As filed with the Securities and Exchange Commission on December __, 1997
Registration No.________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XYBERNAUT CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 54-1799851
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(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
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(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
Maximum maximum Amount of
Title of each class of securities Amount to Aggregate price Aggregate registration
to be registered be registered (1) Per share (2) offering price (1) fee
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 2,622,663 $1.5938 $4,180,000.00 $1,233.10
per share
====================================== ======================= ========================= ===================== ================
(1) Issuable upon the conversion of Series B Preferred Stock, which is estimated based on conversion terms set forth
in the Certificate of Designation and the Registration Rights Agreement between the Company and the Selling
Stockholders assuming conversion by the holders of 4,180 shares of the Series B Preferred Stock at 85% of the
closing bid price of the Company's Common Stock on December 26, 1997. These amounts are subject to
adjustment and could be materially more or 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 is not intended to constitute a prediction as to the number of shares of Common Stock into which the Series
B Preferred Stock will be converted.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c); based on 85% of the
closing bid price of the Company's Common Stock on the Nasdaq SmallCap Market on December 26, 1997.
</TABLE>
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 DECEMBER _, 1997
PROSPECTUS
2,622,663 SHARES OF COMMON STOCK*
(par value $.01 per share)
XYBERNAUT CORPORATION
This Prospectus pertains to the offer and sale from time to time of
up to 2,622,663 shares (the "Shares") of common stock, par value $.01 per share
(the "Common Stock"), of Xybernaut Corporation (the "Company") by or for the
account of certain Company stockholders (the "Selling Stockholders"). See
"Selling Stockholders."
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 receive none 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 December 26, 1997, the closing bid price of the Common Stock
as reported by NASDAQ was $1.875.
*The shares of Common Stock offered hereby include the resale of such
presently indeterminate number of shares of Common Stock as shall be issued in
respect of all shares of Common Stock issuable upon conversion of 4,180 shares
of the Company's Series B Preferred Stock, par value $.01 (the "Series B
Preferred Stock"), placed in separate private placements in November and
December 1997 (the "Private Placements"). The number of shares of Common Stock
indicated to be issuable in connection with such transaction and offered for
resale hereby is an estimate and is based on the conversion set forth in
Certificate of Designation designating the Series B Preferred Stock (the
"Certificate of Designation") and the terms of the Registration Rights Agreement
(the "Registration Rights Agreement") between the Company and one of the Selling
Stockholders, and is subject to adjustment and could be materially more or less
than such estimated amount depending upon factors that cannot be predicted by
the Company at this time, including, among others, the future market price of
the Common Stock. If, however, all 4,180 shares of the Series B Preferred Stock
currently outstanding were converted under the terms of conversion using the
closing bid price of the Common Stock as reported by NASDAQ on December 26,
1997, the Company would be obligated to issue a total of 2,622,663 shares of
Common Stock. This presentation is not intended to constitute a prediction as to
the future market price of the Common Stock or as to the number of shares of
Common Stock into which the Series B Preferred Stock will be converted. See
"Risk Factors -- Series B Preferred Stock" and "Description of Securities --
Preferred Stock -- Series B Preferred Stock."
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 5 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 , 1997
<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. _____) (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, 1996; (ii) Quarterly Reports on Form 10-QSB for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; (iii) Current Report on
Form 8-K dated June 30, 1997; and (iv) 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..............2,622,663 shares of Common Stock to be issued
upon conversion of the Company's outstanding
Series B Preferred Stock.
Common Stock outstanding
prior to the offering hereby....14,209,112 shares of Common Stock (1)
Common Stock outstanding
after the offering hereby...... 16,831,775 shares of Common Stock (1) (2)
Common Stock trading symbol
on NASDAQ ......................XYBR
- ------------------------------
(1) Does not include (i) 1,642,830 shares of Common Stock reserved for
issuance upon the exercise of outstanding options, (ii) 287,860 shares
of Common Stock reserved for issuance upon exercise of outstanding
warrants to purchase Common Stock, (iii) 3,846,429 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) 1,285,713 shares of Common Stock registered for sale in connection
with the Series A Preferred Stock and (v) 420,000 shares of Common Stock
reserved for issuance upon exercise of an option granted pursuant to the
Company's IPO to purchase 210,000 shares of Common Stock and 210,000
redeemable warrants, each such warrant to purchase one share of Common
Stock at an exercise price of $9.075. See "Risk Factors -- Effect of
Possible Non-Cash Future Charge" and " -- Securities Issuable Pursuant
to Options, Warrants and the Unit Purchase Option."
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<PAGE>
(2) Assumes the number of shares of the Common Stock that would be
issuable upon conversion by the holders of all 4,180 shares of the
Series B Preferred Stock outstanding on December 1, 1997 using 85% of
the closing bid price of the Company's Common Stock as at December
26, 1997. See "Risk Factors -Series B Preferred Stock" and
"Description of Securities -- Preferred Stock -- Series B Preferred
Stock."
-4-
<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.
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 1,285,713 shares of Common Stock
underlying the Series A Preferred Stock in a registration statement filed with
the Commission on September 22, 1997. See "Description of Securities -- Series A
Preferred Stock."
SERIES B PREFERRED STOCK
In November and December 1997, 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. 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 the shares of Common
Stock underlying the Series B Preferred Stock in a Registration Statement filed
with the Commission. If the Company does not file the Registration Statement by
December 12, 1997 or the Commission does not declare the Registration Statement
effective by February 10, 1998, the Company must pay each holder of the Series B
Preferred Stock 2% of the outstanding Series B Liquidation Preference of such
holder's Series B Preferred Stock for the first month and 3% of the outstanding
Series B Liquidation Preference for each monthly period thereafter that the
Registration Statement is not filed or is not declared effective. See
"Description of Securities -- Series B Preferred Stock."
-5-
<PAGE>
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 nine months
ended December 31, 1995, the Company incurred a net loss of $2,141,190. In the
year ended December 31, 1996, the Company incurred a net loss of $5,238,536. In
the nine months ended September 30, 1997, the Company incurred a net loss of
$7,064,518. At September 30, 1997, the Company had an accumulated deficit of
$15,839,457, shareholders equity of $2,910,454, and working capital of
$1,541,989. The Company has a limited operating history and 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. 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.
LIQUIDITY; WORKING CAPITAL NEEDS
To meet working capital cash requirements, the Company intends to
reduce operating expenses, obtain a working capital line of credit and/or
complete additional financings. 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 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.
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 September 30,
1997 had sold and delivered approximately $1.6 million of Mobile Assistant(R)
systems. The Company commenced delivery of the preproduction 586 Mobile
Assistant(R) in March 1997 and delivery of the preproduction Pentium(R) Mobile
Assistant P-133(TM) in August 1997. 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. 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.
The commercial success of the Mobile Assistant(R) series,
linkAssist(TM), 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.
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<PAGE>
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 any of 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 InterVision, Phoenix Group, Computing
Devices International, a division of Ceridian Corporation, ViA Inc., Texas
Microsystems, Telxon, Norand, Interactive Solutions, Inc., a subsidiary of
Teltronics, Inc. and a consortium of Litton and TRW. Personal digital assistants
and laptop and notebook computers also are products that could compete against
the Mobile Assistant(R) in applications where hands-free, voice-activated
operation is not required. Many of these computers are manufactured by major
domestic and foreign computer manufacturers, which possess far more resources
than the Company and can be expected to compete vigorously with the Company for
the market at which the Mobile Assistant(R) is directed. The Company is aware of
at least three competitors that have introduced hands-free mobile computing
systems that compete directly with the Mobile Assistant(R). 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 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) 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 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 two products:
one based on an AMD 5x86 processor and the other based on an Intel Pentium(R)
processor. The Mobile Assistant(R) series are the Company's principal products,
and its success will depend upon its commercial acceptance, which cannot be
assured. For single unit purchases, the Mobile Assistant(R) currently is priced
from $4,995 to $8,995, depending upon the model and
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<PAGE>
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). While linkAssist(TM) and the Company's planned software toolkits
are intended for use both with the Mobile Assistant(R) series and independently,
there can be no assurance that a separate market for the Company's existing and
planned software products will develop. There can be no assurance that any
products, if sold, will generate significant revenues or any profits. The
Company is also developing additional products for the Mobile Assistant(R)
series for introduction in the future and intends to modify the Mobile
Assistant(R) series for use in other applications and to develop other products
using its core technologies. Additional product development will result in the
Company incurring significant research and development expenses that may be
unrecoverable should commercialization of new products prove unsuccessful. The
Company also could require additional funding if research and development
expenses are greater than anticipated. There can be no assurance that the
Company will be successful in its future product development efforts or in
diversifying its product line.
