As filed with the Securities and Exchange Commission on May 13, 1998
Registration No. 333-________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
XYBERNAUT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1799851
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
12701 Fair Lakes Circle
Fairfax, Virginia 22033
(703) 631-6925
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(Address, including zip code, and
telephone number, Including area code, of
registrant's principal executive offices)
Edward G. Newman
12701 Fair Lakes Circle
Fairfax, Virginia 22033
(703) 631-6925
------------------------------------------------------------
(Name, address, including zip code, and telephone number,
Including area code, of agent for service)
Copy to:
Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
---------------------------
Approximate date of commencement of proposed sale to public: As soon
as practicable after the effective date of this Registration Statement.
If the only securities on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_| __________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| __________
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================
Proposed Proposed
Title of each Maximum maximum Amount of
class of securities Amount to Aggregate price Aggregate registration
to be registered be registered Per share offering price fee
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<S> <C> <C> <C> <C> <C>
Common Stock, $.01 par value
per share 2,340,938(2)(3) $3.20313(1) $7,498,329 $2,212.01
===================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (g); based on the average ($3.20313) of the
bid ($3.18750) and asked ($3.21875) price on the Nasdaq SmallCap Market on
May 6, 1998.
(2) Represents Common Stock issued in connection with the April 1998 Private
Placement, shares issuable upon exercise of Warrant A and Warrant B,
shares issued to the Placement Agent in connection with the April 1998
Private Placement and shares issuable upon exercise of Put Options in the
aggregate principal amount of $3,000,000. See "Description of Securities."
(3) The shares of Common Stock offered hereby include the resale of such
presently indeterminate number of shares of Common Stock as shall be
issued upon exercise by the Company of Put Options in the aggregate
principal amount of $3,000,000. The number of shares of Common Stock
indicated to be issuable in connection with the exercise of such Put
Options and included in the total shares of Common Stock offered for
resale hereby is an estimate and represents 100% of the number of shares
that would be issuable upon the exercise of Put Options in the aggregate
principal amount of $3,000,000 at a price of $2.87 per share, which is 90%
of $3.18750, the closing bid price of the Common Stock as reported by
NASDAQ on May 6, 1998. 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 Put Options in the aggregate principal amount of
$3,000,000. See "Risk Factors -- Dilution; Impact of Sale of Common Stock
Upon Conversion of Series A and Series B Preferred Stock, and the Exercise
of the Put Options and Warrants"; and "Description of Securities -- The
Put Option."
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<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 MAY___, 1998
PROSPECTUS
2,340,938 Shares of Common Stock
(par value $.01 per share)
XYBERNAUT CORPORATION
This Prospectus pertains to the offer and sale, from time to time,
by or for the account of certain stockholders (the "Selling Stockholders") of
Xybernaut Corporation (the "Company"), of up to 2,340,938 shares (the "Shares")
of common stock, par value $.01 per share (the "Common Stock"), of the Company.
See "Description of Securities."
The Shares offered hereby may be sold by the Selling Stockholders
directly or through agents, underwriters or dealers as designated from time to
time or through a combination of such methods. The Company will not receive any
of the proceeds from any sale of Shares by or for the account of the Selling
Stockholders. The Selling Stockholders and any broker-dealers that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be underwriters and any commissions received or profit realized by them in
connection with the resale of the Shares might be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act"). See "Selling Stockholders" and "Plan of Distribution." The
Company has agreed to bear all expenses relating to this registration, other
than underwriting discounts and commissions. In addition, the Company has agreed
to indemnify the Selling Stockholders against certain liabilities, including
liabilities under the Securities Act. See "Selling Stockholders" and "Plan of
Distribution."
The Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "XYBR". On May 6, 1998, the closing bid price of the Common Stock as
reported by NASDAQ was $3.18750.
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 4 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ______, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048; and Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains an Internet site on the World Wide Web that contains
reports, proxy and information statements and other information filed
electronically by the Company (http://www.sec.gov). Such reports, proxy
statements and other information can also be inspected at the offices of The
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus does not contain all the information set forth in the
Registration Statement on Form S-3 (File No. 333- _____) (the "Registration
Statement") of which this Prospectus forms a part, including exhibits relating
thereto, which has been filed with the Commission in Washington, D.C. Copies of
the Registration Statement and the exhibits thereto may be obtained, upon
payment of the fee prescribed by the Commission, or may be examined without
charge, at the offices of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997; (ii) the Report on Form 8-K dated June 30, 1997; (iii)
the Registration Statement on Form S-3 (Commission File No. 333-36077) filed
with the Commission on September 22, 1997 and Amendment No. 1 to such
Registration Statement filed with the Commission on May 8, 1998; (iv) the
Registration Statement on Form S-3 (Commission File No. 333-43696) filed with
the Commission on January 2, 1998 and Amendment No. 1 and Amendment No. 2 to
such Registration Statement filed with the Commission on January 22, 1998 and
May 8, 1998, respectively; (v) the Registration on Form S-3 (Commission File No.
333-_______) filed with the Commission on May 13, 1998; and (vi) the description
of the Company's Common Stock contained in the Company's Registration Statement
on Form 8-A filed on July 15, 1996 under the Exchange Act (File No. 0-15086),
each as filed with the Commission under the Exchange Act, are incorporated into
this Prospectus by reference.
Each document filed subsequent to the date of this Prospectus
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act before the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such previous statement.
Any statement so modified or superseded shall not be deemed to be a part hereof
except as so modified or superseded.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE
WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY DOCUMENT INCORPORATED
BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS SHOULD BE
DIRECTED TO THE COMPANY, 12701 FAIR LAKES CIRCLE, FAIRFAX, VIRGINIA 22033, (703)
631-6925. ATTENTION: JOHN F. MOYNAHAN.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
and notes thereto appearing elsewhere or incorporated by reference in this
Prospectus.
To inform investors of the Company's future plans and objectives,
this Prospectus (and other reports and statements issued by the Company and its
officers from time to time) contain certain statements concerning the Company's
future results, future performance, intentions, objectives, plans and
expectations that are or may be deemed to be "forward-looking statements." The
Company's ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), which provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company believes it
is in the best interest of investors to take advantage of the "safe harbor"
provisions of the Reform Act. Such forward-looking statements are subject to a
number of known and unknown risks and uncertainties that, in addition to general
economic and business conditions and those described in "Risk Factors" could
cause the Company's actual results, performance and achievements to differ
materially from those described or implied in the forward-looking statements.
THE OFFERING
Securities Registered....................2,340,938 shares of Common Stock
Common Stock outstanding
prior to the offering hereby..........18,782,822 shares of Common Stock(1)(2)
Common Stock outstanding
after the offering hereby.............21,123,760 shares of Common Stock(1)(3)
Common Stock trading symbol
on NASDAQ.............................XYBR
- ---------------------
(1) Does not include (i) 1,390,430 shares of Common Stock reserved for
issuance upon the exercise of outstanding options; (ii) 152,860 shares of
Common Stock reserved for issuance upon exercise of outstanding warrants
to purchase Common Stock; (iii) 4,583,402 shares of Common Stock reserved
for issuance upon exercise of outstanding warrants issued in connection
with the Company's initial public offering (the "IPO"); (iv) 457,496
shares of Common Stock registered in connection with the Series A
Preferred Stock but unissued as of May 8, 1998; (v) 155,424 shares of
Common Stock registered in connection with the Series B Preferred Stock
but unissued as of May 8, 1998; and (vi) 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."
(2) Does not include 840,124 shares of Common Stock issued as of the date
hereof in connection with the April 1998 Private Placement that are being
registered herein.
(3) Assumes the number of shares of the Common Stock that would be issuable
upon exercise by the holders thereof of the Warrant A and Warrant B, and
the exercise by the Company of Put Options in the aggregate principal
amount of $3,000,000. See "Description of Securities."
-3-
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information set forth in this
Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.
HISTORY AND EXPECTATION OF FUTURE LOSSES; NEED FOR ADDITIONAL FINANCING
The Company was incorporated in October 1990 and commenced operations
in November 1992. In the fiscal years ended March 31, 1994 and 1995, the Company
incurred a net loss of $47,352 and $1,303,892, respectively. In the years ended
December 31, 1996 and 1997, the Company incurred a net loss of $5,238,536 and
$9,479,966, respectively. The Company expects to incur a substantial loss for
the quarter ended March 31, 1998. The consolidated balance sheets as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended, incorporated by
reference in this Prospectus, have been incorporated herein in reliance on the
report dated March 31, 1998, which includes an explanatory paragraph, concerning
the Company's ability to continue as a going concern, of Coopers & Lybrand
L.L.P., independent accountants, given on their authority as experts in
accounting and auditing. The Company intends to conduct significant additional
research, development and testing that, together with establishment of marketing
and distribution capabilities, are expected to require substantial funding and
to result in continuing operating losses until such time as sufficient gross
margins from revenues are generated to cover operating costs. There can be no
assurance that, notwithstanding these efforts and the expenditure of substantial
funds, the Company ever will achieve substantial sales of any of its products or
profitable operations or that it will be able to meet the competitive demands of
the industry in which it operates. The success of the Company will be affected
by expenses, operational difficulties and other factors frequently encountered
in the development of a business enterprise in a competitive environment, many
of which may be beyond the Company's control.
See "Risk Factors - Competition."
LIQUIDITY; WORKING CAPITAL NEEDS
To meet working capital cash requirements, the Company intends obtain
a working capital line of credit and/or complete additional financings including
the exercise of its Put Option under the Private Placement. However, there can
be no assurance that the Company can or will obtain sufficient funds to meet, in
whole or in part, its working capital needs from collections of product sales.
There can be no assurance that the Company will be capable of raising additional
capital thereafter or of establishing and obtaining funds from a working capital
line of credit, or that the terms upon which such capital or line of credit
would be available to the Company would be acceptable, in which case the Company
could be required to curtail materially, suspend or cease operations.
DILUTION; IMPACT OF SALE OF COMMON STOCK UPON CONVERSION OF SERIES A
AND SERIES B PREFERRED STOCK, AND THE EXERCISE OF THE PUT OPTIONS AND WARRANTS
The purchasers of the Shares offered hereby will experience immediate
and substantial dilution in the net tangible value of their Shares in the event
of conversion of outstanding Series A and Series B Preferred Stock, and the
exercise of the Put Options and Warrants. Specifically, the Series A and Series
B Preferred Stock are convertible into Common Stock and the Company may exercise
the Put Options resulting in the issuance of 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
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<PAGE>
a negative impact on the trading price of the Common Stock and could increase
the volatility in the trading price of the Common Stock.
In addition, the Company has agreed to reserve and keep available at
all times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to satisfy any obligation to issue the Put Shares, the
Warrant A Shares and the Warrant B Shares; such amount of shares of Common Stock
to be reserved shall be calculated based upon the minimum purchase price
therefor under the terms of the Private Equity Line of Credit Agreement, Warrant
A and Warrant B. The Put Options are exercisable into Common Stock at discounts
from future market prices of the Common Stock, and shares issued pursuant to
Warrant A and Warrant B may be issued at a discount to the future market price
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. See
"Description of Securities."
SERIES A PREFERRED STOCK
In June 1997, the Company sold 3,000 shares of the Series A Preferred
Stock, each share with a liquidation preference of $1,000 (the "Series A
Liquidation Preference"), for an aggregate of $3 million. The Series A Preferred
Stock is 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 Company must reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the Series A Preferred Stock, at least such number
of its Common Stock that is sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock. The sale or other
disposition (for cash, shares of stock, securities or other consideration), of
all or substantially all of the assets of the Company would entitle the holders
of the Series A Preferred Stock to receive the Series A Liquidation Preference
on all their shares of Series A Preferred Stock plus accrued and unpaid
dividends. The Company has registered a total of 1,960,713 shares of Common
Stock underlying the Series A Preferred Stock, of which, 1,285,713 shares were
registered in a registration statement filed with the Commission on September
22, 1997 and an additional 675,000 shares were registered in an amendment to
such registration statement filed with the Commission on May 8, 1998. As of May
8, 1998, 1,503,217 shares of Common Stock had been issued pursuant to
conversions of Series A Preferred Stock. See "Description of Securities --
Series A Preferred Stock."
SERIES B PREFERRED STOCK
In November 1997 and January 1998, the Company placed 4,000 shares of
the Series B Preferred Stock, each share with a liquidation preference of $1,000
(the "Series B Liquidation Preference"), for an aggregate of $4,000,000 and paid
the placement agent for this sale with 180 shares of the Series B Preferred
Stock. In February 1998, the Company placed 1,000 shares of Series B Preferred
Stock and paid the placement for this sale with 60 shares of Series B Preferred
Stock. The Series B Preferred Stock is 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 Company must
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the Series B
Preferred Stock, at least such number of its Common Stock that is sufficient to
effect the conversion of all outstanding shares of the Series B Preferred Stock.
The sale or other disposition (for cash, shares of stock, securities or other
consideration), of all or substantially all of the assets of the Company would
entitle the holders of the Series B Preferred Stock to receive the Series B
Liquidation Preference on all their shares of Series B Preferred Stock plus
accrued and unpaid dividends. The Company has registered a total of 3,327,663
shares of Common Stock
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<PAGE>
underlying the Series B Preferred Stock, of which, 2,622,663 were registered in
a registration statement filed with the Commission on January 2, 1998 and
amended on January 22, 1998, and 705,000 were registered in a further amendment
to such registration statement filed with the Commission on May 8, 1998. As of
May 8, 1998, 3,172,239 shares of Common Stock had been issued pursuant to
conversions of Series B Preferred Stock. See "Description of Securities --
Series B Preferred Stock."
UNCERTAINTY OF MARKET DEVELOPMENT AND PRODUCT ACCEPTANCE
The mobile computing market is emerging and relatively undeveloped.
The Company sold its first Mobile Assistant(R) in 1993 and as of December 31,
1997 had sold and delivered approximately $1.8 million of Mobile Assistant(R)
systems. The Company commenced delivery of the Pentium(R) Mobile Assistant
P-133(TM) in August 1997 and has announced that it expects to commence delivery
of Mobile Assistant(R) IV, a Pentium 266 MHz based system ("MA IV"), in the
quarter ending December 31, 1998. In September 1997, the Company announced
linkAssist(TM), a software development toolkit, which provides speech linking of
data in almost any format, without 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
-6-
<PAGE>
are manufactured by major domestic and foreign computer manufacturers which
possess far more resources than the Company and can be expected to compete
vigorously with the Company for the market at which the Mobile Assistant(R) is
directed. In addition, new and competing technologies are being developed in
hands-free mobile computing systems. There can be no assurance that the Company
will be able to compete successfully against its competitors, that it will have
the working capital needed to incorporate the constant technological advances in
its products or that the competitive pressures faced by the Company will not
adversely affect its financial performance.
DEPENDENCE UPON SUPPLIERS
To prepare the Mobile Assistant(R) P-133 for delivery to customers,
the Company purchases system components from several suppliers, who manufacture,
assemble, integrate and test these components. The Company then combines those
components and performs system tests prior to shipping. Certain components are
currently purchased from single suppliers. The Company expects that the MA IV
will be assembled, integrated and tested by third party. The Company has entered
into written agreements with its suppliers for batteries, head-mounted displays
and computing units. Although the Company believes there are multiple sources
for many parts and components, the Company currently depends heavily on its
current suppliers. Although management believes that the Company could adapt to
any supply interruptions, such occurrences could necessitate changes in product
design or assembly methods for the Mobile Assistant(R) series and cause the
Company to experience temporary delays or interruptions in supply while such
changes are incorporated. Further, because the order time for certain components
may range up to approximately three months, the Company also could experience
delays or interruptions in supply in the event the Company is required to find a
new supplier for any of these components. Any disruptions in supply of necessary
parts and components from the Company's key suppliers could have a material
adverse effect on the Company's results of operations. Any future shortage or
limited allocation of components for the Mobile Assistant(R) could have a
material adverse effect on the Company.
SUBSTANTIAL DEPENDENCE UPON SINGLE PRODUCT LINE;
POSSIBILITY OF UNSUCCESSFUL NEW PRODUCT DEVELOPMENT
The Mobile Assistant(R) series currently consists of the P-133 model
based on a 133 MHz Intel Pentium(R) processor and the MA IV, which is expected
to be available in late 1998. The Mobile Assistant(R) series are the Company's
principal products, and its success will depend upon its commercial acceptance,
which cannot be assured. For single unit purchases, the Mobile Assistant(R)
P-133 currently is priced from $7,196 to $8,995 and up, depending upon the
discount and selected features. As technological developments cause declines in
hardware costs, the Company expects that mobile computer sales will be driven by
system capabilities and integration. There is no assurance that the Mobile
Assistant(R) will offer the performance capabilities or features that customers
will value and, if not, the Company could be required to modify the design of
the Mobile Assistant(R) which may require the expenditure of additional capital
currently unavailable to the Company. While linkAssist(TM) and the Company's
planned software toolkits are intended for use both with the Mobile Assistant(R)
series and independently, there can be no assurance that a separate market for
the Company's existing and planned software products will develop. There can be
no assurance that any products, if sold, will generate significant revenues or
any profits. The Company is also developing additional products for the Mobile
Assistant(R) series for introduction in the future and intends to modify the
Mobile Assistant(R) series for use in other applications and to develop other
products using its core technologies. Additional product development will result
in the Company incurring significant research and development expenses that may
be unrecoverable should commercialization of new products prove unsuccessful.
The Company also could require additional funding if research and
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<PAGE>
development expenses are greater than anticipated. There can be no assurance
that the Company will be successful in its future product development efforts or
in diversifying its product line. See "Risk Factors - Liquidity; Working Capital
Needs."
UNCERTAIN PROTECTION OF PATENT AND PROPRIETARY RIGHTS;
NO ASSURANCE OF ENFORCEABILITY OR SIGNIFICANT COMPETITIVE ADVANTAGE
The Company considers its patent, trade secrets, and other
intellectual property and proprietary information to be important to its
business prospects. The Company relies on a combination of patent, trade secret,
copyright and trademark laws and contractual restrictions to establish and
protect its proprietary rights. The Company has entered into confidentiality and
invention assignment agreements with its employees, and enters into
non-disclosure agreements with its suppliers, VARs, OEMs and actual and
potential customers to limit access to and disclosure of its proprietary
information. The Company has registered its Mobile Assistant(R) and Xybernaut(R)
trademarks on the Principal Register of the United States Patent and Trademark
Office ("Patent Office").
In April 1994, U.S. patent number 5,305,244 ("hands-free,
user-supported portable computers") (the "Patent") for the Mobile Assistant(R)
Series was granted to the Company. This patent was previously assigned to the
Company by several employees of the Company. In September 1995, the Company
received a notification from the Patent Office entitled "office action in
reexamination," which indicated that certain claims under the Patent were
subject to reexamination and were preliminarily rejected. The reexamination of
the Patent was initiated as a result of a request from one of the Company's
competitors. In May 1996, the Company was successful in the reexamination and
the Patent Office issued a Notice of Intent to Issue Reexamination Certificate
and Reexamination Reasons for Patentability/Confirmation with respect to the
issues raised by the request for reexamination, wherein it concluded that the
Company's claims are patentable with respect to the issues raised by the request
for reexamination. In April 1996, the Company received notification that a
second reexamination request had been filed with the Patent Office by the same
competitor that had initiated the prior reexamination, and in September 1996 the
Company received a notification from the Patent Office entitled "office action
in reexamination," which indicates that certain claims under the patent were
subject to reexamination and were preliminarily rejected. In November 1996, the
Company filed a written response to the request for reexamination and
preliminary rejection. The second re-examination has been concluded and the
Patent Office indicated that the Company was successful in the reexamination and
sent the Company a "Notice of Intent to Issue Reexamination Certificate"
indicating that the Patent Office ruled in the Company's favor. Subsequently on
September 23, 1997, the Patent Office issued the Reexamination Certificate to
the Company indicating successful results for the Company in the second
re-examination. Most of the Company's revenue for the twelve months ended
December 31, 1997 and 1996 were derived from products included within the scope
of the patent. The Company has notified several of its competitors of the
existence of the Patent, which the Company's counsel believes may have been
infringed by some of such competitors. The Company intends to take any and all
appropriate measures, including legal action, necessary to maintain and enforce
its rights under the Patent and to recover any damages suffered as a result of
any alleged infringement.
Since July 1996, the Company has filed fifteen patent applications
covering various aspects of computers in general and wearable computers in
particular. Of these fifteen applications, five additional patents have been
issued, one patent has been allowed pending issuance and nine patents are
pending. Most of these applications have also been filed in European countries,
The People's Republic of China, Japan, Republic of Korea, Republic of China
(Taiwan), Canada and Australia. All patents obtained by Company employees under
pending and future applications have been and will be assigned to the Company
under existing invention assignments.
