TM) software offered by the Company allows voice navigation of HTML
document links such as those found on web sites on the World Wide Web and
intranets. This provides the user with hands-free access to all of the
information found on, for example, manufacturer and supplier and company-owned,
web sites.
In addition to webAssist(TM) and linkAssist(TM), the Company has two other
software products in development. Mobile Inspector(TM) is a toolkit to assist
developers in the creation of inspection applications - whether the item under
inspection is a car, a furnace or a human body. This toolkit, already proven
without speech navigation and entry features, is being updated to incorporate
the Company's speech recognition software offerings. The second product, as yet
unnamed, is an authoring toolkit to quickly create Interactive Electronic
Technical Manuals (combinations of expert software and electronic books and
drawings and charts) and on-the-fly training programs.
It is also expected to be ready for market in 1999.
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Marketing and Sales
Markets
The Company's marketing efforts are designed to increase awareness of
and demand for its products in the commercial, industrial and military markets.
The following are examples of selected horizontal and vertical markets that
initially are being, or will be, addressed by the Company:
Commercial Maintenance and Repairs. Information from the United States
Bureau of Labor Statistics and Bureau of Census indicates that as of 1996 there
were more than 5,460,000 commercial mechanics and technicians in the United
States, all of which the Company believes are potential users of the Mobile
Assistant(R) Series and the Company's other products. There are many sources of
savings available from use of the Mobile Assistant(R) Series and the Company's
other products in maintenance and repair operations such as: less formal
training is required for a similar level of performance, the time required for
diagnostic and repair tasks is reduced as "just in time" refreshers and improved
technical information can be provided, and personnel can address a wider range
of complex tasks or products with the same level of basic training. While these
savings can be realized in most industries, the Company anticipates that these
savings will be most immediate and apparent in those industries that require a
large investment in equipment and machinery, including the transportation,
automotive, construction, power generation, health services, agriculture and the
military. In industries such as construction or mining, the Company believes
downtime on critical equipment can cost up to $75,000 or more per day.
Accordingly, a reduction measured in minutes or hours of downtime in these
industries can, in the Company's view, provide ample cost justification for a
Mobile Assistant(R). The telecommunications industry is expected to be a prime
candidate for mobile computing systems given the industry's complex
technologies, increased competition and assets spread over a wide geographic
area. The Mobile Assistant(R) can provide needed knowledge to workers on the top
of a telephone pole, at a remote relay station or in a conduit tunnel. Crew
locations can be monitored and coordinated in the field with the Mobile
Assistant(R) through optional global positioning system technology. Crews at
remote locations can consult with experts using two-way audio and/or video
communications.
Healthcare. According to the National Center for Health Statistics, in
the United States spent approximately 13.6% of the U.S. Gross Domestic Product,
or approximately $1 trillion, on healthcare, with an estimated 25% of such
expenses consumed by administrative expenses. According to the National Center
for Health Statistics, United States, 1994, the United States has over 6,000
hospitals and over 540 health maintenance organizations. According to the United
States Department of Labor, in 1994 there were approximately 4,714,000
healthcare workers in the United States. The Company believes that many of the
current processing and data systems used in healthcare, both in institutions and
in the field, are not well developed or integrated and that hands-free mobile
computing systems could reduce expenses and increase efficiency in this
industry. The Mobile Assistant(R) is believed to present great potential in
field medical operations by providing on-board and remote diagnostics, audio
and/or video communication with doctors for emergency procedures, and
transmission of locations for helicopter pickup through global positioning
systems integrated into the Mobile Assistant(R). Another anticipated benefit of
the Company's hands-free mobile computing technologies is that fewer healthcare
personnel will be needed to perform complex tasks. By providing remote delivery
of medical information, the Company's hands-free mobile computing systems can
become a key component within both managed care and telemedicine organizations,
which are two key submarkets developing within the healthcare industry.
Public Sector. The Company has demonstrated the ability of its
technology to aid in law enforcement, fire protection, emergency services and
control of national borders. The North American distributor of Xybernaut's MA
IV, EnPointe, has demonstrated the success of establishing purchasing schedules
for most significant city, state and municipal agencies, thus making the
technology readily available.
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Education. The Company believes that its mobile computing systems are
well suited for educational applications. The Mobile Assistant(R) is especially
suited for hands-free applications, such as laboratory work, field research and
dissections and has the potential to serve as a mobile student workstation. In
addition, it can provide an ideal computing and control platform for special
education and handicapped needs.
Military. There are several potential military applications for the
Company's hands-free mobile computing systems, including intelligence,
maintenance and field operations. The military has long been an early adopter of
advanced weapons technologies and, as a result, was one of the first sectors to
experience problems with the ability of personnel to maintain, diagnose and
repair the advanced technology employed in both weapons and equipment. These
problems have been compounded by the downsizing of the United States military
and related budget constraints. As a result, even greater pressure will be
placed upon the military to maintain its equipment and weapons platforms with
fewer personnel. The Company believes that most of the estimated 700,000
military maintenance personnel in the United States could be made more efficient
and productive by the Company's hands-free mobile computing systems.
The United States military's increasingly sophisticated weapon systems
require volumes of operational and technical manuals and have dramatically
increased the importance of maintenance. The United States Army has purchased
the Mobile Assistant(R) and has tested its use in the maintenance and repair of
the AH64 Apache Attack helicopter. The Apache can send and receive maintenance
data via an industry standard electrical interface which can be read by an
optional interface for the Mobile Assistant(R). Operating and performance data
can be downloaded directly from the Apache and the Mobile Assistant(R) can be
used to diagnose existing and potential maintenance and repair problems. The
Company anticipates that manufacturers of complex military and commercial
equipment increasingly will incorporate integrated data collection and
transmission capabilities into their technologies to reduce downtime, repair and
maintenance related costs.
The ability to deliver information to soldiers in combat field
operations is the focus of several development programs sponsored by the United
States Army. The Army has been conducting simulated combat maneuvers using
body-worn computing components, including those provided by the Company, to
determine effectiveness for use in coordinating troop locations and movements,
determining enemy locations, and using global positioning systems to provide
coordinates for artillery, helicopter pickup and air support.
The Company has already sold many systems into the US Army and Navy,
and expects that its sales partners will sell heavily into the armed services
both in the USA and overseas.
Marketing
Because the Company's products are frequently combined with products
from other manufacturers to form integrated information systems, the Company
believes that it is more effective to sell principally through Distributors,
Systems Integrators, Industrial and Commercial Equipment Manufacturers,
Independent Software Vendors and VARs with defined market niche expertise and
presence as well as to end users. In preparation for the introduction of the MA
IV, the Company has and is negotiating terms with several specialized
distributors for higher volume distribution of the MA IV. The Company believes
that by forming relationships with these partners we can gain entry to many
various sub-markets and types of end users, and serve customers or have in-place
sales and distribution channels that identify new customers and sales
opportunities. The Company can then reach end users more rapidly in a variety of
industries.
To try to ensure outstanding partner performance, the Company has
offered detailed in-house training sessions to prepare and update personnel for
field sales and training. In addition, the Company is developing comprehensive
sales and operations manuals to be used by these channels and end-users.
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The Company's marketing and sales employees are responsible for
implementing direct marketing plans and sales programs, coordinating sales
activities with sales and marketing and service partners. All fulfillment will
be accomplished through distribution partners, regardless of which entity makes
the actual sales.
License Granted to the Company by Data Disk
During 1997, the Company entered into a series of agreements with
Data-Disk Technology, Inc., a Virginia-based company, that produces a memory
product known as the Data Disk that consists of a non-volatile memory chip
encapsulated in a rugged polymer casing slightly smaller than a soldier's
"dogtag" that is highly resistant to temperature and environmental conditions.
The Company's management believes that the Data Disk provides an ideal storage
medium for body-worn computer applications, especially those that involve a
large number of people, inspection sites or equipment. These tags can be used to
store information such as medical history, repair history or other data unique
to an individual or piece of equipment and from which information can be read by
inserting the tag into a reader that fits in the existing PC card slots on all
models of the Mobile Assistant(R). The U.S. Department of Defense is evaluating
the Data Disk and competing technologies to replace the current system of
stamped metal dogtags for soldiers. Under the agreements with Data Disk, the
Company received an exclusive, perpetual worldwide license to use and sell
present and future Data Disk technology for user-supported (wearable) computing
applications.
Key Suppliers
The Company has entered into supplier relationships with Sony Digital
Products and Shimadzu, among others, for the production of the MA IV system.
(See "--Production"). The Company has designed a proprietary HMD that is being
manufactured by Greenway Engineering using purchased and fabricated parts.
Greenway was contracted to purchase and manage parts and components inventory,
manufacture computer boards, and assemble and test the HMD of the Mobile
Assistant(R), as well as obtain Federal Communications Commission certification
for the Mobile Assistant(R) system.
The Company has also entered into design, production, supply and
support agreements with many companies, in the USA and overseas, in order to
complete its wearable line of computers. They include Fujitsu, Sony Digital
Products, Hitachi, Shimadzu, JAE, Toshiba, Moli Energy, IBM, Texas Instruments,
the SBS, etc.
The Company currently has subcontracted the manufacture of the
body-worn computing unit, headset and battery portions of the 133P to
third-party vendors. These components are assembled and integrated with the
software applications for the Mobile Assistant(R) at the Company's headquarters.
Although the Company believes there are multiple sources for many parts
and components, the Company currently depends heavily on its current suppliers.
While 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.
Production
The Company has a manufacturing agreement with Sony Digital Products, a
subsidiary of Sony Corporation based in Nagano, Japan, for the manufacture of
the MA IV, which is scheduled to begin full production in the quarter ending
December 31, 1998. Shimadzu Corporation, a supplier of head-mounted displays and
other commercial technology products based in Kyoto, Japan, has been engaged by
the Company
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to develop and manufacture a color HMD for use with the MA IV. Most of the parts
and components for the Mobile Assistant(R) are off-the-shelf PC components that
are available in high quantity from multiple vendors. The Company currently uses
a monochrome Active Matrix Liquid Crystal Display ("AMLCD") from one supplier in
its HMD and has been notified by that supplier that the monochrome AMLCD has
been discontinued and is being replaced by a color AMLCD. The Company's
management believes that there are sufficient quantities available of this
monochrome AMLCD to meet currently forecast requirements for the 133P system
until the MA IV system is introduced. If the start of full-scale production of
the MA IV model of the Mobile Assistant(R) is delayed past the quarter ending
December 31, 1998, such delay will have an adverse effect on revenues for the
twelve months ending December 31, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Warranties
The Company currently provides customers with a parts and labor
warranty for one year. Warranty services for the 133P are provided by Matrix and
warranty services for the Company's HMD are provided by Greenway Engineering,
except for the AMLCD, which is provided by its manufacturer. Warranty services
for the MA IV Series is an integrated offering by several vendors. Our
distribution partners are responsible for levels one and two service. The
Company intends to pass on Level 3 maintenance and call-center support to a 3rd
party service firm.
Competition
The Company anticipates that ultimately it will face widespread
competition from other portable computing systems manufacturers. Several other
companies are engaged in the manufacture and development of body-mounted or
hand-held computing systems which can also compete with the Mobile Assistant(R)
Series, including CDI, Teltronics, Inc. (a subsidiary of Interactive Solutions
Inc.), ViA Inc., Texas Microsystems, Telxon, Norand, Raytheon and others.
Personal digital assistants and laptop and notebook computers also are products
that could compete against the Mobile Assistant(R) Series. Some 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)
Series is directed. There can be no assurance the Company will be able to
compete successfully against its competitors or that the competitive pressures
faced by the Company will not adversely affect its financial performance.
However, the Company considers entry by reputable, large computer manufacturers
to be healthy for the marketplace in that it would bring legitimacy to the
market in a more rapid fashion. The Company is also confident in its
intellectual property position.
Intellectual Property
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 Xybernaut(R) trademarks on the Principal
Register of the United States Patent and Trademark Office ("Patent Office") and
the patent and trademark offices in several foreign countries.
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 and April 1996,
the Company received separate reexamination notifications from the Patent
Office, which reexaminations of the Patent were initiated as a result of a
request from one of the Company's competitors.
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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 and the six months ended June 30, 1998 and 1997 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 other patents held by the Company and to recover any
damages suffered as a result of any alleged infringement.
Since July 1996, the Company has filed twenty patent applications
covering various aspects of computers in general and wearable computers in
particular. Of these twenty applications, six additional patents have been
issued, one patent has been allowed pending issuance and thirteen 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 a 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. The Company has implemented a trade secret management program to
further protect the Company's trade secrets and proprietary information. 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.
Research and Development
Research and development expenditures for the years ended December 31,
1997 and 1996 and the six months ended June 30, 1998 and 1997 were $2,350,237,
$1,773,015, $1,010,769 and $1,196,319, respectively. These expenditures consist
primarily of personnel engaged in the research and design of new hardware and
software products, test components, consulting fees, equipment and purchase
software costs required to conduct the Company's development activities.
Employees and Consultants
As of June 30, 1998, the Company had 30 full-time and nine part-time
employees, and had consulting arrangements with ten individuals or firms for
advice and assistance on selected technical and business issues. Of the
Company's full-time employees, two are executive officers, eleven are technical
and administrative support employees, five are engaged in research and
development, four are engaged in assembly and testing and eight are engaged in
sales and marketing. None of the Company's employees are represented by a union
and management believes that the Company's relations with its employees are
good.
- 36 -
<PAGE>
The Company is a party to employment and consulting agreements with
certain of its executive officers and directors. See "Management -- Employment
Agreements; -- Consulting Agreements."
Properties
The Company's office and development facility consists of 18,642 square
feet located at 12701 Fair Lakes Circle, Fairfax, Virginia. The Company's
current lease is for a three-year term expiring September 30, 1998 and requires
monthly rent of approximately $26,000.
To minimize lodging expenses for visiting employees and consultants,
the Company leases an apartment located at 4401 Sedgehurst Drive, #301, Fairfax,
Virginia 22033 pursuant to a month-to-month lease requiring monthly rent of
$975. The Company must give at least 45 days prior written notice before
termination of the lease. The Company also leases an apartment at 11842
Federalist Way for a twelve-month period ending November 30, 1998 with a monthly
rent of $1,099 and an apartment at 4705 Quiet Woods Lane for a twelve-month
period ending July 6, 1999 with a monthly rent of $1,016.
During the year ended December 31, 1997, the Company leased
approximately 650 square feet of office space at FM Building 102, 7-39-5
Nishikamata, Ohta-ku, Tokyo 144, Japan, for use as its Far East representative
office. The initial lease term is for two years ending April 1999 at a base rent
of approximately $1,700 per month and is renewable at the Company's option for
an additional two year period. Subsequent to year-end, the Company terminated
this lease and moved its offices to Wakadayashi Building, 5-12-6 Kita-Shinagawa,
Shinagawa-ku, Tokyo 141, Japan.
Legal Proceedings
On March 19, 1998, Matrix Corporation, with whom the Company had
entered into an agreement in June 1997 (the "June Agreement"), 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 1997 Agreement (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 August 6, 1998, the Court rendered an Order dismissing all of
Matrix's claims, except for the breach of contract claim under the December
Agreement. On September 9, 1998, the Company filed an answer which denies the
material allegations of the complaint, and asserts a counterclaim alleging that
Matrix failed to perform to the requirements of the December Agreement and that
Xybernaut has been damaged by this failure to perform. While there can be no
assurance of the outcome of this legal proceeding, the Company's management
believes that the remaining claim by Matrix is groundless and that the impact of
this legal proceeding will not be materially adverse 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.
- 37 -
<PAGE>
MANAGEMENT
Directors and Executive Officers
The officers and directors of the Company, their ages and present
positions held with the Company are as follows:
<TABLE>
<CAPTION>
Present Position
Name Age with the Company
- ---- --- ----------------
<S> <C> <C>
Edward G. Newman 54 President, Chief Executive Officer and Chairman of the
Board of Directors
George Allen, Esq. 46 Director
Eugene J. Amobi 52 Director
Keith P. Hicks, Esq. 75 Director
Steven A. Newman, M.D. 52 Director and Vice Chairman of the Board of Directors
Phillip E. Pearce 69 Director
James J. Ralabate, Esq. 70 Director
Lt. Gen. Harry E. Soyster 62 Director
(Ret.)