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. In September 1995, the Company received a notification from
the United States Patent and Trademark Office (the "Patent Office") entitled
"office action in reexamination" which indicated that the Company's claims under
its existing patent for the Mobile Assistant(R) were subject to reexamination
and had been preliminarily rejected. In May 1996, the Patent Officer 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 party 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 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 nine months ended December 31, 1996 and for the nine
months ended September 30, 1997 were derived from products included within the
scope of the patent. In October 1995, the Company filed a patent application
covering additional embodiments and extensions of the technologies used in the
Mobile Assistant(R) series. Notwithstanding the foregoing, there can be no
assurance that the Company's pending patent application will issue as a patent,
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
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<PAGE>
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") and end users. The Company
is also developing a network of VARs and OEMs and to intends to enter into joint
ventures and licensing or other collaborative arrangements to market and sell
its mobile computing products. The Company currently is a party to VAR
agreements with six entities. 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.
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 nine month period ended September 30, 1997, three customers
accounted for 58% 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.
-9-
<PAGE>
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 size of its product
development staff and to use outside resources in the near term to meet these
challenges. There can be no assurance that the Company will be successful in
hiring and training 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.
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
-10-
<PAGE>
Company. Assuming the price of Common Stock is equal to or greater than the IPO
price of $5.50 (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.
CONTROL BY EXISTING STOCKHOLDERS
Following this offering, the Company's executive officers, directors
and principal stockholders will, in the aggregate, beneficially own
approximately 42.9% 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 18,117,488 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, 1,285,713 shares registered in
connection with the Series A Preferred Stock and the 2,622,663 additional shares
of Common Stock registered in this offering will be freely tradeable. The
remaining 10,362,683 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").
-11-
<PAGE>
SECURITIES ISSUABLE PURSUANT TO OPTIONS, WARRANTS AND THE UNIT PURCHASE OPTION
At the date of this Prospectus, the Company has reserved an aggregate of
6,197,119 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 250,000 shares granted in September 1994, and $1.37 to $6.00 for
1,392,830 shares granted from April 1, 1995 to December 1, 1997. In order to
retain incentives for directors and current employees during this stage of the
Company's development, the strike price for certain options was reduced to $3.00
per share by the Company's board of directors on August 28, 1997. Current
control persons and board elected officers are not affected by this change. The
exercise price of the 287,860 warrants granted between July 1, 1996 and December
1, 1997 is between $2.38 and $18.00 per share. In connection with the Company's
IPO, warrants to purchase 3,846,429 shares were issued that entitle the holder
to purchase a share of common stock for $9.00 until July 19, 1999. At the
completion of the IPO, the Representative received an option (the "Unit Purchase
Option") to purchase 210,000 Units (the "Units"), each unit consisting of one
share of Common Stock and one Redeemable Warrant (a "Warrant") to purchase one
share of Common Stock, at a price of $9.075 per Unit during a period of four
years commencing July 18, 1997. The Warrants included in the Unit Purchase
Option are exercisable at $12.60 per share. During the terms of the outstanding
options, warrants and the Unit Purchase Option, the holders are given the
opportunity to profit from a rise in the market price of the Common Stock, and
their exercise may dilute the ownership interest of existing stockholders,
including investors in this offering. The existence of the options, the warrants
and the Unit Purchase Option may adversely affect the terms on which the Company
may obtain additional equity financing. Moreover, the holders are likely to
exercise their rights to acquire Common Stock at a time when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of such securities.
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.
IMPACT OF SALE OF COMMON STOCK UPON CONVERSION OF SERIES A AND SERIES B
PREFERRED STOCK ON STOCK PRICE
The Series A and Series B Preferred Stock are convertible into Common
Stock at discounts from future market prices of the Common Stock, which could
result in substantial dilution to existing holders of Common Stock. The sale of
such Common Stock acquired at a discount could have a negative impact on the
trading price of the Common Stock and could increase the volatility in the
trading price of the Common Stock.
-12-
<PAGE>
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."
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<PAGE>
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 November and December 1997 private placements
(the "Private Placements") and consist of the Common Stock issuable upon
conversion of the Series B Preferred Stock. Of the 4,180 shares of Series B
Preferred Stock placed in the Private Placements, 3,640 shares were placed with
one Selling Stockholder. Such Selling Stockholder has purchased and the Company
has issued 3,000 shares of Series B Preferred Stock (the "Initial Shares"), and
such Selling Stockholder is contractually obligated to purchase the remaining
640 shares of Series B Preferred Stock (the "Additional Shares") ten (10) days
after the date of this Prospectus. The Additional Shares must be purchased by
such Selling Stockholder subject only to the effective registration of the
Shares and that the representations and warranties of the Company made on the
date the Initial Shares were purchased are true and correct in all material
respects on the date the Additional Shares are purchased. Another Selling
Stockholder is contractually obligated to purchase 360 shares of Series B
Preferred Stock ten (10) days after the registration statement registering the
Shares is filed and 180 shares of Series B Preferred Stock were issued to a
Selling Stockholder for serving as the placement agent for the Private
Placements. In connection with the Private Placements, the Company granted the
Selling Stockholders certain registration rights pursuant to which the Company
agreed to use its best efforts to keep the Registration Statement, of which this
Prospectus is a part, effective until the earliest of (i) the second anniversary
of the issuance date of the Series B Preferred Stock, (ii) the date the Selling
Stockholders may sell all the Shares under the provisions of Rule 144 or (iii)
the date the Selling Stockholders no longer own any of the Shares.
The following table sets forth certain information regarding the
ownership of shares of Common Stock by the Selling Stockholders as of December
31, 1997, and as adjusted to reflect the sale of the Shares. The information in
the table concerning the Selling Stockholders who may offer Common Shares
hereunder from time to time is based on information provided to the Company by
such stockholder, except for the assumed conversion ratio of shares of the
Series B Preferred Stock into Common Stock, which is based solely on the
assumptions referenced in footnotes (1) and (2) 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."
<TABLE>
<CAPTION>
Shares of Common Stock Owned
after Offering (2)
----------------------------
Shares of
Common Stock Shares of
Owned Prior to Common Stock
Offering to be Sold (1)(2) Number Percent
--------------------- --------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Melcombe Invest. Ltd. (3) -0- 2,283,850 2,283,850 13.6%
Settondown Capital -0- 150,584 150,584 0.9%
International Ltd.
Tonga Partners, L.P. -0- 188,229 188,229 1.1%
--------- --------- -----
Total -0- 2,622,223 2,622,223 15.6%
========= ========= =====
- -----------------
</TABLE>
-14-
<PAGE>
(1) Assumes that the Selling Stockholders will convert all of its Series
B Preferred Stock into Common Stock based upon an average of closing
bid and ask price of $1.875. The Selling Stockholder may convert each
share of the Series B Preferred Stock into such number of shares of
Common Stock as is determined by dividing $1,000 by 85% of the
average closing bid price on the Nasdaq SmallCap Market for the five
trading days prior to the date of conversion.