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Notwithstanding the foregoing, there can be no assurance that the
Company's pending patent applications will issue as patents, that any issued
patent will provide the Company with significant competitive advantages or that
challenges will not be instituted against the validity or enforceability of any
patent held by the Company. The cost of litigation to uphold the validity and
prevent infringement of patents can be substantial. There also can be no
assurance that others will not independently develop similar or more advanced
products, design patentable alternatives to the Company's products or duplicate
the Company's trade secrets. The Company may in some cases be required to obtain
licenses from third-parties or to redesign its products or processes to avoid
infringement. The Company also relies on trade secrets and proprietary
technology and enters into confidentiality agreements with its employees and
consultants. There can be no assurance that the obligation to maintain the
confidentiality of such trade secrets or proprietary information will not be
breached by employees or consultants or that the Company's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors in such a manner that the Company has no practical
recourse.
LIMITED MARKETING AND DIRECT SALES EXPERIENCE;
DEPENDENCE ON OTHERS FOR MARKETING AND SALES.
The Company intends to continue development of a sales organization
to market and sell its mobile computing products to value-added resellers
("VARs"), original equipment manufacturers ("OEMs"), distributors and end users.
The Company is also developing a network of VARs, distributors and OEMs and
intends to enter into joint ventures and licensing or other collaborative
arrangements to market and sell its mobile computing products. Such arrangements
may result in a loss of control by the Company over the marketing and sale of
its products. There can be no assurance that the Company will be successful in
entering into such additional arrangements or be able effectively to manage and
maintain its relationships with others, or that any marketing and sales efforts
undertaken for the Company by others will be successful. The Company also
markets its products outside of the United States. A number of risks are
inherent in international transactions, such as the imposition of governmental
controls including restrictions on the exporting of currency, fluctuations in
foreign currency exchange rates, export license requirements, political and
economic instability, trade restrictions, changes in tariffs and difficulties
and expenses in managing international operations. These and other factors
beyond the Company's control may adversely affect the Company's ability to
achieve significant sales.
DEPENDENCE UPON AND NEED FOR KEY PERSONNEL; LIMITED MANAGEMENT TEAM
The Company's success depends to a significant extent on Edward G.
Newman, its President, Chief Executive Officer and Chairman of its Board of
Directors. The loss of Mr. Newman would have a material adverse effect on the
Company's progress and ultimate likelihood of success. Because the Company is
substantially dependent on Mr. Newman's services and there are currently only
two other board-elected officers of the Company, the Company may be considered
to have limited management. Although the Company has entered into a three-year
employment agreement with Mr. Newman, this agreement may not assure the Company
the continued services of Mr. Newman. The Company has obtained a key-person life
insurance policy on the life of Mr. Newman in the amount of $2,000,000. The
Company's success also will depend upon its ability to attract and retain highly
qualified and experienced management and technical personnel. The Company faces
competition for such personnel from numerous other entities, many of which have
significantly greater resources than the Company. There can be no assurance that
the Company will be successful in recruiting such personnel or that, if
recruited, such persons would succeed in establishing profitable operations for
the Company.
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CUSTOMER CONCENTRATION
For the twelve month period ended December 31, 1996, two of the
Company's customers accounted for 64% and 24%, respectively, of the Company's
revenues. For the fiscal year ended December 30, 1997, two customers accounted
for 34% and 10%, respectively of the Company's revenues. Accordingly, the
Company is significantly dependent on revenues derived from a limited number of
customers. The loss of one or more significant customers may have a material
adverse effect on the ability of the Company to achieve profitability. To the
extent the Company's dependence increases on large corporate customers in the
future, the Company will be subject to an increased risk that the loss of any
such customers will have a material adverse effect on the Company's results of
operations. The Company may remain dependent in the immediate future upon a
limited number of customers (the identity of which may be subject to change) for
a material percentage of its annual operating revenue.
RAPID TECHNOLOGICAL CHANGE AND RISK OF OBSOLESCENCE
The market for computer products is characterized by rapid
technological advances, evolving industry standards, changes in end user
requirements and frequent new product introductions and enhancements. The
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. The Company's success
will depend upon its ability to enhance its current products and develop and
successfully introduce and sell new products that keep pace with technological
developments and respond to evolving end user requirements. Any failure by the
Company to anticipate or respond adequately to technological developments or end
user requirements, or any significant delays in product development or
introduction, could damage the Company's competitive position in the marketplace
and reduce revenues. The Company expects to increase the use of additional
external and internal resources in the near term to meet these challenges. There
can be no assurance that the Company will be successful in hiring, training and
retaining qualified product development personnel to meet its needs. There can
be no assurance that the Company will be successful in developing and marketing
new products or product enhancements on a timely basis. Any failure to
successfully develop and market new products and product enhancements would have
a material adverse effect on the Company's results of operations.
YEAR 2000 ISSUES
The Company is aware of the computing issues associated with the
coming of the millennium (year 2000), most notably whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. Based on preliminary investigations and the
representations of several of its suppliers, the Company currently believes that
computers and software used in its operations and sold by the Company are year
2000 compliant. The Company is working with its suppliers and customers to
either verify year 2000 compliance or identify and execute appropriate changes
to make such systems year 2000 compliant. The Company believes that the cost of
completing any modifications for year 2000 compliance to the systems used or
sold by the Company will not be material. However, there can be no assurance
that the Company's suppliers will be correct in their assertions that their
products are year 2000 compliant or that the Company's estimate of the cost of
systems modifications for year 2000 compliance will prove ultimately to be
correct.
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INDUSTRY CYCLICALITY
The computer industry historically has been affected by periodic
downturns, which have had an adverse economic effect on manufacturers of
computer hardware and software as well as upon end users of computers. In
addition, the life cycle of existing computer products and timing of new product
development and introduction can affect demand for computer products. The
Company's results of operations for any particular period may be adversely
affected by numerous factors, such as the loss of key suppliers or customers,
price competition, problems encountered in managing inventories or receivables,
the timing or cancellation of purchase orders with suppliers and the timing of
expenditures in anticipation of increased sales and customer product delivery
requirements, if any. Price competition in the computer industry in which the
Company competes is intense and could result in gross margin declines which
could have an adverse impact on the Company's financial performance.
EFFECT OF POSSIBLE NON-CASH FUTURE CHARGE
As a condition to the Company's initial public offering (the "IPO"),
certain of the Company's stockholders, primarily officers and directors, have
been required to deposit an aggregate of 1,800,000 shares of Common Stock into
an escrow account (the "Escrowed Shares"). The Escrowed Shares are subject to
incremental release over a three-year period only in the event the Company's
gross revenues and earnings (loss) per share for the 12-month periods ending
September 30, 1997, 1998 and 1999 equal or exceed certain gross revenue and
earnings (loss) per share targets. If such per share targets are not met in any
of the relevant 12-month periods (and the price of the Common Stock does not
meet or exceed the price described below), the Escrowed Shares will be returned
to the Company in amounts which have been agreed upon between the Representative
and the Company for each period and canceled. In addition to the foregoing, all
the then Escrowed Shares will be released to the stockholders if the closing
price of the Common Stock as reported on The Nasdaq SmallCap Market following
this offering equals or exceeds $11.00 for 25 consecutive trading days or 30 out
of 35 consecutive trading days during the period ending September 30, 1999. In
the event any Escrowed Shares held by officers, employees and consultants are
released, the difference between the initial offering price and the market value
of such shares at the time of release will be deemed to be additional
compensation expense to the Company. Assuming the price of Common Stock is equal
to or greater than the initial offering price of the shares at the Company's IPO
(of which there can be no assurance), the release of the Escrowed Shares would
result in an earnings charge that would have the effect of reducing or
eliminating any earnings per share and could have a negative effect on the
market price for the Common Stock. The earnings per share target calculation
will be based on the average number of shares issued and outstanding during each
period but excludes shares issued pursuant to a unit purchase option granted
pursuant to the IPO, extraordinary items or compensation expense charged to the
Company related to the release of the Escrowed Shares. The stock and earnings
targets for escrow release for September 30, 1997 were not achieved and 300,000
shares were canceled from the escrow pool, which resulted in a reduction of 2.1%
of the Company's outstanding shares of Common Stock. Given the expected start of
full-scale production of the MA IV in the quarter ending December 31, 1998, the
Company's management believes that it is likely that the Company's gross
revenues and allowable losses will not meet the Performance Targets for the
12-month period ending September 30, 1998. Accordingly, the release of the
escrow shares for this period is only likely if the stock price equals or
exceeds $11.00 for 25 consecutive trading days or 30 out of 35 consecutive
trading days prior to September 30, 1998. If conditions are not met for release
from escrow, then 750,000 shares of stock will be returned to the Company on
September 30, 1998 and canceled, resulting in no earnings impact and a
commensurately lower number of outstanding shares.
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CONTROL BY EXISTING STOCKHOLDERS
Following this offering, the Company's executive officers, directors
and principal stockholders will, in the aggregate, beneficially own
approximately 31.2% of the Company's outstanding shares of Common Stock. These
stockholders, if acting together, will be able effectively to control most
matters requiring approval by the stockholders of the Company, including the
election of directors. The voting power of these stockholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company.
LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that directors of
the Company shall not be personally liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, subject to
limited exceptions. Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission,
these provisions of the Certificate of Incorporation could prevent the recovery
of monetary damages against directors of the Company. See "Indemnification for
Securities Act Liabilities."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock
in the public market following this offering could adversely affect the market
price of the Common Stock. Of the 21,736,680 shares of Common Stock that will be
outstanding or registered for sale upon the completion of this offering, the
3,846,429 shares distributed in the IPO, the 4,675,456 shares of Common Stock
issued in connection with the conversion of Series A Preferred Stock and Series
B Preferred Stock, the 457,496 unissued shares of Common Stock registered in
connection with the Series A Preferred Stock, the 155,424 unissued shares of
Common Stock registered in connection with the Series B Preferred Stock and the
2,340,938 additional shares of Common Stock registered in this offering will be
freely tradeable. The remaining 10,260,937 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 Rule 144 commencing 90
days from the date of this Prospectus and at various times thereafter through
November 1997. However, pursuant to the terms of agreements entered into
pursuant to the IPO, the holders of 9,905,437 shares of Common Stock may not
sell or dispose of their shares of Common Stock until July 18, 1998 without
prior written consent of the representative of the underwriter in the IPO (the
"Representative").
SECURITIES ISSUABLE PURSUANT TO OPTIONS, WARRANTS AND THE UNIT PURCHASE OPTION
At the date of this Prospectus, the Company has reserved an aggregate
of 6,546,692 shares of Common Stock for issuance on exercise of outstanding
options and warrants. The exercise prices of the options presently outstanding
are $0.01 per share for 100,000 shares granted in September 1994, and $1.37 to
$6.00 for 1,290,430 shares granted from April 1, 1995 to May 8, 1998. The
exercise price of the 287,860 warrants outstanding as of May 8, 1998 is between
$1.76 and $18.00 per share. In connection with the Company's IPO, warrants to
purchase 3,846,429 shares were originally issued that entitle the holder to
purchase a share of common stock for $9.00 until July 19, 1999. These warrants
contain anti-dilution provisions that have resulted in the number of shares to
be issued upon a complete warrant exercise increasing to 4,583,402. At the
completion of the IPO, the Representative received an option (the "Unit Purchase
Option") to purchase 210,000 Units (the "Units"), each
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unit consisting of one share of Common Stock and one Redeemable Warrant (a
"Warrant") to purchase one share of Common Stock, at a price of $9.075 per Unit
during a period of four years commencing July 18, 1997. The Warrants included in
the Unit Purchase Option are exercisable at $12.60 per share. During the terms
of the outstanding options, warrants and the Unit Purchase Option, the holders
are given the opportunity to profit from a rise in the market price of the
Common Stock, and their exercise may dilute the ownership interest of existing
stockholders, including investors in this offering. The existence of the
options, the warrants and the Unit Purchase Option may adversely affect the
terms on which the Company may obtain additional equity financing. Moreover, the
holders are likely to exercise their rights to acquire Common Stock at a time
when the Company would otherwise be able to obtain capital on terms more
favorable than could be obtained through the exercise of such securities.
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 A Preferred Stock
and the Series B Preferred Stock are issued and outstanding. The authorized and
unissued Preferred Stock may be issued with voting, conversion or other terms
determined by the Board of Directors which could be used to delay, discourage or
prevent a change of control of the Company. Such terms could include, among
other things, dividend payment requirements, redemption provisions, preferences
as to dividends and distributions and preferential voting rights. The issuance
of Preferred Stock with such rights could have the effect of limiting
stockholder participation in certain transactions such as mergers or tender
offers and could discourage or prevent a change in management of the Company.
The Company has no present intention to issue any additional Preferred Stock.
See "Description of Securities -- Preferred Stock."
In addition, the Board of Directors of the Company recently adopted
resolutions which implemented a classified or staggered Board of Directors which
would limit an outsider's ability to effect a rapid change of control of the
Board.
The ability of the Board of Directors to issue "blank check"
Preferred Stock and the staggered Board of Directors could have the effect of
delaying, deterring or preventing a change in control of the Company without any
further action by the shareholders. In addition, issuance of Preferred Stock,
without shareholder approval,
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on such terms as the Board of Directors may determine, could adversely affect
the voting power of the holders of the Common Stock, including the loss of
voting control to others. See "Description of Securities."
USE OF PROCEEDS
The Shares being offered hereby are being registered for the account
of the Selling Stockholders, and, accordingly, the Company will not receive any
of the proceeds from the sale of the Shares.
SELLING STOCKHOLDERS
The Shares being offered for resale by the Selling Stockholders were
acquired in connection with the April 1998 Private Placement and the January
1998 Private Placement. Pursuant to the terms and conditions of the Private
Equity Line of Credit Agreement, certain of the Selling Stockholders will
purchase up to an additional $10,000,000 of the Company's Common Stock during
the Commitment Period, as defined in the agreement. See "Description of
Securities."
The following table sets forth certain information regarding the
ownership of shares of Common Stock by the Selling Stockholders as of May 8,
1998, and as adjusted to reflect the sale of the Shares. The information in the
table concerning the Selling Stockholders who may offer Shares hereunder from
time to time is based on information provided to the Company by such
stockholder, except for the assumed exercise of the Warrant A and Warrant B by
the holders thereof and the exercise by the Company of the Put Option, which is
based solely on the assumptions referenced in footnotes (1), (2) and (3) to the
table. Information concerning the Selling Stockholders may change from time to
time and any changes of which the Company is advised will be set forth in a
Prospectus Supplement to the extent required. See "Plan of Distribution."
Shares of
Common Stock Owned
after Offering(4)
---------------------
Shares of
Common Stock Shares of
Owned Prior to Common Stock
Offering to be Sold(3) Number Percent
-------------- ------------- --------- -------
Balmore Funds S.A 1,135,469(1) 1,135,469 1,135,469 5.4%
Austost Anstalt Schaan 1,135,469(1) 1,135,469 1,135,469 5.4%
Settondown Capital
International Ltd. 70,000(2) 70,000 70,000 0.3%
--------- --------- --------- -----
Total 2,340,938 2,340,938 2,340,938 11.1%
========= ========= ========= =====
- -----------------
(1) Includes 592,593 shares of Common Stock, 10,000 shares issuable upon
conversion of Warrant A, 10,000 shares issuable upon conversion of Warrant
B and a total of 1,045,752 shares issuable upon exercise by the Company of
Put Options in the aggregate principal amount of $3,000,000 which have
been allocated equally (522,876 shares) between the two Investors. See
"Description of Securities."
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(2) Includes 50,000 shares of Common Stock and 20,000 shares issuable upon
exercise of Warrant A issued to the Placement Agent in connection with the
Private Placement.
(3) Assumes that each Selling Stockholder will exercise all of its Warrant A
and Warrant B into Common Stock; also assumes the exercise by the Company
of Put Options in the aggregate principal amount of $3,000,000 (1,045,752
shares) which have been allocated equally between the two Investors. See
"Description of Securities."
(4) Each Selling Stockholder has agreed that it will not, following any
purchase of the Put Shares, be the beneficial owner of 4.99% or more of
the then issued and outstanding shares of Common Stock. The Selling
Shareholders are not affiliated with the Company. The Selling Stockholders
have not had any material relationship with the Company within the past
three years.
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, 19,622,946
shares of Common Stock are issued and outstanding, 750 shares of Series A
Preferred Stock are issued and outstanding and no shares of Series B Preferred
Stock are issued and outstanding. The Company currently has reserved 6,546,692
shares of Common Stock for issuance pursuant to outstanding options and
warrants.
THE PRIVATE PLACEMENT
On April 13, 1998 (the "Subscription Date"), the Company consummated
a Private Placement which contemplates the sale of up to $11,000,000 of the
Company's Common Stock over a period of up to two years from the effective date
of the Registration Statement of which this Prospectus is a part (the
"Commitment Period").
Pursuant to the terms of a Private Equity Line of Credit Agreement
(the "Agreement"), Balmore Funds S.A. and Austost Anstalt Schaan (the
"Investors") purchased Common Stock in the principal amount of $1,000,000 (the
"Initial Shares") at an initial purchase price of $1.2656 per share. The Company
also issued to each Investor a Warrant A and a Warrant B to purchase an
aggregate of 20,000 shares of Common Stock (the "Warrant A Shares" and "Warrant
B Shares", respectively). The Company also issued to Settondown Capital
International Ltd. (the "Placement Agent") 50,000 shares of Common Stock and a
Warrant A to purchase an additional 20,000 shares (collectively, the "Placement
Shares").
The Put Option
--------------
During the Commitment Period, the Company may, from time to time,
exercise a "put" right (the "Put Option") by delivery of a put notice to the
Investors pursuant to which the Investors must purchase the allotted number of
shares indicated therein; provided, however, that, unless the Company obtains
Stockholder approval pursuant to the applicable corporate governance rules of
the Nasdaq Stock Market, the Company may not compel the Investors to make a
purchase which results in the issuance to an Investor, individually, of more
than 19.99%
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of the shares of Common Stock of the Company including the Initial Shares. The
maximum number of shares for which the Company may deliver a put notice is
subject to certain limitations based on the trading volume of the Company's
Common Stock and the closing price of the Common Stock. The Put Shares may be
purchased at a 10% discount off the average of the three lowest closing bid
prices of the Common Stock during the Valuation Period (as defined in the
Agreement). The obligation of the Investors to purchase shares upon exercise by
the Company of a Put Option is subject to limitations and termination upon
occurrence of certain conditions set forth in the Agreement.
The Initial Shares, Warrant A and Warrant B were issued, and the Put
Shares, the Warrant A Shares and the Warrant B Shares will be issued, by the
Company in reliance upon the provisions of Section 4(2) and Regulation D of the
Securities Act.
Warrant A
---------
The Warrant A issued to the Investors and the Placement Agent in
connection with the Private Placement may be exercised, subject to the terms and
subject to the conditions set forth therein, at any time on or after October 15,
1998 and on or prior to October 15, 2003, to subscribe for and purchase shares
of Common Stock of the Company at an exercise price of $1.76. The exercise price
and the number of shares for which the Warrant A is exercisable is subject to
adjustment as provided therein, including, but not limited to, anti-dilution
provisions pertaining to the declaration of stock dividends and the merger,
consolidation or liquidation of the Company.
Warrant B
---------
The Warrant B issued to the Investors in connection with the Private
Placement may be exercised, subject to the terms and subject to the conditions
set forth therein, at any time on or after October 15, 1998 and on or prior to
October 15, 2003, to subscribe for and purchase shares of Common Stock of the
Company at an exercise price of $2.81. The exercise price and the number of
shares for which the Warrant A is exercisable is subject to adjustment as
provided therein, including, but not limited to, anti-dilution provisions
pertaining to the declaration of stock dividends and the merger, consolidation
or liquidation of the Company. The Company, at its option, may redeem Warrant A
for $0.01 per Warrant A Share by giving the holder thereof written notice (the
"Call Notice") at any time after the Registration Statement is declared
effective, and the closing bid price of the Common Stock of the Company is
greater than one hundred fifty (150%) percent of the exercise price for twenty
(20) consecutive trading days.
Placement Shares; Compensation to Placement Agent.
--------------------------------------------------
As compensation for services rendered in connection with the Private
Placement, the Company issued to the Placement Agent 50,000 shares of Common
Stock (which are subject to a one year lock-up from the Subscription Date), and
a Warrant A to purchase 20,000 shares of Common Stock. The Company also paid to
the Placement Agent five (5%) percent of the Initial Shares investment amount.