Kaz Toyosato 54 Executive Vice President and Director
Martin Eric Weisberg, Esq. 47 Director
Dr. Edwin Vogt 65 Director
Maarten Heybroek 56 Chief Operating Officer and Chief Financial Officer
</TABLE>
The Company Board of Directors is divided into three different classes.
At each annual meeting of stockholders of the Company, one class of directors
will be elected to succeed those directors in the class whose terms then expire,
for terms expiring at the third succeeding annual meeting of stockholders. The
following is a brief summary of the background of each director and executive
officer of the Company:
Class I Directors
Keith P. Hicks, Esq. has been a director of the Company since July 1994
and currently is a principal in C&H Properties and the owner of Hicks Bonding
Co., Hicks Auctioneering Co. and Hicks Cattle Company. Mr. Hicks is a graduate
of the University of Denver (B.A. 1954) and LaSalle University School of Law
(L.L.B. 1969).
Kaz Toyosato joined the Company in October 1996 as Executive Vice
President of Asian Operations. Mr. Toyosato is responsible for overseeing the
Company's operations in Asia, including Japan. Prior to joining the Company, Mr.
Toyosato spent 27 years with Sony Corporation in Japan where his last position
was the Vice President of Sony USA. He previously served as product manager for
the Sony Walkman product line, as well as Sony's 8mm video camcorder and its
battery line of products.
Martin Eric Weisberg, Esq., who currently serves as Secretary of the
Company, is a partner of the law firm, Parker Chapin Flattau & Klimpl, LLP,
which serves as general counsel to the Company. Mr. Weisberg specializes in the
areas of securities, mergers and acquisitions, financing and international
transactions and has been in the private practice of law for 23 years. Mr.
Weisberg is a summa cum laude graduate of Union College (B.A. 1972) and received
his law degree from The Northwestern University School of Law (1975), where he
graduated summa cum laude, was Articles Editor of the Law Review and was elected
to the Order of the Coif. Mr. Weisberg also attended The London School of
Economics and Political Science.
- 38 -
<PAGE>
Class II Directors
Eugene J. Amobi has been a director of the Company since January 1996.
Since 1983, Mr. Amobi has been President, a director and a principal stockholder
of Tech International, Inc. ("Tech International"), which provides engineering,
technical support and consulting services to government and domestic and
international commercial clients. Mr. Amobi has been president and director of
Tech International of Virginia Inc. ("Tech Virginia"), the Company's
wholly-owned subsidiary, since its spin-off from Tech International. Prior to
1983, Mr. Amobi was a Senior Engineer with E.I. DuPont de Nemours and a Managing
Director of Stanley Consultants, an international engineering consulting firm.
Mr. Amobi is a graduate of The Technion, Israel Institute of Technology (B.S.
1969), Princeton University (M.S. 1970) and Syracuse University (M.B.A. 1973).
Phillip E. Pearce has been a director of the Company since October
1995. Mr. Pearce has been an independent business consultant with Phil E. Pearce
& Associates, Chairman and Director of Financial Express Corporation since 1990
and since 1988 has been a principal of Pearce-Henry Capital Corp. Prior to 1988
Mr. Pearce was Senior Vice President and a director of E.F. Hutton, Chairman of
the Board of Governors of the National Association of Securities Dealers, a
Governor of the New York Stock Exchange and a member of the Advisory Council to
the United States Securities and Exchange Commission on the Institutional Study
of the Stock Markets. Mr. Pearce also is a director of RX Medical Services,
Inc., an operator of medical diagnostic facilities and clinical laboratories,
InfoPower International, Inc., a software development company and StarBase
Corporation, a software development company, and United Digital Networks, Inc.,
a provider of voice and data long distance services. Mr. Pearce is a graduate of
the University of South Carolina (B.A. 1953) and attended the Wharton School of
Investment Banking at the University of Pennsylvania.
Lt. Gen. Harry E. Soyster (Ret.) has been a director of the Company
since January 1995. He is currently Director of Washington Operations and Vice
President of International Operations of Military Professional Resources,
Incorporated. From 1988 until his retirement in 1991, Lieutenant General Soyster
(Ret.) was the Director of the United States Defense Intelligence Agency. Prior
to that time, he was Commander of the United States Army Intelligence and
Security Command and a Deputy Assistant Chief of Staff for Intelligence,
Department of the Army. Lieutenant General Soyster (Ret.) is a graduate of the
United States Military Academy at West Point (B.S. 1957), Penn State University
(M.S. 1963), the University of Southern California (M.S. 1973) and the National
War College (1977).
Dr. Edwin Vogt was appointed a director on September 28, 1998 and has
been a consultant to the Company since 1996. Mr. Vogt joined IBM in 1961 as
Development Programmer and worked in the fields of hardware development, holding
28 patents, as well as software development. As manager he was responsible for
hardware projects (IBM /360, /370, 433x) as well as various software projects
(a.o. voice recognition products) before being appointed Director as manager of
several Hardware and Software Product Development Laboratories. As IBM Software
Group Executive he held the worldwide responsibility for the development and
marketing of IBM Workflow products and Reengineering tools until retiring from
IBM end of 1995. In early 1996 he was appointed Director for the SBS association
(Softwarezentrum Boeblingen / Sindelfingen e.V.) and, since then, has grown this
center to 39 member companies with over 200 experts, predominantly working in
high-growth areas such as Internet, Workflow, Process Automation, Multimedia.
Dr. Vogt is a graduate of the University of Stuttgart with an M.S. in Electrical
Engineering and Mathematics in Theoretical Electrical Engineering.
Current Class III Directors
George Allen, Esq. is a partner of the law firm of McGuire Woods Battle
& Boothe, LLP. Mr. Allen was Virginia's 67th governor from 1994-1998, during
which period state taxes were cut by $1 billion, $14 billion in new investments
were made in the state resulting in 300,000 net new private sector jobs. Mr.
Allen's term in office also was noted for comprehensive reforms in primary and
secondary education, the abolition of parole, reform of the juvenile justice
systems and the replacement of the welfare system with reforms which promote
work ethic and personal responsibility. Prior to serving as Governor of
Virginia, Mr. Allen was a member of the
- 39 -
<PAGE>
U.S. House of Representatives in 1991 and a member of the Virginia
House of Delegates from 1983-1991. Mr. Allen is a member of the Board of
Directors of Commonwealth Biotechnology, Inc. Mr. Allen is a graduate of the
University of Virginia at Charlottesville (B.A. 1974), with distinction, and
received his law degree from the University of Virginia at Charlottesville (J.D.
1977).
Edward G. Newman has been the Company's President since March 1993,
Chief Executive Officer and Chairman of the Board of Directors since December
1994, and a director since 1990. Mr. Newman served as Treasurer of the Company
from 1993 to 1994. From 1984 to 1992 Mr. Newman was President of ElectroTech
International Corporation, a software consulting firm. From 1973 to 1981 Mr.
Newman was employed by Xerox Corporation in several management positions in
office systems strategy, legal systems and international financial systems. Mr.
Newman served with the Central Intelligence Agency from 1966 to 1972. Mr. Newman
also has been an Executive Vice President of Tech International since 1990, and
a director and Chief Executive Officer of Tech Virginia since 1994. See "Certain
Transactions." Mr. Newman is a graduate of the University of Maryland (B.A.
1971) and the University of New Haven (M.B.A. 1984). Mr. Newman is the brother
of Steven A. Newman, M.D., a director of the Company.
Steven A. Newman, M.D. has been a director of the Company since January
1995, a consultant to the Company since January 1996 and Vice Chairman of the
Board of Directors since August 1997. See "Business - Employees and
Consultants." Dr. Newman was Executive Vice President and Secretary of the
Company from December 1994 through October 1995. Dr. Newman also provides
business, management and administrative consulting services to various medical
and business groups. Dr. Newman was President and Chief Executive Officer of Fed
American, Inc., a mortgage banking firm, from 1988 to 1991. Dr. Newman has been
a director of Tech Virginia since 1994. See "Certain Transactions." Dr. Newman
is a graduate of Brooklyn College (B.A. 1967) and the University of Rochester
(M.D. 1972). Dr. Newman is the brother of Edward G. Newman, the Company's
President, Chief Executive Officer and Chairman of the Board of Directors.
James J. Ralabate, Esq. has been a director of the Company since
January 1995 and served as the Company's Secretary until August 1997. Mr.
Ralabate has been in the private practice of patent law since 1982. Prior to
that time, Mr. Ralabate was General Patent Counsel for Xerox Corporation,
responsible for worldwide patent licensing and litigation, and an examiner for
the Patent Office. Mr. Ralabate is intellectual property counsel to the Company,
and is a graduate of Canisius College (B.S. 1950) and The American University
(J.D. 1959).
All Directors of the Company hold office until the third annual meeting
of shareholders following their election or until their successors are elected
and qualified. Officers are appointed to serve at the discretion of the Board of
Directors. The Company has three committees, Compensation, Auditing and
Nominating.
The functions of the Audit Committee include the nomination of
independent auditors for appointment by the Board; meeting with the independent
auditors to review and approve the scope of their audit engagement; meeting with
the Company's financial management and the independent auditors to review
matters relating to internal accounting controls, the Company's accounting
practices and procedures and other matters relating to the financial condition
of the Company; and to report to the Board periodically with respect to such
matters. The Audit Committee currently consists of Keith P. Hicks, Dr. Steven A.
Newman and Phillip E. Pearce.
The function of the Compensation Committee is to review and recommend
to the Board of Directors the appropriate compensation of executive officers of
the Company and to administer the 1996 Omnibus Stock Incentive Plan and the 1997
Stock Incentive Plan. The Compensation Committee currently consists of Dr.
Steven A. Newman, Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg,
Esq.
The function of the Nominating Committee is to select and recommend to
the Board of Directors appropriate candidates for election to the Company's
Board of Directors. The Nominating Committee currently consists of Dr. Steven A.
Newman, Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg, Esq.
- 40 -
<PAGE>
The Company also has an Advisory Board which was established to provide
council and support to the Board of Directors. The members of the Advisory Board
are appointed by the Board of Directors. Its members currently include:
Lawrence Berk is currently Senior Managing Director of Brill
Securities. He has been a money manager and has structured and advised companies
on financings and strategic planning, having held executive positions with
various investment banking firms, including Oppenheimer & Co. where he was a
partner. Mr. Berk has also held many leadership roles in the entertainment
business. He served as a member of the Board of the Actors Studio for 15 years
where he produced plays; he was a founding Chairman of the Veterans Ensemble
Theatre, a group of writers, actors and directors from the Vietnam war; he was
on the Board of the Association of American Dance Companies; and he was a
trustee of the Manhattan Theatre Club. Mr. Berk is a member of the Financial
Investment Analyst Association and the Regional Investment Bankers Association.
Wayne Coleson is at present and since 1994 has been the President and a
Director of Avalon Capital, Inc., a Director of Settondown Capital
International, Ltd. and a Director of Manchester Asset Management, Ltd., each of
which is an investment company which invests in and structures private placement
transactions. Mr. Coleson is a founder of all three companies. During the last
three years Mr. Coleson completed over 75 transactions resulting in $500 million
of investments. Prior to these activities Mr. Coleson was affiliated with
Shoreline Pacific Institutional Finance, Laffer-Warren Investment Brokers and
Lehman Brothers, during which period Mr. Coleson had extensive roles in
structuring, evaluating, negotiating and raising capital for small to micro-cap
companies in the United States and Europe. Mr. Coleson graduated from the
University of Georgia in 1985 with a B.A. in Political Science.
Dr. Andrew Heller has been an advisor to the Board of Directors since
1995. Since 1989 Dr. Heller has been Chairman and Chief Executive Officer of
Heller Associates, a consulting firm to high technology companies. From 1990 to
1993 Dr. Heller was Chairman and Chief Executive Officer of Hal Computer
Systems, Inc., a software and hardware systems development company. From 1966 to
1989 Dr. Heller was employed by IBM (where he was the youngest person ever to be
selected as an IBM Fellow) in a variety of positions including Corporate
Director of Advanced Technology Systems, member of the Executive Committee on
Technology, member of the Technical Review Board, and General Manager, Advanced
Workstation Independent Business Unit. While at IBM, Dr. Heller created and ran
the business unit that created the AIX (UNIX) operating system for IBM and the
RISC RS/6000 family of workstations and servers, from which the current Power PC
was developed. Dr. Heller is a director of Rambus, Inc., Cross/Z, Inc., Network
Translation, Inc., EPR, Inc., Eco Instrumentation, Inc. and UDI Software, Inc.
Dr. Heller has a three-year consulting agreement with the Company whereby Dr.
Heller has agreed to provide strategic planning, business management, strategic
product development and market and financial introduction services to the
Company.
Maarten Heybroek has been an advisor to the Board of Directors since
1992. Since 1986, Mr. Heybroek has been employed by Citibank, as Chief of Staff
and Controller for consumer banking activities in Central Europe and, most
recently, as Director, Compliance and Risk Management for Citibank's United
States consumer banking operations. Prior to that time, Mr. Heybroek was
Director, Finance-European Operations and then Director, Corporate Finance for
Intergraph Corporation, a publicly-traded computer hardware and software firm,
and with Xerox Corporation in a variety of financial and management positions.
Mr. Heybroek is a graduate of Pace University.
Vice Admiral Stephan F. Loftus (ret.) retired from the United States
Navy in May of 1994. Prior to that he served as the Deputy Chief of Naval
Operations (Logistics). Vice Admiral Loftus held previous positions with the
U.S. Navy as Commander, Fleet Air Mediterranean; Director, Office of Budget and
Reports; and Director, Office of Program Appraisal. Vice Admiral Loftus
presently serves as Executive Vice President of Quarterdeck Investment Partners,
Inc. (specializing in merger/acquisitions) and The Spectrum Group (a strategic
planning group). He consults for Lockheed Martin Corporation, SAIC, Johns
Hopkins University - Applied Physics Lab, Systems Planning Corporation, and
Global Planning Corporation. He is on the Board of Directors of AMSEC,
- 41 -
<PAGE>
Inc. and LLD, Inc., and serves as a member of the Logistics Panel for the
Defense Science Board. Also, Admiral Loftus serves as the Chairman of the Board
of Trustees at NMCCG Foundation.
General Richard H. Thompson (ret.) retired from the U.S. Army in 1987
after 43 years of service. His last assignment was as the Commander of the U.S.
Army Material Command, an organization of 132,000 personnel at 171 locations
worldwide with an annual budget in excess of $35 billion. Since his retirement,
General Thompson has served on the Board of Directors of several companies, has
consulted with many others, and has participated as a member of several Study
Groups for the National Academy of Sciences and the House of Representatives. He
is currently the Chairman and Chief Executive Officer and actively engaged in
the operations of three companies he has established: Thompson Delstar Inc., TMI
Asia, and TDIS.
- 42 -
<PAGE>
EXECUTIVE COMPENSATION
The following sets forth the annual and long-term compensation for
services in all capacities to the Company (i) for the fiscal year ended December
31, 1997, for the fiscal year ended December 31, 1996, for the nine month
transitional year ended December 31, 1995 and the fiscal year ended March 31,
1995 of Edward G. Newman, the Company's President, Chief Executive Officer and
Chairman of the Board of Directors, and (ii) for the fiscal years ended December
31, 1997 and December 31, 1996, and for the transitional year dated December 31,
1995 and the fiscal years ended March 31, 1995 of John P. Moynahan, the
Company's former Senior Vice President, Chief Financial Officer, Treasurer and
director. Mr. Moynahan resigned from his various positions with the Company
effective June 3, 1998. No other officer of the Company received annual salary
and bonus exceeding $100,000 during the relevant periods.
<TABLE>
<CAPTION>
Long Term
compensation
awards(1)
Name and Annual compensation (1) --------------
---------------------------- Options All other
principal position Year Salary Bonus (Shares) compensation
--------- -------------- ------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Edward G. Newman 1997 $211,211(1) $- 0 - - 0 - $43,600 (2)
President and Chief Executive Officer 1996 $149,635(1) $- 0 - - 0 - $- 0 -
and Chairman of the Board of 1995* $112,500 $- 0 - - 0 - $- 0 -
Directors 1995 $ 68,750 $- 0 - - 0 - $- 0 -
John F. Moynahan 1997 $142,083 $- 0 - - 0 - $15,465 (2)
Senior Vice President, Chief Financial 1996 $139,688 $- 0 - - 0 - $- 0 -
Officer and Treasurer
1995* $105,000 $- 0 - - 0 - $- 0 -
1995 $ 64,167 $- 0 - 200,000 $- 0 -
</TABLE>
- -----------------
* Transitional year ended December 31, 1995.