(2) Assumes that each Selling Stockholder sells a pro-rata portion of the
2,622,663 shares of Common Stock offered hereby during the effective
period of the Registration Statement. The actual number of shares of
Common Stock offered hereby is subject to change and could be
materially less than the estimated amount indicated, depending upon
(i) the average closing bid price of the Common Stock for the five
trading days prior to the date of conversion, (ii) whether any of the
Series B Preferred Stock has been redeemed and (iii) whether the
number of shares of the Series B Preferred Stock or the Common Stock
outstanding have been adjusted to account for any stock dividend,
stock split, recapitalization, merger, consolidation or other
adjustment.
(3) Each Selling Stockholder has agreed that neither it nor any
subsequent holder of its Series B Preferred Stock will, following any
conversion of such Series B Preferred Stock, 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, 14,209,112
shares of Common Stock are issued and outstanding, 2,250 shares of Series A
Preferred Stock are issued and outstanding and 3,180 shares of Series B
Preferred Stock are issued and outstanding. The Company currently has reserved
6,197,119 shares of Common Stock for issuance pursuant to outstanding options,
warrants and the Unit Purchase Option.
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
-15-
<PAGE>
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"). On September 29, 1997, the holders of the
Series A Preferred Stock converted a portion of their holdings and as of
December 1, 1997, three different entities owned the remaining 2,250 shares of
the Series A Preferred Stock.
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 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
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<PAGE>
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.
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
-17-
<PAGE>
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 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.
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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.
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 3,000 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"). As of December 1, 1997, one
entity owned all 3,000 shares of the Series B Preferred 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.
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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 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.
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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 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
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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.
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 agreed to register the shares of
Common Stock underlying the Series B Preferred Stock in the Registration
Statement filed with the Commission. If the Commission does not file the
Registration Statement by December 12, 1997 or the Commission does not declare
the Registration Statement effective by February 10, 1998, the Company must pay
each holder of the Series B Preferred Stock 2% of the outstanding Liquidation
Preference of such holder's Series B Preferred Stock for the first month and 3%
of the outstanding Liquidation Preference for each monthly period thereafter
that the Registration Statement is not filed or is not declared effective.
Other Designations of Preferred Stock
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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.
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.
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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
Common Stock, 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
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 use its best efforts to keep the
Registration Statement of which this Prospectus is a part effective until the
earliest of (i) the second anniversary of the issuance date of the Series B
Preferred Stock, (ii) the date the Selling Stockholders may sell all the Shares
under the provisions of Rule 144 or (iii) the date the Selling Stockholders no
longer own any of the Shares.
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<PAGE>
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the DGCL provides, in general, that a corporation
incorporated under the laws of the State of Delaware, such as the registrant,
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than a derivative action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action was brought determines such
person is fairly and reasonably entitled to indemnity for such expenses.
The Company's Certificate of Incorporation provides that directors
shall not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability
resulting from a breach of the director's duty of loyalty to the Company or its
stockholders, intentional misconduct or wilful violation of law, actions or
inactions not in good faith, an unlawful stock purchase or payment of a dividend
under Delaware law, or transactions from which the director derives improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Certificate of Incorporation also authorizes the Company to indemnify its
officers, directors and other agents, by bylaws, agreements or otherwise, to the
fullest extent permitted under Delaware law. The Company has entered into an
Indemnification Agreement (the "Indemnification Agreement") with each of its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Company's Certificate of
Incorporation or as otherwise permitted under Delaware law. Each Indemnification
Agreement may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as a director or officer, against liabilities arising
from willful misconduct of a culpable nature, and to obtain directors' and
officers' liability insurance if available on reasonable terms.
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 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.
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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 financial statements of the Company incorporated in
this Prospectus by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996 have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report dated March 31, 1997,
accompanying such financial statements, and are incorporated herein by reference
in reliance upon the reports of such firm, which report is given upon their
authority as experts in accounting and auditing.
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<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS WITH RESPECT TO THE OFFERING MADE HEREBY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE BUSINESS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Available Information............................................2
Incorporation of Certain Documents
by Reference................................................2
Prospectus Summary...............................................3
Risk Factors.....................................................5
Use of Proceeds.................................................13
Selling Stockholders ...........................................13
Description of Securities.......................................14
Delaware Business Combination
Provisions.................................................18
Plan of Distribution ...........................................20
Indemnification for Securities Act Liabilities..................21
Legal Matters...................................................22
Experts ........................................................22
2,622,663 SHARES OF COMMON STOCK
(Issuable upon the exercise of
Series B Preferred Stock)
PROSPECTUS
, 1997
<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.........$ 1,200
Legal fees and expenses.......................$ 30,000
Miscellaneous expenses........................$ 5,000
Total....................................$ 36,200
==========
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
II - 1
<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.
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 Purchase Agreement
4.2 Form of Registration Rights Agreement
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
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;
(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.
II - 2
<PAGE>
(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, State of Virginia on December ___, 1997.
XYBERNAUT CORPORATION
By:/S/ EDWARD G. NEWMAN
--------------------
Edward G. Newman
Chairman of the Board, President
and Chief Executive Officer
II - 4
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints 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 (or any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or 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 attorney-in-fact and agent or either 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, December , 1997
- -------------------- President and Chief
Edward G. Newman Executive Officer
/S/ JOHN F. MOYNAHAN Senior Vice President, Chief December , 1997
- -------------------- Financial Officer, Treasurer
John F. Moynahan and Director
/S/ MARTIN ERIC WEISBERG Secretary and Director December , 1997
- ------------------------
Martin Eric Weisberg
/S/ LT. GEN. HARRY E. SOYSTER Director December , 1997
- -----------------------------
Lt. Gen. Harry E. Soyster
/S/ JAMES J. RALABATE Director December , 1997
- ---------------------
James J. Ralabate
/S/ KEITH P. HICKS Director December ,1997
- ------------------
Keith P. Hicks
/S/ STEVEN A. NEWMAN Director December ,1997
- --------------------
Steven A. Newman
/S/ PHILLIP E. PEARCE Director December ,1997
- ---------------------
Phillip E. Pearce
/S/ EUGENE J. AMOBI Director December ,1997
- -------------------
Eugene J. Amobi
II - 5
<PAGE>
SECURITIES AND
EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
--------------
EXHIBITS
TO
FORM S-3
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT
OF 1933
--------------
<PAGE>
XYBERNAUT
CORPORATION
(EXACT NAME OF ISSUER AS SPECIFIED
IN ITS CHARTER)
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION OF EXHIBIT
4.1 Form of Purchase
Agreement
4.2 Form of Registration
Rights Agreement
5.1 Opinion of Parker
Chapin Flattau &
Klimpl, LLP.
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).
AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT
THIS AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT, dated as of
the date of acceptance set forth below, is entered into by and between XYBERNAUT
CORPORATION, a Delaware corporation, with headquarters located at 12701 Fair
Lakes Circle, Fairfax, Virginia 22033 ("Company"), and the undersigned (the
"Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer, in order to amend and restate
that certain Securities Purchase Agreement to which they are parties, are
executing and delivering this Agreement in accordance with and in reliance upon
the exemption from securities registration afforded, inter alia, by Rule 506
under Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, 4% Convertible Preferred Stock, $.01 par value
per share (the "Convertible Preferred Stock"), of the Company which will be
convertible into shares of Common Stock, $.01 par value per share of the Company
(the "Common Stock"), upon the terms and subject to the conditions of the
Convertible Preferred Stock, and subject to acceptance of this Agreement by the
Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase. (i) The undersigned hereby agrees to purchase from the
Company shares of the Convertible Preferred Stock in the amounts set forth on
the signature page of this Agreement on the Closing Date (as defined below) (the
"Initial Preferred Stock"), and on the Additional Closing Date (as defined
below) (the "Additional Preferred Stock"), out of a total offering of $4,000,000
of such Preferred Stock, and having the terms and conditions set forth in the
certificate of designation to the Certificate of Incorporation of the Company
attached hereto as Annex I (the "Certificate of Designation"). The purchase
price for the Initial Preferred Stock and the Additional Preferred Stock shall
be as set forth on the signature page hereto and shall be payable in United
States Dollars.