The Company also agreed to pay to the Placement Agent, following the closing for
each Put Option, five (5%) percent of the gross proceeds in cash, and five (5%)
percent of the number of shares of Common Stock issuable in total to the
Investors for each Put.
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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 A PREFERRED STOCK
On June 30, 1997, the Board of Directors authorized the issuance of a
series of Preferred Stock consisting of 3,000 shares (the "Series A Preferred
Stock"), each such share of Series A Preferred Stock has a stated value of
$1,000 (the "Liquidation Preference"), pursuant to a Certificate of Designation
(the "Certificate of Designation"). From September 29, 1997 to May 8, 1998, the
holders of the Series A Preferred Stock converted a portion of their holdings
and as of May 8, 1998, three different entities owned the remaining 750 shares
of the Series A Preferred Stock. The Company has registered a total of 1,960,713
shares of Common Stock underlying the Series A Preferred Stock, of which,
1,285,713 shares were registered in a registration statement filed with the
Commission on September 22, 1997 and an additional 675,000 shares were
registered in an amendment to such registration statement filed with the
Commission on May 8, 1998. As of May 8, 1998, 1,503,217 shares of Common Stock
were issued in connection with conversions of Series A Preferred Stock and 750
shares of Series A Preferred Stock were outstanding.
Dividends. The holders of the shares of Series A 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 A Preferred Stock from the date of initial issuance. Such dividends are
in preference to any distributions on any outstanding shares of Common Stock or
any other equity securities of the Company that are junior to the Preferred
Stock as to the payment of dividends.
Preferences on Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of the Series A Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, an amount equal
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to the Liquidation Preference for each share of Series A Preferred Stock owned
by such holder, plus all accrued and unpaid dividends thereon to the date of
payment. If upon liquidation, dissolution, or winding up of the Company, the
assets of the Company available for distribution to its stockholders shall be
insufficient to pay the holders of the Series A Preferred Stock the full
Liquidation Preference plus accrued and unpaid dividends to which they
respectively shall be entitled, the holders of the Series A Preferred Stock
together with the holders of any other series of Preferred Stock ranking on a
parity with the Series A Preferred Stock as to the payments of amounts upon
liquidation, dissolution or winding up shall share ratably in any distribution
of assets according to the respective amounts which would be payable in respect
of all such shares held by the respective stockholders. The sale or other
disposition (for cash, shares of stock, securities or other consideration), of
all or substantially all of the assets of the Company shall be deemed to be a
liquidation, dissolution or winding up of the Company but the merger or
consolidation of the Company into or with another corporation or into or with
the Company, shall not be deemed to be a liquidation, winding up or dissolution
of the Company. The holders of Series A Preferred Stock shall have no priority
or preference with respect to distributions made by the Company in connection
with the repurchase of shares of Common Stock issued to or held by employees,
directors or consultants upon termination of their employment or services
pursuant to agreements providing for the right of said repurchase between the
Company and such persons.
Conversion Rights. The holders of Series A Preferred Stock shall have
conversion rights as follows: (i) no shares of Series A Preferred Stock may be
converted prior to September 28, 1997; (ii) at any time after September 28, 1997
through December 31, 1997, up to twenty-five (25%) percent of the shares of
Series A Preferred Stock then outstanding may be converted, at the option of the
holders thereof; and (iii) thereafter, on January 1, 1998, April 1, 1998 and
July 1, 1998, an additional twenty-five (25%) percent of the shares of Series A
Preferred Stock then outstanding may be converted, on a cumulative and pro rata
basis, at the option of the holders thereof. The number of shares of fully-paid
and nonassessable Common Stock into which each share of Series A 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) 82% 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 A Preferred
Stock has telecopied a notice of conversion to the Company (the "Conversion
Date") and (B) $3.50.
In the event the shares of Series A Preferred Stock are not converted
within ten business days of receipt by the Company of a valid notice of
conversion, the Company shall pay to the holder, by wire transfer, as liquidated
damages for such failure and not as a penalty, an amount in cash equal to 1%
percent per day of the purchase price of the shares of Series A Preferred Stock
to be converted which shall run from the initial Conversion Date and the holder
has the option to withdraw the notice of conversion previously sent; provided,
that the Company shall not be responsible for or required to pay such liquidated
damages if such failure to convert was not caused by any actions or omissions of
the Company.
No fractional shares of Common Stock shall be issued upon conversion
of the Series A Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock on the
Conversion Date, as determined by the Company's Board of Directors. The Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion unless either the certificates evidencing such
shares of Series A Preferred Stock are delivered to the Company or its transfer
agent as provided above, or the holder notifies the Company or its transfer
agent that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates.
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Upon any conversion of Series A Preferred Stock, the shares of Series
A Preferred Stock that are converted shall not be reissued and shall not be
considered outstanding for any purposes. Upon conversion of all of the then
outstanding Series A Preferred Stock, shares of Series A Preferred Stock shall
not be deemed outstanding for any purpose whatsoever and all such shares shall
be retired and canceled and shall not be reissued.
On June 30, 1999, the holders of the Series A Preferred Stock shall
be required to convert all of their outstanding shares of Series A Preferred
Stock into shares of Common Stock. Until converted, the Company shall be
entitled to redeem shares of Series A 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 A 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 A
Preferred Stock.
Redemption. At any time after September 28, 1997, the Company may, at
the option of the Board of Directors, redeem up to 50% of the outstanding shares
of the Series A 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 at or below $2.625. At any time after September 28, 1997,
the Company may, at the option of the Board of Directors, redeem all or a
portion of the remaining 50% of the outstanding shares of the Series A 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 at or
below $1.00. The Company shall give written notice by telecopy, to the holder of
Series A 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 A Preferred Stock
of such holders to be redeemed and shall call upon such holders to surrender to
the Company on the Redemption Date at the place designated in the notice such
holders' redeemed stock. If fewer than all the outstanding shares of Series A
Preferred Stock are to be redeemed, the redemption shall be pro rata among the
holders of Series A Preferred Stock and subject to such other provisions as may
be determined by the Board of Directors. The Redemption Date shall be no more
than 10 days after receipt of written notice from the Company. If the Company
fails to pay the Redemption Price on the Redemption Date, the Company shall pay
to the holder a penalty in an amount in cash equal to 2% percent of the
Redemption Price to be paid on such Redemption Date. If the Company fails to pay
the Redemption Price on the Redemption Date, the holder shall have the right to
convert the Series A Preferred Stock previously presented to the Company and not
redeemed. The Company shall have the right to redeem the Series A Preferred
Stock in any subsequent redemption; provided, however, that if the Company fails
to pay the Redemption Price in a subsequent redemption within 10 days, the
Company shall have the right to redeem the Series A Preferred Stock thereafter
only upon wiring the Redemption Price to the holders simultaneously with sending
the notice of redemption. On or after the Redemption Date, the holders of shares
of Series A Preferred Stock called for redemption shall surrender the
certificates evidencing the shares called for redemption to the Company at the
place designated in such notice and shall thereupon be entitled to receive
payment of the Redemption Price.
The Company shall have the option to redeem the Series A Preferred
Stock at a price determined as follows (each, a "Redemption Price"): (i) any
portion of the first 25% of the outstanding shares of Series A Preferred Stock
at a cash price equal to 110% percent of the Liquidation Preference per share,
together with all unpaid dividends to and including the Redemption Date, or
issue shares of Common Stock at a conversion rate equal to (x) $1,000 divided by
(y) 82% percent 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
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trading days preceding the Conversion Date; (ii) any portion of the second 25%
percent of the outstanding shares of the Series A Preferred Stock at a cash
price equal to 120% of the Liquidation Preference per share, together with all
unpaid dividends to and including the Redemption Date, or issue shares of Common
Stock at a conversion rate equal to (x) $1,000 divided by (y) 82% 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 Conversion Date; and (iii) any portion of the
remaining 50% of the outstanding shares of Series A Preferred Stock, if the
Company receives a Notice of Conversion and the Conversion Price of the Series A
Preferred Stock is below $1.00, at a cash price equal to 110% of the Liquidation
Preference per share, together with all accrued and unpaid dividends to and
including the Redemption Date; provided, however, that payment of the Redemption
Price shall be made from any funds of the Company legally available therefor.
From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
the holders of such shares shall continue), the holders of the shares of the
Series A Preferred Stock called for redemption shall cease to have any rights as
stockholders of the Company, except the right to receive, without interest, the
Redemption Price thereof upon surrender of certificates representing the shares
of Series A Preferred Stock, and such shares shall not thereafter be transferred
(except with the consent of the Company) on the books of the Company and shall
not be deemed outstanding for any purpose whatsoever.
There shall be no redemption of any shares of Series A Preferred
Stock of the Company where such action would be in violation of applicable law.
Call Option. In the event the Company closes on an offering for its
Common Stock at a price per share under $6.00, the Company may, at its option,
call all outstanding shares of Series A Preferred Stock at a call price equal to
200% of the Liquidation Preference.
In the event the Company has an offering for its Common Stock at a
price per share equal to or greater than $6.00, then the holders of the Series A
Preferred Stock shall be required to convert all outstanding shares of Series A
Preferred Stock into shares of Common Stock five business days prior to the
scheduled closing of such offering and each holder may, at its option, sell its
shares of Common Stock as part of such offering.
Voting Rights. Except as otherwise required by law, the holders of
the Series A 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 A 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 A Preferred Stock.
Ranking; Changes Affecting Series A Preferred Stock. The Series A
Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, (i) rank senior to any of the Company's
Common Stock and any other class or series of stock of the Company which by its
terms shall rank junior to the Series A Preferred Stock, and (ii) rank junior to
any other class or series of stock of the Company which by its terms shall rank
senior to the Series A Preferred Stock and (iii) rank on a pari passu basis with
the Series B Preferred Stock and any other series of Preferred Stock of the
Company.
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So long as any shares of Series A Preferred Stock are outstanding,
the Company shall not (i) alter or change any of the powers preferences,
privileges, or rights of the Series A Preferred Stock; or (ii) amend the
provisions of the Certificate of Designation affecting the ranking of the Series
A Preferred Stock, without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of at least a majority of
the outstanding shares of Series A Preferred Stock, as to changes affecting the
Series A Preferred Stock.
Registration Rights. The Company has registered the shares of Common
Stock underlying the Series A Preferred Stock in a registration statement filed
with the Commission.
SERIES B PREFERRED STOCK
On November 12, 1997, the Board of Directors authorized the issuance
of a series of Preferred Stock consisting of 4,180 shares (the "Series B
Preferred Stock"), each such share of Series B Preferred Stock has a stated
value of $1,000 (the "Liquidation Preference"), pursuant to a Certificate of
Designation (the "Certificate of Designation"). On November 12, 1997, the
Company placed 3,180 shares of Series B Preferred Stock and on January 22, 1998,
placed the remaining 1,000 shares. The Company has registered a total of
3,327,663 shares of Common Stock underlying the Series B Preferred Stock, of
which, 2,622,663 were registered in a registration statement filed with the
Commission on January 2, 1998 and amended on January 22, 1998, and 705,000 were
registered in a further amendment to such registration statement filed with the
Commission on May 8, 1998. As of May 8, 1998, all of the Series B Preferred
Stock had been converted to Common Stock resulting in the issuance of 3,172,239
shares of Common Stock.
Dividends. The holders of the shares of Series B 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 B Preferred Stock from the date of initial issuance. Such dividends are
in preference to any distributions on any outstanding shares of Common Stock or
any other equity securities of the Company that are junior to the Preferred
Stock as to the payment of dividends.
Preferences on Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of the Series B Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, an amount equal to the Liquidation Preference for each share of
Series B Preferred Stock owned by such holder, plus all accrued and unpaid
dividends thereon to the date of payment. If upon liquidation, dissolution, or
winding up of the Company, the assets of the Company available for distribution
to its stockholders shall be insufficient to pay the holders of the Series B
Preferred Stock the full Liquidation Preference plus accrued and unpaid
dividends to which they respectively shall be entitled, the holders of the
Series B Preferred Stock together with the holders of any other series of
Preferred Stock ranking on a parity with the Series B Preferred Stock as to the
payments of amounts upon liquidation, dissolution or winding up shall share
ratably in any distribution of assets according to the respective amounts which
would be payable in respect of all such shares held by the respective
stockholders. The sale or other disposition (for cash, shares of stock,
securities or other consideration), of all or substantially all of the assets of
the Company shall be deemed to be a liquidation, dissolution or winding up of
the Company but the merger or consolidation of the Company into or with another
corporation or into or with the Company, shall not be deemed to be a
liquidation, winding up or dissolution of the Company. The holders of Series B
Preferred Stock shall have no priority or preference with respect to
distributions made by the Company in connection with the repurchase of shares of
Common Stock issued to or held by employees, directors
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or consultants upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase between the Company and
such persons.
Conversion Rights. The holders of Series B Preferred Stock shall have
conversion rights as follows: (i) no shares of Series B Preferred Stock may be
converted prior to the earlier of (x) the effective date of the Registration
Statement covering the Shares and (y) February 10, 1998 (the "First Conversion
Date"); (ii) during the thirty-day period after the First Conversion Date, up to
twenty-five (25%) percent of the shares of Series B Preferred Stock then
outstanding may be converted, at the option of the holders thereof; and (iii)
during each thirty-day period thereafter, an additional twenty-five (25%)
percent of the shares of Series B Preferred Stock then outstanding may be
converted, on a cumulative and pro rata basis, at the option of the holders
thereof. The number of shares of fully-paid and nonassessable Common Stock into
which each share of Series B Preferred Stock may be converted shall be
determined by dividing the Liquidation Preference and at the option of the
Company, accrued and unpaid dividends, by an amount (the "Conversion Price")
equal to the 85% of the average closing bid price of the Common Stock as
reported on the Nasdaq SmallCap Market or any successor exchange or trading
market in which the Common Stock is listed for the five trading days (the
"Average Trading Price") preceding the date on which the holder of the Series B
Preferred Stock has telecopied a notice of conversion to the Company (the
"Conversion Date"). The Conversion Price shall not be greater than 120% of the
Average Trading Price on the date of issuance or less than an initial floor
price of 50% of the Conversion Price on the date of issuance. Commencing thirty
days after the First Conversion Date and at the end of each thirty-day period
thereafter, the initial floor price will be reduced by 10%.
In the event the shares of Series B Preferred Stock are not converted
within ten business days of receipt by the Company of a valid notice of
conversion, the Company shall pay to the holder, by wire transfer, as liquidated
damages for such failure and not as a penalty, an amount in cash equal to 1%
percent per day of the purchase price of the shares of Series B Preferred Stock
to be converted which shall run from the initial Conversion Date and the holder
has the option to withdraw the notice of conversion previously sent; provided,
that the Company shall not be responsible for or required to pay such liquidated
damages if such failure to convert was not caused by any actions or omissions of
the Company.
No fractional shares of Common Stock shall be issued upon conversion
of the Series B Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock on the
Conversion Date, as determined by the Company's Board of Directors. The Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion unless either the certificates evidencing such
shares of Series B Preferred Stock are delivered to the Company or its transfer
agent as provided above, or the holder notifies the Company or its transfer
agent that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates.
Upon any conversion of Series B Preferred Stock, the shares of Series
B Preferred Stock that are converted shall not be reissued and shall not be
considered outstanding for any purposes. Upon conversion of all of the then
outstanding Series B Preferred Stock, shares of Series B Preferred Stock shall
not be deemed outstanding for any purpose whatsoever and all such shares shall
be retired and canceled and shall not be reissued.
On November 12, 1999, the holders of the Series B Preferred Stock
shall be required to convert all of their outstanding shares of Series B
Preferred Stock into shares of Common Stock. Until converted, the Company
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shall be entitled to redeem shares of Series B 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 B 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 B
Preferred Stock.
Redemption. At any time after the date of issuance of the Series B
Preferred Stock, the Company may, at the option of the Board of Directors,
redeem any or all of the outstanding shares of the Series B Preferred Stock at
the applicable redemption price, provided, that the holder shall have the right
to convert shares of Series B Preferred Stock which are eligible for conversion
in the first five (5) days after receiving a notice of redemption up to 20% of
the Series B Preferred Stock in the aggregate owned by such holder. The Company
shall give written notice by telecopy, to the holder of Series B Preferred Stock
to be redeemed, which notice shall specify the date for redemption, which date
shall be no later than five (5) business days after the date on which the notice
is delivered to the holder (the "Redemption Date"), the Redemption Price (as
hereinafter defined), the number of shares of Series B Preferred Stock of such
holders to be redeemed and shall call upon such holders to surrender to the
Company on the Redemption Date at the place designated in the notice such
holders' redeemed stock. If fewer than all the outstanding shares of Series B
Preferred Stock are to be redeemed, the redemption shall be pro rata among the
holders of Series B Preferred Stock and subject to such other provisions as may
be determined by the Board of Directors. The Redemption Date shall be no more
than five (5) business days after receipt of written notice from the Company. If
the Company fails to pay the Redemption Price on the Redemption Date, the
Company shall pay to the holder a penalty in an amount in cash equal to
$100,000. If the Company fails to pay the Redemption Price on the Redemption
Date, the Company shall have the right to redeem the Series B Preferred Stock
thereafter only upon wiring the Redemption Price to the holders simultaneously
with sending the notice of redemption. On or after the Redemption Date, the
holders of shares of Series B Preferred Stock called for redemption shall
surrender the certificates evidencing the shares called for redemption to the
Company at the place designated in such notice and shall thereupon be entitled
to receive payment of the Redemption Price.
The Company shall have the option to redeem all or a portion of the
outstanding shares of Series B Preferred Stock at a cash price equal to 122%
percent of the Liquidation Preference per share, together with all unpaid
dividends to and including the Redemption Date (the "Redemption Price");
provided, however, that payment of the Redemption Price shall be made from any
funds of the Company legally available therefor.
From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
the holders of such shares shall continue), the holders of the shares of the
Series B Preferred Stock called for redemption shall cease to have any rights as
stockholders of the Company, except the right to receive, without interest, the
Redemption Price thereof upon surrender of certificates representing the shares
of Series B Preferred Stock, and such shares shall not thereafter be transferred
(except with the consent of the Company) on the books of the Company and shall
not be deemed outstanding for any purpose whatsoever.
There shall be no redemption of any shares of Series B Preferred
Stock of the Company where such action would be in violation of applicable law.
Voting Rights. Except as otherwise required by law, the holders of
the Series B 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.
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Status. In case any outstanding shares of Series B 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 B Preferred Stock.
Ranking; Changes Affecting Series B Preferred Stock. The Series B
Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, (i) rank senior to any of the Company's
Common Stock and any other class or series of stock of the Company which by its
terms shall rank junior to the Series B Preferred Stock, and (ii) rank junior to
any other class or series of stock of the Company which by its terms shall rank
senior to the Series B Preferred Stock and (iii) shall rank on a pari passu
basis with the Series A Preferred Stock and any other series of Preferred Stock
of the Company.
So long as any shares of Series B Preferred Stock are outstanding,
the Company shall not (i) alter or change any of the powers preferences,
privileges, or rights of the Series B Preferred Stock; or (ii) amend the
provisions of the Certificate of Designation affecting the ranking of the Series
B Preferred Stock, without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of at least a majority of
the outstanding shares of Series B Preferred Stock, as to changes affecting the
Series B Preferred Stock.
Registration Rights. The Company has registered the shares of Common
Stock underlying the Series B Preferred Stock in a registration statement filed
with the Commission.
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 and the Series
B 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.
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.
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The three-year moratorium imposed on Business Combinations by Section
203 does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Company's Board of Directors approves either the
Business Combination or the transaction that resulted in the person becoming an
Interested Stockholder, (b) the Interested Stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction that made him or
her an Interested Stockholder (excluding from the 85% calculation shares owned
by directors who are also officers of the corporation and shares held by
employee stock plans which do not permit employees to decide confidentially
whether to accept a tender or exchange offer); or (c) on or after the date a
person becomes an Interested Stockholder, the Company's Board of Directors
approves the Business Combination, and it is also approved at a stockholder
meeting by two-thirds of the voting stock not owned by the Interested
Stockholder.