(1) Compensation does not include (i) $50,000 and $50,084 paid to Frances
C. Newman, wife of Edward G. Newman in 1997 and 1996, respectively, and
(ii)$87,314 paid by Tech of Virginia in 1997 and 1996, as payment of
accrued salaries and expenses.
(2) Includes payment of non-accountable expense allowances and car
allowances.
Options/SAR Grants in Last Fiscal Year
The following table sets forth information on grants of stock options
during fiscal 1997 to executive officers and directors of the Company. All such
options are exercisable to purchase shares of Common Stock.
<TABLE>
<CAPTION>
Options Percent of total Exercise or
granted options granted to base price
Name (shares) officers/directors ($/Share) Expiration date
- ---- in year
------------ --------------------- -------------- ----------------------
<S> <C> <C> <C> <C>
Steven A. Newman 50,000 18.5% $2.6125 January 2, 2007
60,000 22.2% $2.8125 August 28, 2007
Eugene J. Amobi 10,000 3.7% $2.8125 August 28, 2007
Keith P. Hicks, Esq. 10,000 3.7% $2.8125 August 28, 2007
Phillip E. Pearce 10,000 3.7% $2.8125 August 28, 2007
James J. Ralabate, Esq. 10,000 3.7% $2.8125 August 28, 2007
</TABLE>
- 43 -
<PAGE>
<TABLE>
<CAPTION>
Options Percent of total Exercise or
granted options granted to base price
Name (shares) officers/directors ($/Share) Expiration date
- ---- in year
------------ --------------------- -------------- ----------------------
<S> <C> <C> <C> <C>
Lt. Gen. Harry E. Soyster 10,000 3.7% $2.8125 August 28, 2007
Kaz Toyosato 50,000 18.5% $2.8125 August 28, 2007
Martin Eric Weisberg, Esq. 50,000 18.5% $1.6875 August 28, 2007
10,000 3.7% $2.8125 August 28, 2007
</TABLE>
Fiscal Year-End Options/Option Values Table.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
underlying unexercised options in-the-money options
at fiscal year-end at fiscal year-end ($)
------------------------------------ -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Steven A. Newman 110,000 0 0 0
Eugene J. Amobi 60,000 0 0 0
Keith P. Hicks, Esq. 60,000 0 0 0
Phillip E. Pearce 60,000 0 0 0
James J. Ralabate, Esq. 60,000 0 0 0
Lt. Gen. Harry E. Soyster 60,000 0 0 0
Kaz Toyosato 50,000 0 0 0
Martin Eric Weisberg, Esq. 60,000 0 0 0
</TABLE>
None of the foregoing options were exercisable within 60 days of
December 31, 1997.
The Company has no retirement, pension or profit sharing program for
the benefit of its directors, officers or other employees, but the Board of
Directors may recommend one or more such programs for adoption in the future.
Employment Agreements
The Company has entered into an employment agreement with Edward G.
Newman which provides for a three-year term through December 31, 1998; initial
annual base compensation of $150,000 subject to a minimum annual increase to
$198,000 on January 1, 1997 and of at least the annual increase in the United
States Consumer Price Index ("CPI") plus two percent annually thereafter, an
annual cash bonus in an amount to be determined by the Board of Directors; and a
$2,000,000 life insurance policy payable to his designated beneficiaries. Mr.
Newman received payments in 1997 for accrued salaries and expenses related to
his employment with Tech Virginia and continues to provide services to Tech
Virginia without contract at a fixed payment of $1,000 per month with a $650
automobile allowance per month. The employment agreement with Mr. Newman also
entitles him to participate in all benefits which the Company may offer to its
executive officers and employees, as a group. The Company anticipates that such
benefits will include an automobile, health insurance and expense reimbursement.
The employment agreement automatically renews for an additional three-year term
unless terminated in writing by either party on or before October 31, 1998. The
employment agreement also provides for termination at the option of Mr. Newman
in the event of a change of control (which is defined as Mr. Edward Newman
ceasing to serve as either the Chairman of the Company's Board of Directors or
its President and Chief Executive Officer) and that upon any such termination
Mr. Newman is entitled to at least two years of annual compensation under his
employment agreement.
- 44 -
<PAGE>
Mr. Toyosato is employed pursuant to a three-year Employment Agreement
with a term expiring on March 3, 2000. The Employment Agreement provides for an
annual salary of $153,575.23.
Consulting Agreements
The Company and Dr. Steven A. Newman entered into a Consulting
Agreement dated as of January 1, 1996, as amended January 1, 1997. Pursuant to
the Consulting Agreement, Dr. Newman will provide consulting services which
includes, among other things, the review and assistance in the preparation of
the Company's business strategies, assisting with the recruitment and hiring of
key executives and provide advice regarding financing, contracting, management,
overseas operations, strategic alliances and ventures. The annual consulting fee
is $150,000 payable on a monthly basis. The Consulting Agreement also provides
for additional compensation, as determined by the Company's Compensation
Committee, for services by Dr. Newman in connection with the successful
completion of financings, mergers, acquisitions, dispositions, joint ventures
and other material transactions. The term of the Consulting Agreement is four
years terminating on December 31, 2000 unless renewed by the parties.
In 1996, the Company entered into a two-year consulting agreement with
Victor J. Lombardi whereby Mr. Lombardi agreed to provide business development
and marketing services to the Company in exchange for warrants which entitle Mr.
Lombardi to purchase 100,000 shares of Common Stock at $6.00 per share through
December 31, 1999. For the year ended December 31, 1997, the Company recorded
$125,489 in expense connected with the issuance of these warrants.
Compensation of Directors
The Company currently does not pay or accrue salaries or consulting
fees to outside directors for each board or committee meeting attended. While it
is the Company's intention to establish such payments eventually, it does not
currently anticipate doing so. Any payments when implemented will be comparable
to those made by companies of similar size and stage. Directors receive a grant
of options for 50,000 shares of Common Stock upon election to the Board of
Directors and are entitled for each full year of service, commencing with those
directors who were elected at the 1997 Annual Meeting, to receive a grant of
options to purchase 10,000 shares of Common Stock which vests at the end of such
year of service. The Company also has adopted an Omnibus Stock Incentive Plan
and the 1997 Stock Incentive Plan in which directors are eligible to
participate. See "Executive Compensation - Omnibus Stock Incentive Plan; -- 1997
Stock Incentive Plan." Steven A. Newman has entered into a consulting agreement
with the Company. See "Executive Compensation --Consulting Agreements."
Omnibus Stock Incentive Plan
The 1996 Omnibus Stock Incentive Plan (the "1996 Incentive Plan") was
adopted by the Company's Board of Directors effective January 1, 1996. The 1996
Incentive Plan provides for the granting of incentive stock options ("Incentive
Stock Options") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), nonqualified stock options, stock appreciation
rights ("SARs") and grants of shares of Common Stock subject to certain
restrictions ("Restricted Stock") up to a maximum of 650,000 shares to officers,
directors, employees and others. Incentive Stock Options can be awarded only to
employees of the Company at the time of the grant. No options, SARs or
restricted stock ("Restricted Stock") may be granted under the 1996 Incentive
Plan subsequent to December 31, 2006. To date, options have been granted to
purchase all of the 650,000 shares of Common Stock reserved for issuance under
the 1996 Incentive Plan.
The 1996 Incentive Plan is administered by the Compensation Committee
of the Board of Directors (subject to the authority of the full Board of
Directors), which determines the terms and conditions of the options, SARs and
Restricted Stock granted under the 1996 Incentive Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof.
Dr. Steven A. Newman, Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg,
Esq. currently are the members of the Compensation Committee.
- 45 -
<PAGE>
The exercise price of all Incentive Stock Options granted under the
1996 Incentive Plan must equal at least the fair market value of the Common
Stock on the date of grant. In the case of an optionee who owns stock possessing
more than ten percent of the total combined voting power of all classes of stock
of the Company ("Substantial Stockholders"), the exercise price of Incentive
Stock Options must be at least 110% of the fair market value of the Common Stock
on the date of grant. The exercise price of all nonqualified stock options
granted under the 1996 Incentive Plan shall be determined by the Compensation
Committee. The term of any Incentive Stock Option granted under 1996 the
Incentive Plan may not exceed ten years, or, for Incentive Stock Options granted
to Substantial Stockholders, five years. The 1996 Incentive Plan may be amended
or terminated by the Board of Directors, but no such action may impair the
rights of a participant under a previously granted option.
The 1996 Incentive Plan provides the Board of Directors or the
Compensation Committee the discretion to determine when options granted
thereunder shall become exercisable and the vesting period of such options. Upon
termination of a participant's employment or relationship with the Company, all
options terminate and no longer are exercisable unless termination is due to
death or disability, in which case the options are exercisable within one year
of termination. The Compensation Committee has granted extensions of the period
before which options may be exercised for certain terminated employees.
The 1996 Incentive Plan provides that upon a change in control of the
Company, all previously granted options and SARs immediately shall become
exercisable in full and all Restricted Stock immediately shall vest and any
applicable restrictions shall lapse. The 1996 Incentive Plan defines a change of
control as the consummation of a tender offer for 25% or more of the outstanding
voting securities of the Company, a merger or consolidation of the Company into
another corporation less than 75% of the outstanding voting securities of which
are owned in aggregate by the stockholders of the Company immediately prior to
the merger or consolidation, the sale of substantially all of the Company's
assets other than to a wholly-owned subsidiary, or the acquisition by any
person, business or entity other than by reason of inheritance of over 25% of
the Company's outstanding voting securities. The change of control provisions of
the 1996 Incentive Plan may operate as a material disincentive or impediment to
the consummation of any transaction which could result in a change of control.
The 1996 Incentive Plan provides the Board of Directors or the
Compensation Committee discretion to grant SARs in connection with any grant of
options. Upon the exercise of a SAR, the holder shall be entitled to receive a
cash payment in an amount equal to the difference between the exercise price per
share of options then exercised by him and the fair market value of the Common
Stock as of the exercise date. The holder is required to exercise options
covering the number of shares, which are subject to the SAR so exercised. SARs
are not exercisable during the first six months after the date of grant, and may
be transferred only by will or the laws of descent and distribution.
The 1996 Incentive Plan also provides the Board of Directors or the
Compensation Committee discretion to grant to key persons shares of Restricted
Stock subject to certain limitations on transfer and substantial risks of
forfeiture.
1997 Stock Incentive Plan
The 1997 Stock Incentive Plan (the "1997 Incentive Plan") was adopted
by the Company's Board of Directors on April 10, 1997. The 1997 Incentive Plan
provides for the granting of Incentive Stock Options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
nonqualified stock options, SARs and grants of shares of Common stock subject to
certain restrictions (collectively, "Awards") up to a maximum of 1,650,000
shares to officers, directors, key employees and others. Incentive Stock Options
can be awarded only to employees of the Company at the time of the grant. No ISO
may be granted under the 1997 Incentive Plan after April 9, 2007.
- 46 -
<PAGE>
The 1997 Incentive Plan is administered by the Board of Directors or a
Committee of the Board of Directors, which determines the terms and conditions
of the Awards granted under the 1997 Incentive Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof.
Dr. Steven A. Newman, Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg,
Esq. currently are the members of the Committee.
The exercise price of all Incentive Stock Options granted under the
1997 Incentive Plan must equal at least the fair market value of the Common
Stock on the date of grant. In the case of Substantial Stockholders, the
exercise price of Incentive Stock Options must be at least 110% of the fair
market value of the Common Stock on the date of grant. The exercise price of all
nonqualified stock options granted under the 1997 Incentive Plan shall be
determined by the Compensation Committee. The term of any Incentive Stock Option
granted under the 1997 Incentive Plan may not exceed ten years, or, for
Incentive Stock Options granted to Substantial Stockholders, five years. The
1997 Incentive Plan may be amended or terminated by the Board of Directors, but
no such action may impair the rights of a participant under a previously granted
option.
The 1997 Incentive Plan provides the Committee the discretion to
determine when options granted thereunder shall become exercisable and the
vesting period of such options. Upon termination of a participant's employment
or relationship with the Company, options may be exercised only to the extent
exercisable on the date of such termination (within three months), but not
thereafter, unless termination is due to death or disability, in which case the
options are exercisable within one year of termination.
The 1997 Incentive Plan provides the Committee discretion to grant SARs
to key employees, consultants and directors. Promptly after exercise of a SAR
the holder shall be entitled to receive in chase, by check or in shares of
Common Stock, an amount equal to the excess of the fair market value on the
exercise date of the shares of Common Stock as to which the SAR is exercised
over the base price of such shares, which shall be determined by the Committee
The 1996 Incentive Plan also provides the Committee discretion to grant
to key persons shares of restricted stock subject to certain contingencies and
restrictions as the Committee may determine.
As of December 31, 1997 a total of 1,627,430 options were outstanding.
Each of the outstanding options has an exercise price at least equal to the fair
market value of the Common Stock on the date of grant with the exception of
80,000 shares which are subject to acquisition by an officer of the Company and
20,000 shares which are subject to acquisition by an employee of the Company at
$0.0l per share over the period 1995 through 1999. As of December 31, 1997,
there were no SARs outstanding and there has been one grant of Restricted Stock
of 10,000 shares of Common Stock to a former officer of the Company.
Escrowed Shares
As a condition to the Company's initial public offering (the "IPO"),
Royce Investment Group, the Representative of the several underwriters (the
"Representative"), required certain of the Company's stockholders to deposit a
total of 1,800,000 shares of Common Stock (the "Escrowed Shares"), in escrow
pursuant to an escrow agreement with Continental Stock Transfer & Trust Company,
the escrow agent and the Representative. Of such Escrowed Shares, 1,707,210
shares are owned by officers and directors of the Company. The Escrowed Shares
are subject to incremental release to the depositing stockholders based upon the
Company's total revenues and net earnings (loss) for the 12-month periods ending
September 30, 1997, 1998 and 1999. The Escrowed Shares will be released in the
amounts set forth below only upon the achievement by the Company of the
following Performance Targets:
- 300,000 shares if the Company achieves gross revenues of at
least $20,000,000 and a net loss, if any, not in excess of $500,000 for the 12
months ending September 30, 1997;
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<PAGE>
- 750,000 shares if the Company achieves gross revenues of at
least $45,000,000, and earnings per share of at least $1.00 for the 12 months
ending September 30, 1998; and
- 750,000 shares if the Company achieves gross revenues of at
least $90,000,000 and earnings per share of at least $1.25 for the 12 months
ending September 30, 1999.
Notwithstanding the foregoing, if at any time the closing bid price of
the Common Stock reported on The Nasdaq SmallCap Market equals or exceeds $11.00
per share for 25 consecutive trading days or for 30 out of 35 consecutive
trading days (the "Nasdaq Price Target") during the period ending September 30,
1999, all Escrowed Shares then remaining in escrow will be released from the
escrow and returned to the stockholders.
The Escrowed Shares will be subject to incremental release only in the
event the Company achieves the Performance Targets in the 12 months ending
September 30, 1997, 1998 and/or 1999. In addition, upon achieving the Nasdaq
Price Target at any time during the period ending on or prior to September 30,
1999 all then Escrowed Shares will be released. 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 above prior to the expiration
of the applicable 12-month period), the Escrowed Shares in the amounts stated
above will be returned to the Company and canceled. Pursuant to such agreement,
300,000 shares of the Company's Common Stock have been returned to the Company
and canceled for failure to meet the required Performance Target for the 12
months ending September 30, 1997. The earnings per share calculation will be
based on the fully diluted earnings per share, but excluding shares issued
pursuant to the Unit Purchase Option granted to the Representative,
extraordinary items, or any compensation expense charged to the Company related
to the release of the Escrowed Shares. The determination of earnings per share
will be made in accordance with generally accepted accounting principles and
will be based on the financial statements of the Company filed pursuant to the
Securities Exchange Act of 1934, as amended. Escrowed Shares are not
transferable or assignable although they may be voted by the holder.
The Performance Targets and the Nasdaq Price Target were determined by
negotiation between the Company and the Representative and do not imply or
predict any future performance by the Company. The market value of any Escrowed
Shares held by officers, employees or consultants at the time they are released
will be deemed to be additional compensation expense to the Company. Upon such
an occurrence the Company will recognize a potentially material charge to income
which could reduce or eliminate earnings, if any. The amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity or working capital.