1
<PAGE>
(ii) As used herein, the term "Preferred Stock" means the Initial
Preferred Stock and the Additional Preferred Stock, unless the context otherwise
requires.
(iii) As used herein, the term "Securities" means the Preferred
Stock.
b. Form of Payment. The Buyer shall pay the purchase price for the
Initial Preferred Stock or the Additional Preferred Stock, as the case may be,
by delivering immediately available good funds in United States Dollars to the
escrow agent (the "Escrow Agent") identified in the Joint Escrow Instructions
attached hereto as Annex II (the "Joint Escrow Instructions"). Promptly
following payment by the Buyer to the Escrow Agent of the purchase price of the
relevant Preferred Stock, the Company shall deliver a certificate representing
the relevant Preferred Stock duly executed on behalf of the Company to the
Escrow Agent. By signing this Agreement, the Buyer and the Company, and subject
to acceptance by the Escrow Agent, each agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow Instructions, all of the
provisions of which are incorporated herein by this reference as if set forth in
full.
c. Method of Payment. Payment into escrow of the purchase price for
the relevant Preferred Stock shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: 637-1657450
Not later than 1:00 p.m., New York time, on the date which is one (1) New York
Stock Exchange trading days after the Company shall have accepted this Agreement
and returned a signed counterpart of this Agreement to the Escrow Agent by
facsimile, the Buyer shall deposit with the Escrow Agent the aggregate purchase
price for the Initial Preferred Stock, in currently available funds. Time is of
the essence with respect to such payment, and failure by the Buyer to make such
payment, shall allow the Company to cancel this Agreement.
d. Escrow Property. The purchase price and the certificate(s)
representing the Preferred Stock delivered to the Escrow Agent as contemplated
by Sections 1(b) and (c) hereof are referred to as the "Escrow Property."
2
<PAGE>
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock pursuant
to the Registration Statement (as that term is defined in the Registration
Rights Agreement defined below), the Buyer is purchasing the Preferred Stock and
will be acquiring the shares of Common Stock issuable upon conversion of the
Preferred Stock (the "Converted Shares") for its own account for investment only
and not with a view towards the public sale or distribution thereof and not with
a view to or for sale in connection with any distribution thereof;
b. The Buyer is (i) an "accredited investor" as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), (ii) experienced in making investments of the kind described in
this Agreement and the related documents, (iii) able, by reason of the business
and financial experience of its officers (if an entity) and professional
advisors (who are not affiliated with or compensated in any way by the Company
or any of its affiliates or selling agents), to protect its own interests in
connection with the transactions described in this Agreement, and the related
documents, and (iv) able to afford the entire loss of its investment in the
Securities;
c. All subsequent offers and sales of the Preferred Stock and the
shares of Common Stock representing the Converted Shares (such Common Stock
sometimes referred to as the "Shares") by the Buyer shall be made pursuant to
registration of the Shares under the 1933 Act or pursuant to an exemption from
registration;
d. The Buyer understands that the Preferred Stock is being offered
and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying upon the truth and accuracy of, and the Buyer's compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Preferred Stock and to receive the Shares upon conversion;
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Stock and the offer of
the Shares which have been requested by the Buyer, including Annex V hereto. The
Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers to
any such inquiries. Without limiting the generality of the foregoing, the Buyer
has also had the opportunity
3
<PAGE>
to obtain and to review the Company's (1) Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, (2) Quarterly Reports on Form 10-Q for the
fiscal quarters ended June 30, 1997 and March 31, 1997, (3) Forms 8-K dated,
June 30, 1997, and (4) Form S-3 filed on September 22, 1997 (the "Company's SEC
Documents").
f. The Buyer understands that its investment in the Securities
involves a high degree of risk;
g. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities;
h. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
i. Neither the Buyer, nor any affiliate of the Buyer nor any person
acting on its or their behalf, has any intention of entering into, any put
option, short position or other similar instrument or position with respect to
the Preferred Stock or the Shares, and neither the Buyer nor any of its
affiliates nor any person acting on its or their behalf will at any time use
Shares acquired upon conversion of the Preferred Stock to settle or cover any
put option, short position or other similar instrument or position.
j. Notwithstanding the provisions hereof or of the Preferred Stock,
in no event (except with respect to an automatic conversion of the Preferred
Stock as provided in the Certificate of Designations) shall the holder be
entitled to convert any Preferred Stock to the extent that, after such
conversion, the sum of (1) the number of shares of Common Stock beneficially
owned by the Buyer and its affiliates (other than shares of Common Stock which
may be deemed beneficially owned through the ownership of the unconverted
portion of the Preferred Stock), and (2) the number of shares of Common Stock
issuable upon the conversion of the Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Buyer and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
except as otherwise provided in clause (1) of such proviso.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
4
<PAGE>
a. Concerning the Preferred Stock and the Shares. The Preferred Stock
has been duly authorized, and when issued, will be duly and validly issued,
fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder. There are no preemptive
rights of any stockholder of the Company, as such, to acquire the Preferred
Stock or the Converted Shares.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or condition (financial or otherwise) of the Company. The Company has registered
its Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the Common Stock is listed and traded on
The NASDAQ/SmallCap Market. The Company has received no notice, either oral or
written, with respect to the continued eligibility of the Common Stock for such
listing, and the Company has maintained all requirements for the continuation of
such listing.
c. Authorized Shares. The Company has sufficient authorized and
unissued Shares as may be reasonably necessary to effect the conversion of the
Preferred Stock. The Converted Shares have been duly authorized and, when issued
upon conversion of, or as interest on, the Preferred Stock, will be duly and
validly issued, fully paid and non-assessable and will not subject the holder
thereof to personal liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights Agreement and
Stock. This Agreement and the Registration Rights Agreement, the form of which
is attached hereto as Annex IV (the "Registration Rights Agreement"), and the
transactions contemplated thereby, have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company and
this Agreement is, and the Registration Rights Agreement, when executed and
delivered by the Company, will be, valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium, and other similar laws affecting the enforcement of creditors'
rights generally; and the Preferred Stock will be duly and validly authorized
and, when executed and delivered on behalf of the Company in accordance with
this Agreement, will be a valid and binding obligation of the Company in
accordance with its terms, subject to general principles of equity and to
bankruptcy, insolvency, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally.
e. Non-contravention. The execution and delivery of this Agreement
and the Registration Rights Agreement by the Company, the issuance of the
Securities, and the consummation
5
<PAGE>
by the Company of the other transactions contemplated by this Agreement, the
Registration Rights Agreement, and the Preferred Stock do not and will not
conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under (i) the articles of incorporation
or by-laws of the Company, each as currently in effect, (ii) any indenture,
mortgage, deed of trust, or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
including any listing agreement for the Common Stock except as herein set forth,
(iii) to its knowledge, any existing applicable law, rule, or regulation or any
applicable decree, judgment, or order of any court, United States federal or
state regulatory body, administrative agency, or other governmental body having
jurisdiction over the Company or any of its properties or assets, or (iv) the
Company's listing agreement for its Common Stock, except such conflict, breach
or default which would not have a material adverse effect on the transactions
contemplated herein.
f. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the Stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
g. SEC Filings. None of the Company's SEC Documents contained, at the
time they were filed, 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 made therein in light of the circumstances under which they were
made, not misleading. The Company has since September 1, 1996 timely filed all
requisite forms, reports and exhibits thereto with the SEC.
h. Absence of Certain Changes. Since January 1, 1997, there has been
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, or results of operations of the
Company, except as disclosed in Annex V or in the Company's SEC Documents.
i. Full Disclosure. There is no fact known to the Company (other than
general economic conditions known to the public generally or as disclosed in the
Company's SEC Documents), that has not been disclosed in writing to the Buyer
that (i) would reasonably be expected to have a material adverse effect on the
business or financial condition of the Company or (ii) would reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement, the Registration Rights
Agreement, the Joint Escrow Instructions, and the Certificate of Designation
(collectively, the "Transaction Agreements").
j. Absence of Litigation. Except as set forth in Annex V hereto, and
in the Company's SEC Documents, which the Buyer has reviewed, there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board or body pending or, to the knowledge
6
<PAGE>
of the Company, threatened against or affecting the Company, wherein an
unfavorable decision, ruling or finding would have a material adverse effect on
the properties, business or financial condition of the Company and its
subsidiaries taken as a whole or the transactions contemplated by any of the
Transaction Agreements or which would adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, any of the Transaction Agreements.
k. Absence of Events of Default. Except as set forth in Annex V
hereto and Section 3(e) hereof, no Event of Default (or its equivalent term), as
defined in the respective agreement to which the Company is a party, and no
event which, with the giving of notice or the passage of time or both, would
become an Event of Default (or its equivalent term) (as so defined in such
agreement), has occurred and is continuing, which would reasonably be expected
to have a material adverse effect on the Company's financial condition or
results of operations.