Under Section 203, the restrictions described above do not apply if,
among other things, the corporation's original certificate of incorporation
contains a provision electing not to be governed by Section 203. The Company's
Certificate of Incorporation does not contain such a provision. The restrictions
described above also do not apply to certain Business Combinations proposed by
an Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Stockholders may be
effected from time to time in one or more transactions (which may involve block
transactions), in special offerings, exchange distributions and/or secondary
distributions, in negotiated transactions, in settlement of short sales of
Shares, or a combination or such methods of sale, at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Such transactions may be effected on a stock exchange, on the
over-the-counter market or privately. The Selling Stockholders may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Stockholders for whom they may act
as agent (which compensation may be in excess of customary commissions). Without
limiting the foregoing, such brokers may act as dealers by purchasing any and
all of the Shares covered by this Prospectus either as agents for others or as
principals for their own accounts and reselling such securities pursuant to this
Prospectus. The Selling Stockholders and any broker-dealers or other persons
acting on the behalf of parties that participate with such Selling Stockholders
in the distribution of the Shares may be deemed to be underwriters and any
commissions received or profit realized by them on the resale of the Shares may
be deemed to be underwriting discounts and commissions under the Securities Act.
As of the date of this Prospectus, the Company is not aware of any agreement,
arrangement or understanding between any broker or dealer and the Selling
Stockholders with respect to the offer or sale of the Shares pursuant to this
Prospectus.
At the time that any particular offering of Shares is made, to the
extent required by the Securities Act, a prospectus supplement will be
distributed, setting forth the terms of the offering, including the aggregate
number of Shares being offered, the names of any underwriters, dealers or
agents, any discounts, commissions and other items constituting compensation
from the Selling Stockholders and any discounts, commissions or concessions
allowed or reallowed or paid to dealers.
Each of the Selling Stockholders may from time to time pledge the
Shares owned by it to secure margin or other loans made to such Selling
Stockholder. Thus, the person or entity receiving the pledge of any of the
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<PAGE>
Shares may sell them, in a foreclosure sale or otherwise, in the same manner as
described above for such Selling Stockholder.
The Company will not receive any of the proceeds from any sale of the
Shares by the Selling Stockholders offered hereby.
Pursuant to the Registration Rights Agreements, the Company and the
Selling Stockholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act. The Company shall
bear customary expenses incident to the registration of the Shares for the
benefit of the Selling Stockholders in accordance with such agreements, other
than underwriting discounts and commissions directly attributable to the sale of
such securities by or on behalf of the Selling Stockholders.
The Company has agreed to maintain the Registration Statement, of
which this Prospectus is a part, effective until the earlier of (i) the date
that all of the Shares registered under such Registration Statement have been
sold; (ii) the date the holders of the Shares receive an opinion of counsel that
all of the Shares may be sold under the provisions of Rule 144 or (iii) five and
one-half years after the completion of the Private Placement.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the DGCL provides, in general, that a corporation
incorporated under the laws of the State of Delaware, such as the registrant,
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than a derivative action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the 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
-26-
<PAGE>
contained in the Company's Certificate of Incorporation or as otherwise
permitted under Delaware law. Each Indemnification Agreement may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as a
director or officer, against liabilities arising from willful misconduct of a
culpable nature, and to obtain directors' and officers' liability insurance if
available on reasonable terms.
Pursuant to the Registration Rights Agreement, the Company and the
Selling Stockholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
The Company maintains a directors and officers liability policy with
Genesis Insurance Company that contains a limit of liability of $3,000,000 per
policy year.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Parker Chapin Flattau & Klimpl, LLP, New York, New York. Martin
Eric Weisberg, Esq., a member of the firm, is a Director and the Secretary of
the Company.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended, incorporated by reference in this Prospectus,
have been incorporated herein in reliance on the report dated March 31, 1998,
which includes an explanatory paragraph, concerning the Company's ability to
continue as a going concern, of Coopers & Lybrand L.L.P., independent
accountants, given on their authority as experts in accounting and auditing.
-27-
<PAGE>
======================================= =======================================
NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS WITH RESPECT TO THE
OFFERING MADE HEREBY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY 2,340,938 SHARES OF COMMON STOCK
TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE BUSINESS OF THE
COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS ----------
PROSPECTUS
Page ----------
Available Information...............2
Incorporation of Certain
Documents by Reference.............2
Prospectus Summary..................3
Risk Factors........................4
Use of Proceeds....................14
Selling Stockholders ..............14 ____________, 1998
Description of Securities..........15
Delaware Business Combination
Provisions........................24
Plan of Distribution ..............25
Indemnification for Securities
Act Liabilities...................26
Legal Matters......................27
Experts ...........................27
======================================= =======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses which will be
paid by the Company in connection with the issuance and distribution of the
securities being registered on this Registration Statement. The Selling
Stockholders will not incur any of the expenses set forth below. All amounts
shown are estimates.
Filing fee for registration statement.............. $ 2,212.01
Legal fees and expenses............................ $ 25,000.00
Miscellaneous expenses............................. $ 1,000.00
------------
Total......................................... $ 28,212.01
============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") provides, in general, that a corporation incorporated under the
laws of the State of Delaware, such as the registrant, may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (other than a derivative action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In the case of a derivative action, a Delaware corporation
may indemnify any such person against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
The Company's Certificate of Incorporation provides that directors
shall not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability
resulting from a breach of the director's duty of loyalty to the Company or its
stockholders, intentional misconduct or wilful violation of law, actions or
inactions not in good faith, an unlawful stock purchase or payment of a dividend
under Delaware law, or transactions from which the director derives improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Certificate of Incorporation also authorizes the Company to indemnify its
officers, directors and other agents, by bylaws, agreements or otherwise, to the
fullest extent permitted under Delaware law. The Company has entered into an
Indemnification Agreement (the "Indemnification Agreement") with each of its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Company's Certificate of
Incorporation or as otherwise permitted under Delaware law. Each
II - 1
<PAGE>
Indemnification Agreement may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as a director or officer, against
liabilities arising from willful misconduct of a culpable nature, and to obtain
directors' and officers' liability insurance if available on reasonable terms.
The Company maintains a directors and officers liability policy with
Genesis Insurance Company that contains a limit of liability of $3,000,000 per
policy year.
ITEM 16. EXHIBITS.
NUMBER DESCRIPTION OF EXHIBIT
4.1 Form of Private Equity Line Credit Agreement
4.2 Form of Warrant A
4.3 Form of Warrant B
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
10.1 Form of Registration Rights Agreement
10.2 Form of Escrow Agreement
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in their
opinion filed as Exhibit 5.1).
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
II - 2
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of the issue.
The undersigned small business issuer hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II - 3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fairfax, Commonwealth of Virginia on May 8, 1998.
XYBERNAUT CORPORATION
By: /s/ Edward G. Newman
--------------------------------
Edward G. Newman
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes Edward G. Newman and John F. Moynahan, each acting
alone, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement and to file the same with exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-3 has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Edward G. Newman Chairman of the Board, May 8, 1998
- -------------------------- President and Chief Executive
Edward G. Newman Officer
/s/ John F. Moynahan Senior Vice President, Chief May 8, 1998
- -------------------------- financial Officer, Treasurer and
John F. Moynahan Director
/s/ Martin Eric Weisberg Secretary and Director May 8, 1998
- --------------------------
Martin Eric Weisberg
II - 4
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Harry E. Soyster Director May 8, 1998
- --------------------------
Lt. Gen. Harry E. Soyster
/s/ James J. Ralabate Director May 8, 1998
- --------------------------
James J. Ralabate
/s/ Keith P. Hicks Director May 8, 1998
- --------------------------
Keith P. Hicks
/s/ Steven A. Newman Director May 8, 1998
- --------------------------
Steven A. Newman
/s/ Phillip E. Pearce Director May 8, 1998
- --------------------------
Phillip E. Pearce
/s/ Eugene J. Amobi Director May 8, 1998
- --------------------------
Eugene J. Amobi
*By: /s/ Edward G. Newman
-------------------------
Edward G. Newman
Attorney-in-fact
<PAGE>
SECURITIES AND
EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
-------------
EXHIBITS TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
XYBERNAUT CORPORATION
(EXACT NAME OF ISSUER AS SPECIFIED
IN ITS CHARTER)
MAY 11, 1998
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NO./REF.
- ----------- ----------------------- -------------
4.1 Form of Private Equity Line Credit
Agreement
4.2 Form of Warrant A
4.3 Form of Warrant B
5.1 Opinion of Parker Chapin Flattau &
Klimpl, LLP.
10.1 Form of Registration Rights Agreement
10.2 Form of Escrow Agreement
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Parker Chapin Flattau &
Klimpl, LLP (included in their opinion
filed as Exhibit 5.1).
24.1 Power of Attorney (see page II-5 to the
Registration Statement).
EXHIBIT 4.1
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
PRIVATE EQUITY LINE OF CREDIT AGREEMENT dated as of April 13, 1998
(the "Agreement"), among the entities listed on Schedule A attached hereto
(referred to as the "Investor"), Settondown Capital International Ltd. (the
"Placement Agent") located at Charlotte House, Charlotte Street, P.O. Box N.
9204, Nassau, Bahamas, organized and existing under the laws of the Bahamas, and
Xybernaut Corporation, a corporation organized and existing under the laws of
the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase, up to
$11,000,000 (the "Aggregate Purchase Price") of the Common Stock (as defined
below) and Warrant A and Warrant B (as defined below); and
WHEREAS, the Company shall issue to the Placement Agent, in return
for services rendered (in addition to the fees set forth in Section 13.7 below),
(a) upon the Closing for the Initial Shares (as defined below), (i) 50,000
shares of Common Stock (restricted as set forth below in Section 13.7 (i)
below), and (ii) a Warrant A (as defined below) to purchase 20,000 shares of
Common Stock; and (b) upon the Closing of each Put, five (5%) percent of that
number of Put Shares issued on the Closing of each Put in shares of Common Stock
(which shall not be included in the definition of Registrable Securities); and
WHEREAS, such investments will be made in reliance upon the
provisions of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of
the United States Securities Act of 1933, as amended, and the regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in Common Stock to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1 "Bid Price" shall mean the closing bid price (as reported
by Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.2 "Capital Shares" shall mean the Common Stock and any
shares of any other class of common stock whether now or hereafter authorized,
having the right to participate in the distribution of earnings and assets of
the Company (except those issued, or to be issued to consultants, employees, or
directors of the Company in the ordinary course of business).
Section 1.3 "Capital Shares Equivalents" shall mean any securities,
rights, or obligations that are convertible into or exchangeable for or giving
any right to subscribe for any Capital Shares of the Company or any warrants,
options or other rights to subscribe for or purchase Capital Shares or any such
convertible or exchangeable securities (except those issued, or to be issued to
consultants, employees, or directors of the Company in the ordinary course of
business).
<PAGE>
Section 1.4 "Closing" shall mean one of the closings of a purchase
and sale of the Common Stock pursuant to Section 2.1.
Section 1.5 "Closing Date" shall mean, with respect to a Closing, the
Fourth Trading Day following the Put Date related to such Closing, provided all
conditions to such Closing have been satisfied on or before such Trading Day,
except with reference to the purchase of the Initial Shares which Closing shall
be deemed to be the Subscription Date.
Section 1.6 "Commitment Amount" shall mean up to the $11,000,000
which the Investor has agreed to provide to the Company in order to purchase the
Initial Shares and Put Shares pursuant to the terms and conditions of this
Agreement.
Section 1.7 "Commitment Period" shall mean the period commencing on
the earlier to occur of (i) the Effective Date or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investor shall have purchased Put
Shares pursuant to this Agreement for an aggregate Purchase Price of
$10,000,000, (y) the date this Agreement is terminated pursuant to Section 2.4,
or (z) the date occurring two years after the Effective Date.
Section 1.8 "Common Stock" shall mean the Company's common stock, par
value $0.01 per share.
Section 1.9 "Condition Satisfaction Date" shall have the meaning set
forth in Section 7.2.
Section 1.10 "Damages" shall mean any loss, claim, damage, liability,
costs and expenses (including, without limitation, reasonable attorney's fees
and disbursements and costs and expenses of expert witnesses and investigation).
Section 1.11 "Effective Date" shall mean the date on which the SEC
first declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.12 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.13 "Initial Shares" shall have the meaning set forth in
Section 2.8.
Section 1.14 "Initial Shares Investment Amount" shall mean
$1,000,000.
Section 1.15 "Investment Amount" shall mean the dollar amount to be
invested by the Investor to purchase Put Shares with respect to any Put Date as
notified by the Company to the Investor, all in accordance with Section 2.2
hereof.
Section 1.17 "Legend" shall have the meaning set forth in Section
9.1.
Section 1.18 "Market Price" on any given date shall mean the three
lowest closing Bid Prices of the Common Stock during the Valuation Period.
Section 1.19 "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company 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 the Company to
enter into and perform any of its obligations under this Agreement,
2
<PAGE>
the Registration Rights Agreement, the Escrow Agreement, or the Warrants in any
material respect, or in the event the Bid Price shall be under $1.00 for three
consecutive Trading Days prior to a Put Notice.
Section 1.20 "Maximum Put Amount" shall mean the amount indicated in
the Table below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Closing Price 30-Day Avg. Daily 30-Day Avg. Daily 30-Day Avg. Daily 30-Day Avg. Daily
Trading Volume Trading Volume Trading Volume Trading Volume
5,000-25,000 25,001-50,000 50,001-75,000 75,001-Above
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $3.00 $ 200,000 $ 250,000 $300,000 $ 400,000
- ------------------------------------------------------------------------------------------------
$ 3.01 - $6.00 $ 300,000 $ 400,000 $500,000 $ 600,000
- ------------------------------------------------------------------------------------------------
$ 6.01 - $8.00 $ 500,000 $ 600,000 $700,000 $ 800,000
- ------------------------------------------------------------------------------------------------
$ 8.01 - $10.00 $ 700,000 $ 800,000 $900,000 $1,000,000
- ------------------------------------------------------------------------------------------------
$10.01 - $12.00 $ 900,000 $1,000,000 $1,100,000 $1,200,000
- ------------------------------------------------------------------------------------------------
$12.01 - $14.00 $1,100,000 $1,200,000 $1,300,000 $1,400,000
- ------------------------------------------------------------------------------------------------
$14.01 - Above $1,300,000 $1,400,000 $1,500,000 $1,600,000
- ------------------------------------------------------------------------------------------------
</TABLE>
Section 1.21 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.22 "Outstanding" when used with reference to shares of
Common Stock or Capital Shares (collectively the "Shares"), shall mean, at any
date as of which the number of such Shares is to be determined, all issued and
outstanding Shares, and shall include all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that "Outstanding" shall not mean any such Shares
then directly or indirectly owned or held by or for the account of the Company.
Section 1.23 "Person" shall mean an individual, a corporation, a
partnership, an association, a limited liability company, a trust or other
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.24 "Principal Market" shall mean the Nasdaq National
Market, the Nasdaq SmallCap Market or Nasdaq bulletin board, whichever is at the
time the principal trading exchange or market for the Common Stock.
Section 1.25 "Purchase Price" shall mean (a) with respect to the
Initial Shares $1.27 and (b) with respect to Put Shares, ninety (90%) percent
(the "Purchase Price Percentage") of the Market Price upon a Put Date (or such
other date on which the Purchase Price is calculated in accordance with the
terms and conditions of this Agreement).
Section 1.26 "Put" shall mean each occasion the Company elects to
exercise its right to tender a Put Notice requiring the Investor to purchase
shares of the Company's Common Stock, subject to the terms of this Agreement.
Section 1.27 "Put Date" shall mean the Trading Day during the
Commitment Period that a Put Notice to issue and sell Common Stock to the
Investor is deemed delivered pursuant to Section 2.2(b) hereof.
3
<PAGE>
Section 1.28 "Put Notice" shall mean a written notice to the Investor
setting forth the Investment Amount that the Company intends to Put to the
Investor, including the certification that the Company has complied in all
material respects with all obligations and conditions contained in this
Agreement.
Section 1.29 "Put Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to a Put that has occurred or may
occur in accordance with the terms and conditions of this Agreement.
Section 1.30 "Registrable Securities" shall mean any of the shares of
Common Stock issued to the Placement Agent (excluding those issued as a result
of a Closing for a Put), Initial Shares, Put Shares, Repricing Shares, and the
Warrant Shares (i) in respect of which the Registration Statement has not been
declared effective by the SEC, (ii) which have not been sold under circumstances
under which all of the applicable conditions of Rule 144 (or any similar
provision then in force) under the Securities Act ("Rule 144") are met, (iii)
which have not been otherwise transferred to holders who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities bearing a
restrictive legend or (iv) the sales of which, in the opinion of counsel to the
Company, are subject to any time, volume or manner limitations pursuant to Rule
144(k) (or any similar provision then in effect) under the Securities Act.
Section 1.31 "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investor on the
Subscription Date annexed hereto as Exhibit A.
Section 1.32 "Registration Statement" shall mean a registration
statement on Form S-3 (if use of such form is then available to the Company
pursuant to the rules of the SEC and, if not, on such other form promulgated by
the SEC for which the Company then qualifies and which counsel for the Company
shall deem appropriate, and which form shall be available for the resale of the
Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement, and the Warrant
and in accordance with the intended method of distribution of such securities),
for the registration of the resale by the Investor of the Registrable Securities
under the Securities Act.
Section 1.33 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.34 "Reset Price" shall mean ninety (90%) percent of the
Market Price on the applicable Repricing Date as set forth in Section 2.9 below.
Section 1.35 "SEC" shall mean the Securities and Exchange Commission.
Section 1.36 "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.37 "Securities" shall mean any of the shares of Common
Stock issued to the Placement Agent, the Additional Shares, the Initial Shares,
Put Shares, Repricing Shares, and the Warrant Shares.
Section 1.38 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.39 "SEC Documents" shall mean the Company's latest Form
10-K or 10-KSB as of the time in question, all Forms 10-Q or 10-QSB and 8-K
filed thereafter, and the Proxy Statement for its latest fiscal year as of the
time in question until such time the Company no longer has an obligation to
maintain the effectiveness of a Registration Statement as set forth in the
Registration Rights Agreement.
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Section 1.40 "Subscription Date" shall mean the date on which this
Agreement is executed and delivered by the parties hereto and all of the
conditions relating to the Initial Shares shall have been fulfilled.
Section 1.41 "Trading Cushion" shall mean the mandatory ten (10)
Trading Days between Put Dates.
Section 1.42 "Trading Day" shall mean any day during which the New
York Stock Exchange shall be open for business.
Section 1.43 "Valuation Event" shall mean an event in which the
Company at any time during a Valuation Period takes any of the following
actions:
(a) subdivides or combines its Common Stock;
(b) pays a dividend in its Capital Shares or makes any other
distribution of its Capital Shares;
(c) issues any additional Capital Shares ("Additional Capital
Shares"), otherwise than as provided in the foregoing Subsections (a) and (b)
above, at a price per share less, or for other consideration lower, than the Bid
Price in effect immediately prior to such issuance, or without consideration;
(d) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Bid Price in
effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable for
Capital Shares and the consideration per share for which Additional Capital
Shares may at any time thereafter be issuable pursuant to the terms of such
convertible or exchangeable securities shall be less than the Bid Price in
effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable out of
earnings or surplus legally available for dividends under applicable law or any
distribution to such holders made in respect of the sale of all or substantially
all of the Company's assets (other than under the circumstances provided for in
the foregoing subsections (a) through (e)); or
(g) takes any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing
Subsections (a) through (f) hereof, inclusive, which in the opinion of the
Company's Board of Directors, determined in good faith, would have a Material
Adverse Effect upon the rights of the Investor at the time of a Put or exercise
of the Warrant.
Section 1.44 "Valuation Period" shall mean, with respect to the
Purchase Price on any Put Date, the five (5) day trading period consisting of
the three (3) Trading Days immediately preceding and the one (1) Trading Day
following the Trading Day on which a Put Notice is deemed to be delivered, and
the Trading Day on which such notice is deemed to be delivered; provided,
however, that if a Valuation Event occurs during a Valuation Period, a new
Valuation Period shall begin on the Trading Day immediately after the occurrence
of such Valuation Event and end on the seventh Trading Day thereafter.
Section 1.45 "Warrant A" shall have the meaning set forth in Section
2.5 and substantially in the form of Exhibit B.
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Section 1.46 "Warrant B" shall have the meaning set forth in Section
2.6 and substantially in the form of Exhibit C.
Section 1.47 "Warrant Shares" shall mean all shares of Common Stock
or other securities issued or issuable pursuant to exercise of Warrant A or
Warrant B.
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ARTICLE II
Purchase and Sale of Common Stock
Section 2.1 Investments.