Given the expected start of volume production in the current quarter,
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
Escrowed 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 Escrowed 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.
- 48 -
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of September 24, 1998, certain
information regarding the ownership of voting securities of the Company by each
stockholder known to the management of the Company to be (i) the beneficial
owner of more than 5% of the Company's outstanding Common Stock, (ii) the
directors of the Company, (iii) the executive officers named in the Summary
Compensation Table herein under "Executive Compensation" and (iv) all executive
officers and directors as a group. The Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
Amount of Shares
Beneficially
Name(1) Owned Percentage Owned
- ------- ---------------- -----------------
<S> <C> <C>
Edward G. Newman .......................... 3,771,721 (2) 18.0%
Dr. Steven A. Newman....................... 1,683,897 (3) 8.0%
George Allen............................... ---- *
Eugene J. Amobi............................ 360,000 (4) 1.7%
Keith P. Hicks, Esq........................ 414,171 (4) 2.0%
Phillip E. Pearce.......................... 60,000 (4) *
James J. Ralabate, Esq..................... 108,121 (4) *
Jacques Rebibo............................. 197,500 (5) *
Lt. Gen. Harry E. Soyster (Ret.)........... 84,061 (4) *
Kaz Toyosato .............................. 50,000 (6) *
Martin Eric Weisberg, Esq.................. 60,000 (4) *
Officers and directors (13 persons)........ 7,135,556 (7) 32.2%
</TABLE>
(1) The address for Mr. Edward G. Newman and Dr. Steven A. Newman is 12701
Fair Lakes Circle, Suite 550, Fairfax, Virginia 22033; the address for
Mr. Allen is 1 James Center, 901 East Cary Street, Richmond, Virginia
23219; the address for Mr. Amobi is 100 Jade Drive, Wilmington,
Delaware 19810; the address for Mr. Hicks is 4121 Roberts Road,
Fairfax, Virginia 22032; the address for Mr. John P. Moynahan is 12303
Blair Ridge Road, Fairfax, Virginia 22033; the address for Mr. Pearce
is 6624 Glenleaf Court, Charlotte, North Carolina 28270; the address
for Mr. Ralabate is 5792 Main Street, Williamsville, New York 14221;
the address for Mr. Rebibo is 7216 Dulany Drive, McLean, Virginia
22101; the address for Lt. Gen. Soyster (Ret.) is 1201 E. Abingdon
Drive, Suite 425, Alexandria, Virginia 22314; the address for Mr.
Toyosato is Kita-Shinagawa 5-12-6, Wakabayashi Bldg. 2F, Shinagawa-Ku,
Tokyo Japan 141-0001; and the address for Mr. Weisberg is 1211 Avenue
of the Americas, New York, New York 10036.
(2) Excludes 200,000 shares of Common Stock beneficially owned by an
irrevocable trust for Mr. Newman's children and 747,753 shares of
Common Stock beneficially owned by Mr. Newman's wife, Francis C.
Newman. Mr. Newman disclaims beneficial ownership of all such shares.
(3) Includes 110,000 shares of Common Stock issuable upon exercise of
currently exercisable options. Excludes 100,000 shares of Common Stock
beneficially owned by a trust for the benefit of Dr. Newman's children
and 57,800 shares of Common Stock owned by a trust for the benefit of
two relatives of Dr. Newman. Dr. Newman disclaims beneficial ownership
of such shares.
(4) Includes 60,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
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<PAGE>
(5) Mr. Rebibo served as a director of the Company through August 28,
1997. His holdings include 10,000 shares of Common Stock issuable upon
exercise of currently exercisable options.
(6) Includes 50,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(7) Includes 580,250 shares of Common Stock issuable upon exercise of
currently exercisable options. Also includes the holdings of Frances
C. Newman and Jeffrey Pagano, two additional key executives of the
Company, who hold, respectively, 797,753 shares of Common Stock
(including 50,000 shares of Common Stock issuable upon currently
exercisable options) and 250 shares of Common Stock.
- 50 -
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with transactions described below, the Company did not
secure an independent determination of the fairness and reasonableness of such
transactions and arrangements with affiliates of the Company. In each instance
described below, the disinterested directors (either at or following the time of
the transaction) reviewed and approved the fairness and reasonableness of the
terms of the transaction. The Company believes that each transaction was fair
and reasonable to the Company and on terms at least as favorable as could have
been obtained from non-affiliates. Transactions between any corporation and its
officers and directors are subject to inherent conflicts of interest.
Tech International and Tech Virginia
Since December 1992, the Company has maintained various business
relationships with Tech International and since 1994, with Tech Virginia. Tech
International operates a computer software and consulting business. Until
December 30, 1994, Tech International's Virginia operations were conducted
through its Virginia business unit. In December 30, 1994, Tech International
spun-off the Virginia business unit (the "Spin-Off") as Tech Virginia. Edward G.
Newman, a principal stockholder, director and the Chairman, President and Chief
Executive Officer of the Company and Steven A. Newman and Eugene J. Amobi,
directors of the Company, were the stockholders, and continue as officers and
directors of Tech Virginia. Eugene J. Amobi is the sole director and stockholder
of Tech International.
Management Personnel Agreements with Tech Virginia
Messrs. Edward G. Newman, Steven A. Newman and Eugene Amobi each had
employment agreements with Tech Virginia under which each of them was entitled
to a salary and each was eligible to receive certain bonuses. The agreements
with Messrs. Edward G. Newman and Steven A. Newman required each of them to
devote only reasonable time and attention to Tech Virginia, provided their
activities for Tech Virginia did not interfere with their obligations to the
Company. Upon the acquisition of Tech Virginia by the Company, such employment
agreements were terminated by agreement with Messrs. Newman, Newman, and Amobi.
Messrs. Newman, Newman and Amobi have continued to provide services to Tech
Virginia since the acquisition without contract but under similar terms and
conditions as their terminated agreements.
During fiscal 1997, the Company accrued, but did not pay, approximately
$97,800, respectively, in salaries and automobile allowances payable to Eugene
Amobi, a director of the Company, for services provided to Tech Virginia. As of
December 31, 1997, the total amount accrued and owed for such items to Mr. Amobi
was approximately $215,000, which was reduced by $25,000 paid to an entity
affiliated with Mr. Amobi after December 31, 1997.
Consulting Agreement
Steven A. Newman has entered into a consulting agreement with the
Company. See "Executive Compensation - Consulting Agreements."
Legal Services
James J. Ralabate, Esq. was paid $68,031 and $275,548 in fees and
disbursements for legal services rendered to the Company during fiscal 1996 and
fiscal 1997, respectively.
Parker Chapin Flattau & Klimpl, LLP, the law firm where Martin Eric
Weisberg, Esq. is a partner, was paid $5,179 and $137,346.15 in fees and
disbursements for legal services rendered to the Company during fiscal 1996 and
fiscal 1997, respectively.
- 51 -
<PAGE>
SELLING STOCKHOLDER
The Shares being offered for resale by the Selling Stockholder are
issuable to the Selling Stockholder pursuant to the Financing Arrangement
between the Company and the Selling Stockholder. See "Financing Arrangement."
The following table sets forth certain information regarding the ownership of
shares of Common Stock by the Selling Stockholder assuming the sale by the
Company of up to approximately $10,100,000 of Common Stock under the Financing
Arrangement, and as adjusted to reflect the sale of the Shares. The information
in the table concerning the Selling Stockholder who may offer Shares hereunder
from time to time is based on information provided to the Company by such
stockholder. Information concerning the Selling Stockholder 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."
<TABLE>
<CAPTION>
Shares of Common Stock Owned
after Offering
-------------------------------------------
Shares of
Common Shares of
Stock Owned Common
Prior to Stock to be
Offering (2) Sold Number Percent
----------------- ----------------- ------------------ ------------------
HSBC James Capel Canada,
<S> <C> <C> <C> <C>
Inc. --- 2,100,000 2,100,000 10.0%
----------------- ----------------- ------------------ ------------------
</TABLE>
(1) Assumes that the Company will sell up to approximately $10,100,000 of
Common Stock to the Selling Stockholder under the Financing
Arrangement. See "Financing Arrangement."
(2) As of the date of this Prospectus, the Selling Stockholder does not
own any shares of the Company's Common Stock. If all of the shares
offered hereby were purchased and held by the Selling Stockholder, it
would hold 10.0% of the outstanding Common Stock of the Company.
The Selling Stockholder is not affiliated with the Company. The Selling
Stockholder has not had any material relationship with the Company within the
past three years.
- 52 -
<PAGE>
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 24,155,566 shares of Common Stock that will be
outstanding or registered for sale upon the completion of this offering,
22,391,426 will be freely tradeable without restriction or further registration
under the Securities Act. This includes 19,194,366 shares of Common Stock which
are issued and outstanding, 141,700 unissued shares of Common Stock registered
in connection with the Series C Preferred Stock, 955,360 unissued shares of
Common Stock registered in connection with the April 1998 Equity Line of Credit
Private Placement and the 2,100,000 unissued shares of Common Stock registered
in connection with this Financing Arrangement. The remaining 1,764,140 shares
include 1,500,000 shares of Common Stock which are "Escrowed Shares" (see
"Executive Compensation -- Escrowed Shares") and are subject to incremental
release over a two-year period of certain share targets are met, and 264,140
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.
- 53 -
<PAGE>
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
20,958,506 shares of Common Stock and 281 shares of Series C Preferred Stock
issued and outstanding. The Company currently has reserved 6,827,952 shares of
Common Stock for issuance pursuant to outstanding options and warrants.
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").
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.
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
- 54 -
<PAGE>
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.
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.
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.
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.
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.
Transfer Agent and Registrar
The Company has appointed Continental Stock Transfer & Trust Company as
Transfer Agent and Registrar for the Common Stock and the Redeemable Warrants.
- 55 -
<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 shares of Common Stock being registered for offer by the Company
will be issued directly to HSBC James Capel Canada, Inc. ("HSBC") in connection
with the Financing Arrangement whereby the Company, at its option, may issue up
to (a) $31,200,000 of Common Stock to HSBC over a twelve-month period based on
weekly, monthly or quarterly draw downs at a per share purchase price equal to
the lesser of (i) 100% of the average of the daily volume weighted average price
of the Common Stock on NASDAQ SmallCap Market for a certain number of
consecutive trading days preceding the funding date of the draw down and (ii)
$8.00; provided, however, that if the purchase price of the Common Stock is less
than $3.00, HSBC will not be obligated to fund such weekly, monthly or quarterly
draw down, (b) $31,200,000 of Common Stock pursuant to the option granted by the
Company to HSBC to purchase an additional amount of Common Stock equal to the
maximum amount permitted to be drawn down for each draw down (the "Call
Options") and (c) approximately 98,000 Shares, which Shares will be issued upon
exercise of the Warrants which the Company will issue to the investor at each
draw down. See "Financing Arrangement."
- 56 -
<PAGE>
The distribution of the Shares by the Selling Stockholder 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 Stockholder may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Stockholder 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 Stockholder and any broker-dealers or other persons
acting on the behalf of parties that participate with such Selling Stockholder
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.
To the extent required under the Securities Act, a supplemental
prospectus will be filed, disclosing (a) the name of any such broker-dealers,
(b) the number of Shares involved, (c) the price at which such Shares are to be
sold, (d) the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable, (e) that such broker-dealers did not conduct
any investigation to verify the information set out in this Prospectus, as
supplemented, and (f) other facts material to the transaction.
The Company will not receive any proceeds from the sale of the Shares
by the Selling Stockholder offered hereby. However, the Company expects to
receive proceeds from the Financing Arrangement and to use such proceeds for
general corporate purposes. The Company has agreed to pay all costs and expenses
incurred in connection with the registration of the Common Stock offered hereby.
Pursuant to the Subscription Agreement, the Company and HSBC have
agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act, which may be based upon, among other
things, any untrue statement or alleged untrue statement of a material fact made
by the Company or HSBC, as the case may be, or any omission or alleged omission
of a material fact with respect to the Company or HSBC, as the case may be. The
Company shall bear customary expenses incident to the registration of the Shares
for the benefit of HSBC 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 HSBC.
The Company has agreed to keep the Registration Statement relating to
the offering and sale of the Common Stock to HSBC continuously effective until
the earlier of sale of all the Shares or 12 months.
- 57 -
<PAGE>
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 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.
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.
- 58 -
<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 two years then ended included in this Prospectus have been so
included 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.