Prior Issues. Except as set forth in Annex V, during the twelve (12)
months preceding the date hereof, the Company has not issued any convertible
securities. The presently outstanding unconverted principal amount of each such
issuance as at September 30, 1997 are set forth in Annex V.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the
Preferred Stock has not been and is not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the
Preferred Stock, and, until such time as the Common Stock has been registered
under the 1933 Act as contemplated by the Registration Rights Agreement and sold
in accordance with an effective Registration Statement, certificates and other
instruments representing any of the Securities shall bear
7
<PAGE>
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO
THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to enter
into the Registration Rights Agreement, in substantially the form attached
hereto as Annex IV, on or before the Closing Date (as defined below).
d. Filings. The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Preferred Stock to the Buyer under
any United States laws and regulations, or by any domestic securities exchange
or trading market, and to provide a copy thereof to the Buyer promptly after
such filing.
e. Reporting Status. So long as the Buyer beneficially owns any of
the Preferred Stock, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination. The Company will take all action under its control to
continue the listing and trading of its Common Stock on The NASDAQ Stock Market
and will comply in all respects with the Company's reporting, filing and other
obligations under the by-laws or rules of the National Association of Securities
Dealers, Inc. ("NASD") or The NASDAQ Stock Market.
f. Use of Proceeds. The Company will use the proceeds from the sale
of the Preferred Stock (excluding amounts paid by the Company for legal fees and
finder's fees in connection with the sale of the Preferred Stock) for internal
working capital purposes, and shall not, directly or indirectly, use such
proceeds for any loan to or investment in any other corporation, partnership
enterprise or other person.
g. Future Purchases. (i) The Buyer unconditionally and irrevocably
agrees, at the option of the Company, to purchase the Additional Preferred Stock
consisting of an additional $640,000 liquidation amount of Convertible Preferred
Stock in one tranche (the "Additional Tranche"), on the terms and subject to the
conditions hereinafter provided.
8
<PAGE>
(ii) The closing for the Additional Tranche shall occur on a date
(the "Additional Closing Date"), which date shall not be later than the ten (10)
days after the Effective Date (as defined below) or as otherwise mutually agreed
upon by the Company and the Buyer. The closing of the Additional Tranche shall
be conducted upon the same terms and conditions as those applicable to the
Initial Preferred Stock.
(iii) The Buyer's obligations to purchase the Additional Preferred
Stock is subject to the condition that, on the Additional Closing Date, (A) the
Registration Statement required to be filed under the Registration Rights
Agreement shall continue to be effective, and (B) the representations and
warranties of the Company contained in Section 3 hereof shall be true and
correct in all material respects on the Additional Closing Date (and the
Company's issuance of the Additional Preferred Stock shall constitute the
Company's making each such representation and warranty as of such date).
(iv) The Additional Preferred Stock shall be governed by the terms
and provisions of the Certificate of Designation as if such Additional Preferred
Stock was issued on the date the Initial Preferred Stock was issued.
h. Certain Agreements. (i) The Company covenants and agrees that it
will not, without the prior written consent of the Buyer, enter into any
subsequent or further offer or sale of Common Stock or securities convertible
into Common Stock with any third party ("Subsequent Financing") until the
earlier of (a) the date which is forty-five (45) days after the Effective Date
(as defined below) or (b) the date on which 85% of the Preferred Stock shares
have been converted into shares of Common Stock. Notwithstanding the foregoing,
the Company may enter into a Subsequent Financing without the prior written
consent of the Buyer if such Subsequent Financing is exempt from securities
registration under Regulation D and the Company is not required to register the
underlying securities within the later of one hundred twenty (120) days of the
Effective Date (as defined below), or one hundred eighty (180) days from the
Closing Date.
(ii) Subject to the conditions of subparagraph (h)(iii), the
provisions of subparagraph (h)(i) will not apply to (x) the issuance of
securities (other than for cash) in connection with a merger, consolidation,
sale of assets, disposition or (y) the exchange of the capital stock for assets,
stock or other joint venture interests.
(iii) Any action contemplated under subparagraph (h)(ii) is subject
to the condition that registration rights, if any, in connection with such
action shall not require the filing of a Registration Statement in respect of
such stock prior to thirty (30) days after the Effective Date.
(iv) The term "Effective Date" means the effective date of the
Registration Statement covering the Registrable Securities (as defined in the
Registration Rights Agreement).
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<PAGE>
i. Available Shares. The Company shall have at all times authorized
and reserved for issuance, free from preemptive rights, shares of Common Stock
sufficient to yield the number of shares of Common Stock issuable at conversion
as may be required to satisfy the conversion rights of the Buyer pursuant to the
terms and conditions of the Preferred Stock.
j. Dilution. The Company acknowledges that the number of Shares
issuable upon conversion of the Preferred Stock may increase substantially in
certain circumstances, including, but not limited to, when the trading price of
the Common Stock declines prior to a conversion and that the issuance of the
Shares upon such a conversion of the Preferred Stock may have a dilutive effect
of the ownership interest of the other shareholders of the Company.
k. Registered Offering. Notwithstanding anything in the foregoing to
the contrary, the Company shall be permitted, upon prior written notice to the
Buyer, to issue and sell its Common Stock or securities, convertible into its
Common Stock in a registered offering (the "Registered Offering"), provided,
that the proceeds of such Registered Offering shall be applied solely to redeem
the Preferred Stock in accordance with the terms of the Certificate of
Designation.
l. Other Buyers. The Company shall be permitted to issue and sell up
to three hundred sixty (360) additional shares of Preferred Stock to affiliates
of the Company or to persons who do not beneficially own more than five (5%)
percent of the outstanding shares of Common Stock.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the aggregate
purchase price for the Initial Preferred Stock in accordance with Section 1(c)
hereof, the Company will irrevocably instruct its transfer agent to issue Common
Stock from time to time upon conversion of the Preferred Stock in such amounts
as specified from time to time by the Company to the transfer agent, bearing the
restrictive legend specified in Section 4(b) of this Agreement prior to
registration of the Shares under the 1933 Act, registered in the name of the
Buyer or its nominee and in such denominations to be specified by the Buyer in
connection with each conversion of the Preferred Stock. The Company warrants
that no instruction other than such instructions referred to in this Section 5
and stop transfer instructions to give effect to Section 4(a) hereof prior to
registration and sale of the Shares under the 1933 Act will be given by the
Company to the transfer agent and that the Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement, and applicable
law. Nothing in this Section shall affect in any way the Buyer's obligations and
agreement to comply with all applicable securities laws upon resale of the
Securities. If the Buyer provides the Company with an opinion of counsel
reasonably satisfactory to the Company that registration of a resale by the
Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a)
of this Agreement is not required
10
<PAGE>
under the 1933 Act, the Company shall (except as provided in clause (2) of
Section 4(a) of this Agreement) permit the transfer of the Securities and, in
the case of the Shares, promptly instruct the Company's transfer agent to issue
one or more certificates for Common Stock without legend in such name and in
such denominations as specified by the Buyer.