(a) Puts. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII hereof), on any
Put Date the Company may make a Put by the delivery of a Put Notice/ Compliance
Certificate in the form attached hereto as Exhibit D. The number of Put Shares
that the Investor shall receive pursuant to such Put shall be determined by
dividing the Investment Amount specified in the Put Notice by the Purchase Price
on such Put Date, which number of shares shall not exceed the Maximum Put Amount
on such date.
(b) Maximum Aggregate Amount of Puts. Unless the Company
obtains Shareholder approval pursuant to the applicable corporate governance
rules of the Nasdaq Stock Market, the Investor may not be compelled to make a
purchase which results in the issuance to the Investor of more than 19.99% of
the shares of Common Stock (measured from the Subscription Date) as a result of
the transactions contemplated by this Agreement.
Section 2.2 Mechanics.
(a) Put Notice. At any time during the Commitment Period, the
Company may deliver a Put Notice to the Investor, subject to the conditions set
forth in Section 7.1; provided, however, the Investment Amount for each Put as
designated by the Company in the applicable Put Notice shall be neither less
than $100,000 nor more than the Maximum Put Amount.
(b) Date of Delivery of Put Notice. A Put Notice shall be
deemed delivered on (i) the Trading Day it is received by facsimile or otherwise
by the Investor if such notice is received prior to 2:00 p.m. Eastern Time, or
(ii) the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 2:00 p.m. Eastern Time on a Trading Day or at any time on a day
which is not a Trading Day. No Put Notice may be deemed delivered, on a day that
is not a Trading Day.
Section 2.3 Closings. On each Closing Date for a Put (i) the Company
shall deliver (a) to the Escrow Agent for the benefit of the Investor one or
more certificates, at the Investor's option, representing the Put Shares to be
purchased by the Investor pursuant to Section 2.1 herein, registered in the name
of the Investor or, at the Investor's option, deposit such certificate(s) into
such account or accounts previously designated by the Investor, and (b) to the
Escrow Agent for the Placement Agent that number of shares of Common Stock set
forth in Section 13.7; and (ii) the Investor shall deliver to escrow the
Investment Amount specified in the Put Notice by wire transfer of immediately
available funds to the Escrow Agent on or before the Closing Date. In addition,
on or prior to the Closing Date, each of the Company, the Placement Agent, and
the Investor shall deliver to the Escrow Agent all documents, instruments and
writings required to be delivered or reasonably requested by either of them
pursuant to this Agreement in order to implement and effect the transactions
contemplated herein. Payment of funds to the Company and delivery of the
certificates to the Investor and the Placement Agent shall occur on the Closing
Date out of escrow in accordance with the escrow agreement referred to in
Section 7.2 (m); provided, however, that to the extent the Company has not paid
the fees, expenses, and disbursements of the Investor's counsel, and Placement
Agent in accordance with Section 13.7, the amount of such fees, expenses, and
disbursements shall be paid in immediately available funds, at the direction of
the Investor, to Investor's counsel with no reduction in the number of Put
Shares issuable to the Investor on such Closing Date.
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Section 2.4 Termination of Investment Obligation. The obligation of
the Investor to purchase shares of Common Stock shall terminate permanently
(including with respect to a Closing Date that has not yet occurred) in the
event that (i) there shall occur any stop order or suspension of the
effectiveness of the Registration Statement for an aggregate of twenty (20)
Trading Days during the Commitment Period, for any reason other than deferrals
or suspensions in accordance with the Registration Rights Agreement as a result
of corporate developments subsequent to the Subscription Date that would require
such Registration Statement to be amended to reflect such event in order to
maintain its compliance with the disclosure requirements of the Securities Act
or (ii) the Company shall at any time fail to comply with the requirements of
Section 6.3, 6.4 or 6.6; provided, that in the case of clause (i) above, the
Investor's obligation to purchase shares of Common Stock shall be reinstated
when the Investor receives copies of the supplemented or amended prospectus
contemplated by the Registration Rights Agreement.
Section 2.5 The Warrants.
(a) Warrant A. On the Subscription Date, the Company will
issue to the Investor and the Placement Agent Warrant A exercisable beginning
six months from the Subscription Date and then exercisable any time over the
five year period there following, to purchase an aggregate of 20,000 Warrant
Shares for the Investor and 20,000 Warrant Shares for the Placement Agent at the
Exercise Price (as defined in the Warrant). Warrant A shall be delivered by the
Company to the Escrow Agent, and delivered to the Investor and Placement Agent
pursuant to the terms of this Agreement and the Escrow Agreement. The Warrant
Shares shall be registered for resale pursuant to the Registration Rights
Agreement.
(b) Warrant B. On the Subscription Date, the Company will
issue to the Investor Warrant B exercisable beginning six months from the
Subscription Date and then exercisable any time over the five year period there
following, to purchase an aggregate of 20,000 Warrant Shares at the Exercise
Price (as defined in the Warrant). Warrant B shall be delivered by the Company
to the Escrow Agent, and delivered to the Investor pursuant to the terms of this
Agreement and the Escrow Agreement. The Warrant Shares shall be registered for
resale pursuant to the Registration Rights Agreement.
Section 2.6 Additional Shares. In the event that (a) within five
Trading Days of the date the Investor receives any of the Securities issued
hereunder, of an impending "blackout period" in accordance with the Sections
3(g) and 3(h) of the Registration Rights Agreement, and (b) the Bid Price on the
Trading Day immediately preceding such "blackout period" (the "Old Bid Price")
is greater than the Bid Price on the first Trading Day following such "blackout
period" (the "New Bid Price"), the Investor may sell its Registrable Securities
at the New Bid Price pursuant to an effective Registration Statement, and the
Company shall issue to the Investor a number of additional shares equal to the
difference between (y) the product of the number of Registrable Securities held
by the Investor during such "blackout period" that are not otherwise freely
tradeable and the Old Bid Price, divided by the New Bid Price and (z) the number
of Registrable Securities held by the Investor during such "blackout period"
that are not otherwise freely tradeable.
Section 2.7 Liquidated Damages. In the event that the Company does
not deliver unlegended Common Stock in connection with the sale of such Common
Stock by the Investor as set forth in Article IX below, within five (5) Trading
Days of surrender by the Investor of the Common Stock certificate as is set
forth in Article IX below (such date of receipt is referred to as the "Receipt
Date"), the Company shall pay to the Investor, in immediately available funds,
upon demand, as liquidated damages for such failure and not as a penalty, one
(1%) percent of the Purchase Price of the Common Stock undelivered for every day
thereafter for the first ten (10) days and two (2%) percent for every day
thereafter that the unlegended shares of Common Stock are not delivered, which
liquidated damages shall run from the sixth (6th) Trading Day after the Receipt
Date.
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Any and all payments required pursuant to this paragraph shall be payable only
in cash. The parties hereto acknowledge and agree that the sum payable pursuant
to the Registration Rights Agreement and as set forth above, and the obligation
to issue Registrable Securities under Section 2.6 above shall constitute
liquidated damages and not penalties. The parties further acknowledge that the
amount of loss or damages likely to be incurred is incapable or is difficult to
precisely estimate, and the parties are sophisticated business parties and have
been represented by sophisticated and able legal and financial counsel and
negotiated this Agreement at arm's length.
Section 2.8 Initial Purchase.
(a) The Company agrees to sell and the Investors agree to
purchase that number of shares of Common Stock (the "Initial Shares") determined
by dividing the $1,000,000 by the Purchase Price for the Initial Shares on the
Subscription Date. The Initial Shares will be subject to repricing as described
in Section 2.9 herein.
(b) The right of the Company to receive the Initial Shares
Investment Amount from the Investors, and the right of the Investors to receive
the Initial Shares and Warrants A and B is subject to the satisfaction on the
Closing Date for the Initial Shares and Warrants A and B, of each of the
following conditions:
(i) acceptance by the Company, and by the Investor,
of this Agreement and all duly executed
Exhibits thereto by an authorized officer of
the Company;
(ii) deliveryinto escrow by Investor of good cleared
funds as the Initial Shares Investment Amount
(as more fully set forth in the Escrow
Agreement attached hereto as Exhibit E);
(iii) allrepresentations and warranties of the
Investor and of the Company contained herein
shall remain true and correct as of the
Subscription Date;
(iv) the Company shall have obtained all permits and
qualifications required by any state for the
offer and sale of the Common Stock and both the
Warrant A and Warrant B, or shall have the
availability of exemptions therefrom;
(v) the sale and issuance of the Common Stock, both
the Warrant A and Warrant B, and the proposed
issuance of the Common Stock underlying both
the Warrant A and Warrants B shall be legally
permitted by all laws and regulations to which
the Investor and the Company are subject; and
all duly executed Exhibits hereto for the sale
of the Securities;
(vi) delivery of the original Securities as
described herein; and
(vii) receipt by the Investor of an opinion of
counsel of the Company as set forth in Exhibit
F attached hereto.
Section 2.9 Repricing.
(a) First Repricing Date. Upon the Effective Date the Company
agrees to issue that number of additional shares of Common Stock (if any)
resulting from the deficiency between one third of that number of Initial Shares
which would have been issued had the Reset Price on the Effective Date (also
referred to as the "First Repricing Date") been utilized and one third of the
Initial Shares actually issued on the Subscription Date. Such shares shall be
delivered within three (3) Trading Days of the Effective Date.
(b) Second Repricing. Upon the thirtieth (30th) calendar day
after the Effective Date (the "Second Repricing Date"), the Company agrees to
issue that number of additional shares of Common Stock (if any) resulting from
the deficiency between one third of that number of Initial Shares which would
have been issued had the Reset Price on the Second Repricing Date been utilized
and one third of the Initial Shares actually issued
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on the Subscription Date. Such shares shall be delivered within three (3)
Trading Days of the Second Repricing Date.
(c) Third Repricing. Upon the sixtieth (60th) calendar day
after the Effective Date (the "Third Repricing Date"), the Company agrees to
issue that number of additional shares of Common Stock (if any) resulting from
the deficiency between one third of that number of Initial Shares which would
have been issued had the Reset Price on the Third Repricing Date been utilized
and one third of the Initial Shares actually issued on the Subscription Date.
Such shares shall be delivered within three (3) Trading Days of the Third
Repricing Date.
(d) All shares issued under this Section shall be referred to
as "Repricing Shares" and the Company agrees to that in the event there is an
insufficient number of shares of Common Stock being registered in the
Registration Statement for the inclusion of the Repricing Shares, the Company
agrees to file, and cause to be effective, any amendment necessary to the
Registration Statement to include the Repricing Shares. The Company shall only
be required to issue Repricing Shares based upon that number of shares of Common
Stock beneficially held by the Investor on each Repricing Date.
Section 2.10 Repurchase. In the event the Closing Bid Price of the
Common Stock is less than One ($1.00) Dollar, the Company may repurchase any
amount of shares of Common Stock then beneficially owned by the Investors
(repurchased pro rata amongst the Investors) issued pursuant to this Agreement
(except the Put Shares) in cash at one hundred ten (110%) percent of the
Investor's original Purchase Price of the Common Stock (the "Repurchase Price").
Upon receipt by Investor of notice by the Company (the "Repurchase Notice") of
its right to repurchase the aforementioned shares of Common Stock held by the
Investor (the "Repurchase Date"), the Company shall wire transfer the
appropriate amount of funds into an escrow account mutually agreed upon by both
the Company and Investor within three (3) business days of the Repurchase Date.
Additionally, if the Company has not deposited into escrow the Repurchase Price
for the benefit of the Investor, within three (3) business days after the
Repurchase Date, the Company shall have waived its right to repurchase at any
time, and shall pay to the Investors, in immediately available funds, liquidated
damages in the amount of ten (10%) percent of the Repurchase Price. However, in
no event shall the Company: (i) be allowed to send a Repurchase Notice to the
Investor within five (5) days of a Repricing Date, or within five (5) days after
any Repricing Date, or (ii) be entitled to repurchase any Put Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1 Intent. The Investor is entering into this Agreement for
its own account and the Investor has no present arrangement (whether or not
legally binding) at any time to sell the Common Stock to or through any person
or entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
Section 3.2 Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an
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investment in the Common Stock. The Investor acknowledges that an investment in
the Common Stock is speculative and involves a high degree of risk.
Section 3.3 Authority. This Agreement has been duly authorized and
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 3.4 Not an Affiliate. The Investor is not an officer,
director or "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company.
Section 3.5 Organization and Standing. Investors are corporations
duly organized, validly existing, and in good standing under the laws of the
countries of their incorporation or organization.
Section 3.6 Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor, or, to
the Investor's knowledge, (a) violate any provision of any indenture, instrument
or agreement to which Investor is a party or is subject, or by which Investor or
any of its assets is bound; (b) conflict with or constitute a material default
thereunder; (c) result in the creation or imposition of any lien pursuant to the
terms of any such indenture, instrument or agreement, or constitute a breach of
any fiduciary duty owed by Investor to any third party; or (d) require the
approval of any third-party (which has not been obtained) pursuant to any
material contract, agreement, instrument, relationship or legal obligation to
which Investor is subject or to which any of its assets, operations or
management may be subject.
Section 3.7 Disclosure; Access to Information. Investor has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. The Company is
subject to the periodic reporting requirements of the Exchange Act, and Investor
has reviewed or received copies of any such reports that have been requested by
it.
Section 3.8 Manner of Sale. At no time was Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
Section 3.9 Registration or Exemption Requirements. The Investor
further acknowledges and understands that the Securities may not be transferred,
resold or otherwise disposed of except in a transaction registered under the
Securities Act and any applicable state securities laws, or unless an exemption
from such registration is available. The Investor understands that the
certificate(s) evidencing these Securities will be imprinted with a legend that
prohibits the transfer of these Securities unless (i) they are registered or
such registration is not required, and (ii) if the transfer is pursuant to an
exemption from registration other than Rule 144 under the Securities Act and, if
the Company shall so request in writing, an opinion of counsel reasonably
satisfactory to the Company is obtained to the effect that the transaction is so
exempt.
Section 3.10 No Legal, Tax or Investment Advice. The Investor
understands that nothing in this Agreement or any other materials present to the
Investor in connection with the purchase and sale of the Securities constitutes
legal, tax or investment advice. The Investor has relied on, and has consulted
with, such legal, tax and investment advisors as it, in its sole discretion, has
deemed necessary or appropriate in connection with its purchase of the Common
Stock.
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Section 3.11 Put/Short Positions. Neither the Investor, nor any
affiliate of the Investor, has any present intention of entering into any put
option, short position or other similar position with respect to the Securities.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1 Organization of the Company. The Company is a corporation
duly incorporated and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted except as described in the SEC
Documents. Except for Tech International of Virginia, Inc., the Company does not
have any subsidiaries and does not own or control any other business entity. The
Company is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other than those in
which the failure so to qualify would not reasonably be expected to have a
Material Adverse Effect.
Section 4.2 Authority. (i) The Company has the requisite corporate
power and authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Escrow Agreement, and both
Warrants A and B and to issue the Initial Shares, Additional Shares, Put Shares,
Repricing Shares, both Warrants A and B and the Warrant Shares, (ii) the
execution, issuance and delivery of this Agreement, the Registration Rights
Agreement, the Escrow Agreement, and both Warrants A and B by the Company and
the consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required, and (iii) this Agreement, the Registration Rights Agreement, the
Escrow Agreement, and both Warrants A and B have been duly executed and
delivered by the Company and constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
Section 4.3 Capitalization. The authorized capital stock of the
Company consists of 40,000,000 shares of Common Stock, par value $0.01, of which
15,708,015 shares were issued and outstanding as of March 31, 1998, and
6,000,000 shares of Preferred Stock, par value $0.01, of which 4,895shares were
issued and outstanding as of March 31, 1998. Except as set forth in the SEC
Documents, there are no outstanding Capital Shares Equivalents. All of the
outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and nonassessable.
Section 4.4 Common Stock. The Company has registered its Common Stock
pursuant to Section 12(b) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and the Company has maintained all
requirements for the continued listing or quotation of its Common Stock, and
such Common Stock is currently listed or quoted on the Principal Market. As of
the date hereof, the Principal Market is the Nasdaq Small Cap Market.
Section 4.5. SEC Documents. The Company has delivered or made
available to the Investor true and complete copies of the SEC Documents filed by
the Company with the SEC during the twelve (12) months immediately preceding the
Subscription Date (including, without limitation, proxy information and
solicitation
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materials). The Company has not provided to the Investor any information that,
according to applicable law, rule or regulation, should have been disclosed
publicly prior to the date hereof by the Company, but which has not been so
disclosed. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and rules and regulations of the SEC promulgated
thereunder and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
Section 4.6 Valid Issuances. When issued, the Initial Shares, the Put
Shares, the Additional Shares, the Repricing Shares, and the Warrant Shares will
be duly and validly issued, fully paid, and nonassessable. Neither the sales of
the Initial Shares, the Additional Shares, the Put Shares, the Repricing Shares,
Warrants A and B, or the Warrant Shares pursuant to, nor the Company's
performance of its obligations under, this Agreement, the Registration Rights
Agreement, the Escrow Agreement, or Warrants A and B will (i) result in the
creation or imposition by the Company of any liens, charges, claims or other
encumbrances upon the Initial Shares, the Additional Shares, the Put Shares, the
Repricing Shares, the Warrant Shares or any of the assets of the Company, or
(ii) entitle the holders of Outstanding Capital Shares to preemptive or other
rights to subscribe to or acquire the Capital Shares or other securities of the
Company.
Section 4.7 No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Put Shares, the Additional
Shares, the Repricing Shares, Warrants A and B, or the Warrant Shares, or (ii)
made any offers or sales of any security or solicited any offers to buy any
security under any circumstances that would require registration of the Initial
Shares, the Additional Shares, the Put Shares, the Repricing Shares, Warrants A
and B, or the Warrant Shares under the Securities Act.
Section 4.8 Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Articles of
Incorporation, as amended and in effect on the date hereof (the "Certificate"),
and the Company's By-Laws, as amended and in effect on the date hereof (the
"By-Laws").
Section 4.9 No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Common Stock and Warrants A and B do not and will not (i) result in a
violation of the Company's Articles of Incorporation or By-Laws or (ii) conflict
with, or constitute a material default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material agreement,
indenture, instrument or any "lock-up" (except those shares of Common Stock
issued to the Placement Agent as set forth in Section 13.7 below) or similar
provision of any underwriting or similar agreement to which the Company is a
party, or (iii) result in a violation of any federal, state or local law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or by which any property or
asset of the
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Company is bound or affected (except for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect) nor is the Company otherwise in violation of, conflict with or in
default under any of the foregoing as would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect. The business of the
Company is not being conducted in violation of any law, ordinance or regulation
of any governmental entity, except for possible violations that either singly or
in the aggregate would not reasonably be expected to have a Material Adverse
Effect. The Company is not required under federal, state or local law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement or issue
and sell the Common Stock or Warrants A and B in accordance with the terms
hereof (other than any SEC, NASD, Nasdaq or state securities filings that may be
required to be made by the Company subsequent to any Closing, any registration
statement that may be filed pursuant hereto, and any shareholder approval
required by the rules applicable to companies whose common stock trades on the
Nasdaq Small Cap Market ); provided that, for purposes of the representation
made in this sentence, the Company is assuming and relying upon the accuracy of
the relevant representations and agreemens of the Investor herein.
Section 4.10 No Material Adverse Change. Since April 1, 1997, no
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents.
Section 4.11 No Undisclosed Liabilities. The Company has no
liabilities or obligations which are material, individually or in the aggregate,
and are not disclosed in the SEC Documents or otherwise publicly announced,
other than those set forth in the Company's financial statements or as incurred
in the ordinary course of the Company's businesses since April 1, 1997, and
which, individually or in the aggregate, would not reasonably be expected to
have a Material Adverse Effect.
Section 4.12 No Undisclosed Events or Circumstances. Since April 1,
1997, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in the SEC Documents.
Section 4.13 No Integrated Offering. To the Company's knowledge,
neither the Company, nor any of its affiliates, nor any person acting on its or
their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, other than pursuant to
this Agreement, under circumstances that would require registration of the
Common Stock under the Securities Act.
Section 4.14 Litigation and Other Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which would reasonably be expected to have a Material Adverse
Effect. Except as set forth in the SEC Documents, no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which would
be reasonably expected to result in a Material Adverse Effect.