- 59 -
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 and June 30, 1998 (unaudited)............... F-3
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996 and the
six months ended June 30, 1998 (unaudited) and 1997 (unaudited)....................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 (unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 and the
six months ended June 30, 1998 (unaudited) and 1997 (unaudited)....................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F- 1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Xybernaut Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Xybernaut
Corporation and Subsidiary (the Company) as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Xybernaut
Corporation and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company experienced a net loss of
$9,479,966 in 1997 and as discussed in Note 1 to the financial statements, is
currently negotiating a commitment for an equity placement and a standby equity
line. The Company's ability to draw upon this line of credit is contingent upon
their ability to file and have the Securities and Exchange Commission declare
effective a registration statement for these securities. In the event the
Company can draw upon this standby equity line of credit, continuation of the
business thereafter is dependent on the Company's ability to achieve a
sufficient cash flow to meet its cash requirements. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan in regard to these matters is also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
McLean, VA
March 31, 1998
F- 2
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, December 31, June 30,
1997 1996 1998
---------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 952,366 $ 6,274,967 $ 4,014,723
Accounts receivable 216,767 427,790 182,363
Inventories 1,607,781 402,381 1,172,699
Prepaid and other current assets 334,245 197,711 399,883
---------------- ---------------- ----------------
Total current assets 3,111,159 7,302,849 5,769,668
---------------- ---------------- ----------------
Fixed assets:
Property and equipment, net 505,695 323,828 773,788
---------------- ---------------- ----------------
Other assets:
Patent costs, net 384,422 247,612 414,683
Tooling costs, net 376,990 106,738 312,368
Other 153,351 33,547 163,396
---------------- ---------------- ----------------
Total other assets 914,763 387,897 890,447
---------------- ---------------- ----------------
Total assets $ 4,531,617 $ 8,014,574 $ 7,433,903
================ ================ ================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ 19,530 $7,849 $-
Accounts payable 429,780 250,944 468,337
Deferred licensing revenue - 60,000 -
Accrued expenses 908,372 571,742 809,068
---------------- ---------------- ----------------
Total current liabilities 1,357,682 890,535 1,277,405
---------------- ---------------- ----------------
Long-term liabilities:
Notes and loans payable - 44,080 -
Deferred licensing revenue - 190,000 -
---------------- ---------------- ----------------
Total long-term liabilities - 234,080 -
---------------- ---------------- ----------------
Total liabilities 1,357,682 1,124,615 1,277,405
---------------- ---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 6,000,000, 5,000,000
and 6,000,000 (unaudited), shares authorized in 1997,
1996 and as of June 30, 1998 3,000 shares designated as
Series A, for all periods 2,250 shares issued and
outstanding as of December 31, 1997, no shares issued
and outstanding 1996 or as of June 30, 1998 (unaudited)
3,180 shares designated as Series B for all periods, 3,180
shares issued and outstanding as of December 31, 1997,
no shares issued and outstanding 1996 or as of June 30,
1998 (unaudited); 375 shares designated as Series C,
375 shares issued and outstanding as of June 30, 1998
no shares issued and outstanding;
for 1997 or 1996 4,193,355 - 364,754
Common stock, $.01 par value, 40,000,000, 30,000,000
and 40,000,000 (unaudited) shares authorized in 1997,
1996 and as of June 30, 1998, 14,360,515, 14,259,112
and 20,934,765 (unaudited) shares issued
and outstanding as of December 31, 1997, 1996 and as of
June 30, 1998 143,605 142,591 209,348
Additional paid-in capital 17,181,329 15,520,245 27,636,785
Deferred compensation (91,511) - (9,042)
Accumulated deficit (18,252,843) (8,772,877) (22,045,347)
---------------- ---------------- ----------------
Total stockholders' equity 3,173,935 6,889,959 6,156,498
---------------- ---------------- ----------------
Total liabilities and stockholders' equity $ 4,531,617 $8,014,574 $ 7,433,903
================ ================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 3
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, Six Months Ended June 30,
------------------------------------- ---------------------------------------
1997 1996 1998 1997
---------------- ------------------ ------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases $ 555,522 $ 928,732 $ 356,861 $ 220,458
Consulting and license 257,000 164,609 1,839 30,000
---------------- ------------------ ------------------ ------------------
Total revenue 812,522 1,093,341 358,700 250,458
Cost of sales 1,225,572 1,081,197 379,476 409,790
---------------- ------------------ ------------------ ------------------
Gross profit (loss) (413,050) 12,144 (20,776) (159,332)
Operating expenses:
Sales and marketing 3,280,356 1,442,146 1,151,147 1,489,195
General and administrative 3,518,868 2,158,212 1,617,879 1,885,214
Research and development 2,350,237 1,773,015 1,010,769 1,196,319
---------------- ------------------ ------------------ ------------------
Total operating expenses 9,149,461 5,373,373 3,779,795 4,570,728
---------------- ------------------ ------------------ ------------------
Operating loss (9,562,511) (5,361,229) (3,800,571) (4,730,060)
Interest income, net 82,545 122,693 8,067 49,129
---------------- ------------------ ------------------ ------------------
Net loss (9,479,966) (5,238,536) (3,792,504) (4,680,931)
---------------- ------------------
Provision for preferred stock
dividends 82,905 - 2,344 -
Provision for accretion on
preferred stock beneficial
conversion feature 488,693 - - -
---------------- ------------------
Net loss applicable to holders of
common stock $ (10,051,564) $ (5,238,536) $ (3,794,848) $ (4,680,931)
================ ================== ================== ==================
Per common share (basic and diluted):
Net loss before provisions for
preferred stock $ (0.74) $ (0.47) $ (0.22) $ (0.38)
Total provisions for preferred
stock (0.04) - - -
---------------- ------------------ ------------------ ------------------
Net loss applicable to holders of
common stock $ (0.78) $ (0.47) $ (0.22) (0.38)
================ ================== ================= ==================
Weighted average number of
common shares outstanding
(basic and diluted) 12,844,974 11,121,594 17,016,067 12,459,112
================ ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 4
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total Value of Shares
Total Number of Shares Additional Total
---------------------- - Paid-in Accumulated Deferred Stockholder's
Common Preferred Common Preferred Capital Deficit Compensation Equity
------ --------- ------ --------- --------- ------------------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995......... 10,372,489 -- $ 103,725 --$ 2,337,663 $(3,534,341) -- $(1,092,953)
Shares issued pursuant to IPO...... 2,415,000 -- 24,150 -- 10,818,337 -- -- 10,842,487
Shares issued pursuant to conversion
debentures...................... of1,431,427 -- 14,314 -- 2,290,244 -- -- 2,304,558
Shares issued pursuant to redemption
warrants........................ of 20,000 -- 200 -- 34,800 -- -- 35,000
Shares issued for services and incentives 20,496 -- 205 -- 89,201 -- -- 89,406
Acquisition of Tech Virginia....... (300) -- (3) -- (50,000) -- -- (50,003)
Net loss........................... -- -- -- -- -- (5,238,536) -- (5,238,536)
----------- ------ --------- ---------------------- ------------ ---------- ------------
Balance, December 31, 1996......... 14,259,112 -- 142,591 -- 15,520,245 (8,772,877) -- 6,889,959
Issuance of Series A Preferred Stock -- 3,000 -- $2,761,669 -- -- -- 2,761,669
Partial conversion of Series A Stock
Common Stock.................... into250,000 (750) 2,500 (690,417) 687,917 -- -- --
Cancellation of escrow shares of
Common Stock.................... (300,000) -- (3,000) -- 3,000 -- -- --
Cancellation of accrued shares of
Common Stock.................... (1,747) -- (17) -- 17 -- -- --
Issuance of Series B Preferred Stock -- 3,180 -- 2,948,737 -- -- -- 2,948,737
Exercise of stock options.......... 150,000 -- 1,500 -- -- -- -- 1,500
Value of beneficial conversion featur
on Series A and B Preferred Stock e -- -- -- 1,219,712 (1,219,712) -- -- --
Accretion of deemed dividend of
Preferred Stock................. -- -- -- 488,693 (488,693) -- -- --
Preferred stock dividend requirements -- -- -- -- (82,905) -- -- (82,905)
Issuance of warrants on Common Stock -- -- -- -- 217,000 -- $ (217,000) --
Compensation related to Common Stock
warrants........................ -- -- -- -- -- -- 125,489 125,489
Warrants issued in connection with
Preferred Stock offerings....... -- -- -- (95,615) 95,615 -- -- --
Dividends on preferred stock paid with
Common Stock.................... -- 31 -- 9,421 -- -- 9,452
Net loss........................... -- -- -- -- -- (9,479,966) -- (9,479,966)
----------- ------ --------- ---------- ----------- ------------ ---------- ------------
Balance, December 31, 1997......... 14,360,515 5,430 143,605 4,193,355 17,181,329 (18,252,843) (91,511) 3,173,935
Issuance of Series B Preferred Stock
(unaudited)..................... -- 1,000 -- 875,299 -- -- -- 875,299
Issuance of Series C Preferred Stock
(unaudited)..................... -- 375 364,754 364,754
Partial conversion of Series A Prefer 1,887,277
Stock into Common Stock
(unaudited)..................... re1,652,649 (2,250) 16,527 ( ) 1,870,750 -- -- --
Partial conversion of Series B Preferre3,128,045 3,555,602
Stock into Common Stock (unaudited) (4,180) 31,280 ( ) 3,524,322 -- -- --
Sales of Common Stock (unaudited).. 1,649,718 16,498 5,265,556 5,282,054
Issuance of accrued Common Stock
(unaudited)..................... 50,000 500 97,938 98,438
Accretion of deemed dividend of
Preferred Stock (unaudited)..... -- -- -- 374,225 (374,225) -- -- --
Preferred Stock dividend requirements
(unaudited)..................... -- -- -- -- (52,220) -- -- (52,220)
Compensation related to Common
Stock warrants (unaudited)...... -- -- -- -- -- -- 82,469 82,469
Dividends on preferred stock paid
with Common Stock (unaudited)... 96,988 -- 970 -- 126,453 -- -- 127,423
Cancellation of accrued shares of
Common Stock (unaudited)........ (3,150) -- (32) -- (3,118) -- -- (3,150)
Net loss (unaudited)............... -- -- -- -- -- (3,792,504) -- (3,792,504)
----------- ------ --------- ---------- ----------- ------------ ---------- ------------
Balance, June 30, 1998 (unaudited). 20,934,765 375 $209,348 $364,754 $27,636,785 $(22,045,347) $(9,042) $6,156,498
=========== ====== ========= ========== =========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 5
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended December 31, Six Months Ended June 30,
------------------------------- ---------------------------------
1997 1996 1998 1997
-------------- --------------- --------------- ----------------
Cash flows from operating activities: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $ (9,479,966) $ (5,238,536) $ (3,792,504) $ (4,680,931)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 277,299 264,699 152,185 160,547
Provision for write-down of inventory 724,978 202,440 - -
Provision for bad debts 253,211 - (30,697) -
Non cash charges for tooling costs - - 138,682 -
Non cash charges for stock and options issued for
services 125,489 89,406 82,469 125,488
Changes in assets and liabilities:
Inventories (1,930,378) (354,871) 109,730 (295,792)
Accounts receivable (42,188) (337,065) 65,101 (2,338)
Prepaid and other current assets (136,534) (177,094) (65,638) (184,312)
Other assets (119,804) (10,540) (10,528) (4,798)
Accounts payable and accrued expenses 515,466 177,619 (14,873) (74,373)
Deferred licensing revenue (250,000) 250,000 - (30,000)
-------------- --------------- --------------- ----------------
Net cash used in operating activities (10,062,427) (5,133,942) (3,366,073) (4,986,509)
-------------- --------------- --------------- ----------------
Cash flows from investing activities:
Acquisition of property and equipment (364,678) (315,257) (33,515) (306,962)
Acquisition of patents and related costs (231,298) (114,618) (91,190) (155,888)
Capitalization of tooling costs and other assets (270,252) (106,738) (74,060) (284,294)
-------------- --------------- --------------- ----------------
Net cash used in investing activities (866,228) (536,613) (198,765) (747,144)
-------------- --------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from:
Preferred stock offerings, net 5,710,406 - 1,348,496 2,785,000
Common stock offerings, net - - 5,307,048 -
Debentures - 1,000,000 - -
Notes and loans 56,500 340,000 - -
Initial public offering - 13,282,500 - 215,000
Payments for:
Notes and loans (72,232) (591,161) (19,530) (48,924)
Acquisition of Tech Virginia (16,667) (33,334) - -
Initial public offering and debenture fees - (2,561,149) - -
Other (71,953) - (8,819) -
-------------- --------------- --------------- ----------------
Net cash provided by financing activities 5,606,054 11,436,856 6,627,195 2,951,076
-------------- --------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (5,322,601) 5,766,301 3,062,357 (2,782,577)
Cash and cash equivalents, beginning of period 6,274,967 508,666 952,366 6,274,967
-------------- --------------- --------------- ----------------
Cash and cash equivalents, end of period $ 952,366 $ 6,274,967 $ 4,014,723 $ 3,492,390
============== =============== =============== ================
Supplemental disclosure of cash information:
Cash paid during the period for interest $ 7,124 $ 71,750 $ 2,500 $ 8,527
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividen
requirements $ 9,421 $ - $ 126,453 $ -
============== =============== =============== ================
Common stock issued for services rendered $ - $ 89,406 $ 98,438 $ -
============== =============== =============== ================
Deferred compensation in connection with stock
warrants granted $ 217,000 $ - $ - $ -
============== =============== =============== ================
Issuance of warrants in connection with preferred
stock offering 95,615 $ $ - $ -
============== =============== =============== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 6
<PAGE>
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Financing:
The Company:
Xybernaut Corporation (the "Company") was originally incorporated in
Virginia in October 1990 as Contemporary Products & Services, Inc. and changed
its name to Computer Products & Services, Inc. ("CPSI") in 1992. In April 1996,
the Company was merged with Xybernaut Corporation to change the Company name and
reincorporate in Delaware. Since the commencement of operations in November
1992, the Company has engaged in the research, development and commercialization
of products intended to bridge the widening gap between people and knowledge.
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) product. Additional software products are planned for
development and use on the Mobile Assistant(R) and other personal computers.
On July 18, 1996, the Company successfully completed the Initial Public
Offering ("IPO") of its Common Stock and warrants (NASDAQ symbol XYBR and XYBRW)
which are traded on the NASDAQ SmallCap Market.
The Company was a development stage enterprise through March 31, 1995.
Subsequently, the Company has commenced principal operations and, accordingly,
these financial statements are not presented in compliance with Statement of
Financial Accounting Standard No. 7 which describes the financial presentation
for development stage enterprises.
Financing:
The Company has received a commitment for an equity placement of $1
million and a standby equity line of $10 million and is in the process of
finalizing these arrangements. The Company's ability to draw upon this line of
credit is contingent upon its ability to file and have the Securities and
Exchange Commission declare effective a registration statement for these
securities. In the event the Company can draw upon this standby equity line of
credit, continuation of the business thereafter is dependent on the Company's
ability to achieve a sufficient cash flow to meet its cash requirements. This
commitment expires on April 14, 1998. It is the opinion of the Company's
management that such funding arrangements are readily available to the Company
and the execution of any such arrangements is a decision that will depend on
timing, market conditions and the final terms and conditions of such
arrangements. 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 Mobile Assistant(R) are expected to provide significant 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 as soon as appropriate collateral is available. The
Company's management believes that the combination of cash on hand, operating
cash flows, and additional outside funding will provide sufficient liquidity to
meet the Company's cash requirements until at least March 1999.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Tech International of Virginia Inc.
("TechVirginia"). In connection with the IPO, the Company
F- 7
<PAGE>
exercised its option to acquire all of the capital stock of Tech Virginia.
Financial statements prior to the exercise of the option reflect the combined
financial position and results of operations of the Company and Tech Virginia.
All significant intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories:
Inventories, consisting principally of component parts held for resale,
are stated at the lower of cost or market, with cost determined by the first-in,
first-out method. As of December 31, 1997 and 1996, the allowance to reduce
inventory balances to net realizable value was $724,978 and $202,440,
respectively. Most of the reserves and write downs in inventory values result
from the introduction of new products and technology resulting in a reduction or
loss of value of older products or technology. The sales prices of the 133P
model of the Mobile Assistant(R) will be monitored in light of the introduction
of the MA IV model and reserves will be taken as appropriate if the value of the
133P inventory is determined to have been impaired. At this point, the Company's
management does not believe that the value of the 133P model has been
significantly impaired by the introduction of the MA IV.
Property, Equipment, Furniture and Fixtures:
Property, equipment, furniture and fixtures are stated at cost and are
depreciated on a straight-line basis over the estimated useful lives of the
assets, as follows:
Equipment............................. 3-5 years
Furniture and fixtures................ 5 years
Demonstrator units.................... 2 years
Leasehold improvements................ 3 years
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized.
Software Development Costs:
The Company's policy is to capitalize software development costs when
technological feasibility has been established, based on a detailed program
design that is complete, has been confirmed and for which no high-risk
development issues remain.
F- 8
<PAGE>
The establishment of technological feasibility and the ongoing
assessment of the recovery of capitalized software costs requires considerable
judgment by management with respect to certain external factors including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.
Capitalization of software costs will cease when the software is available for
general release to customers, at which time amortization of the costs begins.
These costs will be amortized using the greater of the amount computed using the
straight-line method over the remaining estimated economic life of the product
or the ratio of current gross revenues from the product to the total of current
and anticipated future gross revenues from the product. Since the Company is
currently in the planning and development phase for software toolkits, no costs
have been capitalized to date.
Intangible Assets:
Patent costs consist of legal fees, filing fees and other direct costs
incurred in obtaining and maintaining patents and are amortized on a
straight-line basis over a five-year period.
Tooling Costs:
Tooling costs consist of reimbursed expenses to third-party vendors for
molds to be used exclusively in the manufacturing of the Company's proprietary
head-mounted display ("HMD") and the computing unit for the Mobile Assistant
(R). Capitalized tooling costs will be transferred to inventory based on the
estimated total number of HMDs and computing units to be produced from the
molds. No costs have been transferred to inventory as of December 31, 1997.
Impairment of Long-Lived Assets:
Management of the Company monitors the carrying value of long-lived
assets for potential impairment on an on-going basis. Potential impairment would
be determined by comparing the carrying value of these assets with their
related, expected future net cash flows. Should the sum of the related, expected
future net cash flows be less than the carrying value, management would
determine whether an impairment loss should be recognized. An impairment loss
would be measured by the amount by which the carrying value of the asset exceeds
the future discounted cash flows.
Revenue Recognition and Warranties:
Product sales are recorded on shipment pursuant to a valid customer
purchase order. For equipment shipped under equipment rental or leasing
agreements, revenue is recognized on a straight-line basis over the term of the
rental or lease agreement. Consulting revenue is recognized as the services are
performed pursuant to a written agreement with the client. The Company generally
provides a one-year warranty on parts. The Company's suppliers for the computing
unit and the HMD provide the Company with similar warranties and as a result
warranty reserves are immaterial.
Research and Development Programs:
Research and development costs are charged to operations as incurred,
including the cost of components purchased for testing and product development
that are salable but are intended for development work only.
Income Taxes:
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Income tax expense is the
F- 9
<PAGE>
tax payable or refundable for the period plus or minus the change during the
period in deferred income tax assets and liabilities.
Net Loss Per Share:
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share," which requires the presentation of basic earnings per
share and diluted earnings per share. Basic earnings per share are based on the
weighted average number of outstanding shares of Common Stock. Diluted earnings
per share adjusts the weighted average for the potential dilution that could
occur if stock options, warrants or other convertible securities were exercised
or converted into Common Stock. For all periods presented herein and for
historical quarterly earnings per share amounts, diluted earnings per share is
the same as basic earnings per share for the Company because the effects of such
items were anti-dilutive given the losses incurred in such periods.
Earnings per share for all periods presented conform to SFAS No. 128.
Escrowed Shares:
Escrowed shares, if any, are considered issued and outstanding and
reported as such on the balance sheet. For purposes of computing the net loss
per common and common equivalent share, they are not considered outstanding
until the conditions for their release are met.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 1997 and 1996, because of the relatively short maturity of these
instruments. The carrying value of the notes and loans payable approximated fair
value as of December 31, 1997 and 1996, based upon market prices for the same or
similar debt issues.