b. The Company will permit the Buyer to exercise its right to convert
the Preferred Stock by telecopying an executed and completed Notice of
Conversion to the Company and delivering within three (3) business days
thereafter, the original Notice of Conversion and the certificates representing
the Preferred Stock being converted to the Company by express courier, with a
copy to the transfer agent. Each date on which a Notice of Conversion is
telecopied to and received by the Company in accordance with the provisions
hereof shall be deemed a Conversion Date. The Company will transmit the
certificates representing the Converted Shares issuable upon conversion of any
Preferred Stock (together with certificates representing the Preferred Stock not
being so converted) to the Buyer via express courier, by electronic transfer or
otherwise, within three (3) business days after receipt by the Company of the
original Notice of Conversion and the certificate representing the Preferred
Stock being converted (the "Delivery Date").
c. The Company understands that a delay in the issuance of the Shares
of Common Stock beyond the Delivery Date could result in economic loss to the
Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments to the Buyer for late issuance of Shares upon Conversion in
accordance with the following schedule (where "No. Business Days Late" is
defined as the number of business days beyond five (5) business days from
Delivery Date); provided, however, the Company shall not be obligated to make
any payment under this Section if the cause of such delay in the issuance of the
Shares of Common Stock is not caused by the Company or is the result of an act,
omission or circumstance beyond the control of the Company.
Late Payment For Each
$10,000 of Initial Preferred Stock
No. Business Days Late Principal Amount Being Converted
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 +$200 for each Business
Day Late beyond 10 days
11
<PAGE>
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Nothing herein shall limit the Buyer's right to
pursue actual damages for the Company's failure to issue and deliver the Common
Stock to the Buyer. Furthermore, in addition to any other remedies which may be
available to the Buyer, in the event that the Company fails for any reason to
effect delivery of such shares of Common Stock within five (5) business days
after the Delivery Date, the Buyer will be entitled to revoke the relevant
Notice of Conversion by delivering a notice to such effect to the Company
whereupon the Company and the Buyer shall each be restored to their respective
positions immediately prior to delivery of such Notice of Conversion.
d. In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, upon request of the Buyer and its compliance with the
provisions contained in this paragraph, so long as the certificates therefor do
not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the Buyer by crediting the account of Buyer's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.
6. DELIVERY INSTRUCTIONS.
The Initial Preferred Stock or the Additional Preferred Stock, as the
case may be, shall be delivered by the Company to the Escrow Agent pursuant to
Section 1(b) hereof, on a delivery against payment basis, on the Closing Date
and on the Additional Closing Date, respectively..
7. CLOSING DATE.
The date and time of the issuance and sale of the Initial Preferred
Stock (the "Closing Date") shall occur no later than 1:00 P.M., New York time on
the first NYSE trading day after the fulfillment or waiver of all closing
conditions pursuant to Sections 8 and 9, or such other mutually agreed to time.
The date of the Additional Closing Date shall be the date specified by either
party upon at least five (5) business days' advance notice to the other party;
provided, however, that it shall be a condition of the Additional Closing Date
that (i) the conditions of Section 4(g) be satisfied, and (ii) each of the
conditions contemplated by Sections 8 and 9 hereof shall have been satisfied or
waived on or before such date. Each closing shall occur on such date at the
offices of the Escrow Agent. Notwithstanding anything to the contrary contained
herein, the Escrow Agent will be authorized to release the Escrow Property only
upon satisfaction of the conditions set forth in Sections 8 and 9 hereof.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
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<PAGE>
The Buyer understands that the Company's obligation to sell the
Initial Preferred Stock on the Closing Date and the Additional Preferred Stock
on the Additional Closing Date is conditioned upon:
a. The receipt and acceptance by the Buyer of this Agreement (to be
evidenced by the Buyer's execution and delivery of this Agreement) for the sale
of the Preferred Stock;
b. Delivery by the Buyer to the Escrow Agent of good funds as payment
in full of an amount equal to the relevant purchase price for the Initial
Preferred Stock or the Additional Preferred Stock, as the case may be, in
accordance with Section 1(c) hereof;
c. The accuracy on the Closing Date or the Additional Closing Date,
as the case may be, of the representations and warranties of the Buyer contained
in this Agreement, each as if made on such date, and the performance by the
Buyer on or before such date of all covenants and agreements of the Buyer
required to be performed on or before such date;
d. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or requiring
any consent or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Initial Preferred Stock on the Closing Date and the Additional Preferred Stock
on the Additional Closing Date is conditioned upon:
a. The receipt and acceptance by the Company of this Agreement (such
acceptance to be evidenced by the Company's execution and delivery of this
Agreement) for the sale of at least Three Million Dollars ($3,000,000.00) on the
Closing Date, and Six Hundred Forty Thousand Dollars ($640,000.00) on the
Additional Closing Date in liquidation value of Preferred Stock (or such lesser
amount as the Company, in its sole discretion, shall determine);
b. Delivery by the Company to the Escrow Agent of the Initial
Preferred Stock or the Additional Preferred Stock, as the case may be, in
accordance with this Agreement;
c. The accuracy in all material respects on the Closing Date or the
Additional Closing Date, as the case may be, of the representations and
warranties of the Company contained in this Agreement, each as if made on such
date, and the performance by the Company on or before such date of all covenants
and agreements of the Company required to be performed on or before such date;
and
13
<PAGE>
d. On the Closing Date or the Additional Closing Date, as the case
may be, the Buyer shall have received (i) an opinion of counsel for the Company,
dated such date, in form, scope and substance reasonably satisfactory to the
Buyer, to the effect set forth in Annex III attached hereto, and (ii) the
Registration Rights Agreement duly executed and delivered by the Company.
10. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York without giving effect to the principles
thereof regarding the conflict of laws. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions.
b. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
c. This Agreement may be signed in one or more counterparts, each of
which shall be deemed an original.
d. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.
e. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
f. This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement thereof.
g. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof.
11. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given on the earliest of
(i) the date delivered, if delivered by personal delivery as against
written receipt therefor or by confirmed facsimile transmission, if
received during normal business hours,
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<PAGE>
(ii) the seventh business day after deposit, postage prepaid, in the
United States Postal Service by registered or certified mail, or
(iii) the third business day after mailing by international express
courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled at the
following addresses (or at such other addresses as such party may designate by
ten (10) days' advance written notice similarly given to each of the other
parties hereto):
COMPANY: XYBERNAUT CORPORATION
12701 Fair Lakes Circle
Suite 550
Fairfax, Virginia 22033
ATTN: Steven A. Newman
Telecopier No.: (703) 631-6734
Telephone No.: (703) 631-6925
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: Martin Eric Weisberg, Esq.
Telecopier No.: (212) 704-6288
BUYER: At the address set forth on the signature page of
this Agreement.
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telecopier No. (212) 213-2077
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's
representations and warranties herein shall survive the execution and delivery
of this Agreement and the delivery of the Preferred Stock and the Purchase
Price, and shall inure to the benefit of the Buyer and its successors and
assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
IN WITNESS WHEREOF, this Agreement has been duly executed by the
Buyer or one of its officers thereunto duly authorized as of the date set forth
below.
NUMBER OF SHARES OF
INITIAL PREFERRED STOCK TO BE PURCHASED: 3,000
15
<PAGE>
AGGREGATE PURCHASE PRICE OF
SUCH INITIAL PREFERRED STOCK: $3,000,000
NUMBER OF SHARES OF ADDITIONAL
PREFERRED STOCK TO BE PURCHASED: 640
AGGREGATE PURCHASE PRICE OF SUCH
ADDITIONAL PREFERRED STOCK: $640,000
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf this ________ day of
___________________, 1997.
- -------------------------------- -----------------------------------
Address Printed Name of Subscriber
- --------------------------------
By: ------------------------------
Telecopier No. ------------------ (Signature of Authorized Person)
- -------------------------------- ----------------------------------
Jurisdiction of Incorporation Printed Name and Title
or Organization
As of the date set forth below, the undersigned hereby accepts this Agreement
and represents that the foregoing statements are true and correct and that it
has caused this Securities Purchase Agreement to be duly executed on its behalf.