ARTICLE V
COVENANTS OF THE INVESTOR
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Section 5.1 Compliance with Law. The Investor's trading activities
with respect to shares of the Company's Common Stock will be in compliance with
all applicable state and federal securities laws, rules and regulations and
rules and regulations of the Principal Market on which the Company's Common
Stock is listed.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1 Registration Rights. The Company shall cause the
Registration Rights Agreement to remain in full force and effect so long as any
Registrable Securities remain outstanding and the Company shall comply in all
material respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue the Put
Shares and the Warrant Shares; such amount of shares of Common Stock to be
reserved shall be calculated based upon the minimum Purchase Price therefor
under the terms of this Agreement and Warrant A and Warrant B . The number of
shares so reserved from time to time, as theretofore increased or reduced as
hereinafter provided, may be reduced by the number of shares actually delivered
hereunder and the number of shares so reserved shall be increased or decreased
to reflect potential increases or decreases in the Common Stock that the Company
may thereafter be so obligated to issue by reason of adjustments to Warrants A
and/or B.
Section 6.3 Listing of Common Stock. The Company hereby agrees to
maintain the listing of the Common Stock on a Principal Market, and as soon as
practicable (but in any event prior to the commencement of the Commitment
Period) to list the Initial Shares, the Additional Shares, the Put Shares, the
Repricing Shares, and the Warrant Shares. The Company further agrees, if the
Company applies to have the Common Stock traded on any other Principal Market,
it will include in such application the Put Shares, the Additional Shares, the
Repricing Shares, and the Warrant Shares, and will take such other action as is
reasonably necessary or desirable in the opinion of the Investor to cause the
Common Stock to be listed on such other Principal Market as promptly as
possible. The Company will take all action to continue the listing and trading
of its Common Stock on the Principal Market (including, without limitation,
maintaining sufficient net tangible assets) and will comply in all respects with
the Company's reporting, filing and other obligations under the bylaws or rules
of the Principal Market.
Section 6.4 Exchange Act Registration. The Company will cause its
Common Stock to continue to be registered under Section 12(b) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, and will not take any action or file any document (whether or
not permitted by Exchange Act or the rules thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under said Act.
Section 6.5 Legends. The certificates evidencing the Common Stock to
be sold by the Investor pursuant to Section 9.1 shall be free of legends, except
as set forth in Article IX.
Section 6.6 Corporate Existence. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.
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Section 6.7 Additional SEC Documents. The Company will deliver to the
Investor, as and when the originals thereof are submitted to the SEC for filing,
copies of all SEC Documents so furnished or submitted to the SEC periodically
during the time period that this Agreement is in effect.
Section 6.8 Notice of Certain Events Affecting Registration;
Suspension of Right to Make a Put. The Company will immediately notify the
Investor upon the occurrence of any of the following events in respect of a
registration statement or related prospectus in respect of an offering of
Registrable Securities: (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements to
the registration statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate; and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Put Notice during the continuation
of any of the foregoing events.
Section 6.9 Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.
Section 6.10 Issuance of Put Shares and Warrant Shares. The sale of
the Put Shares and the issuance of the Warrant Shares pursuant to exercise of
Warrants A and B shall be made in accordance with the provisions and
requirements of Section 4(2) of Regulation D and any applicable state securities
law.
Section 6.11 Legal Opinion on Subscription Date. The Company's
independent counsel shall deliver to the Investor upon execution of this
Agreement, and upon the Closings for Put Shares as set forth in Section 7.2 (m)
below, an opinion in the form of Exhibit F annexed hereto.
ARTICLE VII
CONDITIONS TO DELIVERY OF PUTS AND CONDITIONS TO CLOSING
Section 7.1 Conditions Precedent to the Obligation of the Company to
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
and sell the Put Shares to the Investor incident to each Closing is subject to
the satisfaction, at or before each such Closing, of each of the conditions set
forth below.
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(a) Accuracy of the Investor's Representation and Warranties.
The representations and warranties of the Investor shall be true and correct in
all material respects as of the date of this Agreement and as of the date of
each such Closing as though made at each such time.
(b) Performance by the Investor. The Investor shall have
performed, satisfied and complied in all respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Investor at or prior to such Closing.
Section 7.2 Conditions Precedent to the Right of the Company to
Deliver a Put Notice and the Obligation of the Investor to Purchase Put Shares.
The right of the Company to deliver a Put Notice and the obligation of the
Investor hereunder to acquire and pay for the Put Shares incident to a Closing
is subject to the satisfaction, on (i) the date of delivery of such Put Notice
and (ii) the applicable Closing Date (each a "Condition Satisfaction Date"), of
each of the following conditions:
(a) Registration of the Common Stock with the SEC. The Company
shall have filed with the SEC a Registration Statement with respect to the
resale of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement. As set forth in the Registration Rights
Agreement, the Registration Statement (which includes all Put Shares in the Put
Notice) shall have previously become effective and shall remain effective on
each Condition Satisfaction Date and (i) neither the Company nor the Investor
shall have received notice that the SEC has issued or intends to issue a stop
order with respect to the Registration Statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of the Registration Statement, either
temporarily or permanently, or intends or has threatened to do so (unless the
SEC's concerns have been addressed and the Investor is reasonably satisfied that
the SEC no longer is considering or intends to take such action), and (ii) no
other suspension of the use or withdrawal of the effectiveness of the
Registration Statement or related prospectus shall exist. The Registration
Statement must have been declared effective by the SEC prior to the first Put
Date.
(b) Authority. The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the Put Shares,
or shall have the availability of exemptions therefrom. The sale and issuance of
the Put Shares shall be legally permitted by all laws and regulations to which
the Company is subject.
(c) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company shall be true and correct in
all material respects as of each Condition Satisfaction Date as though made at
each such time (except for representations and warranties specifically made as
of a particular date) with respect to all periods, and as to all events and
circumstances occurring or existing to and including each Condition Satisfaction
Date, except for any conditions which have temporarily caused any
representations or warranties herein to be incorrect and which have been
corrected with no continuing impairment to the Company or the Investor.
(d) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement, the Registration Rights
Agreement and Warrants A and B to be performed, satisfied or complied with by
the Company at or prior to each Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction that prohibits or directly and adversely affects any of the
transactions contemplated by this Agreement, and no
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proceeding shall have been commenced that may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this Agreement.
(f) Adverse Changes. Since the date of filing of the Company's
most recent SEC Document, no event that had or is reasonably likely to have a
Material Adverse Effect has occurred.
(g) No Suspension of Trading In or Delisting of Common Stock.
The trading of the Common Stock (including, without limitation, the Put Shares)
is not suspended by the SEC or the Principal Market, and the Common Stock
(including, without limitation, the Put Shares) shall have been approved for
listing or quotation on and shall not have been delisted from the Principal
Market. The issuance of shares of Common Stock with respect to the applicable
Closing, if any, shall not violate the shareholder approval requirements of the
Principal Market. The Company shall not have received any notice threatening the
listing of the Common Stock on the Principal Market.
(h) 4.99% Percent Limitation. On each Closing Date, the number
of Put Shares then to be purchased by the Investor exceeding the number of such
shares which, when aggregated with all other shares of Common Stock then owned
by the Investor beneficially or deemed beneficially owned by the Investor, would
result in the Investor owning no more than 4.99% of all of such Common Stock as
would be outstanding on such Closing Date, as determined in accordance with Rule
13d-3 of the Exchange Act and the regulations promulgated thereunder. For
purposes of this Section 7.2(i), in the event that the amount of Common Stock
outstanding as determined in accordance with Rule 13d-3 of the Exchange Act and
the regulations promulgated thereunder is greater on a Closing Date than on the
date upon which the Put Notice associated with such Closing Date is given, the
amount of Common Stock outstanding on such Closing Date shall govern for
purposes of determining whether the Investor, when aggregating all purchases of
Common Stock made pursuant to this Agreement and, if any, Warrant Shares, would
own more than 4.99% of the Common Stock following such Closing.
(i) Minimum Average Trading Volume. The average trading volume
for the Common Stock over the previous thirty (30) Trading Days exceeds 5,000
shares per Trading Day.
(j) No Knowledge. The Company has no knowledge of any event
more likely than not to have the effect of causing such Registration Statement
to be suspended or otherwise ineffective (which event is more likely than not to
occur within the ten Trading Days following the Trading Day on which such Notice
is deemed delivered).
(k) Trading Cushion. The Trading Cushion shall have elapsed
since the next preceding Put Date.
(l) Escrow Agreement. The parties hereto shall have entered
into a mutually acceptable escrow agreement.
(m) Legal Opinion. On the first Closing of the Put Shares the
Investor shall receive an opinion from counsel to the Company substantially in
the form of Exhibit F annexed hereto. The Investor shall only be entitled to
receive such an opinion of counsel on one occasion during each ninety (90) day
period following the Closing Date of the first Put. For example, the Investor
shall not be entitled to receive an opinion of Company counsel in the event the
Closing Date for a subsequent Put is within ninety (90) days after the Closing
Date for the preceding Put. However, the Investor is entitled to an opinion of
Company counsel in the event the Closing Date for the second Put is more than
ninety (90) days after the first Put.
(n) Other. On each Condition Satisfaction Date, the Investor
shall have received and been reasonably satisfied with such other certificates
and documents as shall have been reasonably requested by the Investor in
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order for the Investor to confirm the Company's satisfaction of the conditions
set forth in this Section 7.2, including, without limitation, a certificate in
substantially the form and substance of Exhibit D hereto, executed in either
case by an executive officer of the Company and to the effect that all the
conditions to such Closing shall have been satisfied as at the date of each such
certificate.
ARTICLE VIII
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION
Section 8.1 Due Diligence Review. The Company shall make available
for inspection and review by the Investor, advisors to and representatives of
the Investor (who may or may not be affiliated with the Investor and who are
reasonably acceptable to the Company), any underwriter participating in any
disposition of the Registrable Securities on behalf of the Investor pursuant to
the Registration Statement, any such registration statement or amendment or
supplement thereto or any blue sky, NASD or other filing, all financial and
other records, all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Investor or
any such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investor and such
representatives, advisors and underwriters and their respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
Section 8.2 Non-Disclosure of Non-Public Information
(a) The Company shall not disclose non-public information to
the Investor, advisors to or representatives of the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a condition to disclosing
any non-public information hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investor.
(b) Nothing herein shall require the Company to disclose
non-public information to the Investor or its advisors or representatives, and
the Company represents that it does not disseminate non-public information to
any investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investor and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of which it becomes
aware, constituting non-public information (whether or not requested of the
Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section 8.2 shall be
construed to mean that such persons or entities other than the Investor (without
the written consent of the Investor prior to disclosure of such information) may
not obtain non-public information in the course of conducting due diligence in
accordance with the terms of this Agreement and nothing herein shall prevent any
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such persons or entities from notifying the Company of their opinion that based
on such due diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or omits a material
fact required to be stated in the Registration Statement or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading.
ARTICLE IX
Legends
Section 9.1 Legends. Unless otherwise provided below, each
certificate representing Registrable Securities will bear the following legend
(the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED
IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR
OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT
IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF
THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE
COMPANY SET FORTH IN A PRIVATE EQUITY LINE OF CREDIT AGREEMENT DATED
AS OF APRIL 13, 1998. A COPY OF THE PORTION OF THE AFORESAID
AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE
COMPANY'S EXECUTIVE OFFICES.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit G hereto. Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement. It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investor to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and without consultation by the transfer agent with
the Company or its counsel and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor:
(a) at any time after the Effective Date, upon surrender of
one or more certificates evidencing Common Stock that bear the Legend, to the
extent accompanied by a notice requesting the issuance of new certificates free
of the Legend to replace those surrendered; provided that (i) the Registration
Statement shall then be effective; (ii) the Investor confirms to the transfer
agent that it has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Common Stock in a bona fide transaction to a
third party that is not an affiliate of the Company; and (iii) the Investor
confirms to the transfer agent that the Investor has complied with the
prospectus delivery requirement. The requirements set forth in subsection
9.1(a)(ii) and 9.1(a)(iii) shall only apply in the event the Company registers
the Common Stock pursuant to a Form S-3
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registration statement pursuant to the Registration Rights Agreement. In the
event the Company registers the Common Stock by means of a registration
statement other then a Form S-3 registration statement, than only the condition
in subsection 9.1(a)(i) herein shall apply.
(b) at any time upon any surrender of one or more certificates
evidencing Registrable Securities that bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered and containing representations that (i) the
Investor is permitted to dispose of such Registrable Securities without
limitation as to amount or manner of sale pursuant to Rule 144(k) under the
Securities Act or (ii) the Investor has sold, pledged or otherwise transferred
or agreed to sell, pledge or otherwise transfer such Registrable Securities in a
manner other than pursuant to an effective registration statement, to a
transferee who will upon such transfer be entitled to freely tradeable
securities.
Any of the notices referred to above in this Section 9.1 may be sent
by facsimile to the Company's transfer agent.
Section 9.2 No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 9.1 has been or shall be placed on the
share certificates representing the Common Stock and no instructions or "stop
transfer orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article IX.
Section 9.3 Investor's Compliance. Nothing in this Article shall
affect in any way the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
ARTICLE X
CHOICE OF LAW
Section 10.1 Choice of Law; Venue; Jurisdiction. This Agreement will
be construed and enforced in accordance with and governed by the laws of the
State of New York, except for matters arising under the Act, without reference
to principles of conflicts of law. Each of the parties consents to the
jurisdiction of the U.S. District Court sitting in the Southern District of the
State of New York or the state courts of the State of New York sitting in
Manhattan in connection with any dispute arising under this Agreement and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions. Each party hereby agrees that if another party to this
Agreement obtains a judgment against it in such a proceeding, the party which
obtained such judgment may enforce same by summary judgment in the courts of any
country having jurisdiction over the party against whom such judgment was
obtained, and each party hereby waives any defenses available to it under local
law and agrees to the enforcement of such a judgment. Each party to this
Agreement irrevocably consents to the service of process in any such proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to such party at its address set forth herein. Nothing herein shall
affect the right of any party to serve process in any other manner permitted by
law.
ARTICLE XI
ASSIGNMENT; ENTIRE AGREEMENT, AMENDMENT; TERMINATION
Section 11.1 Assignment. Neither this Agreement nor any rights of the
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions
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of this Agreement shall inure to the benefit of, and be enforceable by, any
transferee of any of the Common Stock purchased or acquired by the Investor
hereunder with respect to the Common Stock held by such person, and (b) upon the
prior written consent of the Company, which consent shall not unreasonably be
withheld, the Investor's interest in this Agreement may be assigned at any time,
in whole or in part, to any affiliate of the Investor who agrees to make the
representations and warranties contained in Article III and who agrees to be
bound by the covenants of Article V.
Section 11.2 Termination. This Agreement shall terminate upon the
earliest of (i) the date that all the Registrable Securities have been sold by
the Investors pursuant to the Registration Statement; (ii) the date the
Investors receive an opinion from counsel to the Company that all of the
Registrable Securities may be sold under the provisions of Rule 144; (iii) the
Company's written election to the Investors, which may be made at any time after
the occurrence of both (A) the Closing on the Initial Shares, and (B) there has
been Closing(s) for Put Shares for an aggregate Purchase Price of more than One
Million ($1,000,000) Dollars; (iv) the Investors fail to timely provide the
funds for a Put Closing Date as set forth in Section 1.5 above; and (v) two
years after the commencement of the Commitment Period; provided, however, that
the provisions of Articles III, IV, V, VI, VII, VIII, IX, X, XI, and XII, herein
and the registration rights provisions for the Registrable Securities held by
the Investor set forth in this Agreement and the Registration Rights Agreement,
shall survive the termination of this Agreement.
ARTICLE XII
NOTICES
Section 12.1 Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to Xybernaut Corporation: Edward G. Newman and Steven A. Newman
12701 Fair Lakes Circle, Suite 550
Fairfax, VA 2203
Telephone: (703) 631-6925
Facsimile: (703) 631-7070
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With a copy to: Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telephone: (212) 704-6000
Facsimile: (212) 704-6288
If to the Investor at the addresses set forth on Schedule A attached
hereto.
with a copy to: Scott H. Goldstein, Esq.
(shall not constitute notice) Goldstein, Goldstein & Reis, LLP
65 Broadway, 10th Floor
New York, NY 10006
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
Either party hereto may from time to time change its address or
facsimile number for notices under this Section 12.1 by giving at least ten (10)
days' prior written notice of such changed address or facsimile number to the
other party hereto.
Section 12.2 Indemnification. The Company agrees to indemnify and
hold harmless the Investor and each person, if any, who controls the Investor
within the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Investor may become subject, under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the breach of any
term of this Agreement. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
Each Investor agrees that it will indemnify and hold harmless the
Company, and each officer, director of the Company or person, if any, who
controls the Company within the meaning of the Securities Act, against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such officer,
director or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the breach of any term of this
Agreement. This indemnity agreement will be in addition to any liability which
the Investor or any subsequent assignee may otherwise have.
Promptly after receipt by an indemnified party under this Section 12
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the indemnifying
party from any liability which it may have to any indemnified party otherwise
than as to the particular item as to which indemnification is then being sought
solely pursuant to this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such indemnified party of its
23
<PAGE>
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Investor, the fees and expenses of such counsel shall be at the expense of
the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Investor and the indemnifying party and the Investor shall have been advised by
such counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Investor (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of the Investor,
it being understood, however, that the indemnifying party shall, in connetion
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable only for the reasonable fees and expenses of one
separate firm of attorneys for the Investor, which firm shall be designated in
writing by the Investor). No settlement of any action against an indemnified
party shall be made without the prior written consent of the indemnified party,
which consent shall not be unreasonably withheld.
Section 12.3 Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 12.2 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 12.2 hereof
provide for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any indemnified party, then the
Company and the applicable Investor shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in Section 12.2 shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contributions from any person who was
not guilty of such fraudulent misrepresentation.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Counterparts; Facsimile; Amendments. This Agreement may
be executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
24
<PAGE>
Section 13.2 Entire Agreement. This Agreement, the Exhibits or
Attachments hereto, which include, but are not limited to Warrant A and B, the
Escrow Agreement, and the Registration Rights Agreement set forth the entire
agreement and understanding of the parties relating to the subject matter hereof
and supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits and Attachments
to this Agreement are incorporated herein by this reference and shall constitute
part of this Agreement as is fully set forth herein.
Section 13.3 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 13.4 Title and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 13.5 Reporting Entity for the Common Stock. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of
the Investor and the Company shall be required to employ any other reporting
entity.
Section 13.6 Replacement of Certificates. Upon (i) receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of a certificate representing the Put Shares and (ii) in the case
of any such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form and amount to
the Company or (iii) in the case of any such mutilation, on surrender and
cancellation of such certificate, the Company at its expense will execute and
deliver, in lieu thereof, a new certificate of like tenor.
Section 13.7 Fees and Expenses. Each of the Company and the Investor
agrees to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay on the Subscription Date, to (i)
the Placement Agent, five (5%) percent of the Initial Shares Investment Amount
in cash, 50,000 shares of Common Stock (which are to be included in the
definition of "Registrable Securities" above, and are subject to a one year
lock-up from the Subscription Date), and a Warrant A to purchase 20,000 shares
of Common Stock, and (ii) to Goldstein, Goldstein & Reis, LLP, one (1%) percent
of the Initial Shares Investment Amount in cash. In addition to the fees set
forth above, the Company also agrees to pay the following upon the Closing for
each Put: (i) to the Placement Agent, five (5%) percent of the gross proceeds in
cash, and five (5%) percent of the number of shares of Common Stock issuable in
total to the Investors for each Put, and (ii) to Goldstein, Goldstein & Reis,
LLP one half of one (0.5%) percent of the gross proceeds, with a cap of Two
Thousand Five ($2,500) Dollars per Closing of Put Shares.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Private
Equity Line of Credit Agreement to be executed by the undersigned, thereunto
duly authorized, as of the date first set forth above.
XYBERNAUT CORPORATION
By_________________________
BALMORE FUNDS, S.A.
By_________________________
Francois Morax
AUSTOST ANSTALT SCHAAN
By_________________________
Thomas Hackl
SETTONDOWN CAPITAL INTER-
NATIONAL LTD.
By_________________________
Anthony L. M. Inder Riden
26
<PAGE>
SCHEDULE A
INVESTORS:
1. BALMORE FUNDS, S.A.
Trident Chambers
P.O. Box 146
Roadstown, Tortola, BVI
Tel.: 011-411-71-201-6262
Fax: 011-441-71-201-4800
Attn: Francois Morax
Initial Investment Amount: $500,000.00
2. AUSTOST ANSTALT SCHAAN
733 Fuerstentum
Lichenstein Landstrasse 163
Tel: 011 431.53.453.2951
Fax: 011 431.53.453.2895
Attn: Thomas Hackl
Initial Investment Amount: $500,000.00
27
Exhibit 4.2
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE STATE SECURITIES LAWS AND
HAS BEEN ISSUED IN RELIANCE UPON REGULATION D PROMULGATED UNDER THE SECURITIES
ACT. THIS WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY THE WARRANT IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL.