Recent 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. The Company
will begin making the additional disclosures required by SFAS No. 130 in the
first quarter of 1998. 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 desegregates the entity for making internal operating decisions. The
Company will begin making the disclosures required by SFAS No. 131 with
financial statements for the period ending December 31, 1998.
Interim results (unaudited):
The accompanying consolidated balance sheet at June 30, 1998, the
consolidated statements of operations and cash flows for the six months ended
June 30, 1998 and 1997 and the consolidated statement of stockholders' equity
for the six months ended June 30, 1998 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting of
only normal recurring adjustments necessary for the fair presentation of the
results for the interm periods. The data disclosed in the Notes to Consolidated
Financial Statements for these periods are unaudited. The results of operations
for such periods are not necessarily indicative of the results expected for the
full fiscal year or for any future period.
F- 10
<PAGE>
3. Property and Equipment:
Property and equipment consists of the following:
December, 31,
--------------------------------------
1997 1996
----------------- ----------------
Equipment......................... $ 537,635 $ 227,068
Furniture and fixtures............ 74,207 44,814
Demonstrator units................ 53,144 53,144
Leasehold improvements............ 149,659 124,941
----------------- ----------------
814,645 449,967
Less accumulated depreciation..... (308,950) (126,139)
----------------- ----------------
$ 505,695 $ 323,828
================= ================
Depreciation expense for the years ended December 31, 1997 and 1996 was
$186,761 and $80,231, respectively.
4. Debt:
Effective November 17, 1995, the Company sold $1,505,000 principal
amount of 7% Convertible Debentures due in 1997 (the "November 1995 Debentures")
and paid a placement fee of 10% to the placement agent in the form of an
interest-bearing promissory note due at the time of the IPO. On April 16, 1996,
the Company sold $1,000,000 principal amount of 7% Convertible Debentures due in
1997 (the "April 1996 Debentures") and paid a placement fee of 12% to the
placement agent in the form of an interest-bearing promissory note due at the
time of the IPO.
Under the terms of these debentures, the Company had the right to
redeem all debentures, at a price equal to 105% of principal, plus accrued
interest, if the IPO had not occurred within one year after the closing date.
The November 1995 Debentures and the April 1996 Debentures were to convert into
Units upon a successful IPO by the Company at the rate of one Unit for each
$1.75 in principal. The November 1995 Debentures and the April 1996 Debentures
were converted into 1,431,427 Units on July 18, 1996, concurrent with the
Company's IPO.
5. Stockholders' Equity:
Initial Public Offering
On July 18, 1996, the Company completed its IPO and sold 2,415,000
Units at a price of $5.50 per Unit. Each Unit consisted of one share of Common
Stock and one warrant to purchase a share of Common Stock at $9.00 ("Unit").
Gross proceeds from the sale of the Units were $13,282,500 and net proceeds
after expenses were $10,842,487.
At the completion of the offering, the underwriter received an option
to purchase 210,000 Units at a price equal to 165% of the unit offering price
per unit during a period of four years commencing one year from July 18, 1996.
In connection with this offering, the Company's officers and directors
and certain stockholders deposited an aggregate of 1,800,000 shares of Common
Stock of the Company in an escrow account ("Escrowed Shares"). The Common Stock
in the escrow account is 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 twelve month periods ending September 30,
1997, 1998 and 1999 meet or exceed certain performance targets. If the
performance targets are not met in any of the twelve month periods ending
September 30, 1997, 1998, or 1999, the Escrowed Shares will be returned to the
Company. In addition to the foregoing, all Escrowed Shares will be
F- 11
<PAGE>
released to the stockholders if certain stock price targets are met. The market
value of any Escrowed Shares held by officers, employees or consultants at the
time they are released will be deemed to be additional compensation expense to
the Company. The parameters for the September 30, 1997 release were not met and
300,000 shares were canceled from the Escrowed Shares.
Common Stock (unaudited)
In April 1998, the Company entered into an equity line of credit
agreement in which the Company received an initial gross amount of $1,000,000 in
exchange for 840,124 shares of Common Stock 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 draw downs 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 $375,000 private placement in
which the Company issued 110,294 shares of Common Stock
In June 1998, the Company completed a $1,000,000 private placement 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.
Preferred Stock (unaudited)
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 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.
F- 12
<PAGE>
The Company's outstanding common stock and preferred stock are
summarized below:
<TABLE>
<CAPTION>
Dec. 31, 1997 Number of Shares Issued and Outstanding
------------ ------------------------------------------
Number of
Par Value Shares December 31, December 31, June 30,
Per Share Authorized 1997 1996 1998
-------------- ------------ ------------ ------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Common Stock............................... $0.01 40,000,000 14,360,515 14,259,112 20,934,765
Preferred Stock............................ $0.01 6,000,000 -
Series A Preferred stock.......... $0.01 2,250 - -
Series B Preferred stock.......... $0.01 3,180 - -
Series C Preferred stock.......... $0.01 - - 375
</TABLE>
Under the terms of the Company's Articles of Incorporation, the Board
of Directors may determine the rights, preferences, and terms of the Company's
authorized but unissued shares of preferred stock. During the year ended
December 31, 1996, the Company issued 100,000 warrants of Common Stock in
exchange for services provided by an independent contractor, for which
compensation expense of $125,489 was recorded for the year ended December 31,
1997. On June 30, 1997 and November 12, 1997, the Company granted to the
underwriters of the Series A Preferred Stock and Series B Preferred Stock
warrants to purchase a total of 97,860 shares of Common Stock at prices that
range from $3.44 to $4.50 per share. For the year ended December 31, 1997, the
Company recorded approximately $96,000 as a reduction of proceeds from these
preferred stock offerings.
Outstanding Warrants:
At December 31, 1997, outstanding warrants pursuant to the IPO were
2,415,000 and outstanding warrants pursuant to the conversion of the November
1996 Debentures and the April 1997 Debentures were 1,431,427. These 3,846,427
warrants originally entitle the holder to purchase one share of the Company's
Common Stock at an exercise price of $9.00 and expire on July 17, 1999. These
warrants contain anti-dilution provisions that, upon issuance of the Series A
Preferred Stock and the Series B Preferred Stock, have adjusted the number of
shares that can be purchased with one warrant to $1.19, resulting in an
effective exercise price of $7.55, and 4,583,402 shares that would be issued
upon full conversion of the warrants.
6. Stock Options:
On April 18, 1996, the Board of Directors approved, effective January
1, 1996, the Company's 1996 Omnibus Stock Incentive Plan (the "Plan"). Under the
Plan, the Company has reserved 650,000 shares of Common Stock for issuance of
both incentive and non-qualified options, restricted stock awards and stock
appreciation rights ("SARs"). The Plan is administered by the Compensation
Committee of the Board of Directors. At the annual meeting of stockholders on
August 28, 1997, Company stockholders approved the 1997 Stock Incentive Plan,
which provides for up to 1,650,000 shares of the Company's stock. Under these
plans, Options generally become exercisable, beginning one year after the date
granted, in five equal annual installments. No option may be granted at a
priceless than the stock's fair market value on the date of the grant.
Prior to the approved Plan, the Company's Board of Directors approved
250,000 of non-Plan stock options which become exercisable, beginning one year
after the date granted, in five equal annual installments.
Information on options is as follows:
.
F- 13
<PAGE>
<TABLE>
<CAPTION>
Shares Range of Weighted
Under Exercise Average
Option Prices Strike Price
------------ ---------------- -------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995....... 555,530 $ 0.01-6.00 $2.62
Granted................................ 542,000 $2.00-12.00 $3.25
Exercised.............................. - - -
Canceled............................... (103,600) $ 6.00 $6.00
---------
Outstanding at December 31, 1996....... 993,930 $0.01-12.00 $2.97
Granted................................ 1,033,300 $ 1.37-6.00 $3.13
Exercised.............................. (150,000) $ 0.01 $0.01
Canceled............................... (249,800) $ 2.25-6.00 $4.85
---------
Outstanding at December 31, 1997....... 1,627,430 $ 0.01-6.00 $3.04
=========
Exercisable at December 31, 1997....... 271,906 $ 2.25-6.00 $3.55
============
</TABLE>
At December 31, 1997, weighted average remaining contractual life for
options outstanding was 3.69 years. The fair value of the options granted during
the years ended December 31, 1997 and 1996 was $1,246,600 and $1,504,643,
respectively.
During the six months ended June 30, 1998, the Company canceled 575,380
(unaudited) stock options with exercise prices ranging from $0.01 (unaudited) to
$6.00 (unaudited) per share.
In October 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") effective for fiscal years beginning after
December 15, 1996. SFAS No. 123 established financial accounting and reporting
standards for stock-based compensation plans. The Company has adopted the
disclosure-only provisions of SFAS No. 123. In accordance with the provisions of
SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in
accounting for its Plan and, accordingly, does not recognize compensation
expense.
Had compensation expense for the Company's plan been determined based
on the fair value at the grant date for awards in 1997 and 1996 consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per common
and common equivalent shares outstanding would have been the pro forma amounts
indicated below:
Year Ended Year Ended
December, 31 December 31,
1997 1996
----------------- ----------------
Net loss - as reported................ $ (9,479,966) $ (5,238,536)
Net loss - pro forma.................. $ (10,170,223) $ (5,508,736)
Net loss per share - as reported...... $ (0.74) $ (0.47)
Net loss per share - pro forma........ $ (0.79) $ (0.50)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option- pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996: dividend yield of
0%; expected volatility of 60%; risk-free interest rate of 6.41% in 1997 and
5.92% in 1996; and expected lives of 3 years.
F- 14
<PAGE>
7. Significant Customers:
The percentages of total revenue from sales to customers in excess of
10% of the total for each period were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months
December 31, December 31, Ended
1997 1996 June 30, 1998
----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C>
Customer A.......................... 34% 64% --
Customer B.......................... - 24% --
Customer C.......................... 10% - --
</TABLE>
8. Licensing Agreement:
In March 1996, the Company entered into a non-exclusive five-year
licensing agreement with Rockwell International. Pursuant to this agreement, the
Company was granted a price reduction of $1,395,000 related to a purchase order
issued in 1996 and received an initial cash payment of $300,000 that was
recorded as deferred licensing revenue and is being recognized as revenue on a
straight-line basis over the five year term. Revenue of $50,000 related to this
licensing agreement was recognized for the year ended December 31, 1996. During
the year ended December 31, 1997, the Company's licensee informed the Company
that as a result of the restructuring of its business operations, the licensee
had elected to not continue with its business activities under the license. A
portion of the consideration received by the Company in March 1996 for granting
this license was a $300,000 cash payment, which the Company recorded as deferred
license revenue and was amortizing this amount over a five year period. Given
the licensee's stated intent to not to continue conducting business operations
under the license, the remaining deferred licensing revenue of $250,000 as of
December 31, 1996, was recorded as revenue in the year ended December 31, 1997.
9. Income Taxes:
For the year ended December 31, 1997 no income tax benefit has been
provided because the losses could not be carried back and realization of the
benefit of the net operating losses carried forward was not assured. At December
31, 1997, the Company has approximately $16,026,000 of net operating loss carry
forwards for federal income tax purposes. These losses expire in 2012. The use
of these carry forwards may be limited in any one year under Internal Revenue
Code Section 382 if significant ownership changes occurring the future. Net
deferred tax assets are comprised of the following:
December, 31 December 31,
1997 1996
-------------- ---------------
Excess of book over tax depreciation..........$ 23,000 $ 30,000
Net operating loss carryforwards.............. 6,084,000 2,758,000
Adjustment to accrual basis of accounting..... 283,000 56,000
Accrued vacation.............................. - 11,000
Deferred revenue.............................. - 95,000
Tax credit carryforwards...................... 63,000 63,000
Less valuation allowance...................... (6,453,000) (3,013,000)
-------------- ---------------
Net deferred tax asset............... - -
============== ===============
10. Commitments and Contingencies:
Lease Commitments:
During 1994 and 1996, the Company began leasing its operating
facilities and certain equipment under various operating leases expiring on
various dates through 2001. Future minimum payments under noncancelable
operating leases at December 31, 1997 are:
Year Ending December 31,
1998..................................... $ 289,614
1999..................................... 38,891
2000..................................... 21,202
2001..................................... 2,721
2002..................................... -
Total rental expense charged to operations for the year ended December
31,1997 and December 31, 1996 was $258,071 and $202,812, respectively.
Purchase Agreements
The Company has agreements with certain suppliers to purchase
specialized parts and components necessary to produce the Mobile Assistant(R).
Failure of any of these parties to comply with the terms and conditions of
existing agreements could adversely affect the Company's ability to complete and
deliver Mobile Assistant(R) units. The Company is engaged in discussions with
the supplier of the computing unit for its 133P model of the Mobile Assistant(R)
regarding direct assumption by the Company of certain components for the 133P
currently held by this supplier. While the outcome of these discussions is not
certain, if the Company were to assume ownership of the maximum amounts of these
components, approximately $600,000 would be added to inventory and accounts
payable would increase by the same amount.
Patents
The Company considers its patents, trade secrets, and other
intellectual property and other proprietary information to be an important
factor in its business prospects. In September 1995, the Company received a
notification from the United States Patent and Trademark Office ("PTO") entitled
"office action in re-examination" which indicated that the Company's claims
under its existing patent for the Mobile Assistant(R) were subject to
re-examination and had been preliminary rejected. During 1996, this preliminary
rejection was over turned. In April 1997 a second re-examination request was
filed with the PTO and the Company received a notification from the United
States Patent and Trademark Office ("PTO") entitled "office action in
re-examination" which indicated that the Company's claims under its existing
patent for the Mobile Assistant(R) were subject to re-examination and had been
preliminary rejected. During 1997, this preliminary rejection was overturned. In
October 1996, the Company filed a patent application covering additional
embodiments and extensions of the technologies used in the Mobile Assistant(R).
In addition, eight additional patent applications have been filed with the PTO
since the Company's IPO.
Commitments (unaudited)
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
F- 15
<PAGE>
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.
11. Legal Proceedings:
On March 19, 1998, Matrix Corporation (see "Key Suppliers") 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. The Company and its legal counsel have initiated a thorough review of
these allegations and intend to file a counterclaim against Matrix stating that
Matrix failed to perform to the requirements of both the June Agreement and the
December Agreement and that Xybernaut has been damaged by this failure to
perform. 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.
12. Related Party Transactions:
The Company uses a director of the Company as its patent counsel and
paid cash to this director for fees and reimbursement of expenses of
approximately$276,000 in 1997 and for reimbursement of expenses of $93,250 in
1996. An individual who was a director of the Company through August 1997 was
paid$20,750 during 1997 for consulting services pursuant to a contract between
that director and the Company. A director of the Company serves as a consultant
to the Company and during 1997 was paid $305,000 in consulting payments for the
years 1996 and 1997 and $111,000 as reimbursement for expenses incurred during
those two years. The Company accrued, but did not pay in cash, $97,800 in
salaries and automobile allowances payable to a director of the Company for
services provided to Tech Virginia. The Company paid $172,000 as advances on
commissions and expenses to an individual consultant who is an uncle by marriage
to the President of the Company. During 1997, the Company paid approximately
$81,000 for sales and marketing consulting fees and expenses to two members of
the SBS software center in Germany and the Company sold approximately $135,000
of products to the SBS software center during this period.
13. Concentration of Credit Risk Arising from Cash Deposits:
The Company's December 31, 1997 cash and cash equivalent balance
includes approximately $1.0 million of cash invested in a pool of United States
Government and Agency Securities. The amount in excess of insurance provided by
the Federal Deposit Insurance Company is approximately $900,000.
F- 16
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesman or any other _________ Shares
person has been authorized to give any
information or to make any XYBERNAUT CORPORATION
representations, other than those
contained in this Prospectus, and, if
given or made, such information or
representations must not be relied upon
as having been authorized by the Company
or by the Underwriter. This Prospectus
does not constitute an offer to sell, or
a solicitation of an offer to buy, any
securities offered hereby by anyone in
any jurisdiction in which such offer or -----------
solicitation is not qualified and to do
so or to anyone to whom it is unlawful
to make such offer or solicitation.
PROSPECTUS
-------------------------
TABLE OF CONTENTS -----------
Additional Information......................
Prospectus Summary..........................