XYBERNAUT CORPORATION
By:
---------------------------
Title:
-----------------------
Date:
-----------------------
<PAGE>
ANNEX I CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF
INCORPORATION/CERTIFICATE OF DESIGNATIONS
ANNEX II JOINT ESCROW INSTRUCTIONS
ANNEX III OPINION OF COUNSEL
ANNEX IV REGISTRATION RIGHTS AGREEMENT
ANNEX V COMPANY DISCLOSURE MATERIALS
<PAGE>
ANNEX V
COMPANY DISCLOSURE
------------------
[TO BE SUPPLIED]
Annex IV
to
Securities Purchase
Agreement
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of
November 12, 1997 (this "Agreement"), is made by and between XYBERNAUT
CORPORATION, a Delaware corporation (the "Company"), and the entity named on the
signature page hereto (the "Initial Investor").
W I T N E S S E T H:
WHEREAS, the Company and the Initial Investor desire to amend and
restate that certain Registration Rights Agreement to which they are parties;
and
WHEREAS, upon the terms and subject to the conditions of the Amended and
Restated Securities Purchase Agreement, dated as of November 12, 1997, between
the Initial Investor and the Company (the "Securities Purchase Agreement"), the
Company has agreed to issue and sell to the Initial Investor up to 3,640 shares
(the "Preferred Shares") of 4% Series B Convertible Preferred Stock, par value
$.01 per share, of the Company, at an aggregate purchase price of $3,640,000,
which Preferred Stock (as that term is defined in the Securities Purchase
Agreement) is convertible into shares of the Common Stock, $.01 par value, of
the Company (the "Conversion Shares") upon the terms and subject to the
conditions of the Certificate of Designations (as defined in the Securities
Purchase Agreement);
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), with respect to the Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investor" means the Initial Investor and any permitted transferee
or
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<PAGE>
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "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, which shall be evidenced by determinations in good faith
by the Board of Directors of the Company that disclosure of such information in
the registration statement would be detrimental to the business and affairs of
the Company; or (b) any material engagement or activity by the Company which
would, in the good faith determination of the Board of Directors of the Company,
be adversely affected by disclosure in a registration statement at such time,
which determination shall be accompanied by a good faith determination by the
Board of Directors of the Company that the registration statement would be
materially misleading absent the inclusion of such information.
(iii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iv) "Registrable Securities" means the Conversion Shares.
(v) "Registration Statement" means a registration statement of the
Company under the Securities Act.
(b) Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file with the
SEC, as soon as possible after the Closing Date (as defined in the Securities
Purchase Agreement) but in no later than thirty (30) days following the Closing
Date, either a Registration Statement on Form S-3 registering for resale by the
Investor a sufficient number of shares of Common Stock (or such lesser number as
may be required by the SEC, but in no event less than the number of shares into
which the Preferred Stock would be convertible at the time of filing of the Form
S-3 (assuming for such purposes that the Additional Preferred Stock had been
issued at such date and all Preferred Stock was then eligible to be converted,
and had been converted, into Conversion Shares in accordance with the terms of
the Certificate of Designations, whether or not such issuance, eligibility or
conversion had in fact occurred as of such date) or an amendment to any pending
Company Registration Statement on Form S-3, and such Registration Statement or
amended Registration Statement shall state that, in accordance with Rule 416 and
457 under the Securities Act, it also covers such indeterminate number of
additional shares of Common Stock as may become issuable upon conversion of the
Preferred Stock resulting from adjustment in the
2
<PAGE>
Conversion Price, or to prevent dilution resulting from stock splits, or stock
dividends), which Registration Statement shall be declared effective no later
than ninety (90) days after the Closing Date. If at any time the number of
shares of Common Stock into which the Preferred Stock may be converted exceeds
the aggregate number of shares of Common Stock then registered, the Company
shall, within ten (10) business days after receipt of a written notice from any
Investor, either (i) amend the Registration Statement filed by the Company
pursuant to the preceding sentence, if such Registration Statement has not been
declared effective by the SEC at that time, to register all shares of Common
Stock into which the Preferred Stock may be converted, or (ii) if such
Registration Statement has been declared effective by the SEC at that time, file
with the SEC an additional Registration Statement on Form S-3 to register the
shares of Common Stock into which the Preferred Stock may be converted that
exceed the aggregate number of shares of Common Stock already registered.
(b) Payments by the Company.
(i) If the Registration Statement covering the Registrable Securities is
not filed in proper form with the SEC within thirty (30) days after the Closing
Date (the "Required Filing Date"), the Company will make payment to the Initial
Investor in such amounts and at such times as shall be determined pursuant to
this Section 2(b).
(ii) If the Registration Statement covering the Registrable Securities
is not effective (a) within the earlier of (1) fifteen (15) days after notice by
the SEC that it may be declared effective or (2) ninety (90) days following the
Closing Date (the "Required Effective Date"), or (b) after a Suspension Period
(as defined below), then the Company will make payments to the Initial Investor
in such amounts and at such times as shall be determined pursuant to this
Section 2(b).
(iii) Subject to Section 2(b)(vi) below, the amount (the "Periodic
Amount") to be paid by the Company to the Initial Investor shall be determined
as of each Computation Date (as defined below) and such amount shall be equal to
(A) two percent (2%) of the purchase price paid by the Initial Investor (the
"Purchase Price") for all Preferred Shares then purchased and outstanding
pursuant to the Securities Purchase Agreement for the period from the date
following the Required Filing Date or the Required Effective Date, as the case
may be, to the first relevant Computation Date, and (B) three percent (3%) to
each Computation Date thereafter. By way of illustration and not in limitation
of the foregoing, if the Registration Statement is timely filed but is not
declared effective until one hundred sixty-five (165) days after the Closing
Date, the Periodic Amount will aggregate eight percent (8%) of the purchase
price of the Preferred Shares (2% for days 91-120, plus 3% for days 121-150,
plus 3% for days 151-165).
(iv) Each Periodic Amount will be payable by the Company in cash or
other immediately available funds to the Investor upon demand of the Investor.
(v) The parties acknowledge that the damages which may be incurred by
the Investor if the Registration Statement is not filed by the Required Filing
Date or if the Registration Statement has not been declared effective by the
Required Registration Date may be difficult to ascertain. The parties agree that
the Periodic Amount represent a reasonable estimate on the part of the parties,
as of the date of this Agreement, of the amount of such damages. (vi)
Notwithstanding the foregoing, the amounts payable by the Company pursuant to
this provision shall not be payable to the extent any delay in the effectiveness
of the Registration Statement occurs because of an act of, or a failure to act
or to act timely by the Initial Investor or its counsel, or as a result of force
majeure, or in the event all of the Registrable Securities may be sold pursuant
to Rule 144 or another available exemption under the Act.
(vii) "Computation Date" means (i) the date which is the earlier of (A)
thirty (30) days after the Required Filing Date and the Required Effective Date,
as the case may be, or (B) the date after the Required Filing Date or the
Required Registration Date on which the Registration Statement is filed (with
respect to payments due as contemplated by Section 2(b)(i) hereof) or declared
effective (with respect to payments due as contemplated by Section 2(b)(ii)
hereof) or after any Permitted Suspension Period, as the case may be, and (ii)
each date which is the earlier of (A) thirty (30) days after the previous
Computation Date or (B) the date after the previous Computation Date on which
the Registration Statement is filed (with respect to payments due as
contemplated by Section 2(b)(i) hereof) or declared effective (with respect to
payments due as contemplated by Section 2(b)(ii) hereof), as the case may be.