THIS WARRANT MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION DOES NOT
REQUIRE REGISTRATION OF THE WARRANT, WHICH OPINION AND WHICH COUNSEL SHALL BE
SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION.
No. __
WARRANT A
To Purchase ______ Shares of Common Stock of
XYBERNAUT CORPORATION
THIS CERTIFIES that, for value received, _____________________ (the
"Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after October 15, 1998 and on or prior
to October 15, 2003 (the "Termination Date") but not thereafter, to subscribe
for and purchase from XYBERNAUT CORPORATION, a corporation incorporated in the
State of Delaware (the "Company"), ____________ ____________ (______) shares
(the "Warrant Shares") of Common Stock, par value US $0.01 per share of the
Company (the "Common Stock"). The purchase price of one share of Common Stock
(the "Exercise Price") under this Warrant shall be equal to $1.76 The Exercise
Price and the number of shares for which the Warrant is exercisable shall be
subject to adjustment as provided herein. This Warrant is being issued in
connection with the Private Equity Line Of Credit Agreement dated on or about
April 13, 1998 (the "Agreement"), and is subject to its terms and conditions. In
the event of any conflict between the terms of this Warrant and the Agreement,
the Agreement shall control.
<PAGE>
1. Title of Warrant. Prior to the expiration hereof and
subject to compliance with applicable laws, this Warrant and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
2. Authorization of Shares. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue).
Exercise of Warrant. Except as provided in Section 4
below, exercise of the purchase rights represented by this Warrant may be made
at any time or times, before the close of business on the Termination Date, or
such earlier date on which this Warrant may terminate as provided in this
Warrant, by the surrender of this Warrant and the Notice of Exercise Form
annexed hereto duly executed, at the office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the
registered holder hereof at the address of such holder appearing on the books of
the Company) and upon payment of the Exercise Price of the shares thereby
purchased; whereupon the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Certificates
for shares purchased hereunder shall be delivered to the holder hereof within
three (3) business days after the date on which this Warrant shall have been
exercised as aforesaid. Payment of the Exercise Price of the shares may be by
certified check or cashier's check or by wire transfer to an account designated
by the Company in an amount equal to the Exercise Price multiplied by the number
of Warrant Shares.
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
2
<PAGE>
6. Closing of Books. The Company will not close its
shareholder books or records in any manner which prevents the timely exercise of
this Warrant for a period of time in excess of five (5) trading days per year.
7. No Rights as Shareholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. Upon the surrender of
this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares
so purchased shall be and be deemed to be issued to such holder as the record
owner of such shares as of the close of business on the later of the date of
such surrender or payment.
8. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company).
9. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant certificate or any stock certificate relating to the Warrant
Shares, and in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and upon surrender and cancellation of such
Warrant or stock certificate, if mutilated, the Company will make and deliver a
new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of such Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
11. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, then the Warrant shall terminate if the Warrant has not
been exercised by the effective date of such transaction, the Company shall give
the holder of this Warrant thirty (30) days' notice of such termination and of
the proposed effective date of the transaction.
(b) In case the Company shall at any time effect a sale or
merger transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
The Company agrees that the Warrant Shares shall be included in the
Registration Statement to be filed by the Company pursuant to the Private Equity
Line Of Credit Agreement dated as of April 13, 1998.
3
<PAGE>
12. Adjustments of Exercise Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
In case the Company shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, then the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such adjustment of the kind and number
of Warrant Shares or other securities of the Company which are purchasable
hereunder, the holder of this Warrant shall thereafter be entitled to purchase
the number of Warrant Shares or other securities resulting from such adjustment
at an Exercise Price per such Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
13. Voluntary Adjustment by the Company. The Company may at
any time during the term of this Warrant, reduce the then current Exercise Price
to any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant
Shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares (and other securities or property) after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made. Such notice, in
absence of manifest error, shall be conclusive evidence of the correctness of
such adjustment.
15. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the NASDAQ Small Cap
Stock Market or any domestic securities exchange upon which the Common Stock may
be listed.
16. Call/Forced Exercise. The Company, at its option, may
redeem this Warrant for $0.01 per Warrant Share by giving the Holder written
notice (the "Call Notice") at any time after the Registration Statement is
declared effective, and the closing Bid Price of the Common Stock of the Company
is greater than
4
<PAGE>
one hundred fifty (150%) percent of the Exercise Price for twenty (20)
consecutive Trading Days. To be effective, the Call Notice must be given within
three (3) Trading Days after the aforementioned twenty day period. The rights
and privileges granted pursuant to this Warrant shall terminate thirty (30) days
after the Call Notice is sent to the Holder if the warrant is not exercised
during that period. In the event the Warrants are not exercised during this
period the Company will remit to the Holder $0.01 per Warrant Share upon the
Holder tendering to the Company the expired Warrant certificate.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws of New York without regard to its conflict
of law, principles or rules, and be subject to arbitration pursuant to the terms
set forth in the Agreement.
(b) Restrictions. The holder hereof acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal securities laws.
Each certificate representing the Warrant Shares issued to the Holder upon
exercise will bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN
ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF,
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT
SUBJECT TO, SUCH REGISTRATION".
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof by the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: April ___, 1998
XYBERNAUT CORPORATION
By_________________________
5
<PAGE>
NOTICE OF EXERCISE
To: XYBERNAUT CORPORATION
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock, par value $ per shares (the "Common Stock") of XYBERNAUT
CORPORATION pursuant to the terms of the attached Warrant, and tenders herewith
payment of the exercise price in full, together with all applicable transfer
taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
__________________________
(Name)
__________________________
(Address)
__________________________
(3) The shares of Common Stock being issued in connection with the
exercise of the attached Warrant are [not] being issued in connection with the
sale of the Common Stock.
Dated:
__________________________
Signature
1
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_________________________________________________________________.
_________________________________________________________________
Dated: ______________, 1998
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
1
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE STATE SECURITIES LAWS AND
HAS BEEN ISSUED IN RELIANCE UPON REGULATION D PROMULGATED UNDER THE SECURITIES
ACT. THIS WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY THE WARRANT IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL.
THIS WARRANT MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION DOES NOT
REQUIRE REGISTRATION OF THE WARRANT, WHICH OPINION AND WHICH COUNSEL SHALL BE
SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION.
No. __
WARRANT B
To Purchase ______ Shares of Common Stock of
XYBERNAUT CORPORATION
THIS CERTIFIES that, for value received, ___________________________
(the "Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after October 15, 1998 and on or prior
to October 15, 2003 (the "Termination Date") but not thereafter, to subscribe
for and purchase from XYBERNAUT CORPORATION, a corporation incorporated in the
State of Delaware (the "Company"), _________ _______________ (______) shares
(the "Warrant Shares") of Common Stock, par value US $0.01 per share of the
Company (the "Common Stock"). The purchase price of one share of Common Stock
(the "Exercise Price") under this Warrant shall be equal to $2.81 The Exercise
Price and the number of shares for which the Warrant is exercisable shall be
subject to adjustment as provided herein. This Warrant is being issued in
connection with the Private Equity Line Of Credit Agreement dated on or about
April 13, 1998 (the "Agreement"), and is subject to its terms and conditions. In
the event of any conflict between the terms of this Warrant and the Agreement,
the Agreement shall control.
<PAGE>
1. Title of Warrant. Prior to the expiration hereof and subject
to compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares
of Common Stock which may be issued upon the exercise of rights represented by
this Warrant will, upon exercise of the rights represented by this Warrant, be
duly authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
Exercise of Warrant. Except as provided in Section 4 below, exercise
of the purchase rights represented by this Warrant may be made at any time or
times, before the close of business on the Termination Date, or such earlier
date on which this Warrant may terminate as provided in this Warrant, by the
surrender of this Warrant and the Notice of Exercise Form annexed hereto duly
executed, at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company) and upon
payment of the Exercise Price of the shares thereby purchased; whereupon the
holder of this Warrant shall be entitled to receive a certificate for the number
of shares of Common Stock so purchased. Certificates for shares purchased
hereunder shall be delivered to the holder hereof within three (3) business days
after the date on which this Warrant shall have been exercised as aforesaid.
Payment of the Exercise Price of the shares may be by certified check or
cashier's check or by wire transfer to an account designated by the Company in
an amount equal to the Exercise Price multiplied by the number of Warrant
Shares.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
2
<PAGE>
6. Closing of Books. The Company will not close its shareholder
books or records in any manner which prevents the timely exercise of this
Warrant for a period of time in excess of five (5) trading days per year.
7. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise thereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
8. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company).
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
certificate or any stock certificate relating to the Warrant Shares, and in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to it, and upon surrender and cancellation of such Warrant or stock certificate,
if mutilated, the Company will make and deliver a new Warrant or stock
certificate of like tenor and dated as of such cancellation, in lieu of such
Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed
day for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday, Sunday or a legal holiday, then such action
may be taken or such right may be exercised on the next succeeding day not a
legal holiday.
11. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or otherwise
convey all or substantially all of its assets or (ii) to effect a transaction
(by merger or otherwise) in which more than 50% of the voting power of the
Company is disposed of (collectively, a "Sale or Merger Transaction"), in which
the consideration to be received by the Company or its shareholders consists
solely of cash, then the Warrant shall terminate if the Warrant has not been
exercised by the effective date of such transaction, the Company shall give the
holder of this Warrant thirty (30) days' notice of such termination and of the
proposed effective date of the transaction.
(b) In case the Company shall at any time effect a sale or merger
transaction in which the consideration to be received by the Company or its
shareholders consists in part of consideration other than cash, the holder of
this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
The Company agrees that the Warrant Shares shall be included
in the Registration Statement to be filed by the Company pursuant to the Private
Equity Line Of Credit Agreement dated on or about April 13, 1998.
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<PAGE>
12. Adjustments of Exercise Price and Number of Warrant Shares.
The number and kind of securities purchasable upon the exercise of this Warrant
and the Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, then the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such adjustment of the kind and number
of Warrant Shares or other securities of the Company which are purchasable
hereunder, the holder of this Warrant shall thereafter be entitled to purchase
the number of Warrant Shares or other securities resulting from such adjustment
at an Exercise Price per such Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
13. Voluntary Adjustment by the Company. The Company may at any
time during the term of this Warrant, reduce the then current Exercise Price to
any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made. Such notice, in absence of
manifest error, shall be conclusive evidence of the correctness of such
adjustment.
15. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the NASDAQ Small Cap
Stock Market or any domestic securities exchange upon which the Common Stock may
be listed.
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<PAGE>
16. Call/Forced Exercise. The Company, at its option, may redeem
this Warrant for $0.01 per Warrant Share by giving the Holder written notice
(the "Call Notice") at any time after the Registration Statement is declared
effective, and the closing bid price of the Common Stock of the Company is
greater than one hundred fifty (150%) percent of the Exercise Price for twenty
(20) consecutive Trading Days. To be effective, the Call Notice must be given
within three (3) days after the aforementioned twenty day period. The rights and
privileges granted pursuant to this Warrant shall terminate thirty (30) days
after the Call Notice is sent to the Holder if the warrant is not exercised
during that period. In the event the Warrants are not exercised during this
period the Company will remit to the Holder $0.01 per Warrant Share upon the
Holder tendering to the Company the expired Warrant certificate.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant shall
be construed and shall be given effect in all respects as if it had been issued
and delivered by the Company on the date hereof. This Warrant shall be binding
upon any successors or assigns of the Company. This Warrant shall constitute a
contract under the laws of New York without regard to its conflict of law,
principles or rules, and be subject to arbitration pursuant to the terms set
forth in the Agreement.
(b) Restrictions. The holder hereof acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws. Each
certificate representing the Warrant Shares issued to the Holder upon exercise
will bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN
ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF,
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT
SUBJECT TO, SUCH REGISTRATION".
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof by the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
5
<PAGE>
Dated: April __, 1998
XYBERNAUT CORPORATION
By__________________________
NOTICE OF EXERCISE
To: XYBERNAUT CORPORATION
(1) The undersigned hereby elects to purchase ________ shares of
Common Stock, par value $ per share (the "Common Stock") of XYBERNAUT
CORPORATION pursuant to the terms of the attached Warrant, and tenders herewith
payment of the exercise price in full, together with all applicable transfer
taxes, if any.
(2) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
_______________________________
(Name)
_______________________________
(Address)
_______________________________
(3) The shares of Common Stock being issued in connection with the
exercise of the attached Warrant are [not] being issued in connection with the
sale of the Common Stock.
Dated:
_______________________________
Signature
1
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
___________________________________________________________________.
___________________________________________________________________
Dated: ______________, 1998
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
2
PARKER CHAPIN FLATTAU & KL;IMPL, LLP
[LETTERHEAD]
May 12, 1998
Xybernaut Corporation
12701 Fair Lakes Circle
Fairfax, Virginia 22033
Gentlemen:
We have acted as counsel to Xybernaut Corporation, a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 (the "Registration Statement") being filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the offering of 2,340,938 shares (the "Shares") of Common Stock, par value $.01
per share (the "Common Stock") of the Company.
Capitalized terms used herein and not defined shall have the
meanings given to them in the Registration Statement.
In connection with the foregoing, we have examined originals or
copies, satisfactory to us, of the Company's (i) Certificate of Incorporation,
(ii) By-laws and (iii) resolutions of the Company's board of directors. We have
also reviewed such other matters of law and examined and relied upon all such
corporate records, agreements, certificates and other documents as we have
deemed relevant and necessary as a basis for the opinion hereinafter expressed.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
with the original documents of all documents submitted to us as copies or
facsimiles. As to any facts material to such opinion, we have, to the extent
that relevant facts were not independently established by us, relied on
certificates of public officials and certificates of officers or other
representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion that
the Shares, when issued pursuant to the terms and conditions of the Private
Equity Line Credit Agreement, Warrant A, Warrant B and the Put Options will be
validly issued, fully paid and non-assessable.
<PAGE>
Xybernaut Corporation
Exhibit 5.1 Opinion to Registration Statement on Form S-3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/S/ PARKER CHAPIN FLATTAU & KLIMPL, LLP
---------------------------------------
PARKER CHAPIN FLATTAU & KLIMPL, LLP
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of the 13th day of
April, 1998, among the entities listed on Schedule A (collectively referred to
as the "Investors"), Settondown Capital International Ltd. (the "Placement
Agent", along with the Investor also referred to as the "Holders") located at
Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas, and
XYBERNAUT CORPORATION, a corporation incorporated under the laws of the state of
Delaware, and having its principle place of business at 12701 Fair Lakes Circle,
Suite 550, Fairfax, Virginia 22033 (the "Company").
WHEREAS, the Investors are purchasing from the Company, pursuant to
a Private Equity Line of Credit Agreement dated the date hereof (the "Equity
Line Agreement"), an aggregate of up to Eleven Million ($11,000,000) Dollars
principal amount of shares of Common Stock $0.01 par value, a Warrant A to
purchase 20,000 shares of the Company's Common Stock, and a Warrant B to
purchase 20,000 shares of the Company's Common Stock (plus such additional
shares of Common Stock as set forth in the Equity Line Agreement); and
WHEREAS, the Company shall issue to the Placement Agent, in return
for services rendered, the following securities: (a) upon the Closing for the
Initial Shares, (i) up to 50,000 shares of Common Stock (restricted as set forth
in Section 13.7 (i) of the Equity Line Agreement), and (ii) a Warrant A to
purchase 20,000 shares of Common Stock; and (b) upon the Closing of each Put,
five (5%) percent of that number of Put Shares issued on the Closing of each Put
(which shall not be included in the definition of Registrable Securities below);
and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein with respect to the shares of Common Stock
and shares of Common Stock underlying both Warrants A and B (plus such
additional shares of Common Stock issuable pursuant to the terms of the Equity
Line Agreement, collectively hereinafter referred to as the "Stock" or
"Securities" of the Company). All capitalized terms not defined herein shall
have that meaning as set forth in the Equity Line Agreement.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
"Registrable Security" means the Securities; provided, however, that with
respect to any particular Registrable Security, such security shall cease to be
a Registrable Security when, as of the date of determination, (i) it has been
effectively registered under the Securities Act of 1933, as amended (the "1933
Act") and disposed of pursuant thereto, (ii) registration under the 1933 Act is
no longer required for the immediate public distribution of such security as a
result of the provisions of Rule 144 promulgated under the 1933 Act, or (iii) it
has ceased to be outstanding. The term "Registrable Securities" means any and/or
all of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be made in the definition of "Registrable Security"
as is appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holders acknowledge and
understand that prior to the registration of the Securities as provided herein,
the Securities are "restricted securities" as defined in Rule 144
<PAGE>
promulgated under the Act. The Holders understand that no disposition or
transfer of the Securities may be made by the Holders in the absence of (i) an
opinion of counsel to the Holders that such transfer may be made without
registration under the 1933 Act or (ii) such registration. The Placement Agent
agrees that the shares of Common Stock it shall receive on the Subscription Date
shall be subject to a one-year lock up following the Subscription Date.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file
with the Securities and Exchange Commission ("Commission"), within thirty (30)
days after the Subscription Date, a registration statement (on Form S-3) under
the 1933 Act (the "Registration Statement"), at the sole expense of the Company
(except as provided in Section 3(c) hereof), in respect of all holders of
Registrable Securities, so as to permit a resale of the Registrable Securities
under the Act.
The Company shall use its best efforts to cause the
Registration Statement to become effective within ninety (90) days from the
Subscription Date. The number of shares designated in the Registration Statement
to be registered shall be the total of: (i) one hundred fifty (150%) percent of
the number of Initial Shares; (ii) one hundred (100%) percent of the number of
Warrant Shares if they were issued on the day before the filing of the
Registration Statement; and (iii) such additional number of Put Shares deemed
reasonably necessary by the Company.
(b) The Company will maintain the effectiveness the
Registration Statement or post-effective amendment filed under this Section 3
hereof current under the 1933 Act until the earlier of (i) the date that all of
the Registrable Securities have been sold pursuant to the Registration
Statement, (ii) the date the holders thereof receive an opinion of counsel that
all of the Registrable Securities may be sold under the provisions of Rule 144
or (iii) five and one half years after the Subscription Date.
(c) All fees, disbursements and out-of-pocket expenses
and costs incurred by the Company in connection with the preparation and filing
of the Registration Statement under subparagraph 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees) shall be borne by the Company. The Holder shall bear the cost
of underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and the fees and expenses of its counsel. The
Company shall qualify any of the securities for sale in such states as such
Holder reasonably designates and shall furnish indemnification in the manner
provided in Section 6 hereof. However, the Company shall not be required to
qualify any of the securities for sale in any state which will require an escrow
or other restriction relating to the Company and/or the sellers. The Company at
its expense will supply the Holder with copies of the Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section
3 to include a Holder's Registrable Securities in any Registration Statement
which is to be filed if, in the opinion of counsel for both the Holders and the
Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holders and
the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in all Investors or transferees obtaining securities which
are not "restricted securities", as defined in Rule 144 under the 1933 Act.
2
<PAGE>
(e) In the event the Registration Statement to be
filed by the Company pursuant to Section 3(a) above is not filed with the
Commission within thirty (30) days from the Subscription Date and/or the
Registration Statement is not declared effective by the Commission within ninety
(90) days from the Subscription Date, then the Company will pay Holder (pro
rated on a daily basis), as liquidated damages for such failure and not as a
penalty, two (2%) percent of the Purchase Price of the then outstanding
Securities for every thirty (30) day period thereafter until the Registration
Statement has been filed and/or declared effective. Such payment of the
liquidated damages shall be made to the Holders in cash, immediately upon
demand, provided, however, that the payment of such liquidated damages shall not
relieve the Company from its obligations to register the Securities pursuant to
this Section.
If the Company does not remit the damages to the Holders
as set forth above, the Company will pay the Holders' reasonable costs of
collection, including attorneys fees, in addition to the liquidated damages. The
registration of the Securities pursuant to this provision shall not affect or
limit Holders' other rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the
Company from selling securities pursuant to any Registration Statement in which
it is required to include Registrable Securities pursuant to this Section 3.