Risk Factors................................
Financing Arrangement.......................
Use of Proceeds.............................
Dividend Policy.............................
Market for Registrant's Common Equity and
Related Stockholder Matters........
Selected Financial Data.....................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. __________________, 1998
Business ...................................
Management..................................
Executive Compensation......................
Principal Stockholders......................
Certain Relationships and Related
Transactions...........................
Selling Stockholder.........................
Shares Eligible for Future Sale.............
Description of Securities...................
Delaware Business Combination Provisions....
Plan of Distribution........................
Indemnification for Securities Act
Liabilities............................
Legal Matters...............................
Experts ...................................
Index to Consolidated Financial Statements.F-1
- --------------------------------------------------------------------------------
F- 17
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. 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 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.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
It is estimated that the following expenses will be incurred in
connection with the proposed offering hereunder. All of such expenses will be
borne by the Company.
Registration fee - Securities and Exchange Commission...... $3,321.95
Nasdaq listing expenses.................................... $7,500.00
Legal fees and expenses.................................... $60,000.00
Accounting fees and expenses............................... $60,000.00
Printing expenses.......................................... $5,000.00
Miscellaneous expenses..................................... $5,000.00
Total................................................ $140,821.95
Item 26. Recent Sales of Unregistered Securities
The following sets forth certain information regarding sales of
securities of the Company issued within the past three years, which were not
registered pursuant to the Securities Act of 1933, as amended (the "Securities
Act").
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
110,294 shares of Common Stock issued under this private placement were
unregistered, restricted shares. The shares of Common Stock issuable upon
conversion of the Series C Preferred are the subject of an effective
registration statement of the Company.
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 at a price of $6.50
per share.
In December 1997, two employees of the Company exercised options
granted to them for an aggregate of 150,000 shares of Common Stock. No shares
have been issued under the Company's 1996 Omnibus Stock Option Plan and 1997
Stock Option Plan.
The securities listed above were (i) sold pursuant to exemptions from
registration under Section 4(2) of the Securities Act and/or (ii) sold to
persons who were neither nationals nor residents of the U.S., and no facilities
or instrumentalities of U.S. interstate commerce were used in connection with
any offer or sale thereof. No underwriter or underwriting discount or commission
was involved in any of such sales.
Item 27. Exhibits and Financial Statement Schedules
The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Number Description of Exhibit
------ ----------------------
<S> <C>
1.1 Form of Financial Consulting Agreement between the Company and the Representative.*
3.1 Certificate of Incorporation of the Company, as amended.*
3.2 Bylaws of the Company (as amended on September 24, 1998).**
4.1 Warrant Exercise Fee Agreement.*
4.2 Form of Forfeiture Escrow.*
4.3 Form of specimen certificate for Common Stock.*
4.4 Form of Redeemable Warrant.*
II-2
<PAGE>
4.5 Subscription Agreement.
4.6 Form of Warrant.**
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP re: legality.
10.1 December 31, 1994 Acquisition Agreement between the Company and Tech
Virginia.*
10.2 Form of Indemnification Agreement to be entered into
between the Company and each director and officer of the Company.*
10.3 Form of Employment Agreement between the Company and Edward G.
Newman.
10.4 Form of Consulting Agreement between the Company and Steven
A. Newman.*
10.5 November 30, 1994 Lease Agreement between Hyatt Plaza
Limited Partnership and the Company.*
10.6 March 22, 1996 Month-to-Month Tenancy Agreement between the Company and The
Original Tollhouse Historical Preservation Company.*
10.7 October 27, 1994 Residential Deed of Lease between the Company and Frank E. and Heather
H. Moxley.*
10.8 June 10, 1994 Rockwell International Corporation contract.*
10.9 January 5, 1995 Kopin Corporation contract.*
10.10 June 19, 1995 License Agreement for Mobile Inspector(TM)software.*
10.11 1996 Omnibus Stock Incentive Plan.*
10.12 1997 Stock Option Plan.**
10.13 November 20, 1995 Consulting Agreement with CMC Services.*
10.14 Form of Consulting Agreement with Victor J. Lombardi.*
10.15 March 29, 1996 License Agreement with Rockwell International Corporation.*
10.16 Interim 90-Day Agreement with Kopin Corporation.*
10.17 December 7, 1995 Multicosm Ltd. software licensing agreement.*
10.18 April 4, 1996 Electronic Surveillance Technologies Corporation VAR agreement.*
10.19 January 22, 1996 FC Imaging, Inc. VAR agreement.*
10.20 June 18, 1996 NeuroSystems Europe Limited VAR agreement.*
10.21 Business Loan Agreement, Promissory Note and Commercial Security Agreement by and
between Fairfax Bank & Trust Company and the Company.*
10.22 Distributor Agreement with Hewlett-Packard B.V.***
10.23 May 19, 1998 Distribution Agreement with En Pointe Technologies
Sales, Inc.*** 10.24 1998 Agreement with Sony Digital Products Inc.***
23.1 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included in signature page hereto).**
</TABLE>
- -----------------------
* Incorporated by reference to the exhibits filed with the registration
statement on Form SB-2 (Commission file #333-04156).
** To be filed by amendment.
*** Not filed herewith. Confidential treatment has been requested via a
concurrent filing with the Commission pursuant to Rule 406 under the
Securities Exchange Act.
Item 28. 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; and
II-3
<PAGE>
(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;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a form
of prospectus 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; and
(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 Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant 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
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person of the
Registrant in connection with the securities being registered, the Registrant
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 Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes (i) to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser, (ii) that for purposes
of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement as of the time
it was declared effective, and (iii) that for purposes of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus 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-4
<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 SB-2 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 September
30, 1998.
XYBERNAUT CORPORATION
By: /s/ Edward G. Newman
Edward G. Newman
Chairman of the Board, President
and Chief Executive Officer
II-5
<PAGE>
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 SB-2 has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C> <C>
/s/ Edward G. Newman Chairman of the Board, September 30, 1998
- -------------------------
Edward G. Newman President and Chief Executive
Officer
September 30, 1998
/s/ Kaz Toyosato Executive Vice President
- -------------------------- Asian Operations and Director
Kaz Toyosato
/s/ Maarten Heybroek Chief Operating Officer September 30,1998
- -------------------------- and Chief Financial Officer
Maarten Heybroek
/s/ Martin Eric Weisberg Secretary and Director September 30, 1998
- ---------------------------
Martin Eric Weisberg
/s/ Lt. Gen. Harry E. Soyster Director September 30, 1998
- -----------------------------
Lt. Gen. Harry E. Soyster
/s/James J. Ralabate Director September 30, 1998
- -----------------------------
James J. Ralabate
II-6
<PAGE>
/s/ Keith P. Hicks Director September 30, 1998
- ------------------------------
Keith P. Hicks
Director September 30 , 1998
/s/Steven A. Newman
- ------------------------------- Director September 30, 1998
Steven A. Newman
/s/Phillip E. Pearce Director September 30, 1998
- --------------------------------
Phillip E. Pearce
/s/ Eugene J. Amobi Director September 30, 1998
- --------------------------------
Eugene J. Amobi
/s/ Edwin Vogt Director September 30, 1998
- ----------------------
Edwin Vogt
</TABLE>
By: /s/ Edward G. Newman
---------------------
Edward G. Newman
Attorney-in-fact
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
Number Description of Exhibit
----- ----------------------
1.1 Form of Financial Consulting Agreement between the Company and the Representative.*
3.1 Certificate of Incorporation of the Company, as amended.*
3.2 Bylaws of the Company (as amended on September 24, 1998).**
4.1 Warrant Exercise Fee Agreement.*
4.2 Form of Forfeiture Escrow.*
4.3 Form of specimen certificate for Common Stock.*
4.4 Form of Redeemable Warrant.*
4.5 Subscription Agreement.
4.6 Form of Warrant.**
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP re: legality.
10.1 December 31, 1994 Acquisition Agreement between the Company and Tech Virginia.*
10.2 Form of Indemnification Agreement to be entered into between the Company and each
director and officer of the Company.*
10.3 Form of Employment Agreement between the Company and Edward G.
Newman.*
10.4 Form of Consulting Agreement between the Company and Steven
A. Newman.*
10.5 November 30, 1994 Lease Agreement between Hyatt Plaza
Limited Partnership and the Company.*
10.6 March 22, 1996 Month-to-Month Tenancy Agreement between the Company and The
Original Tollhouse Historical Preservation Company.*
10.7 October 27, 1994 Residential Deed of Lease between the Company and Frank E. and Heather
H. Moxley.*
10.8 June 10, 1994 Rockwell International Corporation contract.*
10.9 January 5, 1995 Kopin Corporation contract.*
10.10 June 19, 1995 License Agreement for Mobile Inspector(TM)software.*
10.11 1996 Omnibus Stock Incentive Plan.*
10.12 1997 Stock Option Plan.**
10.13 November 20, 1995 Consulting Agreement with CMC Services.*
10.14 Form of Consulting Agreement with Victor J. Lombardi.*
10.15 March 29, 1996 License Agreement with Rockwell International Corporation.*
10.16 Interim 90-Day Agreement with Kopin Corporation.*
10.17 December 7, 1995 Multicosm Ltd. software licensing agreement.*
10.18 April 4, 1996 Electronic Surveillance Technologies Corporation VAR agreement.*
10.19 January 22, 1996 FC Imaging, Inc. VAR agreement.*
10.20 June 18, 1996 NeuroSystems Europe Limited VAR agreement.*
10.21 Business Loan Agreement, Promissory Note and Commercial Security Agreement by and
between Fairfax Bank & Trust Company and the Company.*
10.22 Distributor Agreement with Hewlett-Packard B.V.***
10.23 May 19, 1998 Distribution Agreement with En Pointe Technologies
Sales, Inc.*** 10.24 1998 Agreement with Sony Digital Products Inc.***
23.1 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit5.1).
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included in signature page hereto).**
</TABLE>
- -----------------------
* Incorporated by reference to the exhibits filed with the registration
statement on Form SB-2 (Commission file # 333-04156).
** To be filed by amendment.
II-8
<PAGE>
*** Not filed herewith. Confidential treatment has been requested via a
concurrent filing with the Commission pursuant to Rule 406 under the
Securities Exchange Act.
II-9
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (the "Agreement") is made and entered into
as of this ______ day of September, 1998, by and between Xybernaut Corporation,
a Delaware corporation ("Xybernaut"), with offices at 12701 Fair Lakes Circle,
Fairfax, Virginia 22033, and HSBC James Capel Canada, Inc., an Ontario company
("HSBC"), with offices at 105 Adelaide Street West, Suite 1200, Toronto, Ontario
M5H 1P9, Canada, providing for the purchase and sale of shares of the common
stock, par value $.01 per share (the "Common Stock"), of Xybernaut, by HSBC or
its designated affiliates (collectively with HSBC, the "Buyer").
Xybernaut and Buyer hereby represent and agree as follows:
1. Definitions.
(a) "Average Daily Price" shall be the price based on the VWAP
of Xybernaut on the NASDAQ Small Cap Market.
(b) "Average Price" shall be the average of the Average Daily
Price for the applicable Draw Down Pricing Period on the NASDAQ SmallCap Market.
(c) "Draw Down" shall have the meaning assigned to such term
in Section 4(a) - hereof.
(d) "Draw Down Exercise Date" shall have the meaning assigned
to such term in Section 4(b) hereof.
(e) "Draw Down Pricing Period" shall mean a period of five (5)
consecutive trading days preceding a weekly Draw Down Exercise Date, a period of
twenty (20) consecutive trading days preceding a monthly Draw Down Exercise Date
and an agreed upon period of consecutive trading days preceding a quarterly Draw
Down Exercise Date.
(f) "Effective Date" shall mean the date the Registration
Statement of the Company covering the Shares being subscribed for hereby is
declared effective.
(g) "Material Adverse Effect" shall mean any effect on the
business, operations, properties or financial condition of Xybernaut that is
material and adverse to Xybernaut and its subsidiaries and affiliates, taken as
a whole and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of Xybernaut to enter into and perform any
of its obligations under this Agreement or the Warrant in any material respect.
(h) "Material Change in Ownership" shall mean that the
officers and directors of Xybernaut shall own less than 20% of the outstanding
Common Stock of Xybernaut.
<PAGE>
(i) "Monthly Draw Down Pricing Period" shall mean a period of
twenty (20) consecutive trading days preceding the monthly Draw Down Exercise
Date.
(j) "Quarterly Draw Down Pricing Period" shall mean an agreed
upon period of consecutive trading days preceding the quarterly Draw Down
Exercise Date.
(k) "Registration Statement" shall mean the registration
statement under the Securities Act of 1933, as amended, to be filed with the
Securities and Exchange Commission for the registration of the Shares.
(l) "Securities" shall mean, collectively, the shares of
Common Stock of Xybernaut being subscribed for hereunder, the shares of Common
Stock issuable to Buyer upon exercise of the Option and the Warrants, the Option
and the Warrants.
(m) "Shares" shall mean, collectively, the shares of Common
Stock of Xybernaut being subscribed for hereunder and those shares of Common
Stock issuable to Buyer upon exercise of the Option and the Warrants.
(n) "Threshold Price" is the lowest price that Xybernaut will
issue new shares of Common Stock.
(o) "VWAP" shall mean the daily volume weighted average price
of Xybernaut on the NASDAQ Small Cap Market as reported by Bloomberg Financial
using the AQR function.
(p) "Warrants" shall have the meaning assigned to such term in
Section 7 hereof.
(q) "Weekly Draw Down Pricing Period" shall mean a period of
five (5) consecutive trading days preceding the weekly Draw Down Exercise Date.
2. Agreement to Subscribe; Pricing.
(a) For at least the twelve (12) month period beginning on the
Effective Date of the Registration Statement, Buyer hereby subscribes for a
total of up to Thirty-One Million, Two Hundred Thousand Dollars ($31,200,000) of
Xybernaut's Common Stock based upon weekly Draw Downs of Six Hundred Thousand
Dollars ($600,000) per weekly Draw Down, monthly Draw Downs of Two Million Four
Hundred Thousand Dollars ($2,400,000) per monthly Draw Down, and quarterly Draw
Downs of Seven Million Two Hundred Thousand Dollars ($7,200,000) per quarterly
Draw Down, and a per share purchase price equal to the lesser of (i) 100% of the
Average Price for the Draw Down Pricing Period and (ii) $8.00 (the "Purchase
Price").
(b) If the Average Daily Price on a given trading day is less
than the Threshold Price then Buyer's payment obligation under the Draw Down
will be reduced by 1/5th, 1/20th or an agreed upon fraction for a weekly,
monthly or quarterly Draw Down, respectively. At no time shall
2
<PAGE>
the Threshold Price be set below $3.00; provided, however, that if trading in
Xybernaut's Common Stock is suspended for more than three (3) hours in any
trading day, the price of the Common Stock shall be deemed to be below the
Threshold Price for that trading day.
3. Conditions Precedent. The parties recognize that all of the
obligations set forth herein are subject to the following conditions:
(a) Xybernaut shall cause to be filed a Registration
Statement, which Registration Statement shall provide for the resale of the
Common Stock purchased by and issued to HSBC in accordance of this Agreement.
Xybernaut shall cause the Registration Statement to be declared effective by the
Securities and Exchange Commission (the "Commission") as expeditiously as
practicable, and in any event prior to the initial Draw Down by Xybernaut.
(b) Before Buyer shall be obligated to accept a Draw Down
request from Xybernaut, Xybernaut shall have caused a sufficient number of
shares of Common Stock to be registered to cover the shares of Common Stock to
be issued in connection with such Draw Down.
4. Draw Down Terms. Subject to the satisfaction of the foregoing
conditions, the parties agree as follows:
(a) Xybernaut, may, in its sole discretion, issue and exercise
a weekly, monthly or quarterly draw down (a "Draw Down") during any Weekly Draw
Down Pricing Period, Monthly Draw Down Pricing Period or Quarterly Draw Down
Pricing Period, which Draw Down Buyer will be obligated to accept.
(b) Only one Draw Down shall be allowed in each Draw Down
Pricing Period. The Draw Down shall occur on the first trading day following the
end of the Draw Down Pricing Period (the "Draw Down Exercise Date"), based on
the Average Daily Price during the Draw Down Pricing Period.
(c) There shall be a maximum of 52 weekly Draw Downs, 12
monthly Draw Downs and 4 quarterly Draw Downs during the term of this Agreement.