3. Obligations of the Company. In connection with the registration of
the Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC by thirty (30) days after
the Closing Date, a Registration Statement with respect to not less than the
number of Registrable Securities provided in Section 2(a) above, and thereafter
use its reasonable best efforts to cause each Registration Statement relating to
Registrable Securities to become effective the earlier of (a) fifteen (15) days
after notice by the SEC that it may be declared effective, or (b) ninety (90)
days after the Closing Date, and keep the Registration Statement effective at
all times until the earliest (the "Registration Period") of (i) the date that is
two years after the Closing Date, (ii) the date when the Investors may sell all
Registrable Securities under Rule 144 or (iii) the date the Investors no longer
own any of the Registrable Securities, which Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) The Company shall permit a single firm of counsel designated by the
Initial Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time (but not less than three (3)
business days) prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects.
(d) Furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel identified to the Company,
(i) promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, and all amendments and
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor;
(e) As promptly as practicable after becoming aware of such event,
notify each Investor of the happening of any event of which the Company 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, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;
(f) As promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of a Notice of Effectiveness or any notice of effectiveness or any stop
order or other suspension of the effectiveness of the Registration Statement at
the earliest possible time;
(g) Notwithstanding the foregoing, if at any time or from time to time
after the date of effectiveness of the Registration Statement, the Company
notifies the Investors in writing of the existence of a Potential Material
Event, the Investors shall not offer or sell any Registrable Securities, or
engage in any other transaction involving or relating to the Registrable
Securities, from the time of the giving of notice with respect to a Potential
Material Event until such Investor 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 Registrable Securities
for more than two twenty (20) day periods in the aggregate during any 12-month
period ("Suspension Period") with at least a ten (10) business day interval
between such periods, during the periods the Registration Statement is required
to be in effect;
(h) Use its reasonable efforts to secure designation of all the
Registrable Securities covered by the Registration Statement on the "Small
Capitalization Market" of the National Association of Securities Dealers
Automated Quotations System ("NASDAQ") within the meaning of Rule 11Aa2-1 of the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the quotation of the Registrable Securities on The NASDAQ SmallCap Market;
or if, despite the Company's reasonable efforts to satisfy the preceding clause,
the Company is unsuccessful in doing so, to secure NASDAQ/OTC Bulletin Board
authorization and quotation for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities;
(i) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(j) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the Registration Statement
and enable such certificates for the Registrable Securities to be in such
denominations or amounts as the case may be, as the Investors may reasonably
request, and, within three (3) business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and opinion of such counsel; and
(k) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. Obligations of the Investors. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of the Registrable Securities
held by it, as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least five (5) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if such Investor elects to have any
of such Investor's Registrable Securities included in the Registration
Statement. If at least two (2) business days prior to the filing date the
Company has not received the Requested Information from an Investor (a
"Non-Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(e) or
3(f), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. Expenses of Registration. All reasonable expenses, other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 3, but including,
without limitation, all registration, listing, and qualifications fees, printers
and accounting fees, the fees and disbursements of counsel for the Company,
shall be borne by the Company.
6. Indemnification. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act (each, an "Indemnified Person" or "Indemnified Party"), against any
losses, claims, damages, liabilities or expenses (joint or several) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof, or any prospectus included therein: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any post-effective amendment thereof or 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, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to state
therein any material fact necessary to make the statements made therein, in
light of the circumstances under which the statements therein were made, not
misleading or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to clause (b) of this Section 6, the Company shall
reimburse the Investors, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a) shall not (I) apply to a Claim arising out
of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by or on behalf of any
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement thereto, if
such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) be available to the extent such Claim is based on a failure of
the Investor to deliver or cause to be delivered the prospectus made available
by the Company; or (III) apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Each Investor will indemnify
the Company and its officers, directors and agents against any claims arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company, by or on behalf of such
Investor, expressly for use in connection with the preparation of the
Registration Statement, subject to such limitations and conditions as are
applicable to the Indemnification provided by the Company to this Section 6.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.
(b) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be. In case any
such action is brought against any Indemnified Person or 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 Person or Indemnified Party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such Indemnified Person or Indemnified Party under this Section 6 for
any legal or other reasonable out-of-pocket expenses subsequently incurred by
such Indemnified Person or Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation, unless the indemnifying
party shall not pursue the action of its final conclusion. The Indemnified
Person or Indemnified Party shall have the right to employ separate counsel in
any such action and to participate in the defense thereof, but the fees and
reasonable out-of-pocket expenses of such counsel shall not be at the expense of
the indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the Indemnified Person or
Indemnified Party. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
Contribution. To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(a) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6; (b) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation; and (c) contribution by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
8. Reports under Exchange Act. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of the Registrable
Securities (or all or any portion of any Debenture of the Company which is
convertible into such securities) only if: (a) the Investor agrees in writing
with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, and (d) at or before the time the Company received the
written notice contemplated by clause (b) of this sentence the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein. In the event of any delay in filing or effectiveness of the
Registration Statement as a result of such assignment, the Company shall not be
liable for any damages arising from such delay, or the payments set forth in
Section 2(c) hereof.
10.Amendment of Registration Rights. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold an eighty (80%) percent
interest of the Registrable Securities. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Investor and the
Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission, receipt
confirmed, or other means) or sent by certified mail, return receipt requested,
properly addressed and with proper postage pre-paid (i) if to the Company,
XYBERNAUT CORPORATION, 12701 Fair Lakes Circle, Suite 550, Fairfax, Virginia
22033, ATTN: Steven Newman Telecopier No.: (703) 631-7070; with a copy to Parker
Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New York, New York
10036, ATTN: Martin Eric Weisberg, Esq., Telecopier No.: (212) 704-6288; (ii) if
to the Initial Investor, at the address set forth under its name in the
Securities Purchase Agreement, with a copy to Samuel Krieger, Esq., Krieger &
Prager, 319 Fifth Avenue, Third Floor, New York, NY 10016, Telecopier No.: (212)
213-2077; and (iii) if to any other Investor, at such address as such Investor
shall have provided in writing to the Company, or at such other address as each
such party furnishes by notice given in accordance with this Section 11(b), and
shall be effective, when personally delivered, upon receipt and, when so sent by
registered or certified mail, four (4) calendar days after deposit with the
United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(a) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York without giving effect to the principles
thereof regarding the conflict of laws. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non coveniens, to the bringing of any such
proceeding in such jurisdictions.
(b) If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
(c) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(d) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(e) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
(j) The Company acknowledges that any failure by the Company to perform
its obligations under Section 3(a) hereof, or any delay in such performance
could result in loss to the Investors, and the Company agrees that, in addition
to any other liability the Company may have by reason of such failure or delay,
the Company shall be liable for all direct damages, if any, caused by any such
failure or delay, unless the same is the result of force majeure, or actions on
the part of the Investor. Neither party shall be liable for consequential
damages.
(k) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
XYBERNAUT CORPORATION
By:
-----------------------
Name:
Title:
---------------------------
By:
-----------------------
Name:
Title:
4
<PAGE>
ANNEX V
COMPANY DISCLOSURE
------------------
Section 3(j): None
Section 3(k): None
Section 3(l): On June 30, 1997, the Company
issued 3,000 shares of Series A
Preferred Stock. As of September 30,
1997, twenty-five (25%) percent of the
Series A Preferred Stock have been
converted into Common Stock of the
Company.
5
Xybernaut Corporation
September __, 1997
Page 1
EXHIBIT 5.1
December 31, 1997
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 a 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 2,622,663 shares (the "Shares") of Common Stock, par value $.01 per
share (the "Common Stock"), issuable upon conversion of the Company's Series B
Preferred Stock (the "Series B Preferred Stock"), par value $.01 per share.
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 upon conversion of the Series B Preferred Stock, will be
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Parker Chapin Flattau & Klimpl, LLP
---------------------------------------
PARKER CHAPIN FLATTAU & KLIMPL, LLP
<PAGE>
Xybernaut Corporation
Exhibit 5.1 Opinion to Registration Statement on Form S-3
Prepared by: Christopher S. Auguste _______
Reviewed by: Gary J. Simon _______
Signed by: Martin E. Weisberg _______
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form
S-3 of our report dated March 31, 1997, 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
-----------------------
Coopers & Lybrand L.L.P.
McLean, VA
December 31, 1997
-1-