(g) If at any time or from time to time after the
effective date of the Registration Statement, the Company notifies the Holders
in writing of the existence of a Potential Material Event (as defined in Section
3(h) below), the Holders shall not offer or sell any Registrable Securities or
engage in any other transaction involving or relating to Registrable Securities,
from the time of the giving of notice with respect to a Potential Material Event
until such Holder receives written notice from the Company that such Potential
Material Event either has been disclosed to the public or no longer constitutes
a Potential Material Event; provided, however, that the Company may not so
suspend the right to such holders of Securities for more than one (1) twenty
(20) day period in the aggregate during any twelve month period, during the
periods the Registration Statement is required to be in effect. If a Potential
Material Event shall occur prior to the date the Registration Statement is
filed, then the Company's obligation to file the Registration Statement shall be
delayed without penalty for not more than twenty (20) days. The Company must
give each Holder notice in writing at least two (2) business days prior to the
first day of the blackout period.
(h) "Potential Material Event" means any of the
following: (a) the possession by the Company of material information not ripe
for disclosure in a registration statement; or (b) any material engagement or
activity by the Company which would be adversely affected by disclosure in a
registration statement at such time, that the Registration Statement would be
materially misleading absent the inclusion of such information.
Section 4. Cooperation with Company. Holders will cooperate with the
Company in all respects in connection with this Agreement, including timely
supplying all information reasonably requested by the Company and executing and
returning all documents reasonably requested in connection with the registration
and sale of the Registrable Securities.
Section 5. Registration Procedures. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible:
3
<PAGE>
(a) prepare and file with the Commission such
amendments and supplements to the Registration Statement and the prospectus used
in connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Act with respect to the sale
or other disposition of all securities covered by such registration statement
whenever the Holder of such securities shall desire to sell or otherwise dispose
of the same (including prospectus supplements with respect to the sales of
securities from time to time in connection with a registration statement
pursuant to Rule 415 promulgated under the Act);
(b) furnish to each Holder such numbers of copies of a
summary prospectus or other prospectus, including a preliminary prospectus or
any amendment or supplement to any prospectus, in conformity with the
requirements of the Act, and such other documents, as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(c) register and qualify the securities covered by the
Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Holders shall reasonably request (subject to the
limitations set forth in Section 3(d) above), and do any and all other acts and
things which may be necessary or advisable to enable each Holder to consummate
the public sale or other disposition in such jurisdiction of the securities
owned by such Holder, except that the Company shall not for any such purpose be
required to qualify to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified or to file therein any general consent to service
of process;
(d) list such securities on the NASDAQ Small Cap Stock
Market or other national securities exchange on which any securities of the
Company are then listed, if the listing of such securities is then permitted
under the rules of such exchange or NASDAQ;
(e) notify each Holder of Registrable Securities
covered by the Registration Statement, at any time when a prospectus relating
thereto covered by the Registration Statement is required to be delivered under
the Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
Section 6. Indemnification.
(a) The Company agrees to indemnify and hold harmless
the Holders and each person, if any, who controls each Holder within the meaning
of the 1933 Act ("Distributing Holder") against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Distributing Holder may become subject, under the
1933 Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, or any related preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company (i) will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
preliminary
4
<PAGE>
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto in reliance upon, and in conformity with, written information
furnished to the Company by the Distributing Holder, specifically for use in the
preparation thereof, or (ii) cannot pay any amounts paid in settlement of any
loss, claim, damage or liability if such settlement is effected without the
consent of the Company, which consent shall not be unreasonably withheld. This
Section 6(a) shall not inure to the benefit of any Distributing Holder with
respect to any person asserting such loss, claim, damage or liability who
purchased the Registrable Securities which are the subject thereof if the
Distributing Holder failed to send orgive (in violation of the 1933 Act or the
rules and regulations promulgated thereunder) a copy of the prospectus contained
in such Registration Statement to such person at or prior to the written
confirmation of such person of the sale of such Registrable Securities, where
the Distributing Holder was obligated to do so under the 1933 Act or the rules
and regulations promulgated thereunder. This indemnity provision will be in
addition to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will
indemnify and hold harmless the Company, and each officer, director of the
Company or person, if any, who controls the Company within the meaning of the
1933 Act, against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such officer, director or controlling person may become subject under the 1933
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof); arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, or any related preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but in each case only to the extent that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the Company by such
Distributing Holder, specifically for use in the preparation thereof. This
indemnity provision will be in addition to any liability which the Distributing
Holder may otherwise have.
(c) Promptly after receipt by an indemnified party
under this Section 6 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve the indemnifying party from any liability which it may have to any
indemnified party otherwise than as to the particular item as to which
indemnification is then being sought solely pursuant to this Section 6. In case
any such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, assume the defense thereof,
subject to the provisions herein stated and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Section 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless the indemnifying party shall not
pursue the action to its final conclusion. The indemnified party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall not be at the
expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is the Distributing Holder, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the
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indemnifying party, or (ii) the named parties to any such action (including any
impleaded parties) include both the Distributing Holder and the indemnifying
party and the Distributing Holder shall have been advised by such counsel that
there may be one or more legal defenses available to the indemnifying party
different from or in conflict with any legal defenses which may be available to
the Distributing Holder (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the Distributing Holder,
it being undertood, however, that the indemnifying party shall, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable only for the reasonable fees and expenses of one
separate firm of attorneys for the Distributing Holder, which firm shall be
designated in writing by the Distributing Holder). No settlement of any action
against an indemnified party shall be made without the prior written consent of
the indemnified party, which consent shall not be unreasonably withheld.
Section 7. Contribution. In order to provide for just and equitable
contribution under the 1933 Act in any case in which (i) the indemnified party
makes a claim for indemnification pursuant to Section 6 hereof but is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 6 hereof provide
for indemnification in such case, or (ii) contribution under the 1933 Act may be
required on the part of any indemnified party, then the Company and the
applicable Distributing Holder shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the applicable
Distributing Holder on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Distributing Holder agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section 7. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section 7 shall be deemed to inclue any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
Section 8. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully
6
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prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:
If to Xybernaut Corporation: Edward G. Newman and Steven A. Newman
12701 Fair Lakes Circle, Suite 550
Fairfax, VA 22033
Tele: (703) 631-6925
Fax: (703) 631-7070
With a copy to: Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Tele: (212) 704-6000
Fax: (212) 704-6288
If to the Investors at the addresses set forth on Schedule A
attached hereto.
If to the Placement Agent: Settondown Capital International Ltd.
Charlotte House, Charlotte Street,
P.O. Box N. 9204
Nassau, Bahamas
with a copy to: Scott H. Goldstein, Esq.
(shall not constitute notice) Goldstein, Goldstein & Reis, LLP
65 Broadway, 10th Floor
New York, New York 10006
Tele: (212) 809-4220
Fax: (212) 809-4228
Either party hereto may from time to time change its address or facsimile number
for notices under this Section by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 9. Assignment. This Agreement is binding upon and inures to
the benefit of the parties hereto and their respective heirs, successors and
permitted assigns. The rights granted the Holder under this Agreement shall not
be assigned without the written consent of the Company, which consent shall not
be unnecessarily withheld. In the event of a transfer of the rights granted
under this Agreement, the Holder agrees that the Company may require that the
transferee comply with reasonable conditions as determined in the discretion of
the Company.
7
<PAGE>
Section 10. Counterparts; Facsimile; Amendments. This Agreement may
be executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 11. Termination of Registration Rights. The rights granted
pursuant to this Agreement shall terminate as to each Holder (and permitted
transferees or assignees) upon the occurrence of any of the following:
(a) all Holder's Securities subject to this Agreement have been
registered;
(b) all of such Holder's Securities subject to this Agreement may
be sold without such registration pursuant to Rule 144 promulgated by the SEC
pursuant to the Securities Act;
(c) all of such Holder's Securities subject to this Agreement can
be sold pursuant to Rule 144(k).
Section 12. Headings. The headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 13. Governing Law: Venue; Jurisdiction. This Agreement will
be construed and enforced in accordance with and governed by the laws of the
State of New York, except for matters arising under the Act, without reference
to principles of conflicts of law. Each of the parties consents to the
jurisdiction of the U.S. District Court sitting in the Southern District of the
State of New York or the state courts of the State of New York sitting in
Manhattan in connection with any dispute arising under this Agreement and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions. Each party hereby agrees that if another party to this
Agreement obtains a judgment against it in such a proceeding, the party which
obtained such judgment may enforce same by summary judgment in the courts of any
country having jurisdiction over the party against whom such judgment was
obtained, and each party hereby waives any defenses available to it under local
law and agrees to the enforcement of such a judgment. Each party to this
Agreement irrevocably consents to the service of process in any such proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to such party at its address set forth herein. Nothing herein shall
affect the right of any party to serve process in any other manner permitted by
law.
Section 14. Severability. If any provision of this Agreement shall
for any reason be held invalid or unenforceable, such invalidity or
unenforceablity shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable
8
<PAGE>
provision had never been contained herein. Terms not otherwise defined herein
shall be defined in accordance with the Agreement.
Section 15. Capitalized Terms. All capitalized terms not otherwise
defined herein shall have the meaning assigned to them in the Equity Line
Agreement.
Section 16. Entire Agreement. This Agreement, together with all
documents referenced herein, embody the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and
supersedes all prior oral or written agreements and understandings relating to
the subject matter hereof. No statement, representation, warranty, covenant or
agreement of any kind not expressly set forth in this Agreement shall affect, or
be used to interpret, change or restrict, the express terms and provisions of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed, on the day and year first above written.
XYBERNAUT CORPORATION
By___________________________
BALMORE FUNDS, S.A.
By___________________________
Francois Morax
AUSTOST ANSTALT SCHAAN
By___________________________
Thomas Hackl
SETTONDOWN CAPITAL INTER-
NATIONAL LTD.
By___________________________
Anthony L. M. Inder Riden
9
ESCROW AGREEMENT
THIS AGREEMENT is made as of the 13th day of April, 1998 by and
among XYBERNAUT CORPORATION, with its principal office at 12701 Fair Lakes
Circle, Suite 550, Fairfax, Virginia 22033, (hereinafter the "Company"), the
"Purchasers" specified on Schedule A attached hereto, with their respective
principal offices at the addresses set forth in Schedule A (hereinafter
collectively referred to as the "Investor"), Settondown Capital International
Ltd. (the "Placement Agent", also referred to as the "Investor") located at
Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas, and
GOLDSTEIN, GOLDSTEIN & REIS, LLP, 65 Broadway, 10th Fl., New York, NY 10006
(hereinafter the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, the Purchasers will be purchasing Common Stock and Warrants
A and B (the "Initial Shares") from the Company at a purchase price as set forth
in a Private Equity Line Of Credit Agreement (the "Agreement") dated as of April
13, 1998, which will be issued as per the terms contained herein and in the
Agreement executed by the Company and Purchaser; and
WHEREAS, the Company will be issuing Common Stock and a Warrant A
(also referred to as the Initial Shares) to the Placement Agent pursuant to the
Agreement; and
WHEREAS, the Company shall have a Put to the Purchasers for the
remainder of the Commitment Amount after the Initial Shares Investment Amount
has been paid to the Company, in accordance with the terms and conditions in the
Agreement; and
WHEREAS, it is intended that the purchase of Securities be
consummated in accordance with the requirements set forth by Regulation D
promulgated under the Securities Act of 1933, as amended; and
WHEREAS, the Company has requested that the Escrow Agent hold the
Initial Shares Investment Amount and the remainder of the Commitment Amount in
escrow until the Escrow Agent has received the Initial Shares, and the Put
Shares. The Escrow Agent will then immediately wire transfer or otherwise
deliver at the Company's discretion immediately available funds to the Company's
account and arrange for delivery of the Initial Shares, and Put Shares to the
Investors as per the terms and conditions in the Agreement.
NOW, THEREFORE, in consideration of the covenants and mutual
promises contained herein and other good and valuable consideration, the receipt
and legal sufficiency of which are hereby acknowledged and intending to be
legally bound hereby, the parties agree as follows:
ARTICLE 1
TERMS OF THE ESCROW FOR THE INITIAL SHARES
<PAGE>
1.1 The parties hereby agree to establish an escrow account with
the Escrow Agent whereby the Escrow Agent shall hold the funds for the purchase
of the Initial Shares (collectively, with the Put Shares, referred to as the
"Securities").
1.2 Upon Escrow Agent's receipt of the Initial Shares Investment
Amount into its attorney trustee account, it shall notify the Company, or the
Company's designated attorney or agent, of the amount of funds it has received
into its account.
1.3 The Company, upon receipt of said notice and acceptance of the
Agreement by both parties, as evidenced by the Company's and the Investor's
execution thereof, shall deliver to the Escrow Agent the Initial Shares. Escrow
Agent shall then communicate with the Company to confirm the validity of its
issuance.
1.4 Once Escrow Agent confirms the validity of the issuance of the
Initial Shares, the Escrow Agent shall immediately wire that amount of funds
necessary to purchase the Initial Shares per the written instructions of the
Company. The Company will furnish Escrow Agent with a "Net Letter" directing
payment of (i) the placement agent fees in the amount of five percent (5%) of
the gross proceeds for the Initial Shares to the Placement Agent; and (ii)
legal, administrative, and escrow costs in the amount of one (1%) percent of the
gross proceeds to Goldstein, Goldstein & Reis, LLP, such fees are to be remitted
to in accordance with wire instructions that will be sent to Escrow Agent from
the Company, with the net balance payable to the Company. Once the funds (as set
forth above) have been received per the Company's instructions, the Escrow Agent
shall then arrange to have the Securities delivered as per instructions from the
Investor.
ARTICLE 2
TERMS OF THE ESCROW FOR THE PUT SHARES
2.1 The parties hereby agree to establish an escrow account with
the Escrow Agent whereby the Escrow Agent shall hold the funds for the purchase
of the Put Shares.
2.2 Upon Escrow Agent's receipt of confirmation in writing that
the Company has properly served a Put Notice in accordance with the Agreement,
and once it has received the Purchase Price for the Put Shares into its attorney
trustee account, it shall notify the Company, or the Company's designated
attorney or agent, of the amount of funds it has received into its account.
2.3 The Company, upon receipt of said notice and acceptance by the
Investors, as evidenced by written notice by the Investor, shall deliver to the
Escrow Agent the Put Shares
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<PAGE>
being purchased. Escrow Agent shall then communicate with the Company to confirm
the validity of its issuance.
2.4 Once Escrow Agent confirms the validity of the issuance of the
Put Shares, he shall immediately wire that amount of funds necessary to purchase
of the Put Shares per the written instructions of the Company. The Company will
furnish Escrow Agent with a "Net Letter" directing payment of (i) placement
agent fees in the amount of five (5%) percent of the gross proceeds for the Put
Shares to the Placement Agent; and (ii) legal, administrative, and escrow costs
in the amount of one half of one (0.5%) percent of the gross proceeds to
Goldstein, Goldstein & Reis, LLP, with a cap of Two Thousand Five Hundred
($2,500) Dollars per Closing of Put Shares. Such fees are to be remitted to in
accordance with wire instructions that will be sent to Escrow Agent from the
Company, with the net balance payable to the Company. Once the funds have been
received per the Company's instructions, the Escrow Agent shall then arrange to
have the Securities delivered as per instructions from the Investor.
ARTICLE 3
MISCELLANEOUS
3.1 No waiver or any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed any extension of
the time for performance of any other obligation or act.
3.2 All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent by fax, overnight courier,
registered or certified mail, postage prepaid, return receipt requested, and
shall be deemed received upon receipt thereof, as follows:
(a) Xybernaut Corporation
12701 Fair Lakes Circle, Suite 550
Fairfax, VA 22033
Attn: Edward G. Newman and Steven Newman
Tele: (703) 631-6925
Fax: (703) 631-7070
or to such other person at such other place as the Company shall designate to
the Investor in writing;
(b) if to the Purchaser, to such Purchaser's address set forth on
Schedule A hereto.
3
<PAGE>
(c) Settondown Capital International Ltd.
Charlotte House, Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas
Attn: Anthony L. M. Inder Riden
Telephone: (242) 325-1033
Facsimile: (242) 323-7918
(d) Goldstein, Goldstein & Reis, LLP 65 Broadway,
10th Fl. New York, NY 10006
Attn: Sheldon E. Goldstein, Esq.
(telephone) (212) 809-4220
(facsimile) (212) 809-4228
3.3 This Agreement shall be binding upon and shall inure to the
benefit of the permitted successors and assigns of the parties hereto.
3.4 This Agreement is the final expression of, and contains the
entire Agreement between, the parties with respect to the subject matter hereof
and supersedes all prior understandings with respect thereto. This Agreement may
not be modified, changed, supplemented or terminated, nor may any obligations
hereunder be waived, except by written instrument signed by the parties to be
charged or by its agent duly authorized in writing or as otherwise expressly
permitted herein.
3.5 Whenever required by the context of this Agreement, the
singular shall include the plural and masculine shall include the feminine. This
Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to Articles are to this Agreement.
3.6 The Company acknowledges and confirms that it is not being
represented in a legal capacity by Goldstein, Goldstein & Reis, LLP and it has
had the opportunity to consult with its own legal advisors prior to the signing
of this Agreement.
3.7 The parties hereto expressly agree that this Agreement shall
be governed by, interpreted under and construed and enforced in accordance with
the laws of the State of New York . Any action to enforce, existing out of, or
relating in any way to, any provisions of this Agreement shall brought through
the American Arbitration Association at the designated locale of New York, New
York as is more fully set forth in the Agreement.
3.8 This Agreement may be altered or amended only with the consent
of all of the parties hereto. Should the Company or Investor attempt to change
this Agreement in a manner which, in the Escrow Agent's discretion, shall be
undesirable, the Escrow Agent may resign as Escrow Agent by notifying the
Company and the Investor in writing. In the case of the Escrow Agent's
resignation or removal pursuant to the foregoing, its only duty, until receipt
of notice from the Company and the Investor or its agent that a successor escrow
agent shall have been appointed, shall be to hold and preserve the funds. Upon
receipt by the Escrow Agent of said notice from the Company and the Investor of
the appointment of a successor escrow agent, the name of a
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<PAGE>
successor escrow account and a direction to transfer the funds, the Escrow Agent
shall promptly thereafter transfer all of the funds held in escrow to said
successor escrow agent. Immediately after said transfer, the Escrow Agent shall
furnish the Company and the Investor with proof of such transfer. The Escrow
Agent is authorized to disregard any notices, requests, instructions or demands
received by it from the Company or the Investor after notice of resignation or
removal shall have been given, unless the same shall be the aforementioned
notice from the Company and the Investor to transfer the funds to a successor
escrow agent or to return same to the respective parties.
3.9 The Escrow Agent shall be reimbursed by the Company and the
Investor for any reasonable expenses incurred in the event there is a conflict
between the parties and the Escrow Agent shall deem it necessary to retain
counsel.
3.10 The Escrow Agent shall not be liable for any action taken or
omitted by it in good faith in accordance with the advice of the Escrow Agent's
counsel; and in no event shall the Escrow Agent be liable or responsible except
for the Escrow Agent's own gross negligence or willful misconduct.
3.11 The Company and the Investors warrant to and agree with the
Escrow Agent that, unless otherwise expressly set forth in this Agreement:
(i) there is no security interest in the Securities or any
part thereof;
(ii) no financing statement under the Uniform Commercial Code
is on file in any jurisdiction claiming a security interest or
in describing (whether specifically or generally) the
Securities or any part thereof; and
(iii) the Escrow Agent shall have no responsibility at any
time to ascertain whether or not any security interest exists
in the Securities or any part thereof or to file any financing
statement under the Uniform Commercial Code with respect to
the Securities or any part thereof.
3.12 The Escrow Agent in its capacity as such has no liability
hereunder to either party other than to hold the funds and the Securities and to
deliver them under the terms hereof. Each party hereto agrees to indemnify and
hold harmless the Escrow Agent in its capacity as such from and with respect to
any suits, claims, actions or liabilities arising in any way out of this
transaction including the obligation to defend any legal action brought which in
any way arises out of or is related to this Escrow.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have cause this Escrow
Agreement to be executed as of the 13th day of April, 1998.
XYBERNAUT CORPORATION
By___________________________
BALMORE FUNDS, S.A.
By____________________________
Francois Morax
AUSTOST ANSTALT SCHAAN
By____________________________
Thomas Hackl
SETTONDOWN CAPITAL INTER-
NATIONAL LTD.
By_____________________________
Anthony L.M. Inder Riden
GOLDSTEIN, GOLDSTEIN & REIS, LLP,
Escrow Agent
By______________________________
Scott H. Goldstein
6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form
S-3 of our report, which includes an explanatory paragraph concerning the
Company's ability to continue as a going concern, dated March 31, 1998 on our
audits of the financial statements of Xybernaut Corporation. We also consent to
the reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand
McLean, VA
May 7, 1998