(d) Xybernaut shall have the right to issue and exercise a
weekly Draw Down of up to $600,000 of Xybernaut's Common Stock per week, a
monthly Draw Down of up to $2,400,000 of Xybernaut's Common Stock per month and
a quarterly Draw Down of up to $7,200,000 of Xybernaut's Common Stock per
quarter, in each case for a period of 12 months.
(e) Subject to all restrictions being satisfied, the exercise
a Draw Down will be automatic. Exercise will be "European Style"( i.e. the Draw
Down can be exercised only on the Draw Down Exercise Date).
3
<PAGE>
(f) Each Draw Down will expire on the calendar day after the
Draw Down Exercise Date.
(g) Xybernaut must inform Buyer via facsimile transmission as
to the amount of the Draw Down Xybernaut wishes to exercise before the first day
of the Draw Down Pricing Period (the "Draw Down Notice"). The closing bid price
of the Common Stock on each Draw Down Exercise Date must be greater than $3.00
per share as reported by the NASDAQ Small Cap Market. At no time shall Buyer be
required to purchase more than the scheduled Draw Down amount for a given week,
month or quarter so that if Xybernaut chooses not to exercise the Draw Down in a
given week, month or quarter Buyer is not obligated to purchase more than the
scheduled amount in subsequent weeks, months or quarters.
(h) On or before three trading days of the Draw Down Exercise
Date, Xybernaut shall deliver the Shares purchased by Buyer to Buyer or to The
Depositary Trust Company ("DTC") on Buyer's behalf. Xybernaut and Buyer shall
cause such Shares to be credited to the DTC account designated by Buyer upon
receipt by Xybernaut of payment for the Draw Down into an account designated by
Xybernaut. The delivery of the shares of Common Stock into Buyer's DTC account
in exchange for payment therefor shall be referred to herein as "Settlement".
Buyer shall coordinate Settlement with Xybernaut through DTC.
5. Buyer's Call Option. Buyer shall have the right to purchase an
additional amount up to the maximum amount permitted to be drawn down for each
Draw Down (the "Option"). For each additional amount that Buyer exercises its
right pursuant to this Section, Buyer must notify Xybernaut in writing of such
exercise no later than 5:00 p.m. (East coast time) on the last day of the
applicable Draw Down Pricing Period. If Buyer so exercises its Option to
purchase additional shares, the price for the shares of Common Stock shall be
the VWAP for the Common Stock on the date Xybernaut furnishes Buyer with the
Draw Down Notice. If Buyer does not exercise its right by such time on the last
day of the applicable Draw Down Pricing Period, Buyer's right with respect to
the applicable Draw Down Pricing Period shall terminate.
6. Restrictions. The parties agree as follows:
(a) A Registration Statement must be effective before the
first day of the Draw Down Pricing Period.
(b) Xybernaut must remain listed or admitted for trading, as
applicable, on the NASDAQ Small Cap Market Systems, NASDAQ National Market
Systems, the New York Stock Exchange or the American Stock Exchange for the
entire Draw Down Pricing Period.
(c) Xybernaut is restricted from entering in any other
financing agreement without the prior consent of Buyer or without terminating
its agreement with Buyer, except that Xybernaut may enter into a loan or credit
facility with a bank or financing institution, establish an employee stock
option plan or finance the acquisition of other companies; provided that any
shares of Common Stock
4
<PAGE>
or securities convertible into shares of Common Stock used to finance any
acquisition shall constitute "restricted securities" under Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), except that Xybernaut
may issue registered shares of Common Stock in connection with an acquisition.
Xybernaut may terminate this Agreement upon not less than thirty (30) business
days' notice to Buyer. Upon termination on the Agreement, Buyer will retain all
Warrants previously received, but forfeit all unissued "Call" privileges granted
pursuant to Section 5 hereof.
(d) No Draw Down will be permitted if there has been a
Material Adverse Effect or Material Change in Ownership in Xybernaut.
(e) All cash payable to Xybernaut upon settlement of a Draw
Down or the exercise of the Option shall be paid by Buyer to a mutually agreed
upon escrow account against the concurrent delivery to the escrow agent of the
escrow amount of the shares of Common Stock subject to the Draw Down or the
exercise of the Option.
(f) At all times during the term of this Agreement there must
be a minimum of eight active Market Makers for Xybernaut's Common Stock on the
NASDAQ Small Cap Market or NASDAQ National Market Systems, as applicable, unless
Xybernaut's Common Stock is listed on the New York Stock Exchange or the
American Stock Exchange.
(g) All Draw Downs shall be settled on the Draw Down Exercise
Date.
7. Warrants; Fees. The parties agree as follows:
(a) For each Draw Down, Buyer will receive warrants
("Warrants") to purchase 12,500 shares of Common Stock for each weekly Draw
Down, 50,000 shares of Common Stock for each monthly Draw Down and 150,000
shares of Common Stock for each quarterly Draw Down. Each Warrant will have a
three (3) year life beginning six (6) months from the closing date of the Draw
Down. Common Stock underlying the Warrants will be registered in the
Registration Statement. If no Draw Down has occurred during a Draw Down Pricing
Period, no Warrants will be issued to Buyer.
(b) The Warrant Strike Price shall be 225% of the Average
Daily Price of the Common Stock on the date Xybernaut furnishes Buyer with the
Draw Down Notice.
(c) Settondown Capital International, Ltd. ("Settondown") will
receive a fee of 5% of the distribution total amount drawn down by Buyer.
Xybernaut acknowledges that Settondown may use a portion of its fee to
compensate other parties relative to a particular Draw Down.
(d) Xybernaut will incur all costs and expenses related to the
transactions contemplated by this Agreement.
5
<PAGE>
8. Representations, Warranties and Covenants of Buyer. Buyer
represents, warrants and covenants to Xybernaut as follows:
(a) This Agreement has been duly authorized, validly executed
and delivered on behalf of Buyer and is a valid and binding agreement of Buyer
enforceable in accordance with its terms, subject to general principles of
equity and of bankruptcy or other laws affecting the enforcement of creditors'
rights;
(b) Buyer has received and carefully reviewed copies of the
Public Documents (as defined herein). No representations or warranties have been
made to Buyer by Xybernaut, the officers or directors or Xybernaut, or any
agent, employee or affiliate of any of them, except as specifically set forth
herein or as set forth in documents referenced herein. Buyer understands that no
federal or state governmental authority has made any finding or determination
relating to the fairness of an investment in the Securities and that no federal
or state governmental authority has recommended or endorsed, or will recommend
or endorse, the investment herein. Buyer, in making the decision to purchase the
Securities subscribed for, has relied upon independent investigation made by it
and has not relied on any information or representations made by third parties;
(c) Buyer understands that the Securities are being offered
and sold to it in reliance on specific provisions of federal and state
securities laws and that Xybernaut is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
Buyer set forth herein;
(d) For as long as Buyer or any affiliate thereof is a holder
of securities of Xybernaut, neither Buyer nor any affiliate shall, directly or
indirectly, bid for, purchase, contract to buy, acquire any option to purchase
or otherwise acquire any Common Stock, warrants or other securities of the
Company in the open market or otherwise, except in accordance with this
Agreement or directly from Xybernaut;
(e) Buyer is an "accredited investor" as defined under Rule
501 of Regulation D under the Securities Exchange Act of 1933; and
(f) Buyer is capable of evaluating the risks and merits of
this investment by virtue of its experience as an investor and its knowledge,
experience, and sophistication in financial and business matters.
9. Representations, Warranties and Covenants of Xybernaut. Xybernaut
represents, warrants and covenants to Buyer as follows:
(a) Xybernaut has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as currently conducted, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place
6
<PAGE>
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure to register or qualify
is not reasonably anticipated to have a Material Adverse Effect;
(b) Xybernaut has registered shares of its Common Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and is in full compliance with all reporting requirements of
the Exchange Act;
(c) Xybernaut has furnished Buyer with copies of Xybernaut's
most recent Annual Report on Form 10-KSB (the "Form 10-KSB") filed with the
Commission, its Form 10- QSB for the quarterly period ended June 30, 1998 (the
"Form 10-QSB")(collectively with the Form 10-KSB and the Form 10-QSB, the
"Public Documents"). The Public Documents at the time of their filing did not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which they were made, not misleading;
(d) The Shares shall be duly authorized and validly issued and
when issued and delivered, will be fully paid and nonassessable;
(e) This Agreement has been duly authorized, validly executed
and delivered on behalf of Xybernaut and is a valid and binding agreement of
Xybernaut enforceable in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally, and Xybernaut has full power and authority to
execute and deliver this Agreement and the other agreements and documents
contemplated hereby and to perform its obligations hereunder and thereunder;
(f) The execution and delivery of this Agreement, the issuance
of the Shares and the consummation of the transactions contemplated by this
Agreement by Xybernaut, will not conflict with or result in a breach of or a
default under any of the terms or provisions of, Xybernaut's certificate of
incorporation or By-laws, or of any material provision of any indenture,
mortgage, deed of trust or other material agreement or instrument to which
Xybernaut is a party or by which it or any of its properties or assets is bound,
any material provision of any law, statute, rule, regulation, or any existing
applicable decree, judgment or order by any court, federal or state regulatory
body, administrative agency, or other governmental body having jurisdiction over
Xybernaut, or any of its properties or assets or will result in the creation or
imposition of any material lien, charge or encumbrance upon any property or
assets of Xybernaut or any of its subsidiaries pursuant to the terms of any
agreement or instrument to which any of them is a party or by which any of them
may be bound or to which any of their property or any of them is subject;
(g) Except as disclosed herein, no authorization, approval,
filing with or consent of any governmental body is required for the issuance and
sale of the Shares;
7
<PAGE>
(h) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending against
or affecting Xybernaut, or any of its properties, which would reasonably be
anticipated to result in a Material Adverse Effect except as set forth in the
Public Documents;
(i) Subsequent to the dates as of which information is given
in the Public Documents, except as contemplated herein, Xybernaut has not
incurred any material liabilities or material obligations, direct or contingent,
or entered into any material transactions not in the ordinary course of
business, and there has not been any change in its capitalization or any
Material Adverse Effect; and
(j) Xybernaut has sufficient title and ownership of all
trademarks, service marks, trade names, copyrights, patents, trade secrets and
other proprietary rights necessary for its business as now conducted and as
proposed to be conducted as described in the Public Documents without any
conflict with or infringement of the rights of others. Except as set forth in
the Public Documents, there are no material outstanding options, licenses or
agreements of any kind relating to the foregoing, nor is Xybernaut bound by or
party to any material options, licenses or agreements of any kind with respect
to the trademarks, service marks, trade names, copyrights, patents, trade
secrets, licenses and other proprietary rights of any other person or entity.
10. Indemnification.
(a) Xybernaut hereby agrees to indemnify and hold harmless
Buyer and its officers, directors, shareholders, employees, agents and attorneys
against any and all losses, claims, damages, liabilities and expenses incurred
by each such person in connection with defending or investigating any such
claims or liabilities, whether or not resulting in any liability to such person,
to which any such indemnified party may become subject under the Securities Act,
or under any other statute, at common law or otherwise, insofar as such losses,
claims, demands, liabilities and expenses arise out of or are based upon (i) any
untrue statement or alleged untrue statement of a material fact made by
Xybernaut (ii) any omission or alleged omission of a material fact with respect
to Xybernaut or (iii) any breach of any representation, warranty or agreement
made by Xybernaut in this Agreement.
(b) Buyer hereby agrees to indemnify and hold harmless
Xybernaut and its officers, directors, shareholders, employees, agents and
attorneys against any and all losses, claims, damages, liabilities and expenses
incurred by each such person in connection with defending or investigating any
such claims or liabilities, whether or not resulting in any liability to such
person, to which any such indemnified party may become subject under the
Securities Act, or under any other statute, at common law or otherwise, insofar
as such losses, claims, demands, liabilities and expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact made by Buyer, (ii) any omission or alleged omission of a material fact
with respect to Buyer or (iii) any breach of any representation, warranty or
agreement made by Buyer in this Agreement.
8
<PAGE>
11. Publicity. Neither Xybernaut nor Buyer shall issue any press
release or make any other public announcement relating to this Agreement which
has not been mutually agreed to by Xybernaut and Buyer. Neither party shall
unreasonably withhold its agreement to the text of any such proposed press
release or other public announcement.
12. Term. The term of this Agreement shall be twelve (12) months from
the initial Draw Down, unless earlier terminated by either party or extended by
mutual consent of the parties.
13. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Delaware without giving effect to
the rules governing the conflicts of laws.
14. Expenses. Each of the parties agrees to pay its own expenses
incident to this Agreement and the performance of its obligations hereunder,
except that Xybernaut will pay the reasonable fees and expenses of Buyer's legal
counsel.
15. Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, express overnight
courier, registered first class mail, overnight courier, or telecopier,
initially to the address set forth below, and thereafter at such other address,
notice of which is given in accordance with the provisions of this Section.
if to Xybernaut:
Xybernaut Corporation
12701 Fair Lakes Circle
Fairfax, Virginia 22033
Attn: Edward G. Newman
President and Chief Executive Officer
Telephone: (703) 631-6925
Telecopier: (703) 631-6734
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn: Martin Eric Weisberg, Esq.
Telephone: (212) 704-6000
Telecopier: (212) 704-6288
9
<PAGE>
if to Buyer:
HSBC James Capel Canada, Inc.
105 Adelaide Street West
Suite 1200
Toronto, Ontario M5H IP9 Canada
Attn: Isser Elishis
Telephone: (416) 947-2700
Telecopier: (416) 947-9450
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; three (3) business days
after being deposited in the mail, postage prepaid, if mailed; the next business
day after being deposited with an overnight courier, if deposited with a
nationally recognized, overnight courier service; when receipt is acknowledged,
if telecopied.
15. Entire Agreement. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter hereof and supersedes all
prior oral or written proposals or agreements relating thereto. This Agreement
may not be amended or any provision hereof waived in whole or in part, except by
a written amendment signed by both of the parties.
16. Counterparts. Agreement may be executed by facsimile signature and
in counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
Xybernaut Corporation
By:
Name: Steven A. Newman
Title: Vice Chairman
HSBC James Capel Canada, Inc.
By:
Name:
Title:
10
LETTERHEAD OF PCFK
September 30, 1998
Xybernaut Corporation
12701 Fair Lakes Circle
Fairfax, Virginia 22033
Ladies and Gentlemen:
We have acted as counsel to Xybernaut Corporation (the "Company") in
connection with a Registration Statement on Form SB-2 filed by the Company with
the Securities and Exchange Commission (the "Registration Statement") relating
to up to 2,002,000 shares (the "Shares") of the Company's Common Stock, par
value $0.01 per share (the "Common Stock"). Of such Shares, 105,000 may be
issued upon the exercise of warrants which may be issued to the holders of the
Shares (the "Warrants").
In connection with the foregoing, we have examined, among other things,
the Registration Statement, the Subscription Agreement, the Warrants and
originals or copies, satisfactory to us, of all such corporate records and of
all such 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 submitted to us as copies. 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,
oaths and declarations of officers or other representatives of the Company.
Based upon the foregoing, we are of the opinion that (i) the Shares,
when issued pursuant to the Subscription Agreement, will be legally issued,
fully paid and non-assessable; and (ii) the Shares issuable upon the exercise of
the Warrants (when such Shares are paid for and issued in accordance with the
terms of the Warrants) will be legally issued, fully paid and non-assessable.
We hereby consent to the use of our name under the caption "Legal
Matters" in the Prospectus constituting a part of the Registration Statement and
to the filing of a copy of this opinion as an exhibit.
Very truly yours,
/s/ PARKER CHAPIN FLATTAU & KLIMPL, LLP
Consent of Independent Accountants
We consent to the inclusion in this registration statement of Xybernaut
Corporation on Form SB- 2 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 consolidated financial statements of Xybernaut
Corporation as of December 31, 1997 and 1996, and for the years then ended. We
also consent to the references to our firm under the captions "Selected
Financial Data" and "Experts". However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data".
McLean, Virginia
September 29, 1998
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<NAME> Xybernaut Corporation
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> Jun-30-1998
<PERIOD-TYPE> 6-MOS
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<PP&E> 1,173,511
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0
364,754
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<TOTAL-LIABILITY-AND-EQUITY> 7,433,903
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<TOTAL-REVENUES> 358,700
<CGS> 379,476
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